As filed with the Securities and Exchange Commission on July 18, 1997
Registration No. 333-26551
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
AMENDMENT NO. 3
To
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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INTEGRAMED AMERICA, INC.
(Exact name of Registrant as specified in its charter)
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Delaware 8011 06-1150326
(State or other (Primary standard industrial (I.R.S. employer
jurisdiction of classification code number) identification number)
incorporation)
One Manhattanville Road
Purchase, New York 10577
(914) 253-8000
(Address and telephone number of Registrant's principal executive offices)
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GERARDO CANET
Chairman and President
IntegraMed America, Inc.
One Manhattanville Road
Purchase, New York 10577
(914) 253-8000
(Name, address and telephone number of agent for service)
----------
Copies to:
STEVEN A. FISHMAN, ESQ. JAMES R. TANENBAUM, ESQ.
ALISON S. NEWMAN, ESQ. Stroock & Stroock & Lavan LLP
Bachner, Tally, Polevoy & Misher LLP 180 Maiden Lane
380 Madison Avenue New York, New York 10038-4982
New York, New York 10017 (212) 806-5400
(212) 687-7000
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Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
----------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
INTEGRAMED AMERICA, INC.
Cross-Reference Sheet
Pursuant to Item 501(b) of Regulation S-K
Item and Caption Location in Prospectus
---------------- ----------------------
1. Forepart of Registration
Statement and Outside Front Cover
Page of Prospectus ................... Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus .................. Front and Outside Back Cover Pages
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges .............................. Prospectus Summary; Risk Factors;
Consolidated Financial Statements
4. Use of Proceeds ...................... Prospectus Summary; Use of
Proceeds
5. Determination of Offering Price ...... Outside Front Cover Page; Risk
Factors; Plan of Distribution
6. Dilution ............................. Risk Factors; Dilution
7. Selling Security Holders ............. *
8. Plan of Distribution ................. Outside Front Cover Page; Plan of
Distribution
9. Description of Securities to be
Registered ........................... Outside Front Cover Page;
Description of Capital Stock
10. Interests of Named Experts ........... *
and Counsel
11. Information With Respect to
the Registrant ....................... Prospectus Summary; Risk Factors;
Selected Consolidated and Pro
Forma Financial Data; Unaudited
Pro Forma Combined Financial
Information; Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management;
Certain Transactions; Principal
Stockholders; Description of
Capital Stock; Shares Eligible for
Future Sale; Consolidated
Financial Statements
12. Disclosure of Commission
Position on Indemnification for
Securities Act Liabilities .......... *
- ----------
* Not applicable.
<PAGE>
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JULY 18, 1997
PROSPECTUS
6,400,000 Shares
[LOGO]
INTEGRAMED(R)
AMERICA
Common Stock
----------
All of the 6,400,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), offered hereby are being sold by IntegraMed America, Inc. (the
"Company"). The Common Stock is quoted on the Nasdaq National Market under the
symbol "INMD." On July 16, 1997, the last reported sale price of the Common
Stock, as quoted on the Nasdaq National Market, was $1.47 per share. See "Price
Range of Common Stock."
----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
Price to Placement Agent Proceeds to
Public Fees (1) Company (2)(3)
- --------------------------------------------------------------------------------
Per Share............. $ $ $
- --------------------------------------------------------------------------------
Total ............. $ $ $
================================================================================
(1) The Common Stock is being offered on an all or none basis by the Company to
selected institutional investors. Vector Securities International, Inc.
(the "Placement Agent") has been retained to act, on a best efforts basis,
as agent for the Company in connection with the arrangement of this
transaction. The Company has agreed to pay the Placement Agent a fee in
connection with the arrangement of this transaction and reimburse the
Placement Agent for certain out-of-pocket expenses. The Company has agreed
to indemnify the Placement Agent against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Plan of Distribution."
(2) The termination date of the offering is , 1997, subject to
extension by mutual agreement of the Company and the Placement Agent. Prior
to the closing date of this best efforts, all or nothing, offering all
investor funds will promptly be placed in escrow with Citibank, N.A., as
escrow agent for funds collected in connection with the offering (the
"Escrow Agent"), in an escrow account established for the benefit of the
investors. Upon receipt of notice from the Escrow Agent that investors have
affirmed purchase of the Common Stock and deposited the requisite funds in
the escrow account, the Company will deposit with The Depository Trust
Company ("DTC") the shares of Common Stock to be credited to the accounts
of the investors and will collect the investor funds from the Escrow Agent.
In the event that investor funds are not received in the full amount
necessary to satisfy the requirements of the offering, all funds deposited
with the Escrow Agent will promptly be returned to the investors. See "Plan
of Distribution."
(3) Before deducting expenses payable by the Company estimated at $ .
----------
Vector Securities International, Inc.
The date of this Prospectus is , 1997
<PAGE>
<PAGE>
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PROSPECTUS SUMMARY
The statements in this Prospectus that relate to future plans, events or
performance are forward-looking statements. Actual results could differ
materially due to a variety of factors, including the factors described under
"Risk Factors" and the other risks described in this Prospectus. The following
summary is qualified in its entirety by the more detailed information and the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus, including information under "Risk Factors."
The Company
IntegraMed America, Inc. (the "Company") is a physician practice management
company specializing in women's health care, with a focus on infertility and
assisted reproductive technology ("ART") services as well as health care
services to peri- and post-menopausal women. The Company provides management
services to a nationwide network of medical providers that currently consists of
ten sites (each, a "Network Site"). 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 the physicians or where the
Company directly employs the physicians. In February 1997, the Company entered
into a management agreement, effective following the completion of this
offering, with Fertility Centers of Illinois, S.C. ("FCI"), one of the largest
providers of infertility and ART services in the United States (the "Pending
Acquisition"). Upon consummation of the Pending Acquisition, the Company's
network will consist of 11 Network Sites and 21 locations.
Until 1996, the Company was focused exclusively on providing management
services to Medical Practices in the area of infertility and ART services.
During 1996, the Company, with the acquisition of a medical practice in Florida,
broadened its focus to include health care services to peri- and post-menopausal
women (ages 40-50 and over 50, respectively). As a result, the Company
established two divisions: the Reproductive Science Center Division (the "RSC
Division"), which provides management services to Medical Practices focused on
infertility and ART services, and the Adult Women's Medical Division (the "AWM
Division"), which provides management services to Medical Practices focused on
health care services for peri- and post-menopausal women. The nine RSC Network
Sites are managed by the Company, while the AWM Network Site is owned by the
Company.
The Company provides comprehensive management services to support the
Medical Practices in each of its divisions. In particular, the Company provides
(i) administrative services, including accounting and finance, human resource
functions and purchasing supplies and equipment, (ii) access to capital, (iii)
marketing and practice development, (iv) information systems and assistance in
developing clinical strategies and (v) access to technology. These services
allow the 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 clinical outcomes and greater patient satisfaction at lower costs.
The market for infertility and reproductive health care services is large
and fragmented. In the United States, approximately 9% of women between the ages
of 15 and 44, or 5.3 million women, have impaired fertility and approximately
2.3 million of these women seek care in any year. Expenditures in 1995 relating
to infertility exceeded $1 billion. In the United States, approximately 38,000
obstetricians and gynecologists ("OB/GYNs") provide initial diagnostic and first
line treatment services, while approximately 600 reproductive endocrinologists
practicing at approximately 300 facilities provide ART services. The Company
believes that the large number of potential patients and fragmented nature in
which infertility and ART services are provided create a significant opportunity
to expand the number of Network Sites in the RSC Division.
The RSC Division currently provides management services to nine Network
Sites. The Medical Practices at these Network Sites provide conventional
infertility and ART services to infertile couples seeking to have a baby.
Conventional infertility services include diagnostic tests performed on the
female, such as endometrial biopsy, laparoscopy/hysteroscopy examinations and
hormone tests, and diagnostic tests performed on the male, such as semen
analysis and tests for sperm antibodies. The physicians at the RSC Network Sites
consult with a couple and advise them as to the treatment that has the greatest
probability of success in light of the couple's specific infertility problem. At
this point, the couple may undergo conventional infertility treatment
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
or, if appropriate, may directly undergo ART treatment. Conventional infertility
treatments include fertility drug therapy, tubal surgery, and intrauterine
insemination, while ART services include, among others, in vitro fertilization,
frozen embryo transfer and donor egg programs.
The Company's efforts in the adult women's health care area are focused on
peri- and post-menopausal women. In the United States, there are over 30 million
peri-menopausal women and over 47 million post-menopausal women. An additional
39 million women in the United States will reach age 50 over the next ten years.
When many women reach menopause, they suffer from estrogen deficiency, a
condition that has been associated with osteoporosis, cardiovascular disease,
and metabolic and endocrine disorders. In addition, women in menopause are at
increased risk for various cancers, urinary incontinence, and visual and hearing
disorders. Furthermore, women in menopause frequently experience psychological
disorders, such as depression. Traditionally, estrogen deficiency has been
treated by OB/GYNs with hormone replacement therapy, while the additional
conditions associated with menopause have been treated by a disconnected array
of other physicians, often leading to increased patient inconvenience and higher
costs. As a result, the Company believes there is a significant unmet medical
need for a comprehensive diagnostic and treatment approach to the broad range of
medical conditions that emerge in peri- and post-menopausal women.
The AWM Division currently consists of one Network Site that represents the
clinical care model for future Network Sites. The AWM Network Site focuses on
the identification and treatment needs of peri- and post-menopausal women and
incorporates both preventative and curative health care. The AWM Network Site
combines specialty physicians and other health professionals to offer a
multi-disciplinary approach to the diagnosis and treatment of health care
problems common to peri- and post-menopausal women. The AWM Division also
contracts with major pharmaceutical companies to conduct clinical testing of new
drugs to treat adult women's health care problems and promotes educational
programs for women relating to menopausal issues.
In establishing a Network Site, the Company typically acquires certain
assets of a Medical Practice and enters into a long-term management agreement
with such Medical Practice. Typically, a management agreement obligates the
Company to pay a fixed sum for the exclusive right to manage the Medical
Practice. A typical management agreement further provides 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.
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 physician services to provide cost-effective
health care. In addition, such payors typically desire to share the risk of
providing services with the medical provider. This focus on cost-containment and
financial risk sharing has placed physician groups and sole practitioners at a
significant competitive disadvantage, particularly in the fields of infertility
and ART services and adult women's health care. Physicians providing health care
in these areas are challenged by the increasingly high level of specialized
skills and technology required for comprehensive patient treatment, the
capital-intensive nature of acquiring and maintaining state-of-the-art medical
equipment and facilities, the need to develop and maintain management
information systems, and the need for seven-days-a-week service to optimize the
outcomes of patient treatments. As a result, physicians are increasingly seeking
to affiliate with larger organizations, including physician practice management
companies.
The Company's strategy is to develop, manage and integrate a nationwide
network of Medical Practices providing high quality, cost-effective women's
health care services. The primary elements of the Company's strategy include
establishing additional Network Sites, further developing the AWM Division,
increasing revenues and operating efficiencies at the Network Sites, and
developing a nationwide, integrated information system.
The Company was incorporated in Delaware on June 4, 1985 under the name
IVF Australia (USA), Ltd. Its name was changed to IVF America, Inc. in April
1992 and to IntegraMed America, Inc. in June 1996. As used in this Prospectus,
unless the context otherwise requires, the "Company" refers to IntegraMed
America, Inc., a Delaware corporation, and its six wholly-owned subsidiaries.
The Company's executive offices are located at One Manhattanville Road,
Purchase, New York 10577, and its telephone number is (914) 253-8000.
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4
<PAGE>
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The Offering
Common Stock offered................... 6,400,000 shares
Common Stock to be outstanding
after the offering.................. 17,317,009 shares (1)
Use of proceeds........................ To consummate the Pending Acquisition
and for working capital and generaL
corporate purposes, including possible
future acquisitions. See "Use of
Proceeds."
Nasdaq National Market symbol.......... INMD
Summary Consolidated and Pro Forma Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
----------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- ------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenues, net .......... $ 13,806 $ 16,025 $ 17,578 $ 16,711 $ 18,343 $ 4,175 $ 5,088
Medical Practice
retainage ........... 3,936 4,605 3,824 3,063 2,680 794 396
-------- -------- -------- -------- -------- ------- -------
Revenues after
Medical Practice
retainage ........... 9,870 11,420 13,754 13,648 15,663 3,381 4,692
Costs of services
rendered ............ 7,257 10,222 10,998 9,986 12,398 2,563 3,615
-------- -------- -------- -------- -------- ------- -------
Network Sites'
contribution ........ 2,613 1,198 2,756 3,662 3,265 818 1,077
General and
administrative
expenses ............ 2,071 3,079 3,447 3,680 4,339 855 918
Equity in loss of
Partnerships (4) .... 876 1,793 -- -- -- -- --
Total other (income)
expenses (including
income taxes) ....... 1,622 923 123 (88) 416 37 204
-------- -------- -------- -------- -------- ------- -------
Net (loss) income ...... (1,956) (4,597) (814) 70 (1,490) (74) (45)
Less: Dividends
accrued and/or
paid on
Preferred Stock ..... -- 748 1,146 600 132 154 33
-------- -------- -------- -------- -------- ------- -------
Net (loss) income
applicable
to Common Stock ..... $ (1,956) $ (5,345) $ (1,960) $ (530) $ (1,622) $ (228) $ (78)
======== ======== ======== ======== ======== ======= =======
Net (loss) income
per share
of Common Stock
before
consideration
for induced
conversion of
Preferred
Stock (5) ........... $ (0.94)(6) $ (2.01) $ (0.32) $ (0.09) $ (0.21) $ (0.04) $ (0.01)
======== ======== ======== ======== ======== ======= =======
Weighted average
number of shares
of Common Stock
outstanding ......... 2,042(6) 2,654 6,081 6,087 7,602 6,087 9,544
======== ======== ======== ======== ======== ======= =======
</TABLE>
Pro Forma
-------------------------------------------------
Combined Company,
Combined Recent Combined
Company Acquisitions Company
and Recent and Pending and Pending
Acquisitions(2) Acquisition(3) Acquisition(3)
--------------- -------------- --------------
Year Ended Three Months Ended
December 31, 1996 March 31, 1997
----------------- --------------
(Unaudited) (Unaudited)
Statement of
Operations Data:
Revenues, net .......... $ 21,665 $ 27,685 $ 6,480
Medical Practice
retainage ........... 2,680 2,680 396
-------- -------- -------
Revenues after
Medical Practice
retainage ........... 18,985 25,005 6,084
Costs of services
rendered ............ 15,534 20,428 4,661
-------- -------- -------
Network Sites'
contribution ........ 3,451 4,577 1,423
General and
administrative
expenses ............ 4,339 4,339 918
Equity in loss of
Partnerships (4) .... -- -- --
Total other (income)
expenses (including
income taxes) ....... 727 1,194 325
-------- -------- -------
Net (loss) income ...... (1,615) (956) 180
Less: Dividends
accrued and/or
paid on
Preferred Stock ..... 132 132 33
-------- -------- -------
Net (loss) income
applicable
to Common Stock ..... $ (1,747) $ (1,088) $ 147
======== ======== =======
Net (loss) income
per share
of Common Stock
before
consideration
for induced
conversion of
Preferred
Stock (5) ........... $ (0.21) $ (0.08) $ 0.01
======== ======== =======
Weighted average
number of shares
of Common Stock
outstanding ......... 8,224 13,598(7) 14,918(7)
======== ======== =======
<TABLE>
<CAPTION>
As of
December 31, As of
1996 March 31, 1997
------------- --------------------------------------------
Pro Forma
Combined
Company
and Pending Pro Forma
Actual Actual Acquisition(8) As Adjusted(9)
------ ---------- -------------- --------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (10) ......... $ 7,092 $ 5,791 $ 5,441 $ 7,641
Total assets (10) ............ 20,850 20,989 29,939 31,789
Total indebtedness (11) ...... 2,553 2,769 2,769 2,769
Accumulated deficit .......... (21,190) (21,235) (21,235) (21,235)
Shareholders' equity ......... 14,478 14,997 23,597 25,797
</TABLE>
(See footnotes on following page)
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5
<PAGE>
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(1) Includes an estimated 1,142,857 shares of Common Stock to be issued in
connection with the Pending Acquisition. Does not include (i) 490,441
shares of Common Stock issuable upon conversion of the Company's Series A
Cumulative Convertible Preferred Stock, $1.00 par value per share (the
"Convertible Preferred Stock"), (ii) 750,178 shares of Common Stock
issuable upon exercise of outstanding warrants at a weighted average
exercise price of $5.31 per share, (iii) 1,052,650 shares of Common Stock
issuable upon exercise of outstanding options at a weighted average
exercise price of $1.84 per share, (iv) 332,454 shares of Common Stock
reserved for future option grants under the Company's stock option plans,
(v) 125,000 shares of Common Stock reserved for issuance pursuant to the
Company's 1994 outside director stock purchase plan (the "Outside Director
Stock Purchase Plan"), (vi) an estimated 101,587 shares issuable upon
exercise of a warrant (the "Advisor Warrant") to be granted to Vector
Securities International, Inc. in connection with advisory services
provided to the Company relating to the Pending Acquisition and (vii)
shares which may be issued, at the physician's option, in partial payment
of the contingent purchase price relating to the acquisition of certain
assets of and the right to manage a physician group practice in San Diego,
California in June 1997 (the "San Diego Acquisition"). See "Management --
Stock Option Plans," "-- Outside Director Stock Purchase Plan,"
"Description of Capital Stock," "Plan of Distribution," "Shares Eligible
For Future Sale" and Note 12 of Notes to the Company's Consolidated
Financial Statements.
(2) Gives effect to the acquisitions described under "Business -- The Network
Sites -- Recent Acquisitions" (the "Recent Acquisitions") (other than the
San Diego Acquisition) as if each had occurred on January 1, 1996. See
"Unaudited Pro Forma Combined Financial Information" and "Business -- The
Network Sites -- Recent Acquisitions."
(3) Gives effect to the Pending Acquisition as if it had occurred on January 1,
1996, with respect to the year ended December 31, 1996, and January 1,
1997, with respect to the three months ended March 31, 1997. There can be
no assurance that the Pending Acquisition will be consummated. See
"Unaudited Pro Forma Combined Financial Information" and "Business -- The
Network Sites -- Pending Acquisition."
(4) In 1993, the Company dissolved its 50% interests in two partnerships which
had been accounted for under the equity method. The management fees
therefrom were reported under "Revenues, net" in the Consolidated Statement
of Operations.
(5) See Note 11 of Notes to the Company's Consolidated Financial Statements
regarding the impact of the Company's conversion offer of the Convertible
Preferred Stock in July 1996 on net loss per share in 1996.
(6) Includes a reduction of $29,000 to net loss related to interest on
promissory notes and an adjustment of 35,000 shares to the weighted average
number of shares of Common Stock outstanding related to outstanding stock
options.
(7) Includes 5,373,626 shares of Common Stock assumed to be issued by the
Company at the beginning of the applicable period to finance the entire
cost of the Pending Acquisition. See "Unaudited Pro Forma Combined
Financial Information."
(8) Gives effect to the Pending Acquisition as if it had occurred on March 31,
1997. There can be no assurance that the Pending Acquisition will be
consummated. See "Use of Proceeds," "Unaudited Pro Forma Combined Financial
Information" and "Business -- The Network Sites -- Pending Acquisition."
(9) Adjusted to give effect to the sale of 6,400,000 shares of Common Stock
offered by the Company hereby (at an assumed public offering price of $1.56
per share) and the application of the net proceeds therefrom of $8.8
million as if this offering occurred on March 31, 1997. Assumes that the
net proceeds of this offering are applied as follows: (i) $6.6 million to
finance the Pending Acquisition and (ii) payment of $350,000 in costs
related to the Pending Acquisition. The remainder of the net proceeds will
be used for working capital and general corporate purposes.
(10) Includes controlled assets of certain Medical Practices of $650,000 and
$425,000 at December 31, 1996 and March 31, 1997, respectively.
(11) Includes approximately $1.4 million of exclusive management rights
obligation.
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6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be carefully considered by potential investors in evaluating an
investment in the shares of Common Stock offered hereby. These factors may cause
actual results, events or performance to differ materially from those expressed
in any forward-looking statements made by the Company in this Prospectus.
History of Losses; Accumulated Deficit; Future Charges to Income. Since its
inception in June 1985, the Company has experienced significant losses from
operations. At March 31, 1997, the Company had an accumulated deficit of
approximately $21.2 million. For the three months ended March 31, 1997 and 1996,
the Company incurred net losses of $45,000 and $74,000, respectively. For the
fiscal years ended December 31, 1996 and 1994, the Company incurred net losses
of approximately $1.5 million and $814,000, respectively, as compared to net
income of $70,000 for the fiscal year ended December 31, 1995. Prior to 1996,
such losses principally resulted from the establishment and development of the
Network Sites, the increase in administrative overhead to support expansion of
the Company's operations, and the 1993 dissolution of two partnerships in which
the Company had had a fifty percent interest. The losses for the fiscal year
ended December 31, 1996 were due in large part to non-recurring charges and
operating losses of $581,000 associated with the closing of the Company's
Westchester Network Site and non-recurring charges and operating losses of
$522,000, associated with the establishment of the AWM Division in June 1996.
There can be no assurance that the Company will ever achieve and sustain
profitability. In addition, at March 31, 1997, the Company's consolidated
financial statements reflect goodwill and other intangible assets of
approximately $7.9 million which are being amortized over periods ranging from
three to 40 years. Amortization expenses related to the Company's acquisitions,
including the acquisition in January 1997 of certain assets of and the right to
manage a physician group practices in the San Francisco area (the "Bay Area
Acquisition"), the San Diego Acquisition and the Pending Acquisition, as well as
similar amortization expenses arising out of future acquisitions, may adversely
affect operating results of the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Risks Relating to Acquisitions and Managing Growth. A key element of the
Company's strategy is to expand through acquisitions and through the expansion
of services offered by affiliated Medical Practices. Identifying physician
practice candidates to be affiliated with the Company's network of Medical
Practices and proposing, negotiating and implementing economically feasible
affiliations with such groups can be a lengthy, complex and costly process.
There can be no assurance that the Company will successfully establish
affiliations with additional Medical Practices. In particular, there can be no
assurance that the Company will be able to acquire assets of, enter into
management services agreements with, or profitably manage, additional Medical
Practices or successfully integrate additional Medical Practices into a network
that will provide appropriate incentives for such practices to improve operating
efficiencies and reduce costs while delivering high-quality patient care. In
addition, there can be no assurance that any anticipated benefits of the
Company's acquisitions will be realized, or that there will not be substantial
unanticipated costs associated with such acquisitions.
As the Company expands its operations, the Company will be required to hire
and retain additional management and administrative personnel and develop and
expand operational systems to support related growth. This growth will continue
to place significant demands on the Company's management, technical, financial
and other resources. Continued growth may impair the Company's ability to
efficiently provide management services to the Medical Practices and to
adequately manage and supervise its employees. The failure to manage growth
effectively could have a material adverse effect on the Company's business,
financial condition and operating results.
Although the Company intends to use a substantial portion of the net
proceeds of this offering for the Pending Acquisition, it will require
significant additional funds for future acquisitions. The Company has no
commitments for any additional financing and there can be no assurance such
financing will be available on acceptable terms, or at all. An inability to
obtain such financing on favorable terms could limit the Company's growth.
Further, unless otherwise required by law, the Company does not intend to seek
stockholder approval for future acquisitions. Accordingly, the stockholders of
the Company will be dependent on management's judgment with respect to such
transactions. These acquisitions may involve the issuance of a significant
number
7
<PAGE>
of additional shares, the assumption or issuance by the Company of indebtedness
and the undertaking by the Company of material obligations, including long-term
management agreements. See "-- Need for Additional Financing," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Company Strategy" and "-- The Network Sites."
Need for Additional Financing. 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 existing Network Sites. Under
certain of its management agreements, the Company has committed to provide a
clinical laboratory. The Medical Practices may require capital for renovation
and expansion and for the addition of medical equipment and technology. The
Company believes that its existing cash resources together with the remaining
net proceeds from this offering after consummation of the Pending Acquisition
and available borrowings under the Company's bank line of credit will be
sufficient to meet the Company's anticipated working capital needs in connection
with its current operations for at least approximately the next 18 months.
However, the Company will be required to obtain additional financing to pursue
its acquisition strategy and intends to seek significant additional financing
over the next two years to fund such acquisition strategy. The Company may
obtain such financing through additional borrowings or the issuance of
additional equity or debt securities, either of which could have an adverse
effect on the value of the shares of Common Stock offered hereby. There can be
no assurance that the Company will be able to secure financing on favorable
terms, if at all. If the Company is unable to secure additional financing in the
future, its ability to pursue its acquisition strategy and its operating results
for future periods may be negatively impacted. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Company Strategy."
Risks Associated with Managed Care Contracts. The Company's ability to
expand its operations is dependent, in part, on Medical Practices managed by the
Company renewing their contracts with managed care organizations and
contracting, on a favorable basis, with additional managed care organizations.
Obtaining new contracts, which increasingly involves a competitive bidding
process, requires that the Company assist the Medical Practices in accurately
anticipating the costs of providing services so that the Medical Practices
undertake contracts where they can expect to realize adequate profit margins or
otherwise meet their objectives. There can be no assurance that Medical
Practices will be successful in contracting with sufficient numbers of managed
care organizations or in negotiating contracts with managed care organizations
on terms favorable to the Company and the Medical Practices.
In connection with managed care contracts, the Medical Practices may be
required to enter into contracts under which services will be provided on a
fee-for-service or risk-sharing/capitated basis. Under certain capitated
contracts, the Medical Practice accepts a predetermined amount per patient, per
month in exchange for providing all necessary covered services. Such contracts
shift much of the risk of providing health care from the payor to the provider.
As such, the Medical Practices would be at risk to the extent costs of providing
medical services to patients exceed the fixed fee reimbursement amount. Medical
costs are affected by a variety of factors that are difficult to predict and not
within the Company's control. To the extent medical costs for services performed
by physicians at the Medical Practices exceed reimbursement amounts, the
revenues and earnings of the respective Medical Practices would decrease.
Accordingly, the Company's management fees for managing such Medical Practices
which are based on revenues and/or earnings of the respective Medical Practices
would decrease. Any such decrease would adversely effect the Company's business,
financial condition and operating results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Effects of Third-Party Payor Contracts."
Dependence Upon Reimbursement by Third-Party Payors; Potential Reductions
in Reimbursement by Third-Party Payors. Approximately 45%, 48% and 54% of the
Company's revenues for the three months ended March 31, 1997 and for the fiscal
years ended December 31, 1996 and 1995, respectively, were derived from revenues
received by the Medical Practices from third-party payors. In addition, the
Company receives substantial reimbursed costs which are indirectly derived from
third-party payors. Cost containment pressures are increasing in the health care
industry as third-party payors institute measures designed to limit payments to
health care providers. Such cost containment measures include reducing
reimbursement rates, limiting services covered, increasing utilization review of
services, negotiating prospective or discounted contract pricing, adopting
capitation strategies and seeking competitive bids. There can be no assurance
that such
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measures will not adversely affect the amounts or types of services that may be
reimbursable to the Medical Practices in the future. In particular, there can be
no assurance that ART services will be reimbursable to the Medical Practices in
the future. The Company believes that this trend will continue to result in a
reduction from historical levels in per-patient revenue for Medical Practices at
the Network Sites. Furthermore, government reimbursement programs are subject to
statutory and regulatory changes, retroactive rate adjustments, administrative
rulings and government restrictions, all of which could materially decrease the
range of services covered by such programs or the reimbursement rates paid to
the Medical Practices for its services. Such future reductions or changes would
have a material adverse effect on the Company's business, financial condition
and operating results. Reimbursement rates vary depending on the type of
third-party payors. Changes in the composition of third-party payors reimbursing
the Medical Practices from higher reimbursement rate payors to lower
reimbursement rate payors could have an adverse effect on the Company's
operating results. In addition, although a few states, including Massachusetts
and Illinois, mandate that insurance companies provide coverage for certain
infertility and ART services, efforts have been made to limit or repeal these
requirements. It cannot be determined what effect, if any, changes in the levels
of state mandated insurance coverage would have on the Company's revenues.
Uncertainty of Market Acceptance of Adult Women's Health Services. The
Company has historically focused on the management of Medical Practices
specializing in infertility and ART services. The Company recently established
the AWM Division to provide diagnostic and treatment services to peri- and
post-menopausal women. However, there can be no assurance that the Company's
strategy relating to adult women's health care will ever gain market acceptance.
In order for the services offered through the AWM Division to achieve market
acceptance, the Company must create awareness of and demand for a comprehensive
diagnostic and treatment approach for the broad range of medical conditions that
emerge in peri- and post-menopausal women. The Company must also educate women,
as well as managed care organizations and other third-party payors, as to the
benefits that may potentially be derived from a comprehensive approach to the
diagnosis and treatment of peri- and post-menopausal women. In addition, the
Company's success in expanding its AWM Division will depend on its ability to
acquire the practices of and enter into management contracts with gynecologists
and other specialty physicians focused on adult women's health care. Failure by
the Company to identify and enter into arrangements with such physicians could
prevent the Company from expanding and developing its AWM Division.
Reliance on Medical Practices, Physicians and Third-Party Vendors. The
Company's revenues will depend on the revenues generated by the Medical
Practices with which the Company has entered into management agreements. The
management agreements define the responsibilities of both the Medical Practices
and the Company and govern the principal terms and conditions of their
relationship. Although the management agreements with the Medical Practices are
for terms generally ranging from ten to 20 years and generally may be terminable
only for cause, there can be no assurance that a Medical Practice will not
terminate its agreement with the Company. Further, there can be no assurance
that any Medical Practice will maintain a successful medical practice or that
any of the key physicians will continue practicing with such Medical Practice.
The Company's business depends, to a significant degree, on the Medical
Practice's ability to recruit and retain qualified physicians. In addition,
Medical Practices enter into non-competition agreements with the physicians or,
in connection with the Bay Area Acquisition and the San Diego Acquisition, the
Company has entered into Professional Responsibility Agreements with the
physicians containing covenants not to compete. However, there can be no
assurance that any such agreement would be enforceable if challenged in court or
would prevent the physician from moving his or her practice to another region in
the United States. Moreover, such a covenant would not prevent the physician
from abandoning the practice of medicine. In addition, these agreements restrict
competition for a limited period of time (which may vary depending upon
particular state law requirements). Therefore, a departing physician may
directly compete with his or her former practice group after the expiration of
such time period. Any resulting loss of revenue by a Medical Practice could have
a material adverse effect on the Company. See "Business -- Network Site
Agreements."
The RSC Network Sites are dependent on third-party vendors that produce
fertility medications that are vital to the provision of infertility and ART
services. Should any of these vendors experience a supply shortage of
medication, it may have an adverse impact on the operations of the Company and
the Medical Practices. See "Business -- Reliance on Third-Party Vendors.
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Competition. The business of providing health care services is intensely
competitive, as is the physician practice 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 physician practices. Although the Company focuses on
physician practices that provide infertility, ART and adult women's health care
services, it competes for management contracts with other physician practice
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 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, physician 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 RSC Network Sites. 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.
A number of physician practice management companies have emerged with a
focus on obstetrics and gynecology. In addition, other health care corporations,
medical providers and physician practice management companies also may decide to
enter into the adult women's health care market, particularly if the Company's
concept to establish a multi-disciplinary approach to treat periand
post-menopausal women gains market acceptance. Further, private practice
physician groups often contract with pharmaceutical companies to perform
clinical trials relating to women's health care. These physician group practices
compete with the AWM Network Site in obtaining contracts for clinical trials.
See "Business -- Competition."
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, and potentially Illinois, are 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, prohibit physicians
from practicing medicine in partnership with, or as employees of, any person not
licensed to practice medicine and prohibit a corporation other than professional
corporations or associations from acquiring the goodwill of a medical practice.
In the context of management contracts between a corporation
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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. It 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 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 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 and Illinois (in the event the Pending Acquisition is consummated)
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.
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.
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With respect to the Pending Acquisition in Illinois, 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 Medical Practice 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 $1,000,000 per year, retroactive to the
effective date of the agreement. In such event, there is likely to be a decrease
in the management fees derived from this Medical Practice. There is a
substantial risk that the compensation arrangement, being based upon a
percentage of revenues, would not be upheld if challenged. Moreover, if the
management agreement were amended to provide for an annual fixed fee payable to
the Company, the contribution from this 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.
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 Office of the Inspector General of the U.S.
Department of Health and Human Services ("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. The failure of the
Company's interpretation of the Federal Antikickback Law to prevail 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 has 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.
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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 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 Medicaid programs as a result of an
investigation arising out of such an action. The Company is currently not
subject to any such claim.
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 of
Medicaid. Violations of these laws may result in prohibition of payment for
services rendered, loss of licenses as well as fines and criminal penalties.
In addition, New York, New Jersey, California, Florida, Pennsylvania and
Illinois 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. The Company's operations in New York, New Jersey, California and
Illinois have laboratories which are or will be subject to such prohibitions on
referrals for services in which the referring physician has a beneficial
interest. However, New York, New Jersey and California 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 the
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.
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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. 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 Company believes it is in material compliance with the foregoing
standards. Nevertheless, the loss of 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.
Health Care Reform. Political, economic and regulatory influences are
subjecting the health care industry in the United States to fundamental change.
Changes in the law, new interpretations of existing laws, or changes in payment
methodology or amounts, may have a dramatic effect on the relative costs
associated with doing business and the amount of reimbursement provided by
government and other third party payors. In addition to specific health care
legislation, both the President and the Congress have expressed an interest in
controlling the escalation of health care expenditures and using health care
reimbursement policies to help control the federal deficit. In recent years,
there have been numerous initiatives on the federal and state levels for
comprehensive reforms affecting the payment for and availability of health care
services. The Company believes that such initiatives will continue during the
foreseeable future. Aspects of certain of these reforms as proposed in the past,
such as further reductions in Medicare and Medicaid payments and additional
prohibitions on physician ownership, directly or indirectly, of facilities to
which they refer patients, if adopted, could adversely affect the Company. In
addition, some states in which the Company operates or may operate in the future
are also considering various health care reform proposals. The Company
anticipates that federal and state governments will continue to review and
assess alternative health care delivery systems and payment methodologies, and
that public debate of these issues will likely continue in the future. Due to
uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, the Company cannot predict which, if any, of such
reform proposals will be adopted, when they may be adopted or what impact they
may have on the Company; however, the exclusion of ART services as a
reimbursable health care benefit would have a material adverse effect on the
Company's business, financial condition and operating results. In addition, the
announcement of reform proposals and the investment community's reaction to such
proposals, as well as announcements by competitors and third-party payors of
their strategies to respond to such initiatives, could adversely effect the
market price of the Common Stock.
Potential Liability and Insurance; Legal Proceedings. 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 Network Sites 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. Further, 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 both risk and amount, although there can be no
assurance that any successful claims will not exceed applicable policy limits.
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There are inherent risks specific to the provision of infertility and ART
services. For example, the long-term effects on women of the administration of
fertility medication, integral to most infertility and ART services, 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 infertility and 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.
Dependence on Key Personnel. The Company is substantially dependent on the
efforts and skills of its current executive management for the management of the
Company and the implementation of its business strategy. Because of the
difficulty in finding adequate replacements for the executive management, the
loss, incapacity or unavailability of any of these individuals could adversely
affect the Company's operations. In addition, the Company's success is also
dependent upon its ability to attract and retain additional qualified personnel
to support the Company's anticipated growth. With the exception of Gerardo
Canet, the Company's Chairman and President, the Company does not have
employment agreements with its executive officers. See "Management --Employment
Agreements."
Possible Volatility of Stock Price. The market price of the Common Stock
following the offering could be subject to significant fluctuations in response
to a number of factors, including variations in the Company's quarterly
operating results, changes in estimates of the Company's earnings, perceptions
about market conditions in the health care industry, adverse publicity relating
to infertility or ART services, the impact of various health care reform
proposals and general economic conditions, some of which are unrelated to the
Company's operating performance. In addition, the stock market generally has
experienced significant price and volume fluctuations. These market fluctuations
could have an adverse effect on the market price or liquidity of the Common
Stock.
Shares Eligible for Future Sale; Registration Rights. Sales of substantial
amounts of Common Stock in the public market after the offering, or the
possibility of such sales occurring, could adversely affect prevailing market
prices for the Common Stock or the future ability of the Company to raise
capital through an offering of equity securities. After this offering, the
Company will have 17,317,009 shares of Common Stock outstanding (including an
estimated 1,142,857 shares of Common Stock to be issued in the Pending
Acquisition). Of these shares, the 6,400,000 shares of Common Stock offered
hereby and an additional 8,587,641 shares of Common Stock outstanding will be
freely tradable in the public market without restriction unless such shares are
held by "affiliates" of the Company, as that term is defined in Rule 144 under
the Securities Act. The remaining 2,329,368 shares of Common Stock outstanding
on completion of this offering are restricted securities under the Securities
Act and may be sold in the public market only if they are registered or if they
qualify for exemption from registration under Rule 144 under the Securities Act.
Pursuant to "lock-up" agreements, all of the Company's executive officers,
directors and certain holders of shares of the outstanding Common Stock, who
collectively hold 1,312,681 shares of Common Stock, have agreed not to offer,
sell, contract to sell, or grant any option, right or warrant to purchase or
otherwise dispose of any of their shares for a period of 90 days from the date
of this Prospectus without the prior written consent of Vector Securities
International, Inc. The Company has agreed that it will not offer, sell,
contract to sell, or grant any option, right or warrant to purchase or otherwise
dispose of Common Stock for a period of 90 days from the date of this
Prospectus, other than pursuant to outstanding warrants and options, existing
stock option plans, and in connection with corporate collaborations and
acquisitions, without the prior written consent of Vector Securities
International, Inc. Upon termination of such lock-up agreements, 979,348 of the
"locked-up" shares will be eligible for immediate sale in the public market
subject to certain volume, manner of sale and other limitations under Rule 144.
Vector Securities International, Inc. may, at its sole discretion and at any
time without notice, release all or any portion of the shares subject to such
lock-up agreements.
As of the date of this Prospectus, the Company had outstanding options and
warrants to purchase a total of 1,802,828 shares of Common Stock (giving effect
to this offering and the Pending Acquisition), of which options and warrants to
purchase 1,204,917 shares are currently exercisable. Of such shares subject to
options and warrants, approximately 582,660 shares are subject to lock-up
agreements for a period of 90 days from the date of this Prospectus. As of the
date of this Prospectus, an additional 332,454 shares were available for future
option grants under the Company's stock option plans. All of the shares issued,
issuable or reserved for issuance
15
<PAGE>
under the Company's stock option plans or upon the exercise of options issued or
issuable under such plans are covered or will be covered by an effective
registration statement. Shares issued upon exercise of such options generally
will be freely tradeable in the public market after the effective date of a
registration statement covering such shares without restriction or further
registration under the Securities Act, subject, in the case of certain holders,
to the Rule 144 limitations applicable to affiliates, the above-referenced
lock-up agreements and vesting restrictions imposed by the Company. In addition,
490,441 shares of Common Stock are issuable upon conversion of the Convertible
Preferred Stock (giving effect to this offering and the Pending Acquisition).
Upon conversion, such shares of Common Stock will be freely tradable in the
public market.
After the offering, holders of an aggregate of 2,329,368 shares of Common
Stock will be entitled to certain rights with respect to the registration of
such shares for resale under the Securities Act (including the shares to be
issued in the Pending Acquisition). In addition, the 851,765 shares issuable
upon exercise of outstanding warrants (including the Advisor Warrant) have
similar registration rights. If such registrations cause a large number of
shares to be registered and sold in the public market, such sales could have an
adverse effect on the market price for the Common Stock. See "Management --
Stock Option Plans," "--Outside Director Stock Purchase Plan," "Description of
Capital Stock," "Shares Eligible for Future Sale" and "Plan of Distribution."
Potential Anti-Takeover Provisions. The Company's Board of Directors is
authorized to issue from time to time, without stockholder authorization, shares
of preferred stock with such terms and conditions as the Board of Directors may
determine in its sole discretion. The rights of the holders of Common Stock will
be subject to, and may be adversely affected by, the rights of the holders of
any Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company. The Company is also subject to Section 203 of the Delaware General
Corporation Law (the "DGCL") which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any of a broad range of business
combinations with any "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder. Any
of these provisions could discourage, hinder or preclude an unsolicited
acquisition of the Company and could make it less likely that stockholders
receive a premium for their shares as a result of any such attempt. See
"Management," "Principal Stockholders" and "Description of Capital Stock."
Failure to Pay Dividends on Convertible Preferred Stock. 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, voting, together with the Common
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. The Company does not anticipate the payment of any
dividends on the Convertible Preferred Stock in the foreseeable future. As of
July 16, 1997, 12 quarterly dividend payments had been suspended resulting in
approximately $397,000 of dividend payments being in arrears. The Company will
continue to accrue cumulative dividends at the rate of approximately $33,000 per
quarter based on the 165,644 shares of Convertible Preferred Stock currently
outstanding. No dividends may be paid on any shares of capital stock ranking
junior to the Convertible Preferred Stock (including the Common Stock) unless
and until all accrued and unpaid dividends on the Convertible Preferred Stock
have been declared and paid in full. In addition, the failure of the Company to
pay a dividend on the Convertible Preferred Stock within 30 days of a dividend
payment date results in a reduction of the conversion price by $0.18 per share,
and the sale of Common Stock at a price, or the issuance of options, warrants or
convertible securities with an exercise or conversion price, below $8.00 per
share (the "Adjustment Price"), will also result in an adjustment of the
conversion price of the Convertible Preferred Stock. The Company's failure to
pay dividends on the Convertible Preferred Stock and the issuance of shares of
Common Stock below the Adjustment Price has resulted in an aggregate reduction
in the conversion price of the Convertible Preferred Stock of $2.16 and $0.96,
respectively. As a result of these reductions, the current conversion price of
the Convertible Preferred Stock is $5.97 per share. In addition, it is
anticipated that the conversion price will be reduced by an additional $2.46 per
share as a result of this offering and the closing of the Pending Acquisition.
16
<PAGE>
Immediate and Substantial Dilution. The purchasers of the shares of Common
Stock offered hereby will experience immediate and substantial dilution in the
pro forma net tangible book value of their shares of Common Stock in the amount
of $1.02 per share, after giving effect to the issuance of 186,512 shares of
Common Stock subsequent to March 31, 1997, including the 145,454 shares issued
in the San Diego Acquisition, the sale of the 6,400,000 shares of Common Stock
and the consummation of the Pending Acquisition. In the event that options and
warrants to purchase Common Stock are exercised or the Company issues additional
shares of Common Stock in the future, including shares that may be issued in
connection with future acquisitions, purchasers of Common Stock in this offering
may experience further dilution in the pro forma net tangible book value per
share of Common Stock. See "Dilution."
Possible Delisting of Securities from The Nasdaq Stock Market. The
Company's Common Stock is currently quoted on the Nasdaq National Market. The
Company will have to maintain certain minimum financial requirements for
continued inclusion on the Nasdaq National Market which require that (i) the
Company maintain at least $4.0 million in "net tangible assets" (total tangible
assets less total liabilities), (ii) the minimum bid price of the Common Stock
be $1.00 or more per share, (iii) the Common Stock have at least two active
market makers and (iv) the Common Stock be held by at least 400 holders.
On November 6, 1996, the Nasdaq National Market proposed changes to the
listing and maintenance requirements which were submitted to the Commission for
final approval on February 28, 1997. If the current proposal is approved without
modification, the Company's qualification for continued listing on the Nasdaq
National Market would require that (i) the Company maintain at least $4.0
million in net tangible assets, (ii) the minimum bid price of the Common Stock
be $1.00 or more per share, (iii) there be at least 750,000 shares in the public
float, valued at a minimum $5.0 million or more, (iv) the Common Stock have at
least two active market makers and (v) the Common Stock be held by at least 400
holders.
If the Company is unable to satisfy the Nasdaq National Market's
maintenance requirements, the Company's securities may be delisted from the
Nasdaq National Market. In such event, trading, if any, in the Common Stock
would thereafter be conducted in the over-the-counter markets in the so-called
"pink sheets" or the National Association of Securities Dealers, Inc.'s
"Electronic Bulletin Board." Consequently, the liquidity of the Company's
securities could be impaired, not only in the number of shares that could be
bought and sold, but also through delays in the timing of the transactions and a
reduction in the number and quality of security analysts' and the news media's
coverage of the Company. In addition, if the Company's securities were to be
delisted from the Nasdaq National Market, the Company's securities could become
subject to Rule 15g-9 under the Exchange Act relating to penny stocks, which
imposes additional sales practice requirements on broker-dealers which sell such
securities to persons other than established customers and "accredited
investors" (generally, individuals with net worth in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses).
Commission regulations define a "penny stock" to be any equity security that is
not listed on The Nasdaq Stock Market or a national securities exchange and that
has a market price (as therein defined) of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. If
the Company's securities were subject to the rules on penny stocks, the market
liquidity for the Company's securities could be adversely affected.
-----------------------
The statements in "Prospectus Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" contain certain forward-looking information 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. The
Company's actual results may differ materially from those described in these
forward-looking statements due to certain factors including, but not limited to,
the following: the success of the Company in acquiring additional management
agreements, including the Company's ability to finance future growth, increases
in overhead due to expansion, the possibility of loss of significant management
contract(s), the profitability or lack thereof at Network Sites, the exclusion
of infertility, ART and adult women's health care services from third-party
reimbursement, government laws and regulation regarding health care, changes in
managed care contracting, and the timely development of and acceptance of new
infertility, ART and adult women's health care technologies and techniques.
Investors are directed to the other risks discussed under the heading "Risk
Factors" and elsewhere herein.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 6,400,000 shares of
Common Stock offered hereby are estimated to be approximately $8.8 million,
assuming a public offering price of $1.56 per share, and after deducting the
Placement Agent's fee and other estimated offering expenses payable by the
Company.
The Company intends to use approximately $6.6 million of the net proceeds
to finance the Pending Acquisition. The aggregate purchase price for the Pending
Acquisition is approximately $8.6 million and approximately $2.0 million of the
purchase price will be paid in shares of the Company's Common Stock. The closing
of the Pending Acquisition is conditioned upon the Company raising at least $6.0
million in capital by August 28, 1997 and other customary closing conditions.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview--Pending Acquisition" and "Business--Pending Acquisition."
The balance of the proceeds of this offering will be used for working
capital and general corporate purposes, including possible future acquisitions
of the assets of, and the right to manage, additional physician practices. The
Company believes that its existing cash resources, together with the remaining
net proceeds from this offering and available borrowings under the Company's
bank line of credit, will be sufficient to meet the Company's anticipated
working capital needs in connection with its current operations for at least
approximately the next 18 months. However, the Company will be required to
obtain additional financing to pursue its acquisition strategy and intends to
seek significant additional financing over the next two years to fund such
acquisition strategy. Although the Company is evaluating and is engaged in
discussions with regard to several potential acquisitions, except with respect
to the Pending Acquisition, the Company has no agreements relating to any
acquisitions and there can be no assurance that any definitive agreements will
ever be entered into by the Company or that any such acquisitions will be
consummated. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
Pending such uses, the Company will invest the net proceeds in short term,
interest bearing, investment grade instruments, certificates of deposit, or
direct or guaranteed obligations of the United States.
18
<PAGE>
DIVIDEND POLICY
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. In addition, no dividends may be paid on the Common
Stock until full dividends have been paid on the Convertible Preferred Stock.
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. The Company
does not anticipate the payment of any cash dividends on the Convertible
Preferred Stock in the foreseeable future. As of July 16, 1997, 12 quarterly
dividend payments had been suspended resulting in approximately $397,000 of
dividend payments being in arrears. See "Description of Capital Stock --
Preferred Stock."
PRICE RANGE OF COMMON STOCK
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 June 1996 and
prior to the name change under the symbol "IVFA" since May 21, 1993. Prior
thereto, the Common Stock had been trading on The Nasdaq SmallCap Market since
October 8, 1992. The following table sets forth, for the periods indicated, the
high and low closing sales price per share of the Common Stock, as reported on
the Nasdaq National Market.
1995 High Low
---- ----- -----
First Quarter ................................. $1.88 $0.94
Second Quarter ................................ 2.44 1.31
Third Quarter ................................. 3.25 1.81
Fourth Quarter ................................ 3.81 1.94
1996
----
First Quarter ................................. $3.75 $2.31
Second Quarter ................................ 4.18 2.00
Third Quarter ................................. 3.50 2.25
Fourth Quarter ................................ 2.62 1.25
1997
----
First Quarter ................................. $2.50 $1.50
Second Quarter ................................ 1.88 1.34
Third Quarter (through July 16, 1997) ......... 1.63 1.41
On July 16, 1997, there were approximately 269 holders of record of the
Common Stock, excluding beneficial owners of shares registered in nominee or
street name.
19
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1997 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization giving effect
to the Pending Acquisition and (iii) the pro forma capitalization as adjusted to
give effect to the sale of the 6,400,000 shares of Common Stock offered hereby
at an assumed public offering price of $1.56 per share and the application of
the estimated net proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
As of March 31, 1997
---------------------------------------------
(In thousands)
Pro Forma
Combined
Company
and Pending Pro Forma
Actual Acquisition As Adjusted
------------ ------------------ -----------
<S> <C> <C> <C>
Exclusive management
rights obligation - long term ............................... $ 1,213 $ 1,213 $ 1,213
Long-term debt ................................................ 681 681 681
Shareholders' equity:
Preferred Stock, $1.00 par value;
3,165,644 shares authorized; 665,644
shares designated as Series A Cumulative
Convertible of which 165,644 shares are
issued and outstanding .................................... 166 166 166
Common Stock, $.01 par value;
25,000,000 shares authorized;
9,587,640 shares issued and
outstanding - actual;
14,961,266 shares issued and
outstanding - pro forma combined
Company and Pending Acquisition;
and 17,130,497 shares issued
and outstanding - pro forma as
adjusted (1) ............................................... 96 150 171
Capital in excess of par ....................................... 35,970 44,516 46,695
Accumulated deficit ............................................ (21,235) (21,235) (21,235)
------- -------- -------
Total shareholders' equity ................................... 14,997 23,597 25,797
------- ------- -------
Total capitalization ....................................... $16,891 $25,491 $27,691
======= ======= =======
</TABLE>
- ------------
(1) Does not include (i) 490,441 shares of Common Stock issuable upon
conversion of the Convertible Preferred Stock (giving effect to this
offering and the Pending Acquisition), (ii) 750,178 shares of Common Stock
issuable upon exercise of outstanding warrants at a weighted average
exercise price of $5.31 per share (giving effect to this offering and the
Pending Acquisition), (iii) 1,052,650 shares of Common Stock issuable upon
exercise of outstanding options at a weighted average exercise price of
$1.84 per share, (iv) 332,454 shares of Common Stock reserved for future
option grants under the Company's stock option plans, (v) 125,000 shares of
Common Stock reserved for issuance pursuant to the Outside Director Stock
Purchase Plan, (vi) an estimated 101,587 shares issuable upon exercise of
the Advisor Warrant, (vii) 186,512 shares issued subsequent to March 31,
1997, including the 145,454 shares issued in the San Diego Acquisition and
(viii) shares which may be issued, at the physician's option, in partial
payment of the contingent purchase price relating to the San Diego
Acquisition. See "Management -- Stock Option Plans," "-- Outside Director
Stock Purchase Plan," "Description of Capital Stock" and "Plan of
Distribution."
20
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1997,
after giving effect to the issuance of 186,512 shares of Common Stock subsequent
to March 31, 1997, including the 145,454 shares issued in connection with the
San Diego Acquisition, was approximately $6.9 million, or approximately $0.71
per share. Net tangible book value per share is equal to the Company's net
tangible assets (tangible assets less total liabilities), divided by the number
of shares of Common Stock outstanding. After giving effect to the sale of the
6,400,000 shares of Common Stock offered hereby at an assumed public offering
price of $1.56 per share, the application of the estimated net proceeds
therefrom, the consummation of the Pending Acquisition and the related issuance
of an estimated 1,142,857 shares of Common Stock, the adjusted pro forma net
tangible book value at March 31, 1997 would have been approximately $9.4
million, or approximately $0.54 per share. This represents an immediate decrease
in such net tangible book value of approximately $0.17 per share to existing
stockholders and an immediate dilution in net tangible book value of
approximately $1.02 per share to new investors. The following table sets forth
the per share dilution to new investors in the offering:
Assumed public offering
price per share .................................. $ 1.56
Pro Forma net tangible
book value per share as of
March 31, 1997 ................................. $ 0.71
Decrease per share
attributable to new investors .................. $ 0.17
------
Pro forma net tangible book value
per share upon consummation
of the Pending Acquisition and
after this offering .............................. $ 0.54
------
Dilution per share to new investors ................ $ 1.02
======
The following table summarizes, on a pro forma basis as of March 31, 1997,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
shareholders, and by new investors in the offering (assuming a public offering
price of $1.56 per share and before deducting the Placement Agent's fee and
estimated offering expense payable by the Company):
<TABLE>
<CAPTION>
Total
Shares Purchased Consideration Average
-------------------- --------------------- Price Per
Number Percent Amount Percent Share
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Existing Shareholders(1) ................ 10,917,009 63.0% $38,322,000 79.3% $3.51
New Investors ........................... 6,400,000 37.0 10,000,000 20.7 1.56
---------- ----- ----------- -----
Total ................................ 17,317,009 100.0% $48,322,000 100.0%
========== ===== =========== =====
</TABLE>
- --------------
(1) Includes (i) 186,512 shares of Common Stock issued subsequent to March 31,
1997, including the 145,454 shares issued in connection with the San Diego
Acquisition, (ii) an estimated 1,142,857 shares of Common Stock issuable in
connection with the Pending Acquisition and (iii) 3,408,366 and 2,432,936
shares of Common Stock issued in connection with the Company's preferred
stock conversion offers in November 1994 and July 1996, respectively.
The foregoing table does not include the issuance of (i) 490,441 shares of
Common Stock issuable upon conversion of the Convertible Preferred Stock (giving
effect to this offering and the Pending Acquisition), (ii) 750,178 shares of
Common Stock issuable upon exercise of outstanding warrants at a weighted
average exercise price of $5.31 per share(giving effect to this offering and the
Pending Acquisition), (iii) 1,052,650 shares of Common Stock issuable upon
exercise of outstanding options at a weighted average exercise price of $1.84
per share, (iv) 332,454 shares of Common Stock reserved for future option grants
under the Company's stock option plans, (v) 125,000 shares of Common Stock
reserved for issuance pursuant to the Outside Director Stock Purchase Plan, (vi)
an estimated 101,587 shares issuable upon exercise of the Advisor Warrant and
(vii) shares which may be issued, at the physician's option, in partial payment
of the contingent purchase price relating to the San Diego Acquisition. See
"Management -- Stock Option Plans," "-- Outside Director Stock Purchase Plan,"
"Description of Capital Stock" and "Plan of Distribution."
21
<PAGE>
SELECTED CONSOLIDATED AND PRO FORMA COMBINED FINANCIAL DATA
(In thousands, except per share data)
The following selected financial data have been 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 Prospectus. The selected historical consolidated financial
data set forth below as of December 31, 1996 and for each of the years ended
December 31, 1994, 1995 and 1996 have been derived from the consolidated
financial statements of the Company for such periods which have been audited by
Price Waterhouse LLP, independent accountants, whose report thereon is included
elsewhere in this Prospectus. The selected historical financial data for each of
the years ended December 31, 1992 and 1993 have been derived from audited
financial statements of the Company which are not included in this Prospectus.
The selected historical financial data set forth below as of March 31, 1997 and
for the three months ended March 31, 1996 and 1997 have been derived from the
Company's unaudited consolidated financial statements, which were prepared on
the same basis as the audited financial statements and which, in the opinion of
management, include all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial information for such
interim periods. Operating results for the three months ended March 31, 1997 are
not necessarily indicative of results that may be expected for the year ending
December 31, 1997. The selected pro forma combined financial data set forth
below at March 31, 1997 and for the year ended December 31, 1996 and for the
three months ended March 31, 1997 have been derived from the unaudited pro forma
combined financial statements of the Company. The pro forma selected financial
data are not necessarily indicative of the actual results of operations or
financial position that would have been achieved had the Recent Acquisitions
(other than the San Diego Acquisition), the Pending Acquisition and this
offering been completed at the beginning of the applicable period, nor are the
statements indicative of the Company's future results of operations or financial
position. See "Unaudited Pro Forma Combined Financial Information."
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
----------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- ------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenues, net .......... $ 13,806 $ 16,025 $ 17,578 $ 16,711 $ 18,343 $ 4,175 $ 5,088
Medical Practice
retainage ........... 3,936 4,605 3,824 3,063 2,680 794 396
-------- -------- -------- -------- -------- ------- -------
Revenues after
Medical Practice
retainage ........... 9,870 11,420 13,754 13,648 15,663 3,381 4,692
Costs of services
rendered ............ 7,257 10,222 10,998 9,986 12,398 2,563 3,615
-------- -------- -------- -------- -------- ------- -------
Network Sites'
contribution ........ 2,613 1,198 2,756 3,662 3,265 818 1,077
General and
administrative
expenses ............ 2,071 3,079 3,447 3,680 4,339 855 918
Equity in loss of
Partnerships (4) .... 876 1,793 -- -- -- -- --
Total other (income)
expenses (including
income taxes) ....... 1,622 923 123 (88) 416 37 204
-------- -------- -------- -------- -------- ------- -------
Net (loss) income ...... (1,956) (4,597) (814) 70 (1,490) (74) (45)
Less: Dividends
accrued and/or
paid on
Preferred Stock ..... -- 748 1,146 600 132 154 33
-------- -------- -------- -------- -------- ------- -------
Net (loss) income
applicable
to Common Stock ..... $ (1,956) $ (5,345) $ (1,960) $ (530) $ (1,622) $ (228) $ (78)
======== ======== ======== ======== ======== ======= =======
Net (loss) income
per share
of Common Stock
before
consideration
for induced
conversion of
Preferred
Stock (5) ........... $ (0.94)(5) $ (2.01) $ (0.32) $ (0.09) $ (0.21) $ (0.04) $ (0.01)
======== ======== ======== ======== ======== ======= =======
Weighted average
number of shares
of Common Stock
outstanding ......... 2,042(5) 2,654 6,081 6,087 7,602 6,087 9,544
======== ======== ======== ======== ======== ======= =======
</TABLE>
Pro Forma
-------------------------------------------------
Combined Company,
Combined Recent Combined
Company Acquisitions Company
and Recent and Pending and Pending
Acquisitions(1) Acquisition(2) Acquisition(2)
--------------- -------------- --------------
Year Ended Three Months Ended
December 31, 1996 March 31, 1997
----------------- --------------
(Unaudited) (Unaudited)
Statement of
Operations Data:
Revenues, net .......... $ 21,665 $ 27,685 $ 6,480
Medical Practice
retainage ........... 2,680 2,680 396
-------- -------- -------
Revenues after
Medical Practice
retainage ........... 18,985 25,005 6,084
Costs of services
rendered ............ 15,534 20,428 4,661
-------- -------- -------
Network Sites'
contribution ........ 3,451 4,577 1,423
General and
administrative
expenses ............ 4,339 4,339 918
Equity in loss of
Partnerships (4) .... -- -- --
Total other (income)
expenses (including
income taxes) ....... 727 1,194 325
-------- -------- -------
Net (loss) income ...... (1,615) (956) 180
Less: Dividends
accrued and/or
paid on
Preferred Stock ..... 132 132 33
-------- -------- -------
Net (loss) income
applicable
to Common Stock ..... $ (1,747) $ (1,088) $ 147
======== ======== =======
Net (loss) income
per share
of Common Stock
before
consideration
for induced
conversion of
Preferred
Stock (5) ........... $ (0.21) $ (0.08) $ 0.01
======== ======== =======
Weighted average
number of shares
of Common Stock
outstanding ......... 8,224 13,598(6) 14,918(6)
======== ======== =======
22
<PAGE>
<TABLE>
<CAPTION>
As of
December 31, As of
1996 March 31, 1997
---------- ---------------------------------------------
Pro Forma
Combined
Company
and Pending Pro Forma
Actual Actual Acquisition(7) As Adjusted(8)
-------- ------------- -------------- -------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (9) ............. $ 7,092 $ 5,791 $ 5,441 $ 7,641
Total assets (9) ................ 20,850 20,989 29,939 31,789
Total indebtedness (10) ......... 2,553 2,769 2,769 2,769
Accumulated deficit ............. (21,190) (21,235) (21,235) (21,235)
Shareholders' equity ............ 14,478 14,997 23,597 25,797
</TABLE>
(1) Gives effect to the Recent Acquisitions (other than the San Diego
Acquisition) as if each had occurred on January 1, 1996. See "Unaudited Pro
Forma Combined Financial Information" and "Business -- The Network Sites --
Recent Acquisitions."
(2) Gives effect to the Pending Acquisition as if it had occurred on January 1,
1996, with respect to the year ended December 31, 1996, and January 1,
1997, with respect to the three months ended March 31, 1997. There can be
no assurance that the Pending Acquisition will be consummated. See
"Unaudited Pro Forma Combined Financial Information" and "Business -- The
Network Sites -- Pending Acquisition."
(3) In 1993, the Company dissolved its 50% interests in two partnerships which
had been accounted for under the equity method. The management fees
therefrom were reported under "Revenues, net" in the Consolidated Statement
of Operations.
(4) See Note 11 of Notes to the Company's Consolidated Financial Statements
regarding the impact of the Company's conversion offer of the Convertible
Preferred Stock in July 1996 on net loss per share in 1996.
(5) Includes a reduction of $29,000 to net loss related to interest on
promissory notes and an adjustment of 35,000 shares to the weighted average
number of shares of Common Stock outstanding related to outstanding stock
options.
(6) Includes 5,373,626 shares of Common Stock assumed to be issued by the
Company at the beginning of the applicable period to finance the entire
cost of the Pending Acquisition. See "Unaudited Pro Forma Combined
Financial Information."
(7) Gives effect to the Pending Acquisition as if it had occurred on March 31,
1997. There can be no assurance that the Pending Acquisition will be
consummated. See "Use of Proceeds," "Unaudited Pro Forma Combined Financial
Information" and "Business -- The Network Sites -- Pending Acquisition."
(8) Adjusted to give effect to the sale of 6,400,000 shares of Common Stock
offered by the Company hereby (at an assumed public offering price of $1.56
per share) and the application of the net proceeds therefrom of $8.8
million as if this offering occurred on March 31, 1997. Assumes that the
net proceeds of this offering are applied as follows: (i) $6.6 million to
finance the Pending Acquisition and (ii) payment of $350,000 in costs
related to the Pending Acquisition. The remainder of the net proceeds will
be used for working capital and general corporate purposes.
(9) Includes controlled assets of certain Medical Practices of $650,000 and
$425,000 at December 31, 1996 and March 31, 1997, respectively.
(10) Includes approximately $1.4 million of exclusive management rights
obligation.
23
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Combined Balance Sheet at March 31, 1997
and the Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1996 and the three months ended March 31, 1997 have been prepared
to reflect adjustments to the Company's historical results of operations and
financial position to give effect to the Recent Acquisitions (other than the San
Diego Acquisition which was consummated in June 1997) and the Pending
Acquisition. The Unaudited Pro Forma Combined Balance Sheet reflects the Pending
Acquisition as if it had occurred on March 31, 1997 and the Unaudited Pro Forma
Combined Statement of Operations for the year ended December 31, 1996 reflects
the Recent Acquisitions (other than the San Diego Acquisition) and the Pending
Acquisition as if they had occurred on January 1, 1996. The Unaudited Pro Forma
Combined Statement of Operations for the three months ended March 31, 1997
reflects the Pending Acquisition as if it had occurred on January 1, 1997.
The unaudited pro forma combined financial information gives effect to the
Recent Acquisitions (other than the San Diego Acquisition) and the Pending
Acquisition using the purchase method of accounting, and is based upon an
allocation (or, in the case of the Pending Acquisition, a preliminary
allocation) of the acquisition costs to the tangible and intangible assets
acquired and the liabilities assumed based upon the estimated fair values at the
respective date of acquisition and includes the adjustments described in the
notes to the unaudited pro forma combined financial information. Such allocation
of the acquisition costs may change upon final appraisal of the fair value of
the net assets acquired. Any resulting changes are not expected to be material
to the pro forma combined financial information.
The unaudited pro forma combined financial information has been prepared by
the Company based on the financial statements of the Company, Bay Area Fertility
and Gynecology Medical Group, a California partnership ("Bay Area Fertility"),
acquired in the Bay Area Acquisition, and FCI to be acquired in the Pending
Acquisition, which statements are included elsewhere in this Prospectus, and the
financial statements of other Medical Practices acquired in the Recent
Acquisitions (other than the San Diego Acquisition), which statements are not
included in this Prospectus. For purposes of preparing the unaudited pro forma
combined financial information, the results of operations of the Company have
been adjusted to combine the actual results of operations of the Company with
the estimated results of the Company's operations derived from the historical
results of the Medical Practices adjusted in accordance with the terms of the
related management agreement, if applicable. The unaudited pro forma combined
financial information is presented for illustrative purposes only and is not
necessarily indicative of the results that would have been obtained if the
acquisitions occurred on the dates indicated or that may be realized in the
future. The pro forma adjustments are based upon certain assumptions and
estimates that management of the Company believes are reasonable. The Company
believes that all adjustments considered necessary for a fair presentation have
been included in the unaudited pro forma combined financial information. The
unaudited pro forma combined financial information should be read in conjunction
with the Company's audited Consolidated Financial Statements and the notes
thereto and the historical financial statements of Bay Area Fertility and FCI
and the notes thereto included elsewhere in this Prospectus.
24
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
As of
March 31, 1997
-------------------------------------------------------------
Pro Forma Pending Acquisition
--------------------------------------------
Assets
Historical(1) Acquired Adjustments Combined
------------- -------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short term
investments............................. $ 3,401 $ -- $ -- $ 3,401
Accounts receivable, net................... 3,728 -- -- 3,728
Management fees receivable, net............ 1,757 -- -- 1,757
Other current assets....................... 1,003 -- -- 1,003
------- ----- ------- -------
Total current assets..................... 9,889 -- -- 9,889
------- ----- ------- -------
Fixed assets, net............................. 2,947 600(2) -- 3,547
Intangible assets, net........................ 7,937 -- 8,350(3) 16,287
Other assets.................................. 216 -- -- 216
------- ----- ------- -------
Total assets............................. $20,989 $ 600 $ 8,350 $29,939
======= ===== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 575 $ -- $ -- $ 575
Accrued liabilities and due to
Medical Practices....................... 1,703 -- 350(4) 2,053
Dividends accrued on preferred stock....... 364 -- -- 364
Current portion of exclusive management
rights obligation....................... 222 -- -- 222
Note payable and current portion
of long-term debt....................... 653 -- -- 653
Patient deposits........................... 581 -- 581
------- ----- ------- -------
Total current liabilities................ 4,098 -- 350 4,448
Exclusive management rights obligation........ 1,213 -- -- 1,213
Long-term debt................................ 681 -- -- 681
Shareholders' equity:
Preferred Stock............................ 166 -- -- 166
Common Stock............................... 96 -- 54(5) 150
Capital in excess of par................... 35,970 -- 8,546(5) 44,516
Accumulated deficit........................ (21,235) 600 (600) (21,235)
------- ----- ------- -------
Total shareholders' equity............... 14,997 600 8,000 23,597
------- ----- ------- -------
Total liabilities and
shareholders' equity................... $ 20,989 $ 600 $ 8,350 $29,939
======== ===== ======= =======
</TABLE>
Notes to Unaudited Pro Forma Combined Balance Sheet
(1) Reflects the Company's actual consolidated balance sheet as of March 31,
1997.
(2) Represents the estimated historical book value of assets to be acquired
pursuant to the Pending Acquisition.
(3) Represents the purchase price to be paid by the Company in excess of the
estimated fair value of assets to be acquired in the Pending Acquisition.
(4) Represents estimated accrued costs and expenses associated with the closing
of the Pending Acquisition.
(5) Represents the issuance of 5,373,626 shares of Common Stock that would have
been issued on March 31, 1997 to finance the entire cost of the Pending
Acquisition.
25
<PAGE>
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1996
------------------------------------------------------------------------------
Pro Forma Recent Acquisitions (1)(2)
--------------------------------------------------------------
RSC Division
Recent
Acquisitions
-------------------- AWM
RSC of Bay Division
Dallas Area Recent
Acqui- Acqui- Acqui- Adjust-
Historical(5) sition sition sitions ments Combined
------------- ------ -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues, net ....................... $ 18,343 $650(6) $ 1,441(6) $ 1,231(7) $ -- $ 21,665
Medical Practice retainage .......... 2,680 -- -- -- -- 2,680
-------- ---- ------- ------- -------- --------
Revenues after Medical Practice
retainage ........................ 15,663 650 1,441 1,231 -- 18,985
Costs of services rendered .......... 12,398 615 1,151(9) 1,370(10) -- 15,534
-------- ---- ------- ------- -------- --------
Network Sites' contribution ......... 3,265 35 290 (139) -- 3,451
-------- ---- ------- ------- -------- --------
General and administrative
expenses ......................... 4,339 -- -- -- -- 4,339
Clinical service development
expenses ......................... 323 -- -- -- -- 323
Amortization of intangible assets ... 331 -- -- -- 197(12) 528
Interest (income) expense, net ...... (379) -- -- -- 93(14) (286)
-------- ---- ------- ------- -------- --------
Total other expenses ................ 4,614 -- -- -- 290 4,904
-------- ---- ------- ------- -------- --------
(Loss) income before income taxes ... (1,349) 35 290 (139) (290) (1,453)
Provision for taxes ................. 141 -- -- -- 21(15) 162
-------- ---- ------- ------- -------- --------
Net (loss) income ................... (1,490) 35 290 (139) (311) (1,615)
Less: Dividends accrued on
Preferred Stock .................. 132 -- -- -- -- 132
-------- ---- ------- ------- -------- --------
Net (loss) income applicable to
Common Stock before
consideration for induced
conversion of Preferred Stock ... $(1,622) $ 35 $ 290 $ (139) $ (311) $ (1,747)
======== ==== ======= ======= ======== ========
Net (loss) income per share of Common
Stock before consideration
for induced conversion of
Preferred Stock .................. $ (0.21) $ (0.21)
======== ========
Weighted average number
of shares of Common Stock
outstanding ...................... 7,602 333(16) 289(17) 8,224
======== ======= ======= ========
</TABLE>
Year Ended December 31, 1996
-------------------------------------
Pro Forma
Pending Acquisition(3)(4)
-------------------------------------
Pending
Acqui- Adjust-
sition ments Combined
------- ------- ---------
Revenues, net ....................... $ 6,020(8) $ -- $ 27,685
Medical Practice retainage .......... -- -- 2,680
------- -------- --------
Revenues after Medical Practice
retainage ........................ 6,020 -- 25,005
Costs of services rendered .......... 4,894(11) -- 20,428
------- -------- --------
Network Sites' contribution ......... 1,126 -- 4,577
------- -------- --------
General and administrative
expenses ......................... -- -- 4,339
Clinical service development
expenses ......................... -- -- 323
Amortization of intangible assets ... -- 418(13) 946
Interest (income) expense, net ...... -- -- (286)
------- -------- --------
Total other expenses ................ -- 418 5,322
------- -------- --------
(Loss) income before income taxes ... 1,126 (418) (745)
Provision for taxes ................. -- 49(15) 211
------- -------- --------
Net (loss) income ................... 1,126 (467) (956)
Less: Dividends accrued on
Preferred Stock .................. -- -- 132
------- -------- --------
Net (loss) income applicable to
Common Stock before
consideration for induced
conversion of Preferred Stock ... $ 1,126 $ (467) $ (1,088)
======= ======== ========
Net (loss) income per share of Common
Stock before consideration
for induced conversion of
Preferred Stock .................. $ (0.08)
========
Weighted average number
of shares of Common Stock
outstanding ...................... 5,374(18) 13,598
======== ========
<TABLE>
<CAPTION>
Three Months Ended March 31, 1997
--------------------------------------------------
Pro Forma
Pending Acquisition(3)(4)
--------------------------------------------------
Pending
Acqui- Adjust-
Historical(5) sition ments Combined
------------ ------- ----- --------
<S> <C> <C> <C> <C>
Revenues, net ....................... $ 5,088 $1,392(8) $ -- $ 6,480
Medical Practice retainage .......... 396 -- -- 396
------- ------ ------- -------
Revenues after Medical Practice
retainage ........................ 4,692 1,392 -- 6,084
Costs of services rendered .......... 3,615 1,046(11) -- 4,661
------- ------ ------- -------
Network Sites' contribution ......... 1,077 346 -- 1,423
------- ------ ------- -------
General and administrative
expenses ......................... 918 -- -- 918
Clinical service development
expenses ......................... 59 -- -- 59
Amortization of intangible assets ... 137 104(13) 241
Interest (income) expense, net ...... (24) -- -- (24)
------- ------ ------- -------
Total other expenses ................ 1,090 -- 104 1,194
------- ------ ------- -------
(Loss) income before income taxes ... (13) 346 (104) 229
Provision for taxes ................. 32 -- 17(15) 49
------- ------ ------- -------
Net (loss) income ................... (45) 346 (121) 180
Less: Dividends accrued on
Preferred Stock .................. 33 -- -- 33
------- ------ ------- -------
Net (loss) income applicable to
Common Stock before
consideration for induced
conversion of Preferred Stock ... $ (78) $ 346 $ (121) $ 147
======= ====== ======= =======
Net (loss) income per share of Common
Stock before consideration
for induced conversion of
Preferred Stock .................. $ (0.01) $ 0.01
======= =======
Weighted average number
of shares of Common Stock
outstanding ...................... 9,544 5,374(18) 14,918
======= ======= =======
</TABLE>
See accompanying notes to unaudited pro forma combined statement of operations.
26
<PAGE>
Notes to Unaudited Pro Forma Combined Statement of Operations
(1) In May 1996, the Company acquired certain assets of and the right to manage
the Reproductive Science Center of Dallas (the "RSC of Dallas"). The
aggregate purchase price was approximately $701,500, consisting of $244,000
in cash and a $457,500 promissory note. The aggregate purchase price for
the RSC of Dallas was allocated as follows: $144,000 to fixed assets and
the balance of $557,500 to exclusive management rights, which will be
amortized over the ten year term of the management agreement.
In June 1996, the Company acquired all of the outstanding stock of the
three related Florida corporations (collectively, the "Merger Companies")
and 51% of the outstanding stock of the National Menopause Foundation, Inc.
("NMF"), a related Florida corporation. In exchange for the shares of the
Merger Companies, the Company paid an aggregate of approximately $2.9
million, consisting of $350,000 in cash and 666,666 shares of Common Stock.
In exchange for 51% of the outstanding stock of NMF, the Company paid cash
in an aggregate amount of $50,000 and issued a $600,000 promissory note.
The aggregate purchase price for the Merger Companies was allocated to
assets acquired and liabilities assumed as follows: $338,000 to current
assets, $99,000 to fixed assets, $214,000 to research contracts which will
be amortized over a three-year period, $235,000 to accrued liabilities,
$97,000 to debt and the balance of approximately $2.5 million to goodwill,
which will be amortized over a forty-year period. The aggregate purchase
price of NMF was allocated as follows: $2,000 to current assets, $30,000 to
fixed assets, $10,000 to current liabilities and the balance of $628,000 to
goodwill, which will be amortized over a 40-year period.
In December 1996, the Company acquired W. Banks Hinshaw, Jr., M.D., P.A., a
Florida professional association ("Hinshaw"), and merged Hinshaw's
operations into the AWM Division. The aggregate purchase price for Hinshaw
was $465,200, of which $235,200 was paid in cash and the balance is payable
in four equal installments of $55,000 commencing December 31, 1997. The
aggregate purchase price for Hinshaw was allocated as follows: $145,000 to
fixed assets and the balance of $320,000 to goodwill, which will be
amortized over a 40-year period.
In January 1997, the Company acquired certain assets of the Bay Area
Fertility, and acquired the right to manage the Bay Area Fertility and
Gynecology Medical Group, Inc., a California professional corporation which
is the successor to Bay Area Fertility medical practice (the "Bay Area
Acquisition"). The aggregate purchase price was approximately $2.1 million,
consisting of $1.5 million in cash and 333,333 shares of Common Stock. The
aggregate purchase price for the Bay Area Acquisition was allocated as
follows: $29,000 to fixed assets, $500,000 to the trade name of "Bay Area
Fertility" and the balance of approximately $1.6 million to exclusive
management rights, which will be amortized over the 20 year term of the
management agreement.
(2) Reflects the pro forma operating results of the Company derived from the
historical statements of operations of the Recent Acquisitions (other than
the San Diego Acquisition) from January 1, 1996 through the respective date
of consummation of each of the Recent Acquisitions (other than the Bay Area
Acquisition) and, in the case of the Bay Area Acquisition, from January 1,
1996 through December 31, 1996. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Recent Acquisitions"
and "Business -- The Network Sites -- Recent Acquisitions" for a summary of
the Recent Acquisitions. The audited financial statements of Bay Area
Fertility for the year ended December 31, 1996 are included elsewhere in
this Prospectus.
(3) In February 1997, the Company entered into agreements to acquire certain
assets of and the right to manage FCI. The aggregate purchase price for the
Pending Acquisition is approximately $8.6 million, approximately $6.6
million of which is payable in cash and approximately $2.0 million of which
is payable in shares of the Company's Common Stock, the exact number of
which to be determined based on the average market price of the Common
Stock for the ten trading day period prior to the third business day prior
to closing of the Pending Acquisition. The closing of the Pending
Acquisition is conditioned upon the Company's raising at least $6.0 million
in capital by August 28, 1997 and other customary closing conditions. If
consummated, the Pending Acquisition will be the largest acquisition by the
Company to date as part of its series of acquisitions over the last
eighteen months.
(4) Reflects the pro forma operating results of the Company derived from the
historical statements of operations of FCI for the year ended December 31,
1996 and for the three months ended March 31, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Pending Acquisition" and "Business -- The Network Sites -- Pending
Acquisition" for a summary of the Pending Acquisition. The audited
financial statements of FCI for the year ended December 31, 1996 and the
unaudited financial statements of FCI for the three months ended March 31,
1997 are included elsewhere in this Prospectus.
(5) Reflects the Company's actual consolidated statement of operations for the
year ended December 31, 1996, including (i) the results of the Recent
Acquisitions other than the Bay Area Acquisition and the San Diego
Acquisition from each of their respective acquisition dates and (ii) the
Company's actual consolidated statement of operations for the three months
ended March 31, 1997, including the results of Bay Area Fertility from the
date of acquisition.
27
<PAGE>
(6) Reflects the Company's fees that would have been earned under its
management agreements with (i) Bay Area Fertility for the year ended
December 31, 1996 and (ii) the RSC of Dallas for the period from January 1,
1996 through the date of its acquisition. The Company's management fee of
approximately $1.4 million related to the Bay Area Acquisition would have
been comprised of the following: (i) 6% of Bay Area Fertility's actual
revenues of approximately $2.1 million for the year ended December 31,
1996, (ii) reimbursed cost of services which would have been paid by the
Company on behalf of Bay Area Fertility equal to approximately $1.2
million, consisting of $923,000 and $228,000 in cost of services rendered
and general and administrative expenses, respectively, of Bay Area
Fertility for the year ended December 31, 1996, and (iii) 20% of Bay Area
Fertility's actual net income after deducting the Company's 6% base
management fee for the year ended December 31, 1996, or 20% of $821,080.
The Company's management fee of $650,000 related to the RSC of Dallas
Acquisition was calculated in the same manner as the management fee related
to the Bay Area Acquisition.
(7) Reflects 100% of the revenues earned by Hinshaw, the Merger Companies and
NMF for the period from January 1, 1996 through the respective dates of
acquisition.
(8) Reflects the Company's fee that would have been earned for the year ended
December 31, 1996 and for the three months ended March 31, 1997 under its
management agreement with FCI. The Company's management fee of
approximately $6.0 million and $1.4 million related to the Pending
Acquisition for the year ended December 31, 1996 and three months ended
March 31, 1997, respectively, would have been comprised of the following:
(i) 6% of FCI's actual revenues of approximately $8.3 million and $2.2
million for the year ended December 31, 1996 and the three months ended
March 31, 1997, respectively, (ii) reimbursed expenses which would have
been paid by the Company on behalf of FCI equal to approximately $4.9
million and $1.0 million for the year ended December 31 1996 and the three
months ended March 31, 1997, respectively, (which includes all expenses of
FCI before income taxes, excluding physician compensation and certain
physician benefits of approximately $3.0 million and $590,000,
respectively), and (iii) an additional fee of 7.5% and 9.5%, respectively,
of FCI's actual revenues of approximately $8.3 million and $2.2 million for
the year ended December 31, 1996 and the three months ended March 31, 1997,
respectively; the percentage used in determining such additional fee varies
based upon the ratio of FCI's cost of services (after the calculation of
the Company's management fee) to revenues.
(9) Represents all direct costs that would have been incurred by the Company in
the operation of (i) the RSC of Dallas for the period from January 1, 1996
through the date of its acquisition and (ii) Bay Area Fertility for the
year ended December 31, 1996. Pursuant to the Company's management
agreements with the RSC of Dallas and Bay Area Fertility, the respective
costs of services rendered are reimbursed to the Company and are included
in the Company's revenues. See notes (2) and (6) above and "Business --
Network Site Agreements --Management Agreements."
(10) Represents all direct costs that would have been incurred by the Company in
the operation of Hinshaw, the Merger Companies and NMF for the period from
January 1, 1996 through the respective dates of acquisition. See note (2)
above and "Business -- Network Site Agreements -- Management Agreements."
(11) Represents all direct costs that would have been incurred by the Company in
the operation of FCI for the year ended December 31, 1996 and for the three
months ended March 31, 1997. Pursuant to the Company's management agreement
with FCI, such costs of services rendered will be reimbursed to the Company
and will be included in the Company's revenues. See notes (4) and (8) above
and "Business -- Network Site Agreements -- Management Agreements."
(12) Reflects additional amortization of exclusive management rights, goodwill
and other intangible assets that are being amortized over periods ranging
from three to 40 years, as detailed in the following table:
<TABLE>
<CAPTION>
Amorti- Annual Pro Rata
Asset zation Amortization Pro Rata Amortization
Type of Value Period in Expense Amortization Expense
Asset (000's omitted) Years (000's omitted) Period (000's omitted)
------- ------------ ------ --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Bay Area Fertility Exclusive Management $1,556 20 $ 78 1/1/96-12/31/96 $ 78
Right
Bay Area Fertility Trade Name 500 20 25 1/1/96-12/31/96 25
RSC of Dallas Exclusive Management 557 10 56 1/1/96-5/15/96 20
Right
Merger Companies Goodwill 2,531 40 63 1/1/96-6/6/96 28
Merger Companies Research Contracts 214 3 71 1/1/96-6/6/96 31
NMF Goodwill 628 40 16 1/1/96-6/6/96 7
Hinshaw Goodwill 320 40 8 1/1/96-12/31/96 8
---- ----
$317 $197
==== ====
</TABLE>
28
<PAGE>
(13) Reflects amortization of the exclusive management right that will be
amortized over the twenty year term of the management agreement.
(14) Reflects the decrease in interest income assuming $1.5 million in cash was
paid on January 1, 1996 for the right to manage Bay Area Fertility assuming
a 5.0% annual interest rate, which represents the approximate average
interest rate earned by the Company on commercial paper investments during
the year ended December 31, 1996. Also reflects the pro rata increased
interest expense related to a note payable of $600,000 at an interest rate
of 4.16% and assumed debt in connection with the establishment of the AWM
Division in June 1996.
(15) Represents state income and capital taxes that would have been payable by
the Company on the income derived from the Recent Acquisitions (other than
the San Diego Acquisition) and the Pending Acquisition. No adjustment has
been made for federal income taxes because the Company would have utilized
its net operating loss carryforwards.
(16) Represents the weighted average shares outstanding related to the issuance
of 333,333 shares of Common Stock issued in connection with the Bay Area
Acquisition.
(17) Represents the weighted average shares outstanding related to the issuance
of 666,666 shares of Common Stock for the acquisition of the Merger
Companies.
(18) Assumes that 5,373,626 shares of Common Stock were issued by the Company at
the beginning of the applicable period to finance the entire cost of the
Pending Acquisition.
29
<PAGE>
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 months ended March 31, 1996 and 1997 and
for the three years ended December 31, 1996. It should be read in conjunction
with the Company's Consolidated Financial Statements, the related notes thereto
and other financial and operating information included elsewhere in this
Prospectus.
The following discussion contains certain forward-looking statements 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. The Company's actual results may differ materially from those
described in these forward-looking statements due to certain factors including,
but not limited to, the following: the success of the Company in acquiring
additional management agreements, including the Company's ability to finance
future growth, increases in overhead due to expansion, the possibility of loss
of significant management contract(s), the profitability or lack thereof at
Network Sites, the exclusion of infertility, ART and adult women's health care
services from third-party reimbursement, government laws and regulation
regarding health care, changes in managed care contracting, and the timely
development of and acceptance of new infertility, ART and adult women's health
care technologies and techniques. Investors are directed to the other risks
discussed under the heading "Risk Factors" and elsewhere herein.
Overview
The Company has historically focused its efforts on providing management
support services to Medical Practices in the area of infertility and ART
services. During 1996, the Company broadened its focus from infertility and ART
services to include adult women's health care services. In connection therewith,
the Company established two divisions: the RSC Division, which concentrates on
infertility and ART services, and the AWM Division, which concentrates on
comprehensive diagnostic and treatment alternatives for peri- and
post-menopausal women. To more accurately reflect its broadened focus, in 1996,
the Company changed its name from "IVF America, Inc." to "IntegraMed America,
Inc."
For the three months ended March 31, 1997, the Company had a net loss of
$45,000. In 1996, the Company had a net loss of approximately $1.5 million,
largely due to non-recurring charges and operating losses of $581,000 associated
with the closing of the Westchester Network Site and to non-recurring charges
and operating losses of $522,000 associated with the establishment of the AWM
Division. The Westchester Network Site had a hospital-based agreement with the
Company that required the Company to rely on the hospital for the provision of
medical and support services, space and utilities. The Company determined to
terminate this arrangement at the Westchester Network Site because the Network
Site contribution at the Westchester Network Site did not compare favorably to
the Network Site contribution at other Medical Practices managed by the Company,
due, in part, to the lack of a formal management agreement with the physicians
and the Company's inability to provide both infertility and ART services at this
Network Site. Costs incurred for the AWM Division primarily related to physician
severance and to the development of two new medical office locations.
During the three months ended March 31, 1997, the Company derived
substantially all of its revenue pursuant to eight management agreements and
from the AWM Division. For the three months ended March 31, 1997, the management
agreement with MPD Medical Associates (MA), P.C. relating to the Boston Network
Site provided 32.5% of revenues and the management agreement with Saint Barnabas
Medical Center relating to the New Jersey Network Site and the AWM Division each
comprised over 10% of the Company's revenues. During 1996, the Company derived
substantially all of its revenue pursuant to eight management agreements, the
Westchester Network Site agreement and from the AWM Division. For the year ended
December 31, 1996, the management agreement relating to the Boston Network Site
provided 38.5% of revenues and the management agreement relating to the New
Jersey Network Site and the Westchester Network Site agreement, which was
terminated in November 1996, each comprised over 10% of the Company's revenues.
The Medical Practices managed by the Company are parties to managed care
contracts. Approximately 45%, 48% and 54% of the Company's revenues for the
three months ended March 31, 1997 and for the fiscal years ended December 31,
1996 and 1995, respectively, were derived from revenues received by the Medical
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Practices from third-party payors. In addition, the Company receives substantial
reimbursed costs which are indirectly derived 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.
Recent Acquisitions
During 1996 and the first half of 1997, the Company completed several
significant acquisition transactions. In May 1996, the Company acquired certain
assets of and the right to manage the Reproductive Science Center of Dallas in
Carrollton, Texas, a provider of conventional infertility and ART services. The
aggregate purchase price was approximately $701,500, consisting of $244,000 in
cash and a $457,000 promissory note. In June 1996, the Company acquired all of
the outstanding stock of three related Florida corporations (collectively, the
"Merger Companies") and 51% of the outstanding stock of the National Menopause
Foundation, Inc. ("NMF"), a related Florida corporation, to establish the AWM
Division. In exchange for the shares of the Merger Companies, the Company paid
an aggregate of approximately $2.9 million, consisting of $350,000 in cash and
666,666 shares of Common Stock. In exchange for 51% of the outstanding stock of
NMF, the Company paid cash in an aggregate amount of $50,000 and issued a
$600,000 promissory note. In December 1996, the Company acquired W. Banks
Hinshaw, Jr., M.D., P.A., a Florida professional association ("Hinshaw"), and
merged Hinshaw's operations into the AWM Division. The aggregate purchase price
for Hinshaw was $465,200, of which $235,200 was paid in cash and the balance is
payable in four equal installments of $55,000 commencing December 31, 1997. In
January 1997, the Company acquired certain assets of the Bay Area Fertility and
acquired the right to manage the Bay Area Fertility and Gynecology Medical
Group, Inc., a California professional corporation which is the successor to Bay
Area Fertility's medical practice (the "Bay Area Acquisition"). The aggregate
purchase price for the Bay Area Acquisition was approximately $2.1 million,
consisting of $1.5 million in cash and 333,333 shares of Common Stock.
In June 1997, the Company acquired certain assets of and the right to
manage the Reproductive Science Medical Center ("RSMC"), a California
professional corporation located near San Diego (the "San Diego Acquisition").
The aggregate purchase price for the San Diego Acquisition was approximately
$900,000, consisting of $50,000 in cash and 145,454 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.
Pending Acquisition
In February 1997, the Company entered into agreements to acquire certain
assets of and the right to manage the Fertility Centers of Illinois, S.C.
("FCI"), a five physician group practice with six locations in the Chicago area
(the "Pending Acquisition"). The aggregate purchase price for the Pending
Acquisition is approximately $8.6 million, consisting of approximately $6.6
million in cash and approximately $2.0 million in shares of Common Stock (an
estimated 1,142,857 shares based on a per share price of $1.75), the exact
number of which will be determined based on the average market price of the
Common Stock for the ten trading day period prior to the third business day
prior to closing of the Pending Acquisition; but not more than $3.25 per share
or less than $1.75 per share. The Company intends to use a substantial portion
of the net proceeds of this offering to finance the Pending Acquisition. The
Pending Acquisition will be the largest acquisition by the Company to date. The
Company believes that the Pending Acquisition will represent a significant
revenue source for the Company. See "Use of Proceeds" and "Business -- The
Network Sites."
RSC Division
The operations of the RSC Division are currently conducted pursuant to nine
management agreements.
Under five of the Company's management agreements, the Company receives a
three-part management fee as compensation for its management services comprised
of: (i) a fixed percentage of net revenues generally equal to 6%, (ii)
reimbursed cost of services (costs incurred in managing a Network Site and any
costs paid on behalf of the Network Site) and (iii) a fixed or variable
percentage of earnings after the Company's management
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fees and any guaranteed physician compensation, or an additional fixed or
variable percentage of net revenues which generally results in the Company
receiving up to an additional 15% of net revenues. Direct costs incurred by the
Company in performing its management services and costs incurred on behalf of
the Network Site are recorded as cost of services rendered. The physicians
receive as compensation all earnings remaining after payment of the Company's
management fee. The Company's compensation pursuant to the management agreement
relating to the Pending Acquisition will also be determined and recorded in this
manner.
Under the Company's management agreements for the Boston and Long Island
Network Sites, the Company displays the patient service revenues of the Medical
Practices which are reflected in revenues, net on its consolidated statement of
operations. Under these agreements, the Company records all patient service
revenues and, out of such revenues, the Company pays the Medical Practices'
expenses, physicians' and other medical compensation, direct materials and
certain hospital contract fees (the "Medical Practice retainage"). Specifically,
under the management agreement for the Boston Network Site, the Company
guarantees a minimum physician compensation based on an annual budget primarily
determined by the Company. Remaining revenues, if any, which represent the
Company's management fees, are used by the Company for other direct
administrative expenses which are recorded as costs of services. Under the
management agreement for the Long Island Network Site, the Company's management
fee is payable only out of remaining revenues, if any, after the payment of all
expenses of the Medical Practice. Under these arrangements, the Company is
liable for payment of all liabilities incurred by the Medical Practices and is
at risk for any losses incurred in the operation thereof. The Company has
recently entered into an agreement with respect to the Long Island Network Site
pursuant to which the Company will receive a fixed fee (initially equal to
$240,000 per annum) and reimbursed costs of services. The Company anticipates
that this agreement will become effective during the second half of 1997,
subject to applicable regulatory approvals and certain other conditions. If such
approvals are not obtained and conditions not met, the current agreement
relating to the Long Island Network Site will remain in effect.
Under the Company's management agreement for the New Jersey Network Site,
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 management agreement for the Walter Reed
Network Site, the Company's revenues are derived from certain ART laboratory
services performed, and the Company bills patients directly for these services.
The Company's direct costs are reimbursed out of these revenues with the balance
representing the Company's Network Site contribution. All direct costs incurred
by the Company are recorded as costs of services.
The management agreements are typically for terms of ten to 20 years and
are generally subject to termination due to insolvency, bankruptcy or material
breach of contract by the other party. See "Business --Network Site Agreements."
AWM Division
The AWM Division's operations are currently conducted through and owned by
the Women's Medical & Diagnostic Center, Inc., a Florida corporation and a
wholly-owned subsidiary of the Company. The Company bills and records all
clinical revenues of the AWM Division and records all direct costs incurred as
costs of services rendered. The Company retains as Network Site contribution an
amount determined using the three-part management fee calculation described
above. The remaining balance is paid as compensation to the employed physicians
and is recorded by the Company as costs of services rendered. The employed
physicians receive a fixed monthly draw which may be adjusted quarterly by the
Company based on the Network Site's actual operating results.
Revenues in the AWM Division also include amounts earned under contracts
relating to clinical trials performed by the AWM Division. The AWM Division has
contracted with major pharmaceutical companies to participate in clinical trials
to determine the safety and efficacy of drugs under development. Research
revenues are recognized pursuant to each respective contract in the period in
which the medical services (as stipulated by the clinical trial protocol) are
performed and collection of such fees is considered probable. Net realization is
dependent upon final approval by the sponsor that procedures were performed
according to trial protocol. Payments collected from sponsors in advance for
services are included in accrued liabilities, and costs incurred in performing
the clinical trials are included as costs of services rendered.
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The Company's 51% interest in NMF is included in the Company's consolidated
financial statements. The Company records 100% of the revenues and costs of NMF
and reports 49% of any profits of NMF as minority interest on the Company's
consolidated balance sheet.
Results of Operations
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31,
1996
Revenues for the three months ended March 31, 1997 (the "first quarter of
1997") were approximately $5.1 million as compared to approximately $4.2 million
for the three months ended March 31, 1996 (the "first quarter of 1996"), an
increase of 21.9%. In the first quarter of 1997, the Company's RSC Division and
AWM Division contributed 86.9% and 13.1%, respectively, of the Company's total
revenues.
RSC Division revenues for the first quarter of 1997 were approximately $4.4
million as compared to $4.2 million for the first quarter of 1996, an increase
of 5.9%. Revenues under the RSC Division were comprised of (i) patient service
revenues, (ii) three-part management fees and (iii) at the New Jersey Network
Site, management fees based on a percentage of revenues and reimbursed costs of
services. Patient service revenues were approximately $2.4 million in the first
quarter of 1997 compared to approximately $2.7 million for the first quarter of
1996, a decrease of 13.5%. Patient service revenues decreased due to the absence
of the Westchester Network Site agreement which the Company terminated in
November 1996 and due to an 8.8% decrease in revenues related to the Boston
Network Site attributable to lower volume at such Network Site. The decrease in
patient service revenues was partially offset by patient service revenues
provided by the management agreement relating to the Walter Reed Network Site
which was entered into in December 1995. Three-part management fee revenues were
approximately $1.2 million in the first quarter of 1997 compared to
approximately $703,000 in the first quarter of 1996, an increase of 67.6%. The
increase in three-part management fee revenues was attributable to a new
management agreement entered into in the second quarter of 1996 and the first
quarter of 1997. Management fees based on a percentage of revenues and
reimbursed costs of services of the New Jersey Network Site were approximately
$879,000 in the first quarter of 1997 compared to approximately $739,000 in the
first quarter of 1996, an increase of 18.9%, due to an increase in volume at
such Network Site. AWM Division revenues for the first quarter of 1997 were
approximately $668,000.
Medical Practice retainage, which represents physicians' and other medical
fees, direct materials, and certain hospital contract fees related to the Boston
and Long Island Network Sites in the first quarter of 1997 and to the Boston,
Long Island and Westchester Network Site in the first quarter of 1996, was
approximately $396,000 in the first quarter of 1997 as compared to approximately
$794,000 in the first quarter of 1996, a decrease of 50.1%, primarily due to the
absence of the Westchester Network Site agreement.
The increase in revenues and the decrease in Medical Practice retainage
resulted in an increase of approximately 38.8% in revenues after Medical
Practice retainage in the first quarter of 1997 compared to the first quarter of
1996.
Costs of services rendered were approximately $3.6 million in the first
quarter of 1997 as compared to approximately $2.6 million in the first quarter
of 1996, an increase of 41.0%. This increase was directly attributable to new
management agreements entered into in the second quarter of 1996 and the first
quarter of 1997 under the RSC Division and to the establishment of the AWM
Division. This increase was partially offset by the absence of costs from the
Westchester Network Site agreement. As a percentage of revenues, net costs of
services rendered increased to 71.0% in the first quarter of 1997 compared to
61.4% in the first quarter of 1996 primarily due to the costs incurred in
establishing the AWM Division.
Network Sites' contribution was approximately $1.1 million in the first
quarter of 1997 compared to $818,000 in the first quarter of 1996, an increase
of 31.7%, as a result of the revenue and cost variances discussed above. As a
percentage of revenues, Network Sites' contribution increased to 21.2% in the
first quarter of 1997 as compared to 19.6% in the first quarter of 1996.
General and administrative expenses for the first quarter of 1997 were
$918,000 compared to $855,000 in the first quarter of 1996, an increase of 7.4%.
Such increase was primarily attributable to costs associated with the new AWM
Division, partially offset by the absence of costs associated with the closing
of a regional office in late 1996.
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Clinical service development expenses were $59,000 in the first quarter of
1997 compared to $67,000 in the first quarter of 1996, a decrease of 11.9%. Such
decrease was primarily due to a decrease in development costs related to genetic
and immature oocyte testing.
Amortization of intangible assets was $137,000 in the first quarter of 1997
as compared to $42,000 in the first quarter of 1996. This increase was
attributable to the Company's acquisitions in the second and fourth quarter of
1996 and the first quarter of 1997.
Interest income for the first quarter of 1997 was $34,000 compared to
$120,000 in the first quarter of 1996. This decrease was due to a lower cash
balance and to lower short-term interest rates.
The provision for income taxes primarily reflected Massachusetts income
taxes and New York capital taxes in the first quarter of 1997 and in the first
quarter of 1996, respectively.
Net loss was $45,000 in the first quarter of 1997 compared to a net loss of
$74,000 in the first quarter of 1996. This decrease in net loss was primarily
due to a $259,000 increase in contribution, partially offset by an increase of
$95,000 in amortization of intangible assets, an $86,000 decrease in interest
income, and a $63,000 increase in general and administrative expenses.
Calendar Year 1996 Compared to Calendar Year 1995
Revenues for 1996 were approximately $18.3 million as compared to
approximately $16.7 million for 1995, an increase of 9.8%. For the year ended
December 31, 1996, the Company's RSC Division and AWM Division contributed 95.9%
and 4.1%, respectively, of the Company's total revenues.
RSC Division revenues for the year ended December 31, 1996 were
approximately $17.6 million as compared to $16.7 million for the year ended
December 31, 1995, an increase of 5.2%. Revenues under the RSC Division were
comprised of (i) patient service revenues, (ii) three-part management fees and
(iii) at the New Jersey Network Site, management fees based on a percentage of
revenues and reimbursed costs of services. Patient service revenues for the year
ended December 31, 1996 were $11.4 million compared to $13.8 million for the
year ended December 31, 1995 , a decrease of 17.1%. Patient service revenues
decreased due to a 52.9% decrease in patient service revenues related to the
Westchester Network Site agreement which the Company terminated in November 1996
and to the effects of the Company's new management agreement related to the New
Jersey Network Site, pursuant to which the Company's revenues now consist of a
fixed percentage of the New Jersey Network Site's revenues and reimbursed costs
of services (as described below) and are no longer recorded as patient service
revenues. The decrease in patient service revenues was partially offset by a
7.1% increase in revenue at the Boston Network Site and a 11.7% increase in
revenue at the Long Island Network Site, both of which were attributable to an
increase in volume at such Network Sites. The increase in volume at the Long
Island Network Site in 1996 was primarily attributable to increased revenues
generated from additional facility agreements entered into with physicians at
such Network Site in 1996. The 1996 results also reflect a full year of
operations at the Long Island Network Site as compared to 1995, during which
period such Network Site was closed for approximately five months to implement
operational changes at such Network Site. Three-part management fee revenues
were approximately $3.2 million for the year ended December 31, 1996 compared to
approximately $981,000 for the year ended December 31, 1995. The increase in
three-part management fee revenues was primarily attributable to new management
agreements entered into in the second quarter of 1996 and to there being a full
year of revenues for those agreements that were entered into during 1995.
Management fees based on a percentage of revenues and reimbursed costs of
services of the New Jersey Network Site were approximately $3.0 million in 1996
compared to approximately $1.9 million in 1995, an increase of 55.9%,
attributable to there being a full year under the new management agreement. AWM
Division revenues for the year ended December 31, 1996 were approximately
$757,000.
Medical Practice retainage for 1996 was approximately $2.7 million as
compared to approximately $3.1 million in 1995, a decrease of 12.5%, primarily
due to the decrease in volume and a negotiated reduction in hospital contract
fees at the Westchester Network Site, management contract changes related to the
New Jersey Network Site and to operational changes at the Long Island Network
Site. This decrease was partially offset by an increase in physician
compensation at the Boston Network Site attributable to the addition of a
physician who commenced services at such Network Site in July 1995 and to
renegotiated physician compensation at such Network Site.
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The increase in revenues and the decrease in Medical Practice retainage
resulted in an increase of 14.8% in revenues after Medical Practice retainage in
1996 compared to 1995.
Costs of services rendered were approximately $12.4 million in 1996 as
compared to approximately $10.0 million in 1995, an increase of 24.2%. Such
increase was primarily due to the Network Sites acquired by the Company in the
second and fourth quarters of 1995 and the second quarter of 1996, and to a
$365,000 charge recorded in the third quarter of 1996 associated with closing
the Westchester Network Site. These increases were partially offset by the
effects of the new management contract related to the New Jersey Network Site,
which included the reversal of $120,000 in deferred rent, and lower occupancy
and direct material costs related to the Long Island Network Site due to the
relocation and operational changes effected at this Network Site in the second
quarter of 1995.
General and administrative expenses were approximately $4.3 million in 1996
as compared to approximately $3.7 million in 1995, an increase of 17.9%. Such
increase was primarily attributable to $522,000 of costs incurred primarily in
establishing the AWM Division and administrative costs attributable to the
opening of regional offices in the third quarter of 1995 and in 1996.
Clinical service development expenses, consisting of costs incurred under
the Company's development contracts, were approximately $323,000 in 1996 as
compared to approximately $290,000 in 1995, an increase of 11.4%. Such increase
was due to funding requirements pursuant to the Company's new collaborative
agreement with Monash University, which expenses were partially offset by a
decrease in development costs related to genetic and immature oocyte testing.
Amortization of intangible assets was approximately $331,000 in 1996 as
compared to approximately $73,000 in 1995 and principally represented the
amortization of the purchase price paid by the Company for the exclusive right
to manage Network Sites that were acquired in the second and fourth quarters in
1995 and the second quarter of 1996. The 1996 expense amount also included
goodwill and other intangible asset amortization related to the establishment of
the AWM Division in June 1996. At December 31, 1996, the Company's consolidated
financial statements reflect goodwill and other intangible assets of
approximately $5.9 million, which is being amortized over periods ranging from
three to 40 years. The Company anticipates that the Bay Area Acquisition and the
Pending Acquisition, as well as any future acquisitions, will involve the
recording of a significant amount of goodwill and intangible assets on its
balance sheet.
Interest income for 1996 was approximately $415,000 compared to
approximately $626,000 in 1995. This decrease was due to a lower cash balance
and lower short-term interest rates. See "-- Liquidity and Capital Resources."
The provision for income taxes primarily reflected Massachusetts income
taxes and New York capital taxes in 1996 and 1995.
Net loss was approximately $1.5 million in 1996 as compared to net income
of approximately $70,000 in 1995. This net loss was primarily due to a $397,000
decrease in Network Site contribution attributable to a $1.4 million decrease in
contribution related to the Westchester Network Site, inclusive of a $365,000
non-recurring charge to account for the closing of this Network Site, and a
decrease in contribution from the Boston Network Site, partially offset by
significant increases in contribution from the New Jersey and Long Island
Network Sites. In addition, general and administrative expenses increased by
$659,000 largely due to non-recurring charges associated with the establishment
of the AWM Division, a $258,000 increase in amortization of intangible assets,
and a $211,000 decrease in interest income.
Calendar Year 1995 Compared to Calendar Year 1994
Revenues for 1995 were approximately $16.7 million as compared to
approximately $17.6 million for 1994, a decrease of 4.9%. The decrease in
revenues was attributable to two significant events. The first event was the
temporary closing in late February 1995 of the Long Island Network Site for
implementation of certain changes in its operational structure, including
relocating the facility and modifying certain agreements it has with Medical
Practices. The Long Island Network Site reopened in July 1995 at a new location
in Mineola. The second event was the new management contract with Saint Barnabas
Medical Center, effective in May 1995, involving the New Jersey Network Site,
pursuant to which the Company's revenues now consist of a fixed
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percentage of the New Jersey Network Site's revenues and reimbursed costs of
services, as opposed to 100% of this Network Site's revenues. Unfavorable
revenue variances were partially offset by higher revenues associated with the
Boston and Westchester Network Sites, primarily attributable to increased volume
and patient service mix, respectively, and by revenues recorded pursuant to the
Company's management agreements with the Philadelphia, Kansas City and
Longmeadow Network Sites, all of which were acquired in 1995.
Medical Practice retainage for 1995 was approximately $3.1 million as
compared to approximately $3.8 million in 1994, a decrease of 19.9%, primarily
due to the two significant events described above.
The majority of the decrease in revenues was offset by the decrease in
Medical Practice retainage which resulted in less than a 1.0% decrease in
revenues after Medical Practice retainage earned in 1995 compared to 1994.
Costs of services rendered were approximately $10.0 million in 1995 as
compared to approximately $11.0 million in 1994, a decrease of 9.2%. Such
decrease was primarily due to the temporary closing of both the Long Island and
New Jersey Network Sites and to the new management contract with the New Jersey
Network Site, partially offset by additional costs recorded by the Company
pursuant to its management contracts with the Network Sites acquired in 1995. As
a percentage of revenues, costs of services decreased to 59.8% in 1995 compared
to 62.6% in 1994 due to the favorable variance in cost of services partially
offset by the unfavorable variance in revenues.
General and administrative expenses for 1995 were approximately $3.7
million as compared to approximately $3.4 million in 1994, an increase of 6.8%.
Such increase was primarily attributable to new regional offices and higher
marketing costs, partially offset by a decrease in consulting fees.
Clinical service development expenses were approximately $290,000 in 1995
as compared to approximately $452,000 in 1994, a decrease of 35.8%. Such
decrease was primarily due to lower expenses pursuant to the Company's
collaborative agreements with Monash University under which the Company made its
final funding in July 1994 under its original agreement and made its initial
funding under a new agreement entered into in July 1995, and a decrease in
development costs related to genetic and immature oocyte testing.
Amortization of intangible assets of $73,000 in 1995 represented the
amortization of the purchase price paid by the Company for the exclusive right
to manage certain of the Network Sites acquired in 1995 over the ten-year term
of each management agreement.
Interest income for 1995 was approximately $626,000 as compared to
approximately $519,000 in 1994 due to higher short-term interest rates.
The provision for income taxes in 1995 reflected Massachusetts income taxes
and New York capital taxes, and, in 1994, reflected Massachusetts income taxes
and Connecticut capital taxes.
Net income was approximately $70,000 in 1995 compared to a net loss of
approximately $814,000 in 1994. Such increase was primarily due to a $906,000
increase in Network Site contribution, a $162,000 decrease in clinical service
development expenses, and a $107,000 increase in interest income, partially
offset by a $233,000 increase in general and administrative costs and a $73,000
increase in amortization of intangible assets.
Liquidity and Capital Resources
Historically, the Company has financed its operations primarily through
sales of equity securities. At March 31, 1997, the Company had working capital
of approximately $5.8 million (including $425,000 of controlled assets of
Medical Practices), approximately $3.4 million of which consisted of cash and
cash equivalents (including $65,000 of controlled cash) compared to working
capital of $7.1 million at December 31, 1996 (including $650,000 of controlled
assets of Medical Practices), approximately $6.0 million of which consisted of
cash and cash equivalents (including $191,000 of controlled cash) and short term
investments. The net decrease in working capital at March 31, 1997 was
principally due to payments of $1.5 million in cash as part of the purchase
price of the Bay Area Acquisition in addition to cash required to fund
operations, partially offset by an aggregate increase in receivables and other
current assets. See Note 2 of Notes to Consolidated Financial Statements.
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In January 1997, the Company acquired certain assets of Bay Area Fertility
and the right to manage Bay Area Fertility and Gynecology Medical Group, Inc., a
California professional corporation which is the successor to Bay Area
Fertility's medical practice for an aggregate purchase price of approximately
$2.0 million, consisting of $1.5 million in cash and 333,333 shares of Common
Stock. In February 1997, the Company entered into agreements with respect to the
purchase of certain assets of and the right to manage FCI. The aggregate
purchase price for the Pending Acquisition is approximately $8.6 million, of
which approximately $6.6 million is payable in cash and approximately $2.0
million is payable in shares of Common Stock based on the average market price
of the Common Stock for the ten trading day period prior to the third business
day prior to closing, subject to a minimum and maximum price per share. The
Company intends to use a substantial portion of the net proceeds of this
offering to finance the Pending Acquisition. In June 1997, the Company acquired
certain assets of and the right to manage RSMC for an aggregate purchase price
of $900,000, consisting of $50,000 in cash and 145,454 shares of Common Stock.
An additional $650,000 is 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.
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 existing Network Sites. Under certain of its management
agreements, the Company has committed to provide a clinical laboratory. The
Medical Practices may require capital for renovation and expansion and for the
addition of medical equipment and technology. The Company expects that it will
need to obtain additional financing to pursue its acquisition strategy and
intends to obtain significant additional financing over the next two years to
fund such strategy.
Under certain of its management agreements, the Company is obligated to
advance funds to the Medical Practices to provide a minimum physician draw (up
to an aggregate of approximately $1.3 million per annum) and to provide new
services, utilize new technologies, fund projects, purchase the net accounts
receivable of the Medical Practices and for other purposes. Any advances are to
be repaid monthly and will bear interest at the prime rate used by the Company's
primary bank in effect at the time of the advance.
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 bear interest at the Bank's prime
rate plus 0.75% per annum, which at July 16, 1997, was 9.25%. The Credit
Facility terminates on April 1, 1998 and is secured by the Company's assets. At
July 16, 1997, $250,000 was outstanding under the Credit Facility. In June 1997,
the Company obtained a commitment from the Bank for a new $4.0 million
non-restoring credit facility (the "New Credit Facility"). Borrowings
under the New Credit Facility will bear interest at the Bank's prime rate plus
1.0% per annum. Borrowings outstanding under the New Credit Facility at
September 30, 1998 will convert into a four year term loan. Any amounts borrowed
under the New Credit Facility will reduce amounts available for future
borrowings under the New Credit Facility. The New Credit Facility will be
cross-collateralized and cross-defaulted with the Credit Facility. The Bank's
commitment under the New Credit Facility is subject to, among other things, the
consummation of this offering and the Pending Acquisition. On a short-term
basis, the Company will continue to finance its operations from its current
working capital and may, from time to time, make additional borrowings under the
Credit Facility and the New Credit Facility.
The Company has commitments to fund clinical services development pursuant
to various collaboration agreements. Effective July 1, 1995, the Company entered
into a new three-year agreement with Monash University that provides for Monash
to conduct research in ART services and techniques to be funded by a minimum
annual payment of 220,000 Australian dollars, the results of such research to be
jointly owned by the Company and Monash. If certain milestones are met as
specified in this agreement, the Company's annual payment may be a maximum of
300,000 Australian dollars in year two and 380,000 Australian dollars in year
three. Minimum payments of 55,000 Australian dollars and payments for the
attainment of certain research milestones will be made quarterly throughout the
term of this agreement. The Company expensed approximately $36,000, $48,000,
$189,000 and $88,000 under this agreement in the three months ended March 31,
1997 and 1996 and in the fiscal years ended December 31, 1996 and 1995,
respectively.
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In July 1996, the Company made a conversion offer to holders of the
Convertible Preferred Stock in order to strengthen the Company's capital
structure by reducing the number of shares of Convertible Preferred Stock
outstanding, with the concomitant elimination on all shares of Convertible
Preferred Stock converted of (i) the need to pay or accrue the $0.80 per share
cumulative annual dividend thereon and (ii) the $10.00 per share liquidation
preference thereon plus accumulated and unpaid dividends. As a result of the
conversion offer of the Convertible Preferred Stock, pursuant to which
approximately 78.6% of the Convertible Preferred Stock then outstanding was
converted into Common Stock, the Company reversed approximately $973,000 in
accrued dividends from its balance sheet and reversed the required accrual of
$486,000 in annual dividends and the requirement to include these dividends in
earnings per share calculations. As of July 16, 1997, dividend payments of
$397,000 were in arrears as a result of the suspension by the Board of Directors
of 12 consecutive quarterly dividend payments on the Convertible Preferred
Stock. The Company does not anticipate the payment of any dividends on the
Convertible Preferred Stock in the foreseeable future. See "Description of
Capital Stock -- Preferred Stock."
New Accounting Standards
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," in the first quarter of 1996. 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.
The Company also adopted SFAS No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), on January 1, 1996. Under SFAS 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 SFAS 123.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" ("SFAS 128"). The Company will adopt SFAS 128 for its
fiscal year ending December 31, 1997. The Company does not anticipate the effect
on earnings to be material.
Fluctuations in Quarterly Results
The Company's revenues are typically lower during the first quarter of the
Company's fiscal year. This lower level of revenues is primarily attributable to
the commencement of fertility treatment by the patients of the Medical Practices
at the beginning of the calendar year. Quarterly results also may be materially
affected by the timing of acquisitions and the timing and magnitude of costs
related to acquisitions. Therefore, results for any quarter are not necessarily
indicative of the results that the Company may achieve for any subsequent fiscal
quarter or for a full fiscal year.
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<PAGE>
BUSINESS
Company Overview
IntegraMed America, Inc. (the "Company") is a physician practice management
company specializing in women's health care, with a focus on infertility and
assisted reproductive technology ("ART") services as well as health care
services to peri- and post-menopausal women. The Company provides management
services to a nationwide network of medical providers that currently consists of
ten sites (each, a "Network Site"). 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 the physicians or where the
Company directly employs the physicians. In February 1997, the Company entered
into a management agreement, effective following the completion of this
offering, with Fertility Centers of Illinois, S.C. ("FCI"), one of the largest
providers of infertility and ART services in the United States (the "Pending
Acquisition"). Upon consummation of the Pending Acquisition, the Company's
network will consist of 11 Network Sites and 21 locations.
Until 1996, the Company was focused exclusively on providing management
services to Medical Practices in the area of infertility and ART services.
During 1996, the Company, with the acquisition of a medical practice in Florida,
broadened its focus to include health care services to peri- and post-menopausal
women (ages 40-50 and over 50, respectively). As a result, the Company
established two divisions: the Reproductive Science Center Division (the "RSC
Division"), which provides management services to Medical Practices focused on
infertility and ART services, and the Adult Women's Medical Division (the "AWM
Division"), which provides management services to Medical Practices focused on
health care services for peri- and post-menopausal women.
Industry
Physician Practice 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
1995 were over $1 trillion, with approximately $200 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 cost-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
are increasingly seeking to affiliate with larger organizations, including
physician practice management companies, which manage the nonmedical aspects of
physician practices, such as billing, purchasing and contracting with payor
entities. In addition, affiliation with physician practice management companies
provides physician groups and sole practitioners 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.
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The trends that are leading physicians to affiliate with physician practice
management companies are magnified in the fields of reproductive medicine and
adult women's health care 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 intra-cytoplasmic sperm injection, assisted
hatching and cryopreservation of embryos.
According to The American Society for Reproductive Medicine, it is
estimated that approximately 9% of women between the ages of 15 and 44, or 5.3
million women, have impaired fertility and approximately 2.3 million of these
women seek care in any year. According to industry sources, expenditures related
to infertility services in 1995 exceeded $1 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 for 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 600 reproductive endocrinologists. There are approximately 300
facilities providing ART services in the United States, of which approximately
half are hospital-affiliated and half are free-standing physician practices.
Increasingly, hospital affiliated programs are moving out of the hospital and
into lower cost physician practice settings.
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Adult Women's Health Care
The wide range of medical conditions that frequently emerge in women in
menopause comprise a critical element of adult women's health care. When many
women reach menopause, they begin to experience a number of associated physical
and psychological conditions. For example, women entering menopause frequently
have a condition known as estrogen deficiency. Low levels of estrogen have been
associated with osteoporosis, cardiovascular disease, and metabolic and
endocrine disorders. Furthermore, women in menopause are at increased risk for a
number of other conditions, including various cancers, arthritis, urinary
incontinence and visual and hearing disorders. In addition to the range of
physical symptoms, women in menopause frequently experience psychological
disorders, including depression and other emotional problems.
In the United States, there are over 30 million peri-menopausal women (ages
40-50) and over 47 million post-menopausal women (over age 50). An additional 39
million women in the United States will reach age 50 over the next 10 years.
Most women in the peri-menopausal range are asymptomatic, but have underlying
health issues that begin to emerge with the onset of menopause. Traditionally,
women in menopause have been treated by their OB/GYN with hormone replacement
therapy and are referred to a specialist if there is suspicion of more
complicated health problems. The additional conditions and symptoms associated
with menopause are typically treated by a disconnected array of other
physicians, including those specializing in primary care, endocrinology,
internal medicine, orthopedic medicine, psychiatry and others, often leading to
increased patient inconvenience and higher costs.
The Company believes there is a significant unmet medical need for a
comprehensive diagnostic and treatment approach to the broad range of medical
conditions that emerge in peri- and post-menopausal women. While a number of
physician practice management companies have developed a focus on obstetrics and
gynecology, the Company believes that there are currently no well organized
medical delivery systems that fully address the preventative and therapeutic
needs of peri- and post-menopausal woman. The Company believes that peri- and
post-menopausal women's health and well being can be vastly improved through a
comprehensive program of preventative and curative treatment and guidance.
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 women's health care services. The primary elements of the
Company's strategy include (i) establishing additional Network Sites, (ii)
further developing the AWM Division, (iii) increasing revenues at the Network
Sites, (iv) increasing operating efficiencies at the Network Sites and (v)
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 practices in the Company's two areas of focus. The Company will
primarily focus its acquisition activities on larger group practices operating
in major cities. 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 and adult women's health care, (ii)
the Company's experience and expertise in increasing revenues and lowering costs
at its Medical Practices, (iii) the Company's success in improving patient
outcomes by providing management services to its Medical Practices and (iv) the
Company's affiliations and relationships with leading academic institutions,
health care companies and managed care organizations and other third-party
payors.
Further Developing the AWM Division
With the establishment of its current AWM Network Site, the Company has
developed a clinical care model whereby it can effectively provide the broad
range of medical services necessary for the treatment of peri- and
post-menopausal women. The Company's AWM Network Site offers a multidisciplinary
approach, integrating "under one roof" the physicians and other medical
specialists necessary for the prevention, diagnosis and treatment of peri-and
post-menopausal conditions. The Company intends to acquire and manage
41
<PAGE>
the practices of leading gynecologists and integrate these practices with other
specialty physicians and professionals focused on adult women's health care. In
addition, the Company intends to continue to expand the participation of the AWM
Division in the clinical testing of new drugs to treat women's health care
conditions and the promotion of educational programs relating to menopause.
Increasing Revenues at the Network Sites
The Company intends to increase revenues derived under its management
agreements by assisting the Medical Practices in (i) adding additional
physicians to achieve multi-physician group practices with sizable market
presence, (ii) adding services offered at the Medical Practices which have
previously been outsourced, such as laboratory and ART services, (iii)
increasing marketing and practice development efforts and (iv) increasing the
participation of the Medical Practices in clinical trials of new drugs under
development.
Increasing Operating Efficiencies at the Network Sites
The Company intends to increase the operating efficiencies of its current
Network Sites as well as future Network Sites to be acquired. By consolidating
the overhead of the Network Sites, including staffing, purchasing and financial
reporting and controls, the Company believes that it can significantly reduce
the time and costs associated with managing the operating and financial aspects
of individual Medical Practices. For example, Medical Practices will be able to
reduce the costs of supplies, drugs, equipment, services and insurance by
contracting through the Company on a consolidated group basis. In addition, by
eliminating the administrative and management burdens of running a Medical
Practice, the Company enables 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 clinical outcomes and greater patient
satisfaction at lower costs.
Developing a Nationwide, Integrated Information System
The Company plans to utilize its established base of Network Sites to
develop a nationwide, integrated information system to collect and analyze
clinical, patient, administrative and financial 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 an 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.
Management Services
The Company provides comprehensive management services to support the
Medical Practices in each of its divisions. In particular, the Company provides
(i) administrative services, including accounting and finance, human resource
functions and purchasing supplies and equipment, (ii) access to capital, (iii)
marketing and practice development, (iv) information systems and assistance in
developing clinical strategies and (v) access to technology. These services
allow the 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.
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Access to Capital
The Company provides the Network Sites increased access to capital.
Increased access to capital allows for expansion and growth of the Medical
Practices, as well as the acquisition of state-of-the-art laboratory, diagnostic
and clinical facilities needed to conduct advanced procedures and to achieve
successful clinical outcomes. For example, many ART procedures, which are being
performed in hospital settings, result in higher costs and less revenues to the
physicians. By providing ART facilities, the Company enables Medical Practices
to reduce costs and increase revenues by removing these procedures from hospital
settings.
Marketing and Practice Development
In today's highly competitive health care environment, marketing and
practice development are essential for the growth and success of physician
practices. However, these marketing and development efforts are often too
expensive for many physician practice groups. Affiliation with the Company's
network provides physicians access to significantly greater marketing and
practice development 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. With
respect to the RSC Division, 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. With respect to the AWM
Division, the Company believes that the clinical care model developed at the AWM
Network Site and the preventative nature of the services offered will be well
received by managed care organizations.
Information Systems and Clinical Strategies
The Company provides the Medical Practices with information systems and
assists Medical Practices in developing clinical strategies and implementing
quality assurance and risk management programs in order to improve patient care
and clinical outcomes. For example, the RSC Division has instituted a pregnancy
rate 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 improved pregnancy rates at the RSC Network Sites.
Physicians at the Medical Practices also can access a number of customized
practice and research based systems designed by the Company for analyzing
clinical data.
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. Furthermore, the Company sponsors research
conducted at leading ART programs, including Monash University, Australia.
The Network Sites
Each of the Company's Network Sites consists of a location or locations
where the Company has a management agreement with a Medical Practice, which in
turn employs the physicians or where, in the case of the AWM Network Site, the
Company owns the Medical Practice and directly employs the physicians. All of
the Network Sites are managed by the Company except for the AWM Network Site
which is owned by the Company. At certain Network Sites, Medical Practices have
agreements with physicians who are not employed by the particular Medical
Practices or the Company for such physicians to use the Network Sites'
facilities.
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Current Network Sites
The Company currently has a nationwide network consisting of ten Network
Sites with 15 locations in eight states and the District of Columbia and 45
physicians. Upon consummation of the Pending Acquisition, the Company's network
will consist of 11 Network Sites with 21 locations in nine states and the
District of Columbia and 50 physicians. The following table describes in detail
each Network Site:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Initial
Number of Number of Management
Network Site City Locations Physicians(1) Contract Date
------------ ---- --------- ------------- -------------
<S> <C> <C> <C> <C>
RSC DIVISION
Reproductive Science
Center of Boston Waltham, MA 2 6 July 1988
Reproductive Science
Associates Mineola, NY 1 10 June 1990
(Long Island)
Institute of Reproductive
Medicine and Science of
Saint Barnabas Medical Center Livingston, NJ 1 5 December 1991
Reproductive Science Center of
Greater Philadelphia Wayne, PA 2 7 May 1995
Reproductive Science Associates Kansas City, MO 1 2 November 1995
Reproductive Science Center
of Walter Reed Army
Medical Center Washington, DC 1 5 December 1995
Reproductive Science
Center of Dallas Carrollton, TX 1 1 May 1996
Reproductive Science
Center of the Bay Area
Fertility and Gynecology
Medical Group San Ramon, CA 1 3 January 1997
Fertility Centers of Illinois, S.C. Chicago, IL 6 5 Pending(2)
Reproductive Sciences Medical
Center of San Diego La Jolla, CA 2 2 June 1997
AWM DIVISION
Women's Medical & Diagnostic
Center Gainesville, FL 3 4 June 1996 (3)
- ----------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Includes physicians employed by the Medical Practices or the Company, as
well as physicians who have arrangements to utilize the Company's
facilities.
(2) On February 28, 1997, the Company entered into agreements to acquire
certain assets of and the right to manage FCI. See "-- Pending
Acquisition."
(3) Represents the date of acquisition of the AWM Network Site.
Recent Acquisitions
Since May 1996, the Company has acquired certain assets of three Medical
Practices to establish three new RSC Network Sites and directly acquired two
Medical Practices to establish the AWM Network Site.
In May 1996, the Company acquired certain assets of and the right to manage
the Reproductive Science Center of Dallas in Carrollton, Texas, a provider of
conventional infertility and ART services. The aggregate purchase price was
approximately $701,500, consisting of $244,000 in cash and a $457,500 promissory
note.
In June 1996, the Company, through its wholly-owned subsidiary INMD
Acquisition Corp., acquired the Merger Companies and 51% of the outstanding
stock of NMF to establish the AWM Division. In exchange for the shares of the
Merger Companies, the Company paid cash in an aggregate amount of $350,000 and
issued 666,666 shares of Common Stock. In addition, Gerardo Canet was granted an
irrevocable proxy to vote the shares of Common Stock issued in the transaction
through September 30, 1997. In exchange for 51% of the outstanding stock of NMF,
the Company paid $50,000 and issued a $600,000 promissory note. In December
1996, the Company acquired Hinshaw and merged Hinshaw's operations into the AWM
Division. The aggregate purchase price for Hinshaw was $465,200, of which
$235,200 was paid in cash and the balance is
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payable in four equal installments of $55,000 commencing December 31, 1997.
Effective March 31, 1997, Morris Notelovitz, M.D., Ph.D., the principal
stockholder of the Merger Companies, terminated his employment arrangement with
the Company. See "Management -- Executive Officers and Directors."
In January 1997, the Company acquired certain assets of the Bay Area
Fertility and acquired the right to manage the Bay Area Fertility and Gynecology
Medical Group, Inc., a California professional corporation which is the
successor to Bay Area Fertility's medical practice. The aggregate purchase price
was approximately $2.1 million, consisting of $1.5 million in cash and 333,333
shares of Common Stock.
In June 1997, the Company acquired certain assets of and the right to
manage RSMC. The aggregate purchase price for the San Diego Acquisition was
approximately $900,000, consisting of $50,000 in cash and 145,454 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. In addition, RSMC granted Gerardo
Canet an irrevocable proxy to vote the shares of Common Stock issued to it in
the San Diego Acquisition with respect to the election of directors and certain
other matters for a two year period from the date of issuance of such shares.
Pending Acquisition
In February 1997, the Company entered into agreements to acquire certain
assets of and the right to manage FCI, a physician group practice comprised of
five physicians and six locations in the Chicago, Illinois area. The aggregate
purchase price for the Pending Acquisition is approximately $8.6 million,
approximately $6.6 million of which is payable in cash and approximately $2.0
million of which is payable in shares of Common Stock, the exact number of which
will be determined based on the average market price of the Common Stock for the
ten trading day period on the third business day prior to closing of the Pending
Acquisition, subject to a minimum and maximum price per share. The Company has
agreed to cause a nominee of FCI to be appointed as a director of the Company
upon consummation of the Pending Acquisition and nominated as a director of the
Company at the first annual meeting of stockholders after consummation of the
Pending Acquisition. In addition, FCI will grant Gerardo Canet an irrevocable
proxy to vote the Common Stock issued to it in the Pending Acquisition with
respect to the election of directors and certain other matters for a two-year
period following the closing of the Pending Acquisition. The closing of the
Pending Acquisition is conditioned upon the Company's raising at least $6.0
million in capital by August 28, 1997 and other customary closing conditions.
The Company intends to use a substantial portion of the proceeds of this
offering to finance the Pending Acquisition. The Pending Acquisition will be the
largest acquisition by the Company to date. The Company's net revenues for the
three months ended March 31, 1997 and for the fiscal year ended December 31,
1996, giving pro forma effect to the acquisitions completed in 1996 and 1997
(other than the San Diego Acquisition) and the Pending Acquisition as if such
acquisitions were consummated as of January 1, 1996 and 1997, respectively,
would have been approximately $6.4 million and $27.5 million, respectively, an
increase of 28.0% and 49.4% as compared to the Company's actual revenues for the
three months ended March 31, 1997 and for the fiscal year ended December 31,
1996 of approximately $5.0 million and $18.3 million, respectively. See
"Selected Consolidated and Pro Forma Combined Financial Data."
The Company is evaluating and is engaged in discussions with regard to
several potential acquisitions. However, except with respect to the Pending
Acquisition, 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. See "--
Company Strategy."
Clinical and Medical Services
RSC Network Sites
The RSC Network Sites offer conventional infertility and ART services and
the majority of the RSC Network Sites have 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.
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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 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
Since 1989, the Company has sponsored research by Monash University in
Melbourne, Australia ("Monash") relating to the development of new ART services
and techniques. In July 1995, the Company entered into a three-year agreement
with Monash University which provides for Monash to conduct research in ART and
human fertility to be funded by a minimum annual payment of 220,000 Australian
dollars by the Company, the results to be jointly owned by the Company and
Monash. If certain milestones are met as specified in the agreement, the
Company's annual payment may be a maximum of 300,000 Australian dollars in year
two and 380,000 Australian dollars in year three. Minimum payments of 55,000
Australian dollars and payments for the attainment of certain research
milestones will be made quarterly throughout the term of the agreement from July
1, 1995 until June 30, 1998. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." 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 a genetic disorder 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.
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Laboratory Services
At a majority of the RSC Network Sites, facilities are available for
Medical Practices 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 RSC Network Sites generate
additional revenue by providing such endocrine and andrology laboratory tests
for non-affiliated physicians in the geographic area.
AWM Network Site
The Company's AWM Network Site represents the clinical care model for
future AWM Network Sites. The AWM Network Site focuses on the identification and
treatment needs of peri- and post-menopausal women and incorporates both
preventative and curative health care. The AWM Network Site combines specialty
physicians and other health professionals to offer a multidisciplinary approach
to the diagnosis and treatment of health care problems common to peri- and
post-menopausal women. Such problems include cardiovascular disease,
incontinence, osteoporosis, metabolic and endocrine conditions, and emotional
and psychological disorders. The Company currently employs two OB/GYNs, one
family practice physician and one radiologist at the AWM Network Site and has
entered into arrangements with a nutritionist, a physical therapist and a
psychologist. The AWM Division concentrates its efforts in the following three
areas: clinical care, clinical research and educational programs.
Clinical Care
The AWM Division has adopted a clinical care model based on the fact that
the health risk factors of peri-and post-menopausal women can be objectively
measured and once identified, treated. Clinical services include complete
cardiovascular assessment, urodynamic analysis, bone densitometry, hormone
replacement therapy, physical therapy, exercise stress testing, nutrition
assessment/dietary recommendation, psychological/sexual counseling, as well as
mammography and laboratory tests designed to provide early detection of cancers
of the breast, colon and reproductive organs.
Recent studies have indicated that with proper preventive medical care,
lifestyle changes, diet and exercise, the health risk factors of women aged 40
to 65 can be significantly reduced. Early intervention can reduce the risk
factors for osteoporosis and heart disease, and early detection of problems such
as breast and other cancers can increase survival rates.
Clinical services are provided at the AWM Network Site by physicians and
health professionals who specifically focus on peri- and post-menopausal women.
The Company believes that the provision of medical services by physicians
familiar with the diagnosis and treatment of the symptoms and conditions that
develop at menopause will result in improved quality of patient care.
Additionally, the Company believes that having physicians with a number of
specializations available at the same location should lead to improved patient
convenience and satisfaction. The Company also believes that the focus on
preventive treatment and cost-containment at the AWM Network Site will be well
received by managed care organizations and other third-party payors.
Clinical Research
The AWM Division contracts with major pharmaceutical companies to perform
clinical trials on new drugs under development to determine the safety and
efficacy of such drugs. Since June 1996, the AWM Division has been involved in
24 clinical trials with 14 pharmaceutical companies. The Company believes that
participation in these clinical trials provides access to advanced therapies for
patients not otherwise readily available and generates additional revenue for
the Company and the Medical Practices. The Company believes that pharmaceutical
companies retain the physicians at the Medical Practices to conduct clinical
trials due to the quality of such physicians, the Company's ability to recruit
subjects for the clinical trials, and the Company's experience with the clinical
protocols and record keeping necessary for such clinical trials.
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Educational Programs
The AWM Division offers multifaceted educational programs designed to
increase patient compliance, attract new patients and educate peri- and
post-menopausal women on related health care and quality of life issues. For
example, the AWM Division offers support groups, lectures, resource materials
and products designed specifically for the needs of adult women. The AWM
Division also publishes the Women's Health Digest, a quarterly publication which
is distributed nationally and includes articles on traditional and
non-traditional medical therapies as well as important breakthroughs in women's
health care and topics that enhance the quality of life. In addition, the AWM
Division has a 1-900 number available to answer common questions women have
regarding their own health.
Network Site Agreements
In establishing a Network Site in states in which there are prohibitions
restricting commercial enterprises from owning medical service companies, the
Company typically (i) acquires certain assets of a physician practice, (ii)
enters into a long-term management agreement with the physician practice under
which the Company provides comprehensive management services to the physician
practice, (iii) requires that the physician practice enter into long-term
employment agreements containing non-compete provisions with the affiliated
physicians and (iv) assumes the principal administrative, financial and general
management functions of the physician practice. Typically, the physician
practice contracting with the Company is a professional corporation of which 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 20 years
and are generally subject to termination due to insolvency, bankruptcy or
material breach of contract by the other party. 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 the Company's current form of management agreement, which is in use
at five Network Sites and is the form used in the Pending Acquisition, 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
Network Site and any costs paid on behalf of the Network Site) and (iii) a fixed
or variable percentage of earnings after the Company's management fees and any
guaranteed physician compensation, or an additional fixed or variable percentage
of net revenues which generally results in the Company receiving up to an
additional 15% of net revenues.
Under another form of management agreement, which is in use at two Network
Sites, the Company records all patient service revenues and, out of such
revenues, the Company pays the Medical Practices' expenses, physicians' and
other medical compensation, direct materials and certain hospital contract fees.
Specifically, under the management agreement for the Boston Network Site, the
Company guarantees a minimum physician compensation based on an annual budget
primarily determined by the Company. Remaining revenues, if any, which represent
the Company's management fees, are used by the Company for other direct
administrative expenses which are recorded as costs of services. Under the
management agreement for the Long Island Network Site, the Company's management
fee is payable only out of remaining revenues, if any, after the payment of all
expenses of the Medical Practice. Under these arrangements, the Company is
liable for payment
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of all liabilities incurred by the Medical Practices and is at risk for any
losses incurred in the operation thereof. The Company has recently entered into
an agreement with respect to the Long Island Network Site pursuant to which the
Company will receive a fixed fee (initially equal to $240,000 per annum) and
reimbursed costs of services. The Company anticipates that this agreement will
become effective during the second half of 1997, subject to applicable
regulatory approvals and certain other conditions. If such approvals are not
obtained and conditions not met, the current agreement relating to the Long
Island Network Site will remain in effect.
In addition, 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations --Overview -- RSC Division."
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.
In Florida, where the Company's current AWM Network Site is located, there
are currently no prohibitions restricting commercial enterprises from owning
medical service companies. As a result, the Company was able to acquire a direct
ownership interest in the Medical Practice at the AWM Network Site. The Company
entered into employment agreements (containing customary non-compete provisions)
directly with the physicians at the AWM Network Site. In the event a physician's
employment agreement is terminated for any reason other than death or permanent
disability of the physician during the first five years, the Company is entitled
to receive from the physician any unamortized purchase price paid by the Company
to acquire the exclusive right to manage the Medical Practice.
Personal Responsibility Agreements
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 physicians in connection with the Bay Area Acquisition and with the
physician shareholder in connection with the San Diego Acquisition. 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. Upon consummation of
the Pending Acquisition, the Company will have PR Agreements with each of the
physicians at FCI. In appropriate circumstances, the Company may enter into such
agreements with physicians in connection with future acquisitions.
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
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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 RSC Network Sites are dependent on three third-party vendors that
produce fertility medications (Lupron, Metrodin and Fertinex) 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 RSC Network Sites. To date, the RSC Network Sites have not experienced any
such adverse impacts.
Competition
The business of providing health care services is intensely competitive, as
is the physician practice 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 physician practices. Although the Company focuses on physician
practices that provide infertility, ART and adult women's health care services,
it competes for management contracts with other physician practice 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
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, physician 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 RSC Network Sites. 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.
A number of physician practice management companies have emerged with a
focus on routine obstetrics and gynecology. In addition, other health care
corporations, medical providers and physician practice management companies may
decide to enter into the adult women's health care market, particularly if the
Company's concept to establish a multi-disciplinary approach to treat peri- and
post-menopausal women gains market acceptance. In addition, private practice
physician groups often contract with pharmaceutical companies to perform
clinical trials relating to women's health care. These physician group practices
compete with the AWM Network Site in obtaining contracts for clinical trials.
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
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limited period of time for infertile couples. However, there can be no assurance
that third-party payors will increase reimbursement coverage for ART services.
See "-- Government Regulation."
The RSC Division 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. The Company estimates that the majority of the
couples participating in infertility and ART services at an RSC Network Site,
other than in Massachusetts, have greater than 50% of their costs reimbursed by
their health care insurance carrier. In Massachusetts, where comprehensive
infertility and ART services insurance reimbursement is mandated, virtually all
patient costs are reimbursed.
The majority of diagnostic and therapeutic services offered through the
Company's AWM Division are currently covered by third-party payors. As these
services emphasize prevention and screening, the Company believes that they will
continue to be covered by third-party payors.
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 and Illinois (in the event the Pending Acquisition is consummated),
are 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 prohibit a
corporation other than professional corporations or associations 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
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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 and, potentially, 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.
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 Pending Acquisition in Illinois, 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 Medical Practice 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
this Medical Practice may decrease. There is a substantial risk that the
compensation arrangement, being based upon a percentage of revenues, would not
be upheld if challenged. Moreover, if the management agreement were amended to
provide for an annual fixed fee payable to the Company, the contribution from
this 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
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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 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. The failure of the Company's
interpretation of the Federal Antikickback Law to prevail 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
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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 and
Illinois 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 or will be subject
to prohibitions on referrals for services in which the referring physician has a
beneficial interest. However, New York, New Jersey and California 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
54
<PAGE>
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 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 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 Network Sites 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.
55
<PAGE>
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 July 16, 1997, the Company had 212 employees, six of whom are
executive management, 189 are employed at the Network Sites and 23 are employed
at the Company's headquarters. Of the Company's employees, 28 persons at the
Network Sites and five 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.
Properties
In January 1995, the Company relocated its headquarters and executive
offices to an office building in Purchase, New York where it occupies
approximately 8,000 square feet under a lease expiring April 14, 2000 at a
monthly rental of $12,671, increasing annually to $15,339 per month in January
1999. The Company leases, subleases, and/or occupies, pursuant to its management
agreements, each Network Site space from either third-party landlords or from
the Medical Practices. The Company believes its executive offices and the space
occupied by the Network Sites are adequate.
Legal Proceedings
In November 1994, the Company was served with a complaint in a matter
captioned Karlin v. IVF America, et. al., filed in the Supreme Court of the
State of New York, County of Westchester. The suit also named, as co-defendants,
Vicki L. Baldwin, a Director of the Company, United Hospital and Dr. John
Stangel. The action purported to be a class action, initiated by plaintiffs on
behalf of themselves and a class of persons similarly situated. The complaint
alleged that the defendants, individually and collectively, had, in the
communication of clinical outcome statistics, inaccurately stated success rates
or failed to communicate medical risks attendant to ART procedures. These
allegations gave rise to the central issue of the case, that of informed
consent. The plaintiffs' application for class certification was denied by the
court. The court ruled that the potential class of patients treated at the
Westchester Network Site did not meet the criteria for class action status as
required by New York law. The plaintiffs appealed this decision. In June 1997,
the Appellate Division of the Supreme Court of the State of New York, Second
Department affirmed the lower court decision.
There are several other 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 or the
operating results of the Company.
56
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company:
Name Age Position
- ---------------------------------- --- ----------------------------------
Gerardo Canet .................... 52 Chairman of the Board, President,
Chief Executive Officer and
Director
Peter O. Callan .................. 39 Vice President, Central Region
Jay Higham ....................... 38 Vice President, Marketing and
Development
Dwight P. Ryan ................... 39 Vice President, Chief Financial
Officer, Treasurer and Secretary
Glenn G. Watkins ................. 45 Vice President, President of the
AWM Division
Donald S. Wood, Ph.D. ............ 52 Vice President, Chief Operating
Officer of the RSC Division
Vicki L. Baldwin ................. 51 Director
Elliott D. Hillback, Jr. (1) ..... 52 Director
Sarason D. Liebler (1) (3) ....... 60 Director
Patricia M. McShane, M.D. ........ 48 Director
Lawrence J. Stuesser (1) (2) ..... 54 Director
- ----------
(1) Member of Audit Committee and Compensation Committee.
(2) Chairman of Compensation Committee.
(3) Chairman of Audit Committee.
Mr. Canet became President, Chief Executive Officer and a director of the
Company effective February 14, 1994 and the Chairman of the Board effective
April 19, 1994. For approximately five years prior to joining the Company, Mr.
Canet held various executive management positions with Curative Health Services,
Inc., most recently as Executive Vice President and President of its Wound Care
Business Unit. From 1979 to 1989, Mr. Canet held various management positions
with Kimberly Quality Care, Inc. ("Kimberly") (and a predecessor company), a
provider of home health care services, most recently from 1987 to 1989 as
Executive Vice President, Chief Operating Officer and director. Mr. Canet earned
an M.B.A. from Suffolk University and a B.A. in Economics from Tufts University.
Mr. Canet has been a director of Curative Health Services, Inc. since July 1991.
Mr. Callan became Vice President of Operations for the Central Region in
August 1995. For two years prior to joining the Company, Mr. Callan performed
volunteer services in Papua, New Guinea teaching health and business management.
From 1990 to 1993, Mr. Callan held the position of Regional Vice President with
Kimberly. For six years prior thereto, Mr. Callan held various management
positions with Kimberly. Mr. Callan earned his R.N. at Davnets School of
Nursing, Ireland and a diploma in gerontology from Queens University, Belfast,
Ireland.
Mr. Higham became Vice President of Marketing and Development in October
1994. For four years prior to joining the Company, Mr. Higham held a variety of
executive positions, the most recent of which was as Vice President of Health
Systems Development for South Shore Hospital and South Shore Health and
Education Corporation where he developed and implemented a strategy for
integration with physician group practices and managed care payors. Mr. Higham
earned an M.H.S.A. from George Washington University.
Mr. Ryan became Secretary of the Company in March 1994, Vice President in
November 1993, Chief Financial Officer in February 1993, and has been Treasurer
since December 1990. Mr. Ryan served as Controller from December 1989 through
January 1993 and as an executive employee of the Company from December 1987 to
December 1989. For more than two years prior to joining the Company, Mr. Ryan
was financial manager of CenterCore Incorporated, a manufacturer of office
furniture. Mr. Ryan holds a B.A. from Lynchburg College.
57
<PAGE>
Mr. Watkins joined the Company in February 1997 as a corporate Vice
President and as its President of the AWM Division. During 1996, Mr. Watkins
headed his own health care consulting firm specializing in physician integration
and practice management services. Previously, Mr. Watkins held numerous
executive management positions over his 24-year career at Morton Plant Mease
Health Care, Inc., a provider of integrated health services in Tampa Bay,
Florida, including the position of President for various subsidiaries from 1988
through 1996. Mr. Watkins holds an M.S. in Management from the University of
South Florida, a B.A. from the University of South Florida and an A.R.R.T.
certification in Radiological Technology.
Dr. Wood joined the Company in April 1991 as its Vice President of Genetics
and in October 1992 was promoted to Vice President, Science and Technology. In
1997, Dr. Wood was promoted to Vice President, Chief Operating Officer of the
RSC Division. From 1989 through March 1991, Dr. Wood was the Executive Vice
President and Chief Scientific Officer of Odyssey Biomedical Corp., a genetic
testing company which he co-founded and which was acquired by IG Labs, Inc. in
December 1990. Dr. Wood received a Ph.D. in Physiology from Washington State
University and completed a post-doctoral fellowship in neurology at the
Columbia/Presbyterian Medical Center in New York, where he subsequently was
appointed an Assistant Professor of Neurology.
Ms. Baldwin is the mother of two children conceived at the Monash IVF
Program in Melbourne, Australia, and a founder of the Company. Ms. Baldwin is
currently a director of the Company and was an executive officer and a director
from its inception through December 1995. Prior to founding the Company, Ms.
Baldwin worked as a management consultant for McKinsey and Company, Inc. in
Australia. Ms. Baldwin has recently joined Oxford Health Plans, Inc. where she
is focusing on an initiative aimed at implementing a new model for developing
and financing specialty women's health services. Ms. Baldwin earned a B.A. in
Biology and Chemistry with High Honors from the University of Delaware, received
an M.Ed. from the University of Houston, and an M.B.A. in International Business
and Finance from New York University. Ms. Baldwin is a past president of Women
in Management and serves on the Board of Directors of RESOLVE, Inc., a national,
nonprofit organization serving the needs of infertile couples.
Mr. Hillback was elected a director of the Company in June 1992. Mr.
Hillback is a Senior Vice President of Genzyme Corp., a position he has held
since July 1990, and from July 1991 to September 1996, Mr. Hillback has also
served as the President and Chief Executive Officer of Genzyme Genetics, a
division of Genzyme Corp. Mr. Hillback is currently a director of Aquila
Biopharmaceuticals, Inc. Mr. Hillback has a B.A. from Cornell University and an
M.B.A. from Harvard Business School.
Mr. Liebler was elected a director of the Company in August 1994. Mr.
Liebler is President of SDL Consultants, a privately-owned consulting firm
engaged in rendering general business advice. From February 1985 to December 1,
1991, Mr. Liebler served as Chief Executive Officer of American Equine Products,
Inc. and served as a director of that company from February 1985 to November
1992. American Equine Products, Inc., manufactured and distributed horse health
care products and was a franchisor of retail pet stores and a distributor of pet
products. American Equine Products, Inc. filed for bankruptcy in September 1991.
During the past 20 years, Mr. Liebler has been a director and/or officer of a
number of companies in the fields of home health care, clinical diagnostics,
high density optical storage and sporting goods.
Dr. McShane was elected a director of the Company in March 1997 and was a
Vice President of the Company in charge of medical affairs from September 1992
through February 28, 1997. Since May 1988, Dr. McShane has been, and currently
is, the Medical Director of the Boston Network Site where she is engaged in the
private practice of medicine, specializing in infertility. For four years prior
thereto, Dr. McShane was the Director of the IVF program at Brigham and Women's
Hospital in Boston. Dr. McShane has held various positions at Harvard University
School of Medicine, including Assistant Professor of Obstetrics and Gynecology.
Dr. McShane graduated from Tufts University School of Medicine and is board
certified in reproductive endocrinology and infertility.
Mr. Stuesser was elected a director of the Company in April 1994. Since
June 1996, Mr. Stuesser has held the position of President and Chief Executive
Officer of Computer People Inc., the U.S. subsidiary of London-based Delphi
Group. From July 1993 to May 1996, he was a private investor and business
consultant. Mr. Stuesser was elected Chairman of the Board in July 1995 and has
been a director of Curative Health Services, Inc. since 1993. Mr. Stuesser was
Chief Executive Officer of Kimberly from 1986 to July 1993, at
58
<PAGE>
which time Kimberly was acquired by the Olsten Company. Mr. Stuesser holds a
B.B.A. in accounting from St. Mary's University.
In connection with the Company's acquisition of the Merger Companies in
June 1996, Morris Notelovitz, M.D., Ph.D. became a member of the Company's Board
of Directors, and under two long term employment agreements (the "Employment
Agreements"), one with the Company and the other with the AWM Division, Dr.
Notelovitz agreed to serve as Vice President for Medical Affairs and Medical
Director of the AWM Division and agreed to provide medical services under the
AWM Division. Effective January 1, 1997, Dr. Notelovitz resigned from his
position as a director of the Company and terminated the Employment Agreements
(the medical services under the Employment Agreement with the AWM Division
terminated effective March 31, 1997). Currently, Dr. Notelovitz is a greater
than 5% shareholder of the Company's outstanding Common Stock.
The Board of Directors currently consists of six members. The Board of
Directors are elected by the Company's stockholders at each annual meeting or,
in the case of a vacancy, are appointed by the directors then in office, to
serve until the next annual meeting or until their successors are elected and
qualified. Officers are appointed by and serve at the discretion of the Board of
Directors.
The Company has agreed to cause a nominee of FCI to be appointed as a
director of the Company upon consummation of the Pending Acquisition and
nominated as a director of the Company at the first annual meeting of
stockholders after consummation of the Pending Acquisition.
Board Committees
The Audit Committee consists of Messrs. Hillback, Liebler and Stuesser. The
Audit Committee is authorized by the Board of Directors to review, with the
Company's independent accountants, the annual financial statements of the
Company; to review the work of, and approve non-audit services performed by,
such independent accountants; and to make annual recommendations to the Board
for the appointment of independent public accountants for the ensuing year. The
Audit Committee also reviews the effectiveness of the financial and accounting
functions, organization, operations and management of the Company.
The Compensation Committee consists of Messrs. Hillback, Liebler and
Stuesser. The Compensation Committee reviews and recommends to the Board of
Directors the compensation and benefits of all officers of the Company, reviews
general policy matters relating to compensation and benefits of employees of the
Company, administers the issuance of stock options to the Company's officers,
employees and consultants and also has authority to grant options to directors
who are not employees of the Company.
Director Compensation
In 1996, in addition to stock option compensation discussed below,
non-employee directors of the Company received an annual retainer of $10,000, a
fee of $750 for each meeting of the Board attended and $2,500 per year for
membership on a committee of the Board and were reimbursed for expenses actually
incurred in attending meetings. Directors who are also executive officers are
not compensated for their services as directors.
Under the Outside Director Stock Purchase Plan, there are 125,000 shares of
Common Stock reserved for issuance, pursuant to which 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. No
such elections were made as of the date of this Prospectus.
On June 11, 1996, the Board of Directors granted stock options to purchase
6,000 shares of Common Stock to each of Messrs. Hillback, Liebler and Stuesser,
and to Ms. Vicki Baldwin, the non-employee directors, each such option being
exercisable at $3.75 per share, 50% of which shares become exercisable in June
1997 and the balance of such shares become exercisable in June 1998. On October
24, 1995, the Board of Directors granted stock options to purchase 6,000 shares
of Common Stock to each of Messrs. Hillback, Liebler and Stuesser, each such
option being exercisable at $2.56 per share, 50% of which shares became
exercisable in June 1996 and the balance of such shares become exercisable in
June 1997. On November 15, 1994, the Board of Directors granted stock options to
purchase 30,000 shares of Common Stock to each of Messrs. Hillback,
59
<PAGE>
Liebler and Stuesser, each such option being exercisable at $1.25 per share, 25%
of which shares become exercisable one year from the date of the grant;
thereafter the shares become exercisable at the rate of 6.25% of the total
number of shares subject to the option every three months. New non-employee
directors will be granted options to purchase 30,000 shares of Common Stock
under the Company's 1992 Incentive and Non-Incentive Stock Option Plan (the
"1992 Plan") and, annually upon re-election, non-employee directors will be
granted options to purchase 6,000 shares of Common Stock under the 1992 Plan.
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 for aggregate fees of approximately $17,000, $22,000 and $40,000 during
the fiscal years ended December 31, 1996, 1995 and 1994, respectively.
Limitation on Liability
The DGCL permits a corporation through its certificate of incorporation to
eliminate the personal liability of its directors to the corporation or its
stockholders for monetary damages for breach of fiduciary duty of loyalty and
care as a director, with certain exceptions. The exceptions include a breach of
the director's duty of loyalty, acts or omissions not in good faith or which
involve intentional misconduct or knowing violation of law, improper
declarations of dividends, and transactions from which the directors derived an
improper personal benefit. The Company's Amended and Restated Certificate of
Incorporation exonerates the Company's directors from monetary liability to the
fullest extent permitted by this statutory provision but does not restrict the
availability of non-monetary and other equitable relief. See "Description of
Capital Stock."
Executive Compensation
The following table sets forth a summary of the compensation paid or
accrued by the Company during the years ended December 31, 1996, 1995 and 1994
for the Company's Chief Executive Officer and for the five most highly
compensated executive officers (the "Named Executive Officers"), including three
who are no longer serving as officers of the Company, effective January 1, 1997,
February 28, 1997 and April 16, 1997, respectively.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
-------------
Securities
Annual Compensation Underlying
-------------------------- Options
Name and Principal Position Year Salary ($) Bonus ($) Granted (#)
------------------------- ---- -------- -------- ----------
<S> <C> <C> <C> <C>
Gerardo Canet ....................................... 1996 220,000 -- 120,000
President and 1995 215,000 53,750 --
Chief Executive Officer 1994 189,000(1) 27,000 315,500
Peter O. Callan ..................................... 1996 108,000 10,000 --
Vice President, 1995 41,545(1) 9,375 40,000
Central Region
Lois A. Dugan ....................................... 1996 120,000 -- --
Vice President, 1995 113,000 28,250 --
Northeast Region (2) 1994 78,750(1) 12,495 40,000
Jay Higham .......................................... 1996 125,000 -- 40,000
Vice President, Marketing 1995 110,000 19,250 --
and Development 1994 27,500(1) 4,609 40,000
Patricia M. McShane, M.D. ........................... 1996 238,000 29,000 --
Vice President, Medical 1995 173,600 15,190 --
Affairs (3) 1994 203,000 8,000 37,293
Morris Notelovitz, M.D., Ph.D. ...................... 1996 179,000(1) -- 40,000
Vice President for Medical
Affairs and Medical Director
of the AWM Division (4)
</TABLE>
60
<PAGE>
- ----------
(1) Gerardo Canet, Peter Callan, Lois Dugan, Jay Higham and Morris Notelovitz
commenced employment with the Company on February 14, 1994, August 14,
1995, April 5, 1994, October 3, 1994 and June 7, 1996, respectively.
(2) Effective April 16, 1997, Ms. Dugan resigned as Vice President of the
Company's Northeast Region.
(3) Amount represents aggregate compensation earned for serving as an executive
officer of the Company and as the Medical Director of the Boston Network
Site. Effective February 28, 1997, Dr. McShane resigned as Vice President
of the Company in charge of Medical Affairs. Dr. McShane was elected a
director in March 1997 and remains the Medical Director at the Boston
Network Site.
(4) Annual compensation amount represents aggregate compensation earned for
serving as an executive officer of the Company and as the Medical Director
of the Women's Medical & Diagnostic Center, Inc. Effective January 1, 1997
and March 31, 1997, Dr. Notelovitz resigned as an executive officer of the
Company and as the Medical Director at the AWM Division, respectively. As a
result of his resignation, the options granted to Dr. Notelovitz in 1996
were canceled.
Stock Option Information
The following table sets forth certain information concerning grants of
stock options made during 1996 to each of the Named Executive Officers:
OPTIONS GRANTED IN 1996
<TABLE>
<CAPTION>
Percentage
of Shares Potential Realizable
Underlying Value at Assumed
Number of Total Annual Rates of Stock
Shares Options Market Price Appreciation
Underlying Granted to Price on for Option Term(2)
Options Employees Exercise Date of ---------------------
Name Granted in 1996(1) Price Grant Expiration Date 5% 10%
----- ------- --------- ----- ----- -------------- --- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Gerardo Canet ................... 120,000(3) 35% $2.37 $2.34 August 1, 2006 $173,715 $445,073
Jay Higham ...................... 40,000(3) 12% $2.37 $2.34 August 1, 2006 $ 57,905 $148,357
Morris Notelovitz, M.D., Ph.D. .. 40,000(4) 12% $3.75 $3.75 June 11, 2006(4) $ 94,333 $239,061
</TABLE>
- ----------
(1) Based on an aggregate of 344,500 options granted to employees in 1996,
including options granted to the Named Executive Officers and to outside
directors.
(2) Potential realizable value is based on the assumption that the price per
share of Common Stock appreciates at the assumed annual rate of stock
appreciation for the option term. The assumed 5% and 10% annual rates of
appreciation (compounded annually) over the term of the option are set
forth in accordance with the rules and regulations adopted by the
Commission and do not represent the Company's estimate of future stock
price appreciation.
(3) Each such option being exercisable at $2.37 per share, 25% of which shares
become exercisable one year from the date of grant; thereafter the shares
become exercisable at the rate of 6.25% of the total number of shares
subject to the option every three months.
(4) Exercisable, with respect to 25% of the underlying shares, one year from
the date of grant; thereafter the options become exercisable every three
months at the rate of 6.25% of the total number of shares subject to each
such options. These options were cancelled as a result of Dr. Notelovitz's
resignation as an executive officer of the Company in January 1997.
61
<PAGE>
The following table sets forth certain information concerning the number
and value of unexercised options held by each of the Named Executive Officers
who held unexercised options at December 31, 1996:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Value of Unexercised
Number of Securities Underlying In-the-Money
Shares Unexercised Options at Options at
Acquired December 31, 1996 (#) December 31, 1996($)(1)
Upon Value ------------------------- ------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
----- ----------- ----------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gerardo Canet ............... -- -- -- 19,001 -- 19,001
-- -- 71,249 4,750 71,249 4,750
-- -- 34,125 11,375 -- --
20,000 43,750(2) 67,500 87,500 25,650 33,250
-- -- -- 120,000(3) -- --
Peter O. Callan ............. -- -- 12,500 27,500 -- --
Lois A. Dugan ............... -- -- 15,625 9,375 -- --
-- -- 7,500 7,500 2,812 2,812
Jay Higham .................. -- -- 12,500 12,500 6,687 6,687
-- -- 7,500 7,500 2,812 2,812
-- -- -- 40,000(3) -- --
Patricia M. McShane, M.D.(4) -- -- 15,475 9,285 -- --
-- -- 2,707 -- 1,936 --
-- -- 6,266 6,267 2,350 2,350
Morris Notelovitz,
M.D., Ph.D. (5) .......... -- -- -- 40,000 -- --
-- --
</TABLE>
- ----------
(1) Based upon the closing sales price of the Common Stock on the Nasdaq
National Market on December 31, 1996 of $1.625 per share.
(2) Represents the positive spread between the respective exercise prices of
the exercised options and the closing sales price of the Common Stock on
the Nasdaq National Market on June 28, 1996, the date of exercise, of $3.44
per share.
(3) These options were granted by the Company in August 1996, each such option
being exercisable at $2.37 per share, 25% of which shares become
exercisable one year from the date of grant; thereafter, the shares become
exercisable at the rate of 6.25% of the total number of shares subject to
the option every three months.
(4) These options were canceled as a result of Dr. McShane's resignation as an
executive officer of the Company in February 1997.
(5) These options were canceled as a result of Dr. Notelovitz's resignation as
an executive officer of the Company in January 1997.
Stock Option Plans
The Company has in effect the 1988 Stock Option Plan (the "1988 Plan")
which has 161,627 shares of Common Stock reserved for issuance thereunder and
the 1992 Plan, which has 1,300,000 shares of Common Stock reserved for issuance
thereunder. The 1988 Plan and the 1992 Plan are referred to herein collectively
as the "Plans."
The purposes of the Plans are to further the growth and development of the
Company, its direct and indirect subsidiaries and the entities with which the
Company collaborates to deliver services. The grant of options by the Company is
intended to encourage selected employees, directors, consultants, agents,
independent contractors and other persons who contribute and are expected to
contribute materially to the Company's success to obtain a proprietary interest
in the Company through ownership of its stock. The Plans provide such persons
with an added incentive to promote the best interests of the Company and afford
the Company a means of attracting persons of outstanding ability.
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<PAGE>
The Plans are administered by the Board of Directors or a committee of the
Board of Directors (the "Committee"); provided, however, that with respect to
"officers" and "directors," as such terms are defined for purposes of Rule 16b-3
("Rule 16b-3") promulgated under the Exchange Act, such committee, shall consist
of "disinterested" directors as defined in Rule 16b-3, but only if at least two
directors meet the criteria of "disinterested" directors as defined in Rule
16b-3.
Options granted under the Plans may be either incentive options or
non-incentive options. Under both the 1988 and 1992 Plans, incentive stock
options, as defined in Section 422 of the Internal Revenue Code of 1986, as
amended, 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 the Committee 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.
The 1992 Plan provides for the automatic grant to outside directors of the
Company of non-incentive stock options to purchase 30,000 shares of Common Stock
on the date such person is first elected or appointed a director, at an exercise
price equal to the fair market value of the Common Stock on the date of grant.
Stock options issued under the Plans 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 the 1988 Plan, options expire one month after the date of the
holder's termination of employment with the Company or six months following
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.
On April 19, 1994, the Compensation Committee of the Board of Directors of
the Company approved a stock option exchange program under which incentive stock
options to purchase an aggregate of 107,992 shares of Common Stock at an
exercise price of $2.50 per share were granted to employees holding options to
purchase an identical number of shares at exercise prices ranging from $8.00 to
$11.75, contingent upon the surrender of the old stock options. The new stock
options expire on April 18, 2004 and are exercisable, with respect to 25% of the
underlying shares, one year from the date of grant; thereafter the options
become exercisable every three months at the rate of 6.25% of the total number
of shares subject to each such option. Stock options to purchase an aggregate of
105,559 shares of Common Stock were surrendered.
As of the date of this Prospectus, there were outstanding under the 1988
Plan options to purchase 105,772 shares at exercise prices ranging from $0.625
to $1.55 per share and there were outstanding under the 1992 Plan options to
purchase 977,544 shares at exercise prices ranging from $0.625 to $3.75 per
share.
Outside Director Stock Purchase Plan
On April 19, 1994, the Board of Directors approved the 1994 Outside
Director Stock Purchase Plan (the "Outside Director Stock Purchase Plan"),
reserving for issuance thereunder 125,000 shares of Common Stock, pursuant to
which directors who are not full-time employees of the Company may elect to
receive all or 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, 1996 and 1995, there were no
options outstanding under the Outside Director Stock Purchase Plan.
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<PAGE>
Employment Agreements
On February 14, 1994, Gerardo Canet entered into an employment agreement
with the Company to serve as its President and Chief Executive Officer and was
appointed a director. Pursuant to the employment agreement, Mr. Canet receives
an annual salary of $215,000 subject to increases and in February 1994 was
granted options to purchase an aggregate of 140,500 shares of Common Stock.
Under Mr. Canet's employment agreement, the Company may terminate his employment
without cause on thirty days' notice, in which event Mr. Canet will receive, as
severance pay, twelve months' salary payable monthly. In the event Mr. Canet's
employment is terminated by reason of his permanent disability or death, Mr.
Canet (or his legal representative) will receive six months' base salary
(reduced by any payments following termination received under any long-term
disability policy maintained by the Company for Mr. Canet's benefit).
The employment agreement further provides that in the event that (i) within
one year after a "Change of Control" (as defined therein) of the Company, Mr.
Canet's employment terminates or there occurs a material reduction in his duties
(other than by reason of his disability) or a material interference by the
Company's Board of Directors with the exercise of his authority or (ii) the
Company is acquired for cash in excess of $10.00 per share of Common Stock, the
stock options granted to Mr. Canet under the agreement would accelerate and
become exercisable as of the date of such termination, material reduction,
material interference, or cash acquisition, or, with respect to the incentive
options, the earliest date thereafter consistent with certain restrictions set
forth in the agreement.
Under the employment agreement, Mr. Canet has agreed not to compete with
the Company while employed by the Company and for a period of one year
thereafter.
The Company is a party to Change in Control Severance Agreements with
Gerardo Canet, the Chairman of the Board, President and Chief Executive Officer
of the Company, and Dwight Ryan, Vice President and Chief Financial Officer of
the Company providing for severance pay to certain members of senior management
if their employment is terminated upon a change in control of the Company.
The Company is also a party to Executive Retention Agreements with each of
Dr. Wood and Messrs. Higham, Callan and Watkins, Vice Presidents of the Company.
The Change in Control Severance Agreement and the Executive Retention
Agreements (together referred to herein as the "Agreements") provide for certain
severance payments and benefits to the named executive in the event of a
termination of their employment, either by the Company without cause, or by the
executive for "Good Reason" (as defined therein), at any time within eighteen
(18) months following a "Change in Control" (as defined therein) of the Company
(any such termination, a "Qualifying Termination"). More specifically, the
Agreements provide the named executive with one additional year of salary, bonus
(if applicable), and benefits (or equivalent), more than he or she would
previously have been entitled to receive upon a termination without cause (or,
additionally, in the case of Mr. Canet, certain terminations by Mr. Canet for
Good Reason which would be deemed equivalent to a termination without cause
under his current employment agreement). Pursuant to the terms of the
Agreements, all incentive options granted to the respective executive would
become fully vested upon a Qualifying Termination, subject to certain terms and
conditions. Also, pursuant to the Agreements, the Company would be required to
pay each respective executive for all reasonable fees and expenses incurred by
the respective executive in litigating his or her rights, thereunder, to the
extent the executive is successful in any such litigation.
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<PAGE>
CERTAIN TRANSACTIONS
Dr. Patricia M. McShane, became a director of the Company in March 1997
and was a Vice President of the Company in charge of medical affairs from
September 1992 through February 28, 1997. Since May 1988, Dr. McShane has been,
and currently is, the Medical Director of the Boston Network Site and has also
been, and currently is, engaged in the private practice of medicine,
specializing in infertility. Dr. McShane's aggregate compensation earned in 1996
for serving as an executive officer of the Company and as the Medical Director
of the Boston Network Site was $239,000. In June 1997, the Company granted Dr.
McShane 30,000 options to purchase Common Stock, exercisable at $2.38 per share,
in connection with her appointment to the Board of Directors of the Company.
SDL Consultants, a company owned by Sarason D. Liebler, a director of the
Company, rendered consulting services to the Company during 1996 and 1995 for
aggregate fees of approximately $17,000 and $22,000, respectively. SDL
Consultants is paid a daily rate (determined prior to each consulting project)
plus reasonable out-of-pocket expenses.
Under an agreement relating to preimplantation embryo genetic testing with
Genzyme Genetics, a division of Genzyme Corp., the Company funded research in
the amount of approximately $56,000 and $134,000 in 1996 and 1995, respectively.
Genzyme Genetics and the Company mutually agreed to terminate the agreement
effective December 31, 1996. Elliott D. Hillback, Jr., a director of the
Company, is Senior Vice President of Genzyme Corp. See "Business--Clinical and
Medical Services."
In connection with the Company's acquisition of the Merger Companies in
June 1996, Morris Notelovitz, M.D., Ph.D. became a member of the Company's Board
of Directors, and under the Employment Agreements, Dr. Notelovitz agreed to
serve as Vice President for Medical Affairs and Medical Director of the AWM
Division and agreed to provide medical services under the AWM Division.
Effective January 1, 1997, Dr. Notelovitz resigned from his position as a
director of the Company and terminated the Employment Agreements (the medical
services under the Employment Agreements terminated effective March 31, 1997).
Currently, Dr. Notelovitz is a greater than 5% shareholder of the Company's
outstanding Common Stock.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth at July 10, 1997 and as adjusted to reflect
the sale by the Company of the shares of Common Stock offered hereby and giving
effect to the Pending Acquisition, certain information with respect to the
beneficial ownership of the Common Stock (i) by each person who is known by the
Company to be the beneficial owner of more than five percent of the outstanding
shares of Common Stock, (ii) by each of the Named Executive Officers, (iii) by
each of the directors of the Company and (iv) by all directors and executive
officers of the Company as a group. Unless otherwise indicated below, the
business address of each person listed is c/o IntegraMed America, Inc., One
Manhattanville Road, Purchase, NY 10577.
<TABLE>
<CAPTION>
Percentage
Beneficially
Number of Owned
Shares -------------------------
Beneficially Prior to the After the
Name and Address Owned(1) Offering Offering
----------------------------------- --------------- ---------- ---------
<S> <C> <C> <C>
Alphi Investment Management Company
155 Pfingsten Road, Suite 360
Deerfield, IL 60013 ..................... 820,600(2) 8.40% 4.74%
FMR Corp.
82 Devonshire Street
Boston, MA 02109 ........................ 805,500(3) 8.24 4.65
Morris Notelovitz
2801 N.W. 58th Blvd.
Gainesville, FL 32605 ................... 666,666(4) 6.82 3.85
Fertility Centers of Illinois, S.C.
3000 North Halsted Street
Chicago, IL 60657 ........................ 1,142,857(5) -- 6.60
Gerardo Canet ............................... 2,261,738(6)(7) 11.15 12.87
Peter O. Callan ............................. 20,000(6) * *
Lois A. Dugan ............................... 32,125(6) * *
Jay Higham .................................. 39,499(6) * *
Donald S. Wood, Ph.D. ....................... 35,833(6) * *
Vicki L. Baldwin ............................ 56,132(6) * *
Elliott D. Hillback, Jr. .................... 29,625(6)(8) * *
Patricia M. McShane, M.D. ................... -- -- --
Sarason D. Liebler .......................... 46,075(6) * *
Lawrence J. Stuesser ........................ 218,725(6)(9) 2.23 1.26
All executive officers and directors
as a group (11 persons) .................. 2,744,555(10) 15.62 15.42
</TABLE>
- --------------
* Represents less than 1%
(1) As of July 10, 1997, there were 165,644 shares of Convertible Preferred
Stock outstanding of which 150,000 shares, or 90.6%, were owned by Barry
Blank (Box 32056, Phoenix, AZ 85064) as reported on his Schedule 13D filed
with the Securities and Exchange Commission (the "Commission") on June 6,
1994. Upon the conversion of each share of Convertible Preferred Stock
owned by Mr. Blank into 2.96 shares of Common Stock, giving effect to the
sale by the Company of the shares of Common Stock offered hereby and giving
effect to the Pending Acquisition, he would own approximatley 2.56% of the
Company's outstanding Common Stock.
(2) As reported on its Schedule 13G filed with the Commission on February 11,
1997, Alphi Investment Management Company ("AIMCO") may be deemed to be
beneficial owners of these shares which include 666,800 shares, or 6.95%,
of the Company's Common Stock, owned by Alphi Fund L.P. of which AIMCO is
the general partner.
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<PAGE>
(3) As reported on their Schedule 13G filed with the Commission on February 14,
1997, FMR Corp. and its wholly-owned subsidiary, Fidelity Management &
Research Company may be deemed to be beneficial owners of these shares,
which include 605,500 shares of the Company's outstanding Common Stock,
owned by Fidelity VIP Equity-Income Fund. In addition, as reported on such
Schedule 13G, Edward C. Johnson, III, Chairman of FMR Corp., and certain
Johnson family members through their ownership of voting Common Stock, form
a controlling group with respect to FMR Corp., and, as such, may be deemed
to be beneficial owners of such shares of Common Stock.
(4) Represents shares issued by the Company in its acquisition of the Merger
Companies in June 1996. Gerardo Canet has an irrevocable proxy to vote
these shares through September 30, 1997.
(5) Represents shares to be issued by the Company to FCI in connection with the
Pending Acquisition. FCI is an entity owned directly or indirectly by Aaron
Lifchez, M.D., Jacob Moise, M.D., Jorge Valle, M.D. and Brian Kaplan, M.D.
Pursuant to an agreement, an estimated 1,142,857 shares of Common Stock
will be issued in connection with the Pending Acquisition. FCI will grant
Gerardo Canet an irrevocable proxy to vote these shares for the election of
directors and certain matters for a two year period following the closing
of the Pending Acquisition.
(6) Includes (or consists of) currently exercisable options to purchase Common
Stock as follows: Gerardo Canet -- 256,761; Peter Callan -- 20,000; Lois
Dugan -- 28,125; Jay Higham -- 37,499; Donald Wood -- 33,833; Elliott
Hillback, Jr. -- 29,625; Lawrence Stuesser -- 29,625; and Sarason Liebler
-- 29,625.
(7) Includes (i) 666,666 shares of Common Stock owned by Morris Notelovitz,
M.D., Ph.D. for which Gerardo Canet has an irrevocable proxy to vote
through September 30, 1997 and (ii) 145,454 shares of Common Stock owned by
RSMC for which Mr. Canet has an irrevocable proxy to vote for the election
of directors and certain other matters through June 6, 1999. Also includes
an estimated 1,142,857 shares of Common Stock to be issued to FCI in the
Pending Acquisition as to which Mr. Canet will have an irrevocable proxy to
vote with respect to the election of directors and certain other matters
for a two year period following the closing of the Pending Acquisition.
(8) Excludes 136,612 shares of Common Stock owned by Genzyme Genetics, a
division of Genzyme Corp., that Elliott D. Hillback, Jr., as a Senior Vice
President of Genzyme Corp., may be deemed to beneficially own as to which
Mr. Hillback has disclaimed beneficial ownership.
(9) Includes 31,600 shares of Common Stock held by family members of Lawrence
Stuesser for which Mr. Stuesser has disclaimed beneficial ownership.
(10) Includes currently exercisable options to purchase 476,896 shares of Common
Stock. If all of the shares described in note (8) were included, the number
of shares owned would be 1,738,310 and 2,881,167 shares and the percentage
ownership, would be 16.96% prior to the offering and 16.19% after the
offering, respectively.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 25,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock, par value $0.01 per share
("Preferred Stock").
Preferred Stock
The Board of Directors is authorized to establish and designate the
classes, series, voting powers, designations, preferences and relative,
participating, optional or other rights, and such qualifications, limitations
and restrictions of the Preferred Stock as the Board, in its sole discretion,
may determine without further vote or action by the stockholders.
The rights, preferences, privileges, and restrictions or qualifications of
different series of Preferred Stock may differ with respect to dividend rates,
amounts payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions, and other matters. The issuance of
Preferred Stock could decrease the amount of earnings and assets available for
distribution to holders of Common Stock or could adversely affect the rights and
powers, including voting rights, of holders of Common Stock.
The existence of the Preferred Stock and the power of the Board of
Directors of the Company to set its terms and issue a series of Preferred Stock
at any time without stockholder approval, could have certain anti-takeover
effects. These effects include that of making the Company a less attractive
target for a "hostile" takeover bid or rendering more difficult or discouraging
the making of a merger proposal, assumption of control through the acquisition
of a large block of Common Stock or removal of incumbent management, even if
such actions could be beneficial to the stockholders of the Company.
Convertible Preferred Stock
The issuance of 2,500,000 shares of Convertible Preferred Stock has been
authorized by resolutions adopted by the Board of Directors and is set forth in
a Certificate of Designations of Series A Cumulative Convertible Preferred Stock
filed with the Secretary of State of the State of Delaware, which contains the
designations, rights, powers, preferences, qualifications and limitations of the
Convertible Preferred Stock. All outstanding shares of Convertible Preferred
Stock are fully paid and nonassessable.
The following is a summary of the terms of the Convertible Preferred
Stock. This summary is not intended to be complete and is subject to, and
qualified in its entirety by reference to, the Certificate of Designations filed
with the Secretary of State of the State of Delaware amending the Company's
Certificate of Incorporation and setting forth the rights, preferences and
limitations of the Convertible Preferred Stock, filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
On November 30, 1994, the Company announced it may purchase up to 300,000
shares of its outstanding Convertible Preferred Stock at such times and prices
as it deems advantageous. The Company has no commitment or obligation to
purchase any particular number of shares, and it may suspend the program at any
time. As of the date hereof, there were 165,644 shares of Convertible Preferred
Stock outstanding.
Dividends
The holders of the Convertible Preferred Stock are entitled to receive if,
when and as declared by the Board of Directors out of funds legally available
therefor, dividends at the rate of $0.80 per share per annum, payable quarterly
on the fifteenth day of August, November, February and May of each year,
commencing August 15, 1993, to the holders of record as of a date, not more than
sixty days prior to the dividend payment date, as may be fixed by the Board of
Directors. Dividends accrue from the first day of the quarterly period in which
such dividend may be payable, except with respect to the first quarterly
dividend which shall accrue from the date of issuance of the Convertible
Preferred Stock.
No dividends may be paid on any shares of capital stock ranking junior to
the Convertible Preferred Stock (including the Common Stock) unless and until
all accumulated and unpaid dividends on the Convertible Preferred Stock have
been declared and paid in full.
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<PAGE>
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, voting,
together with the Common 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. The Company
does not anticipate the payment of any dividends on the Convertible Preferred
Stock in the foreseeable future. As of July 16, 1997, 12 quarterly dividend
payments had been suspended resulting in $397,000 of dividend payments being in
arrears.
Conversion
At the election of the holder thereof, each share of Convertible Preferred
Stock will be convertible into Common Stock at any time prior to redemption at a
conversion rate of 1.1 shares of Common Stock for each share of Convertible
Preferred Stock (equivalent to a conversion price of $9.0909 per share). The
conversion rate is subject to adjustment from time to time in the event of (i)
the issuance of Common Stock as a dividend or distribution on any class of
capital stock of the Company; (ii) the combination, subdivision or
reclassification of the Common Stock; (iii) the distribution to all holders of
Common Stock of evidences of the Company's indebtedness or assets (including
securities, but excluding cash dividends or distributions paid out of earned
surplus); (iv) the failure of the Company to pay a dividend on the Convertible
Preferred Stock within 30 days of a dividend payment date, which will result in
each instance in a reduction of $0.18 per share; or (v) the sale of Common Stock
at a price, or the issuance of options, warrants or convertible securities with
an exercise or conversion price, below $8.00 per share, except upon exercise of
options and/or warrants outstanding on the date of this Prospectus and options
thereafter granted to employees. No adjustment in the conversion rate will be
required until cumulative adjustments require an adjustment of at least 1.5% in
the conversion rate. No fractional shares will be issued upon conversion, but
any fractions will be adjusted in cash on the basis of the then current market
price of the Common Stock. Payment of accumulated and unpaid dividends will be
made upon conversion to the extent of legally available funds. The right to
convert the Convertible Preferred Stock terminates on the date fixed for
redemption.
On October 7, 1994, the Company offered to the holders of the 2,000,0000
outstanding shares of the Convertible Preferred Stock the ability to convert
each share of Convertible Preferred Stock into 3.0 shares of Common Stock, and
$0.20 in cash (the "Offer"). Upon expiration of the Offer on November 10, 1994
and pursuant to its terms 1,136,122 shares of Convertible Preferred Stock were
accepted for conversion into 3,408,366 shares of Common Stock and $227,224 in
cash. In connection with the Offer, five-year warrants to purchase 70,826 shares
of Common Stock at $1.25 per share were issued to Raymond James & Associates,
Inc.
On June 6, 1996, the Company made a new conversion offer (the "Second
Offer") to the holders of the 773,878 outstanding shares of the Convertible
Preferred Stock. Under the Second Offer, holders of Convertible Preferred Stock
received four shares of Common Stock upon conversion of each 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, and pursuant to
its terms, 608,234 shares of Convertible Preferred Stock were accepted for
conversion into 2,432,936 shares of Common Stock, or 78.6% of the Convertible
Preferred Stock outstanding, constituting all the shares validly tendered. Upon
consummation of the Second Offer, there were 9,198,375 shares of Common Stock
outstanding and 165,644 shares of Convertible Preferred Stock outstanding. As a
result of the conversion, the Company reversed approximately $973,000 in accrued
dividends from its balance sheet and $6.1 million of liquidation preference has
been eliminated.
Redemption
The Company may, at its option, redeem the Convertible Preferred Stock, in
whole and not in part, at any time at a redemption price of $10.00 per share,
plus accumulated and unpaid dividends, if the market price of the Common Stock
(the closing sale price as reported by The Nasdaq SmallCap Market or, if not
traded thereon, the high bid price as reported by Nasdaq or, if not quoted
thereon, the high bid price in the National Quotation Bureau sheet listing for
the Common Stock) equals or exceeds $12.00 per share for twenty consecutive
trading days ending no more than ten days prior to the date of notice of
redemption.
69
<PAGE>
In addition, the Company may, at its option, redeem the Convertible
Preferred Stock, in whole and not in part, at any time on or after May 20, 1997
at the redemption prices set forth below, plus accumulated and unpaid dividends:
Date of Redemption Per Share
----------------- --------
May 20, 1997 to May 19, 1999 .............................. $10.70
May 20, 1999 to May 19, 2001 .............................. $10.50
May 20, 2001 to May 19, 2003 .............................. $10.30
May 20, 2003 and thereafter ............................... $10.00
Notice of redemption must be mailed to each holder of Convertible
Preferred Stock to be redeemed at his last address as it appears upon the
Company's registry books at least thirty days prior to the record date of such
redemption. On and after the redemption date, dividends will cease to accumulate
on shares of Convertible Preferred Stock called for redemption.
On or after the redemption date, holders of shares of Convertible
Preferred Stock which have been redeemed shall surrender their certificates
representing such shares to the Company at its principal place of business or as
otherwise specified and thereupon the redemption price of such shares shall be
payable to the order of the person whose name appears on such certificate or
certificates as the owner thereof; provided, that a holder of Convertible
Preferred Stock may elect to convert such shares into Common Stock at any time
prior to the date fixed for redemption.
From and after the redemption date, all rights of the holders of such
shares shall cease with respect to such shares and such shares shall not
thereafter be transferred on the books of the Company or be deemed to be
outstanding for any purpose whatsoever.
Voting Rights
The holders of the Convertible Preferred Stock are not entitled to vote,
except as set forth below and as provided by applicable law. On matters subject
to a vote by holders of the Convertible Preferred Stock, the holders are
entitled to one vote per share.
The affirmative vote of at least a majority of the shares of Convertible
Preferred Stock voting as a class, shall be required to authorize, effect or
validate the creation and issuance of any class or series of stock ranking equal
or superior to the Convertible Preferred Stock with respect to the declaration
and payment of dividends or distribution of assets on liquidation, dissolution
or winding up. In the event that the Company has the right to redeem the
Convertible Preferred Stock no such vote is required if, prior to the time such
class is issued, provision is to be made for the redemption of all shares of the
Convertible Preferred Stock and such Convertible Preferred Stock is redeemed on
or prior to the issuance of such class.
In the event that the Company fails to pay any dividends for four
quarterly dividend payment periods, whether or not consecutive, the holders of
the Convertible Preferred Stock shall be entitled to one vote per share of
Convertible Preferred Stock on all matters submitted to the Company's
stockholders, including election of directors; once in effect, such voting
rights are not terminated by the payment of all accrued dividends. In May 1995,
as a result of the Company's Board of Directors suspending four quarterly
dividend payments, holders of Convertible Preferred Stock became entitled to one
vote per share of Convertible Preferred Stock voting, together with the Common
Stock, on all matters submitted to a vote of stockholders, including election of
directors.
Liquidation
In the event of any voluntary or involuntary liquidation, dissolution or
winding-up of the Company, before any payment or distribution of the assets of
the Company (whether capital or surplus), or the proceeds thereof, may be made
or set apart for the holders of Common Stock or any stock ranking junior to the
Convertible Preferred Stock the holders of Convertible Preferred Stock will be
entitled to receive, out of the assets of the Company available for distribution
to stockholders, a liquidating distribution of $10.00 per share, plus any
accumulated and unpaid dividends. If, upon any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the assets of the Company
are insufficient to make the full payment of $10.00 per share, plus all
accumulated and unpaid dividends on the Convertible Preferred Stock and similar
payments, any other class of stock ranking on a parity with the Convertible
Preferred Stock upon liquidation, then the holders of the Convertible Preferred
Stock or such other shares will share ratably in any such distribution of the
Company's assets in proportion to the full respective distributable amounts to
which they are entitled.
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<PAGE>
Miscellaneous
The Company is not subject to any mandatory redemption or sinking fund
provisions with respect to the Convertible Preferred Stock. The holders of the
Convertible Preferred Stock are not entitled to preemptive rights to subscribe
for or to purchase any shares or securities of any class which may at any time
be issued, sold or offered for sale by the Company. Shares of Convertible
Preferred Stock redeemed or otherwise reacquired by the Company shall be retired
by the Company and shall be unavailable for subsequent issuance.
Transfer Agent
American Stock Transfer & Trust Company, 40 Wall Street, New York, New
York 10005 is the transfer agent for the Convertible Preferred Stock.
Common Stock
The holders of outstanding shares of Common Stock are entitled to share
ratably on a share-for-share basis with respect to any dividends paid on the
Common Stock when, as and if declared by the Board of Directors out of funds
legally available therefor. Each holder of Common Stock is entitled to one vote
for each share held of record. The Common Stock is not entitled to conversion or
preemptive rights and is not subject to redemption. Upon liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in the net assets legally available for distribution
after the liquidating distribution to the holders of the Convertible Preferred
Stock. All outstanding shares of Common Stock are fully paid and nonassessable.
Gerardo Canet, President and Chief Executive Officer of the Company has an
irrevocable proxy to vote (i) 666,666 shares of Common Stock owned by Morris
Notelovitz, on all matters subject to a vote of the stockholders through
September 30, 1997 and (ii) 145,454 shares of Common Stock currently owned by
RSMC and any shares subsequently issued to RSMC in connection with the San Diego
Acquisition, with respect to the election of directors and certain other matters
for two years from the date of issuance. In addition, upon consummation of the
Pending Acquisition, FCI will grant Mr. Canet an irrevocable proxy to vote the
shares of Common Stock issued to it in the Pending Acquisition (estimated to be
1,142,857 shares) with respect to the election of directors and certain other
matters. There are no transfer restrictions on the shares, other than those
imposed by federal and state securities law.
Transfer Agent
American Stock Transfer & Trust Company, 40 Wall Street, New York, New
York 10005 is the transfer agent and registrar for the Common Stock.
Limitation of Liability
As permitted by the DGCL, the Company's Amended and Restated Certificate
of Incorporation provides that directors of the Company shall not be personally
liable to the Company or its stockholders for damages for the breach of any duty
owed to the Company or its stockholders except for liability for any breach of
duty based upon an act or omission (i) in breach of the director's duty of
loyalty to the Company or its stockholders, (ii) not in good faith or involving
a knowing violation of law or (iii) resulting in the receipt by such director of
an improper personal benefit.
As a result of the provision, the Company and its stockholders may be
unable to obtain monetary damages from a director for breach of his duty of
care. Although stockholders may continue to seek injunctive or other equitable
relief for an alleged breach of fiduciary duty by a director, stockholders may
not have any effective remedy against the challenged conduct if equitable
remedies are unavailable.
In addition, the Company's Amended and Restated Certificate of
Incorporation and By-Laws provide that the Company will indemnify any and all
corporate agents, including any director, officer, employee or agent of the
Company, to the fullest extent permitted by the DGCL. Accordingly, the Company
will be required to indemnify any such corporate agent against his expenses and
liabilities in connection with proceedings other than those by or in the right
of the Company involving the corporate agent by reason of his being such, if (i)
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company and (ii) with respect to any
criminal proceedings, he had no reasonable cause to believe his conduct was
unlawful.
71
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after
the offering, or the possibility of such sales occurring, could adversely affect
prevailing market prices for the Common Stock or the future ability of the
Company to raise capital through an offering of equity securities. After this
offering, the Company will have 17,317,009 shares of Common Stock outstanding
(including an estimated 1,142,857 shares to be issued in the Pending
Acquisition). Of these shares, the 6,400,000 shares of Common Stock offered
hereby and an additional 8,587,641 shares of Common Stock outstanding will be
freely tradable in the public market without restriction unless such shares are
held by "affiliates" of the Company, as that term is defined in Rule 144 under
the Securities Act. The remaining 2,329,368 shares of Common Stock outstanding
on completion of this offering are restricted securities under the Securities
Act and may be sold in the public market only if they are registered or if they
qualify for exemption from registration under Rule 144 under the Securities Act.
Pursuant to "lock-up" agreements, all of the Company's executive officers,
directors and certain holders of shares of the outstanding Common Stock, who
collectively hold 1,312,681 shares of Common Stock, have agreed not to offer,
sell, contract to sell, or grant any option, right or warrant to purchase or
otherwise dispose of any of their shares for a period of 90 days from the date
of this Prospectus without the prior written consent of Vector Securities
International, Inc. The Company also has agreed that it will not offer, sell,
contract to sell, or grant any option, right or warrant to purchase or otherwise
dispose of Common Stock for a period of 90 days from the date of this
Prospectus, other than pursuant to outstanding warrants and options, existing
stock option plans, and in connection with corporate collaborations and
acquisitions, without the prior written consent of Vector Securities
International, Inc. Upon termination of such lock-up agreements, 979,348 of the
"locked-up" securities will be eligible for immediate sale in the public market
subject to certain volume, manner of sale and other limitations under Rule 144.
Vector Securities International, Inc. may, at its sole discretion and at any
time without notice, release all or any portion of the shares subject to such
lock-up agreements.
As of the date of this Prospectus, the Company had outstanding options and
warrants to purchase a total of 1,802,828 shares of Common Stock (giving effect
to this offering and the Pending Acquisition), of which options and warrants to
purchase 1,204,917 shares are currently exercisable. Of such shares subject to
options and warrants, approximately 582,660 shares are subject to lock-up
agreements for a period of 90 days from the date of this Prospectus. As of the
date of this Prospectus, an additional 332,454 shares were available for future
option grants under the Company's stock option plans. All of the shares issued,
issuable or reserved for issuance under the Company's stock option plans or upon
the exercise of options issued or issuable under such plans are covered or will
be covered by an effective registration statement. Shares issued upon exercise
of such options generally will be freely tradeable in the public market after
the effective date of a registration statement covering such shares without
restriction or further registration under the Securities Act subject, in the
case of certain holders, to the Rule 144 limitations applicable to affiliates,
the above-referenced lock-up agreements and vesting restrictions imposed by the
Company. In addition, 490,441 shares of Common Stock are issuable upon
conversion of the Convertible Preferred Stock (giving effect to this offering
and the Pending Acquisition). Upon conversion, such shares of Common Stock will
be freely tradable in the public market.
After the offering, holders of an aggregate of 2,329,368 shares of Common
Stock will be entitled to certain rights with respect to the registration of
such shares for resale under the Securities Act (including the shares to be
issued in the Pending Acquisition). In addition, the 851,765 shares issuable
upon exercise of outstanding warrants (including the Advisor Warrant) have
similar registration rights. If such registrations cause a large number of
shares to be registered and sold in the public market, such sales could have an
adverse effect on the market price for the Common Stock. See "Management --
Stock Option Plans," "-- Outside Director Stock Purchase Plan," "Description of
Capital Stock" and "Plan of Distribution."
72
<PAGE>
PLAN OF DISTRIBUTION
The Common Stock is being offered for sale by the Company on a best
efforts, all or nothing, basis to selected institutional investors. Vector
Securities International, Inc., the Placement Agent, has been retained pursuant
to a placement agency agreement to act as the exclusive agent for the Company in
connection with the arrangement of offers and sales of the Common Stock on a
best efforts basis.
The Placement Agent is not obligated to and does not intend to itself take
(or purchase) any of the shares of Common Stock. It is anticipated that the
Placement Agent will obtain indications of interest from potential investors for
the amount of the offering and that effectiveness of the Registration Statement
will not be requested until indications of interest have been received for the
amount of the offering. No investor funds will be accepted until indications of
interest have been received for the amount of the offering, and no investor
funds will be accepted prior to effectiveness of the Registration Statement.
Notifications of intention to purchase and definitive prospectuses will be
distributed to all investors at the time of pricing, informing investors of the
closing date, which will be scheduled for three business days after pricing.
After the Registration Statement is declared effective and prior to the closing
date, all investor funds will promptly be placed in escrow with Citibank, N.A.,
as Escrow Agent, in an escrow account established for the benefit of the
investors. The Escrow Agent will invest such funds in accordance with Rule
15c2-4 promulgated under the Exchange Act. Prior to the closing date, the Escrow
Agent will advise the Company that payment for the purchase of the shares of
Common Stock offered hereby has been affirmed by the investors and that the
investors have deposited the requisite funds in the escrow account at the Escrow
Agent. Upon receipt of such notice, the Company will deposit with DTC the shares
of Common Stock to be credited to the respective accounts of the investors.
Investor funds, together with interest thereon, if any, will be collected by the
Company through the facilities of the Escrow Agent on the scheduled closing
date. The offering will not continue after the closing date. In the event that
investor funds are not received in the full amount necessary to satisfy the
requirements of the offering, all funds deposited in the escrow account will
promptly be returned.
The Company has agreed (i) to pay to the Placement Agent 7.0% of the
proceeds of this offering (or approximately $700,000, assuming gross proceeds of
this offering are $10.0 million) as the selling commission, (ii) to indemnify
the Placement Agent against certain liabilities, including liabilities under the
Securities Act and (iii) to reimburse the Placement Agent for up to $125,000 for
certain expenses incurred by it in connection with the offering.
Vector Securities International, Inc. has acted as the Company's financial
advisor in connection with the Pending Acquisition. The Company has agreed to
pay Vector Securities International, Inc., in cash upon consummation of the
Pending Acquisition, a transaction fee equal to 3.0% of the aggregate
consideration to be paid in the Pending Acquisition for the right to manage FCI
(or approximately $240,000). The Company also has agreed to sell to Vector
Securities International, Inc., for an aggregate of $50, the Advisor Warrant,
which permits Vector to purchase up to that number of shares of Common Stock
equal to 2.0% of the aggregate consideration paid by the Company with respect to
the right-to-manage fee in the Pending Acquisition ($8.0 million) divided by the
average closing bid price per share of the Common Stock for the ten day trading
period prior to closing of the Pending Acquisition, at an exercise price equal
to $1.81. In addition, the Company has agreed to reimburse Vector Securities
International, Inc. for its out-of-pocket expenses in connection with the
Pending Acquisition and to indemnify Vector Securities International, Inc.
against certain losses, claims, damages, liabilities and expenses.
The Company has agreed not to issue, and certain officers and directors
and other shareholders of the Company have agreed that they will not, directly
or indirectly, offer, sell, contract to sell, or grant any option, right or
warrant to purchase or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable for, or any rights to purchase or
acquire, Common Stock for a period of 90 days from the date of this Prospectus,
without the prior written consent of Vector Securities International, Inc. See
"Shares Eligible for Future Sale."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Bachner, Tally, Polevoy & Misher LLP, New York, New
York. Certain legal matters in connection with this offering will be passed upon
for the Placement Agent by Stroock & Stroock & Lavan LLP, New York, New York.
73
<PAGE>
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and 1995 and for each of the three years in the period ended December 31,
1996 included in this Prospectus and the financial statement schedule included
in the Registration Statement have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of Bay Area Fertility and Gynecology Medical
Group as of December 31, 1996 and for the year ended December 31, 1996 included
in this Prospectus and the Registration Statement have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The financial statements of Fertility Centers of Illinois, S.C. as of
December 31, 1996 and 1995 and for each of the two years in the period ended
December 31, 1996 included in this Prospectus and the Registration Statement
have been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of MPD Medical Associates (MA), P.C. as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996 included in this Prospectus and the Registration Statement
have been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the offices of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as the following regional offices of the Commission: Seven World Trade Center,
13th Floor, New York, New York 10048; and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such material
also may be accessed electronically by means of the Commission's home page on
the Internet (http://www.sec.gov). In addition, such reports, proxy statements
and other information concerning the Company can be inspected at the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
The Company has filed with the Commission a Registration Statement on Form
S-1, including amendments thereto, under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain parts of which were omitted in accordance with the
rules and regulations of the Commission. For further information with respect to
the Company and such Common Stock, reference is made to the Registration
Statement and the exhibits and schedules filed as a part thereof. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete, and, in each instance, if
such contract or document is filed as an exhibit to the Registration Statement,
reference is made to such exhibit for a more complete description, each such
statement being qualified in all respects by such reference to such exhibit. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the Commission's Public Reference Section, Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of all or any part
of such material may be obtained from the Commission at its principal office
above after payment of fees prescribed by the Commission.
74
<PAGE>
INDEX TO FINANCIAL STATEMENTS
INTEGRAMED AMERICA, INC. Page
----
Report of Independent Accountants ................................ F-2
Consolidated Balance Sheet as of December 31, 1995 and 1996
and March 31, 1997 (unaudited) ................................ F-3
Consolidated Statement of Operations for the years ended
December 31, 1994, 1995 and 1996 and for the three months
ended March 31, 1996 and 1997 (unaudited) .................... F-4
Consolidated Statement of Shareholders' Equity for the
years ended December 31, 1994, 1995 and 1996 and for the
three months ended March 31, 1996 and 1997 (unaudited) ....... F-5
Consolidated Statement of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 and for the three months
ended March 31, 1996 and 1997 (unaudited) .................... F-6
Notes to Consolidated Financial Statements ....................... F-7
Bay Area Fertility and Gynecology Medical Group
Report of Independent Accountants ................................ F-25
Balance Sheet as of December 31, 1996 ............................ F-26
Statement of Operations for the year ended
December 31, 1996 ............................................. F-27
Statement of Cash Flows for the year ended
December 31, 1996 ............................................. F-28
Notes to Financial Statements .................................... F-29
Fertility Centers of Illinois, S.C
Report of Independent Accountants ................................ F-31
Combined Balance Sheet as of December 31, 1995 and 1996
and March 31, 1997 (unaudited) ................................ F-32
Combined Statement of Operations for the years ended
December 31, 1995 and 1996 and for the three months
ended March 31, 1996 and 1997 (unaudited) .................... F-33
Combined Statement of Stockholders' Equity for the years
ended December 31, 1995 and 1996 and for the three months
ended March 31, 1996 and 1997 (unaudited) .................... F-34
Combined Statement of Cash Flows for the years ended
December 31, 1995 and 1996 and for the three months ended
March 31, 1996 and 1997 (unaudited) .......................... F-35
Notes to Combined Financial Statements ........................... F-36
MPD Medical Associates (MA), P.C.
Report of Independent Accountants................................. F-41
Balance Sheet as of December 31, 1995 and 1996 and
March 31, 1997 (unaudited) .................................... F-42
Statement of Operations for the years ended December 31, 1994,
1995 and 1996 and for the three months ended March 31, 1996
and 1997 (unaudited) .......................................... F-43
Notes to Financial Statements .................................... F-44
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
IntegraMed America, Inc.
In our opinion, the accompanying consolidated balance sheet 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, 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/ Price Waterhouse LLP
Price Waterhouse LLP
Stamford, Connecticut
February 24, 1997
F-2
<PAGE>
INTEGRAMED AMERICA, INC.
CONSOLIDATED BALANCE SHEET
(all amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------- March 31,
1995 1996 1997
---- ---- ----
(unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ...................................................... $ 7,883 $ 3,761 $ 3,336
Short term investments ......................................................... 1,500 2,000 --
Patient accounts receivable, less allowance for doubtful accounts
of $64, $113 and $127 in 1995, 1996 and 1997, respectively ................... 1,271 2,770 3,146
Management fees receivable, less allowance for doubtful accounts
of $0, $50 and $147 in 1995, 1996 and 1997, respectively ..................... 1,125 1,249 1,757
Research fees receivable ....................................................... -- 232 222
Other current assets ........................................................... 508 897 1,003
Controlled assets of Medical Practices (see Note 2)
Cash ......................................................................... 296 191 65
Accounts receivable, less allowance for doubtful accounts
of $25, $146 and $92 in 1995, 1996 and 1997, respectively .................. 1,449 459 360
Other current assets ........................................................... 14 -- --
-------- -------- --------
Total controlled assets of Medical Practices ........................... 1,759 650 425
Total current assets ................................................... 14,046 11,559 9,889
-------- -------- --------
Fixed assets, net ................................................................. 2,266 3,186 2,947
Intangible assets, net ............................................................ 1,761 5,894 7,937
Other assets ...................................................................... 198 211 216
-------- -------- --------
Total assets ........................................................... $ 18,271 $ 20,850 $ 20,989
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................... $ 181 $ 1,020 $ 575
Accrued liabilities ............................................................ 1,307 1,652 1,275
Due to Medical Practices-- (see Notes 2 and 6) ................................. 606 326 428
Dividends accrued on Preferred Stock ........................................... 946 331 364
Current portion of exclusive management rights obligation ...................... 297 222 222
Note payable and current portion of long-term debt ............................. 274 426 653
Patient deposits ............................................................... 411 490 581
-------- -------- --------
Total current liabilities .............................................. 4,022 4,467 4,098
-------- -------- --------
Exclusive management rights obligation ............................................ 978 1,213 1,213
Long-term debt .................................................................... 340 692 681
Commitments and Contingencies -- (see Note 14) .................................... -- -- --
Shareholders' equity:
Preferred Stock, $1.00 par value --
3,785,378 shares authorized in 1995 and 3,165,644 shares authorized in 1996
and 1997 -- 2,500,000 undesignated; 1,285,378 and 665,644 shares designated
as Series A Cumulative Convertible of which 785,378, 165,644 and 165,644
were issued and outstanding in 1995, 1996 and 1997, respectively ............. 785 166 166
Common Stock, $.01 par value-- 25,000,000 shares authorized;
6,086,910, 9,230,557 and 9,587,640 shares issued and outstanding in
1995, 1996 and 1997, respectively ............................................ 61 92 96
Capital in excess of par ....................................................... 31,785 35,410 35,970
Accumulated deficit ............................................................ (19,700) (21,190) (21,235)
-------- -------- --------
Total shareholders' equity ............................................. 12,931 14,478 14,997
-------- -------- --------
Total liabilities and shareholders' equity ............................. $ 18,271 $ 20,850 $ 20,989
======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements
F-3
<PAGE>
INTEGRAMED AMERICA, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(all amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the three months
For the years ended December 31, ended March 31,
---------------------------------- -------------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues, net (see Note 2) .................. $ 17,578 $16,711 $ 18,343 $ 4,175 $ 5,088
Medical Practice retainage (see Note 2) ..... 3,824 3,063 2,680 794 396
------- ------- -------- -------- ------
Revenues after Medical Practice retainage
(see Note 2) ............................. 13,754 13,648 15,663 3,381 4,692
Costs of services rendered .................. 10,998 9,986 12,398 2,563 3,615
------- ------- -------- -------- ------
Network Sites' contribution ................. 2,756 3,662 3,265 818 1,077
------- ------- -------- -------- ------
General and administrative expenses ......... 3,447 3,680 4,339 855 918
Clinical service development expenses ....... 452 290 323 67 59
Amortization of intangible assets ........... -- 73 331 42 137
Interest income ............................. (519) (626) (415) (120) (34)
Interest expense ............................ 40 20 36 5 10
. ------- ------- -------- -------- ------
Total other expenses ....................... 3,420 3,437 4,614 849 1,090
------- ------- -------- -------- ------
(Loss) income before income taxes .......... (664) 225 (1,349) (31) (13)
Provision for income and capital taxes ..... 150 155 141 43 32
------- ------- -------- -------- ------
Net (loss) income .......................... (814) 70 (1,490) (74) (45)
Less: Dividends accrued and/or paid on
Preferred Stock ......................... 1,146 600 132 154 33
------- ------- -------- -------- ------
Net loss applicable to Common Stock before
consideration for induced conversion of
Preferred Stock ......................... $(1,960) $ (530) $ (1,622) $ (228) $ (78)
======= ======= ======== ======== ======
Net loss per share of Common Stock before
consideration for induced conversion of
Preferred Stock ......................... $ (0.32) $ (0.09) $ (0.21) -- --
======= ======= ======== ======== ======
Net loss per share of Common Stock
(see Note 11) ........................... $ (0.32) $ (0.09) $ (0.68) $ (0.04) $(0.01)
======= ======= ======== ======== ======
Weighted average number of shares of
Common Stock outstanding ................ 6,081 6,087 7,602 6,087 9,544
======= ======= ======== ======== ======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
INTEGRAMED AMERICA, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(all amounts in thousands, except share amounts)
<TABLE>
<CAPTION>
Cumulative Convertible
Preferred Stock Common Stock Total
---------------------- ------------------ Capital in Accumulated Shareholders'
Shares Amount Shares Amount Excess of Par Deficit Equity
------- -------- ------ ------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 ................. 2,000,000 $ 2,000 2,666,867 $27 $ 33,461 $(18,956) $ 16,532
Conversion of Preferred Stock to Common
Stock, net of issuance costs .............. (1,136,122) (1,136) 3,408,366 34 326 -- (776)
Dividends accrued and paid to
preferred shareholders ..................... -- -- -- -- (1,146) -- (1,146)
Exercise of Common Stock options ............. -- -- 11,677 -- 23 -- 23
Net loss ..................................... -- -- -- -- -- (814) (814)
---------- ------- --------- --- -------- -------- --------
BALANCE AT DECEMBER 31, 1994 ................. 863,878 864 6,086,910 61 32,664 (19,770) 13,819
Dividends accrued to preferred shareholders .. -- -- -- -- (600) -- (600)
Purchase and retirement of Preferred Stock ... (78,500) (79) -- -- (279) -- (358)
Net income ................................... -- -- -- -- -- 70 70
---------- ------- --------- --- -------- -------- --------
BALANCE AT DECEMBER 31, 1995 ................. 785,378 785 6,086,910 61 31,785 (19,700) 12,931
Conversion of Preferred Stock to Common
Stock, net of issuance costs and the
reversal of accrued Preferred Stock
dividends .................................. (608,234) (608) 2,432,936 24 1,298 -- 714
Issuance of Common Stock for acquisition ..... -- -- 666,666 7 2,493 -- 2,500
Dividends accrued to preferred shareholders .. -- -- -- -- (132) -- (132)
Purchase and retirement of Preferred Stock ... (11,500) (11) -- -- (72) -- (83)
Exercise of Common Stock options ............. -- -- 44,045 -- 38 -- 38
Net loss ..................................... -- -- -- -- -- (1,490) (1,490)
---------- ------- --------- --- -------- -------- --------
BALANCE AT DECEMBER 31, 1996 ................. 165,644 166 9,230,557 92 35,410 (21,190) 14,478
Issuance of Common Stock for acquisition ..... -- -- 333,333 3 579 -- 582
Dividends accrued to preferred shareholders .. -- -- -- -- (33) -- (33)
Exercise of Common Stock options ............. -- -- 3,750 -- 14 -- 14
Issuance of Common Stock to an employee ...... -- -- 20,000 1 -- -- 1
Net loss ..................................... -- -- -- -- -- (45) (45)
---------- ------- --------- --- -------- -------- --------
BALANCE AT MARCH 31, 1997 (unaudited) ........ 165,644 $ 166 9,587,640 $96 $ 35,970 $(21,235) $ 14,997
========== ======= ========= === ======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
INTEGRAMED AMERICA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(all amounts in thousands)
<TABLE>
<CAPTION>
For the three months
For the years ended December 31, ended March 31,
-------------------------------- -----------------
1994 1995 1996 1996 1997
---- ---- ---- ----- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ..................................... $ (814) $ 70 $(1,490) $ (74) $ (45)
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:
Depreciation and amortization ...................... 770 775 1,116 230 417
Writeoff of fixed assets ........................... 275 21 -- -- 55
Changes in assets and liabilities net of effects from
acquired businesses --
(Increase) decrease in assets:
Patient accounts receivable ........................ (142) (94) (1,318) (542) (376)
Management fees receivable ......................... -- (1,125) (124) (207) (508)
Research fees receivable ........................... -- -- 10 -- 10
Other current assets ............................... 22 (304) (379) (95) (106)
Other assets ....................................... 1 (21) (13) (17) (5)
(Increase) decrease in controlled assets of
Medical Practices:
Patient accounts receivable ........................ 316 806 990 458 99
Other current assets ............................... 15 25 14 4 --
Increase (decrease) in liabilities:
Accounts payable ................................... 175 (502) 839 92 (445)
Accrued liabilities ................................ (56) 3 106 (228) (377)
Due to Medical Practices ........................... 124 (131) (280) (12) 102
Patient deposits ................................... (109) (77) 79 7 91
-------- -------- ------- ------- -------
Net cash (used in) provided by operating activities ...... 577 (554) (450) (384) (1,088)
-------- -------- ------- ------- -------
Cash flows (used in) provided by investing activities:
Purchase of short term investments .................... -- (1,500) (500) -- --
Proceeds from short term investments .................. -- -- -- -- 2,000
Payment for exclusive management rights and acquired
physician practices ................................ -- (177) (984) -- (1,635)
Purchase of net assets of acquired businesses ......... -- (168) (394) -- (29)
Purchase of fixed assets and leasehold improvements ... (913) (1,152) (1,498) (344) (64)
Proceeds from sale of fixed assets and leasehold
improvements ....................................... -- 651 86 -- 80
-------- -------- ------- ------- -------
Net cash (used in) provided by investing activities ...... (913) (2,346) (3,290) (344) 352
-------- -------- ------- ------- -------
Cash flows (used in) provided by financing activities:
Proceeds from bank under Credit Facility .............. -- -- -- -- 250
Principal repayments on debt .......................... (78) (84) (193) (44) (52)
Principal repayments under capital lease obligations .. (326) (173) (216) (43) (27)
Repurchase of Convertible Preferred Stock ............. -- (358) (83) (11) --
Used for recapitalization costs ....................... (776) -- (33) -- --
Dividends paid on Convertible Preferred Stock ......... (800) -- -- -- --
Proceeds from exercise of Common Stock options ........ 23 -- 38 2 14
-------- -------- ------- ------- -------
Net cash (used in) provided by financing activities ...... (1,957) (615) (487) (96) 185
-------- -------- ------- ------- -------
Net decrease in cash ..................................... (2,293) (3,515) (4,227) (824) (551)
Cash at beginning of period .............................. 13,987 11,694 8,179 8,179 3,952
-------- -------- ------- ------- -------
Cash at end of period .................................... $ 11,694 $ 8,179 $ 3,952 $ 7,355 $ 3,401
======== ======== ======= ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY:
IntegraMed America, Inc. (the "Company") is a physician practice management
company specializing in women's health care, with a focus on infertility and
assisted reproductive technology ("ART") services as well as health care
services to peri- and post-menopausal women. During 1996, the Company provided
management services to a nationwide network of medical practices that consists
of ten sites (each, a "Network Site"). 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 the physicians or where
the Company directly employs the physicians.
Until 1996, the Company was focused exclusively on providing management
services to Medical Practices in the area of infertility and ART services.
During 1996, the Company, with the acquisition of a medical practice in Florida,
broadened its focus to include health care services to peri- and post-menopausal
women (ages 40-50 and over 50, respectively). As a result, the Company
established two divisions: the Reproductive Science Center Division (the "RSC
Division"), which provides management services to Medical Practices focused on
infertility and ART services, and the Adult Women's Medical Division (the "AWM
Division"), which provides management services to Medical Practices focused on
health care services for peri- and post-menopausal women.
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. and the Adult Women's Medical Center, Inc. All significant
intercompany transactions have been eliminated. The Company derives its revenues
from patient service revenues, management agreements with a three-part
management fee and, with respect to the New Jersey Network Site, a management
agreement with fees based on a percentage of the revenues and reimbursed costs
of services of such Network Site.
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.
Interim results --
In the opinion of management, the accompanying unaudited interim financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position at March 31, 1997,
and the results of operations and cash flows for the interim periods presented.
Operating results for the interim period are not necessarily indicative of
results that may be expected for the year ending December 31, 1997.
Revenue and cost recognition --
RSC Division
During 1996, the RSC Division's operations were comprised of nine
management agreements, one of which was terminated in November 1996 and one of
which was terminated in January 1997. During the three-month period ended March
31, 1997, the RSC Division's operations were principally comprised of eight
management agreements, one of which was entered into on January 7, 1997.
F-7
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Under four of the agreements 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 cost 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 and any guaranteed physician compensation, or an
additional fixed or variable percentage of net revenues which generally results
in the Company receiving up to an additional 15% of net revenues. 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 Practice are recorded in costs of services rendered. The physicians
receive as compensation all remaining earnings after payment of the Company's
management fee.
Under three management agreements, one of which was terminated in November
1996, the Company displays the patient service revenues of the Medical Practices
which are reflected in revenues, net on its consolidated statement of
operations. Under these agreements, the Company records all patient service
revenues and, out of such revenues, the Company pays the Medical Practices'
expenses, physicians' and other medical compensation, direct materials and
certain hospital contract fees (the "Medical Practice retainage"). Approximately
70-80% of Medical Practice retainage is fixed and the balance is primarily
comprised of certain physician compensation and drug costs which vary according
to Medical Practice volume. Specifically, under the management agreement for the
Boston Network Site, the Company guarantees a minimum physician compensation
based on an annual budget primarily determined by the Company. Remaining
revenues, if any, which represent the Company's management fee, are used by the
Company for other direct administrative expenses which are recorded as costs of
services. Under the management agreement for the Long Island Network Site, the
Company's management fee is payable only out of the remaining revenues, if any,
after the payment of all expenses of the Medical Practice. Under these
arrangements, the Company is liable for payment of all liabilities incurred by
the Medical Practices and is at risk for any losses incurred in the operations
thereof.
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.
AWM Division
The AWM Division's operations are currently comprised of one Network Site
with three locations which are directly owned by the Company and a 51% interest
in the National Menopause Foundation ("NMF"), a company which develops
multifaceted educational programs regarding women's healthcare and publishes a
quarterly women's health digest. The Network Site is also involved in clinical
trials with major pharmaceutical companies.
The Company bills and records all patient service revenues of the Network
Site and records all direct costs incurred as costs of services. The Company
retains as Network site contribution an amount determined using the three-part
management fee calculation described above with regard to the RSC Division, and
the balance is paid as compensation to the Medical Practices and is recorded by
the Company in costs of services rendered. The Medical Practices receive a fixed
monthly draw which may be adjusted quarterly by the Company based on the
respective Network Site's actual operating results.
Revenues in the AWM Division also include amounts earned under contracts
relating to clinical trials between the Network Site and various pharmaceutical
companies. The Network Site contracts with major pharmaceutical companies
(sponsors) to perform women's medical care research mainly to determine the
safety and efficacy of a medication. Research revenues are recognized pursuant
to each respective contract in the period which the medical services (as
stipulated by the research study protocol) are performed and collection of such
fees is considered probable. Net realization is 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 are included
in costs of services rendered.
F-8
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company's 51% interest in NMF is included in the Company's consolidated
financial statements. The Company records 100% of the patient service revenues
and costs of NMF and reports 49% of any profits of NMF as minority interest on
the Company's consolidated balance sheet. Minority interest at December 31, 1996
and March 31, 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.
Short term investments --
Short term investments consist of investments in corporate commercial paper
with an original maturity of less than one year but greater than three months
and are available for sale. Investments are recorded at cost, which approximates
market.
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 and risk of loss due to
non-collectibility is borne by the Company. As of December 31, 1996 and March
31, 1997, of the total patient accounts receivable of $2,770,000 and $3,146,000,
respectively, approximately $836,000 and $1,041,000 of accounts receivable were
a function of Network Site revenue (i.e., the Company purchased the accounts
receivable from the Medical Practice) and the balances of $1,934,000 and
$2,105,000, respectively, were a function of net revenues of the Company (see
Note 2 -- "Revenue and cost recognition" above).
Management fees receivable --
Management fees receivable represent fees owed to the Company pursuant to
its management agreements with certain Network Sites (see Note 2 -- "Revenue and
cost recognition" above).
Research fees receivable --
Research fees receivable represent receivables from pharmaceutical companies
for medical services provided by the Medical Practices at the Network Site under
the AWM Division to patients pursuant to protocols stipulated under contracts
relating to clinical trials between the pharmaceutical companies and the AWM
Division.
Controlled assets of Medical Practices --
Controlled cash represents segregated cash held in the name of certain
Medical Practices; controlled accounts receivable represent patient receivables
due to certain Medical Practices, and controlled other current assets represent
assets owned by and held in the name of certain Medical Practices, all of which
are reflected on the Company's consolidated balance sheet due to the Company's
unilateral control of such assets.
At December 31, 1995 and 1996 and at March 31, 1997, of the $1,759,000,
$650,000 and $425,000, respectively, controlled assets of Medical Practices,
$279,000, $117,000 and $76,000, respectively, were restricted for payment of the
amounts due to Medical Practices and the balances of $1,480,000, $533,000 and
$349,000, respectively, were payable to the Company.
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.
F-9
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Intangible assets --
Intangible assets at December 31, 1995 and 1996 and March 31, 1997
consisted of the following (000's omitted):
1995 1996 1997
---- ---- ----
(unaudited)
Exclusive management rights .............. $1,621 $2,178 $ 4,281
Goodwill ................................. 50 3,935 4,004
Trademarks ............................... 372 394 395
------ ------ ------
Total ................................ 2,043 6,507 8,680
Less -- accumulated amortization ......... (282) (613) (743)
------ ------ ------
Total ................................ $1,761 $5,894 $7,937
====== ====== ======
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.
Trademarks
Trademarks represent trademarks, service marks, trade names and logos
purchased by the Company and are valued at cost less accumulated amortization.
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 or twenty years. Goodwill and
other intangibles are amortized over periods ranging from three to forty years.
Trademarks are amortized over seven years. Accumulated amortization of exclusive
management rights, goodwill and trademarks was $73,000, $0 and $209,000 at
December 31, 1995, respectively, and $270,000, $91,000 and $252,000 at December
31, 1996, respectively, and $343,000, $137,000 and $263,000 at March 31, 1997,
respectively.
Due to Medical Practices --
Due to Medical Practices represents liabilities the Company was obligated
to pay on behalf of, or directly to, the Medical Practices from the controlled
assets of Medical Practices, which may be offset by advances made by the Company
to certain Medical Practices for professional and affiliate fees.
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.
F-10
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Earnings per share --
Net loss per share is determined by dividing net income or loss, decreased
or increased by accrued dividends and dividend payments on the Series A
Cumulative Convertible Preferred Stock ("Preferred Stock"), by the weighted
average number of shares of Common Stock outstanding during the period (see Note
11).
NOTE 3 -- REVENUES, MEDICAL PRACTICE RETAINAGE AND COSTS OF SERVICES:
The following table sets forth for the years ended December 31, 1994, 1995
and 1996 and for the three months ended March 31, 1996 and 1997, revenues,
Medical Practice retainage and costs of services for each of the Company's three
types of management agreements (patient service revenues, three-part management
fee and percent of revenues and reimbursed costs of services) and revenues and
costs of services for the AWM Division (000's omitted):
<TABLE>
<CAPTION>
For the
For the years three months
ended December 31, ended March 31,
--------------------------- ---------------
1994 1995 1996 1996 1997
------- ------ ------ ------- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues, net:
RSC Division --
Patient service revenues ................. $17,578 $13,820 $11,449 $2,733 $2,363
Management fees-- three part management
fee ................................... -- 981 3,159 703 1,178
Management fees-- percent of revenues
and reimbursed costs of services of the
New Jersey Network Site ............... -- 1,910 2,978 739 879
------- ------- ------- ------ ------
Total RSC Division revenues, net ... 17,578 16,711 17,586 4,175 4,420
------- ------- ------- ------ ------
AWM Division -- revenues ................... -- -- 757 -- 668
------- ------- ------- ------ ------
Total revenues, net ................ $17,578 $16,711 $18,343 $4,175 $5,088
======= ======= ======= ====== ======
Medical Practice retainage:
RSC Division --
Medical Practice retainage related to
patient service revenues .............. $ 3,824 $ 3,063 $ 2,680 $ 794 $ 396
======= ======= ======= ====== ======
Costs of services:
RSC Division --
Costs related to patient service revenues $10,998 $ 7,963 $ 7,465 $1,692 $1,497
Costs related to three part management
fees .................................. -- 933 3,049 672 1,173
Costs related to New Jersey Network Site . -- 1,090 1,095 199 349
------- ------- ------- ------ ------
Total RSC division costs of services 10,998 9,986 11,609 2,563 3,019
------- ------- ------- ------ ------
AWM Division-- Costs of services ........... -- -- 789 -- 596
------- ------- ------- ------ ------
Total costs of services ............ $10,998 $ 9,986 $12,398 $2,563 $3,615
======= ======= ======= ====== ======
</TABLE>
F-11
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the year ended December 31, 1996, the Boston Network Site, which is
reflected as patient service revenues under the RSC Division, provided 38.5% and
58.9% of revenues, net and Network Sites' contribution, respectively, of the
Company. Summary financial information for this Network Site is as follows
(000's omitted):
<TABLE>
<CAPTION>
For the
For the three months
years ended December 31, ended March 31,
------------------------------ ------------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues, net ................. $5,960 $6,594 $7,063 $1,813 $1,653
Medical Practice retainage..... 451 556 1,015 276 258
----- ----- ----- ----- -----
Revenues after Medical
Practice retainage ......... 5,509 6,038 6,048 1,537 1,395
Costs of services rendered..... 3,632 3,970 4,126 964 985
----- ----- ----- ----- -----
Network Site's contribution.... $1,877 $2,068 $1,922 $ 568 $ 410
===== ===== ===== ===== =====
</TABLE>
In addition, the New Jersey Network Site, which management fee is based
upon a percentage of revenues, provided 16.9% and 34.5% of revenues, net and
Network Sites' contribution, respectively, of the Company.
NOTE 4 -- FIXED ASSETS, NET:
Fixed assets, net at December 31, 1995 and 1996 and March 31, 1997
consisted of the following (000's omitted):
1995 1996 1997
---- ---- -----
(unaudited)
Furniture, office and other equipment ..... $ 1,617 $ 2,145 $ 2,088
Medical equipment ......................... 1,319 1,954 1,950
Leasehold improvements .................... 728 1,246 1,196
Assets under capital leases ............... 1,453 1,426 1,420
------- ------- -------
Total ................................. 5,117 6,771 6,654
Less--Accumulated depreciation and
amortization .......................... (2,851) (3,585) (3,707)
------- ------- -------
$ 2,266 $ 3,186 $ 2,947
======= ======= =======
Assets under capital leases primarily consist of medical equipment.
Accumulated amortization relating to capital leases at December 31, 1995 and
1996 and March 31, 1997 was $908, $1,065 and $1,060, respectively.
NOTE 5 -- ACCRUED LIABILITIES:
Accrued liabilities at December 31, 1995 and 1996 and March 31, 1997
consisted of the following (000's omitted):
1995 1996 1997
---- ---- -----
(unaudited)
Deferred compensation ........................ $ 314 $ 357 $ 352
Accrued payroll and benefits ................. -- 226 --
Deferred research revenue .................... -- 118 74
Accrued state taxes .......................... 93 166 205
Deferred rent ................................ 286 166 161
Westchester Network Site closing reserve ..... -- 90 --
Other ........................................ 614 529 483
------ ------ ------
Total accrued liabilities .................... $1,307 $1,652 $1,275
====== ====== ======
F-12
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6 -- DUE TO MEDICAL PRACTICES:
Due to Medical Practices at December 31, 1995 and 1996 and March 31, 1997
consisted of the following (000's omitted):
1995 1996 1997
---- ---- -----
(unaudited)
Accrued hospital contract fees ................. $446 $ 354 465
Accrued professional fees and affiliates, net .. 130 (46) (59)
Accrued other .................................. 30 18 22
---- ----- -----
Total due to Medical Practices ................. $606 $ 326 $ 428
==== ===== =====
NOTE 7 -- ACQUISITIONS AND MANAGEMENT AGREEMENTS
The transactions detailed below were accounted for by the purchase method
and the purchase price has been allocated to the assets acquired and liabilities
assumed based upon the estimated fair value at the date of acquisition. The
consolidated financial statements at and for the year ended December 31, 1996
include the results of these transactions, with the exception of the Bay Area
Acquisition which was completed in January 1997 (see Note 18), from their
respective dates of acquisition. The Bay Area Acquisition is included in the
unaudited consolidated financial statements at and for the three months ended
March 31, 1997, from the date of acquisition.
On June 7, 1996, the Company entered into an Agreement and Plan of Merger
(the "Agreement") pursuant to which INMD Acquisition Corp. ("IAC"), a Florida
corporation and wholly-owned subsidiary of the Company, acquired all of the
outstanding stock of the following three related Florida corporations: The
Climacteric Clinic, Inc. ("CCI"), Midlife Centers of America, Inc. ("MCA"), and
Women's Research Centers, Inc. ("WRC"), America, (collectively, the "Merger
Companies"), and 51% of the outstanding stock of NMF, a related Florida
corporation. Pursuant to the Agreement, the Merger Companies were merged with
and into IAC, the surviving corporation in the Merger, which will continue its
corporate existence under the laws of the State of Florida under the name Adult
Women's Medical Center, Inc. ("AWMC"). In exchange for the shares of the Merger
Companies, the Company paid cash in an aggregate amount of $350,000 and issued
666,666 shares of Common Stock which had a market value of $2.5 million. In
exchange for the 51% of the outstanding stock of NMF, the Company paid cash in
an aggregate amount of $50,000 and issued a note in an amount of $600,000, which
is payable in sixteen quarterly installments of $37,500 beginning September 1,
1996 with simple interest at a rate of 4.16%. The Merger Companies and NMF
represent one of the locations under the Women's Medical & Diagnostic Center
("WMDC").
The aggregate purchase price of the Merger Companies of $2,850,000 was
allocated as follows to assets acquired and liabilities assumed: $338,000 to
current assets, $99,000 to fixed assets, $214,000 to intangible assets which
will be amortized over a three-year period, $235,000 to accrued liabilities,
$97,000 to debt and the balance of $2,531,000 to goodwill, which will be
amortized over a forty-year period. The aggregate purchase price of NMF of
$650,000 was allocated as follows: $2,000 to current assets, $30,000 to fixed
assets, $10,000 to current liabilities and the $628,000 balance to goodwill,
which will be amortized over a forty-year period.
On May 15, 1996, the Company acquired certain assets of and the right to
manage W.F. Howard, M.D., P.A. near Dallas, Texas (the "RSC of Dallas"), a
provider of conventional infertility and assisted reproductive technology
services. The aggregate purchase price was approximately $701,500 of which
approximately $244,000 was paid at closing and the Company issued a promissory
note for the $457,500 balance which is payable as follows: $100,000 on the last
business day of May 1997 and 1998, and $36,786 on the last business day of May
in each of the seven years thereafter, thru May 2005. The aggregate purchase
price was allocated to fixed assets in the amount of $144,000 and the balance of
$557,500 to exclusive management rights, which will be amortized over the ten
year term of the agreement.
Refer to Note 18 -- Subsequent Events -- regarding the Bay Area Acquisition
which closed in January 1997.
F-13
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following unaudited pro forma results of operations have been prepared
by management based on the unaudited financial information of the Merger
Companies, NMF, the RSC of Dallas and Bay Area Fertility 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 unaudited results to reflect operations as if the related
management agreements had been consummated on January 1, 1996 and 1995,
respectively. 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 acquisition and management agreement
had been in effect on the dates indicated or which may be obtained in the
future.
<TABLE>
<CAPTION>
For the year ended December 31,
(000's omitted)
-------------------------------
1995 1996
---- ----
(unaudited)
<S> <C> <C>
Revenues, net ..................................................... $ 21,388 $ 21,006
(Loss) income before income taxes (1) ............................. $ 139 $ (1,593)
Net (loss) applicable to Common Stock (includes $132,000 and
$600,000 dividends accrued on Preferred Stock for the year-ended
December 31, 1996 and 1995, respectively) before consideration
for induced conversion of Preferred Stock ....................... $ (623) $ (1,878)
Net (loss) per share of Common Stock before consideration
for induced conversion of Preferred Stock ....................... $ (0.09) $ (0.23)
</TABLE>
- ------------------
(1) Income (loss) before income taxes include $385,000 and $520,000 of goodwill
and exclusive management rights amortization in 1995 and 1996,
respectively.
NOTE 8 -- EXCLUSIVE MANAGEMENT RIGHTS OBLIGATION:
Exclusive management rights obligation represents the liability owed by
the Company to Medical Practices for the cost of acquiring the exclusive right
to manage the non-medical aspects of the Medical Practices' infertility
practices. Typically, the Company will pay cash for a portion of such cost at
the inception of the management agreement and pay the balance in equal
installments over the life of the agreement, usually ten years.
At December 31, 1996, aggregate exclusive management rights obligation
payments in future years were as follows (000's omitted):
1997 .............................................. $ 222
1998 .............................................. 222
1999 .............................................. 159
2000 .............................................. 159
2001 .............................................. 159
Thereafter ........................................ 514
------
Total payments .................................... $1,435
======
F-14
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9 -- DEBT:
Debt at December 31, 1995 and 1996 and at March 31, 1997 consisted of the
following (000's omitted):
1995 1996 1997
---- ---- ----
(unaudited)
Acquisition note payable ..................... $ -- $ 525 $ 488
Note payable to Bank ......................... -- -- 250
Notes payable to Medical Practices employed
by the Company ........................... -- 220 220
Obligations under capital lease .............. 485 269 287
Construction loan ............................ 129 51 38
Other ........................................ -- 53 51
----- ------- -------
Total debt ................................... 614 1,118 1,334
Less--Current portion ........................ (274) (426) (653)
----- ------- -------
Long-term debt ............................... $ 340 $ 692 $ 681
===== ======= =======
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 bear interest at the Bank's prime
rate plus 0.75% per annum, which at March 31, 1997, was 9.25%. The Credit
Facility terminates on April 1, 1998 and is secured by the Company's assets. At
March 31, 1997, $250,000 was outstanding under the Credit Facility and is
included in "Note payable and current portion of long-term debt" in the
accompanying consolidated balance sheet. At December 31, 1996, no amounts were
outstanding under the Credit Facility.
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 Notes 7 and
15).
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 is to be paid in four equal
installments of $55,000 for each of the next four years commencing December 30,
1997.
In May 1992, the Company obtained a $350,000 construction loan for the
development of its New Jersey Network Site of which $129,000 and $51,000 were
outstanding at December 31, 1995 and 1996, respectively. The debt is payable in
fifty-four monthly installments of $6,481 commencing on April 1, 1993 through
September 1, 1997. Interest is payable at the bank's prime rate which was 8.5%,
8.25% and 8.25% at December 31, 1995 and 1996 and March 31, 1997, respectively.
Capital lease obligations relate primarily to furniture and medical
equipment for the Network Sites. The current portion of capital lease
obligations was $202,000, $139,000 and $163,000 at December 31, 1995, 1996 and
March 31, 1997, respectively.
The Company has operating leases for its corporate headquarters and for
medical office space relating to its managed Network Sites. In 1996, the Company
also entered into operating leases for certain medical equipment. Aggregate
rental expense under operating leases was $829,000, $522,000 and $540,000 for
the year ended December 31, 1994, 1995 and 1996 and $123,000 and $187,000 for
the three months ended March 31, 1997 and 1996, respectively. Refer to Note 14
- -- "Commitments and Contingencies -- Commitments to Medical Practices."
F-15
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 1996, the minimum lease payments for assets under capital
and noncancelable operating leases in future years were as follows (000's
omitted):
Capital Operating
------- ---------
1997 ...................................... $ 149 $ 730
1998 ...................................... 124 739
1999 ...................................... 6 702
2000 ...................................... 4 357
2001 ...................................... -- 265
Thereafter ................................ -- 831
----- ------
Total minimum lease payments .............. 283 $3,624
======
Less -- Amount representing interest ...... (14)
-----
Present value of minimum lease payments ... $ 269
=====
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, 1994, 1995 and 1996 and for the three months ended
March 31, 1996 and 1997 of $150,000, $155,000, $140,000, $43,000 and $32,000,
respectively, was comprised of current state taxes payable.
The Company's deferred tax assets 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. This
valuation allowance increased from $6,584,000 at December 31, 1995 to $7,115,000
and $7,160,000 at December 31, 1996 and March 31, 1997, respectively, due to
changes in operating losses and tax deductible temporary differences.
At December 31, 1996, the Company had operating loss carryforwards of
approximately $17.9 million which expire in 2002 through 2011. Approximately
$14.5 million of such loss carryforwards occurred prior to the 1993 ownership
change which resulted from the Company's May 1993 Preferred Stock offering. For
tax purposes, there is an annual limitation of approximately $2.8 million on the
utilization of net operating losses resulting from this change in ownership in
May 1993.
Significant components of the noncurrent deferred tax assets (liabilities)
at December 31, 1995 and 1996 were as follows (000's omitted):
December 31,
--------------------
1995 1996
---- ----
Net operating loss carryforwards ............... $ 6,138 $ 6,777
Other .......................................... 504 438
Valuation allowance ............................ (6,584) (7,115)
------- -------
Deferred tax assets ............................ 58 100
Deferred tax liabilities ....................... (58) (100)
------- -------
Net deferred taxes ............................. $ -- $ --
======= =======
F-16
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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,
1994, 1995 and 1996 as a result of the following:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
--------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Tax expense (benefit) at Federal statutory rate ...... $(277,000) $ 79,000 $(472,000)
State income taxes ................................... 150,000 155,000 141,000
Net operating profit or loss (providing)
not providing current year tax benefit ............ 277,000 (79,000) 472,000
--------- --------- ---------
Provision for income taxes ........................... $ 150,000 $ 155,000 $ 141,000
========= ========= =========
</TABLE>
NOTE 11 -- SHAREHOLDERS' EQUITY:
At its meeting held on July 26, 1994, the Company's Board of Directors
approved an offer to the holders ("Preferred Stockholders") of the 2,000,000
outstanding shares of the Company's Preferred Stock to convert each share of
Preferred Stock into 3.0 shares of the Company's Common Stock, $.01 par value
per share, and $.20 in cash (the "Offer"). Upon expiration of the Offer on
November 10, 1994 and pursuant to its terms, 1,136,122 shares of Preferred Stock
were accepted for conversion into 3,408,366 shares of Common Stock and $227,224
in cash. In connection with the Offer, five-year warrants to purchase 70,826
shares of Common Stock at $1.25 per share were issued to Raymond James &
Associates, Inc.
On June 6, 1996, the Company made a new conversion offer (the "Second
Offer") to the holders of the 773,878 outstanding shares of the Company's
Preferred Stock. Under the Second Offer, Preferred Stockholders received four
shares of the Company's Common Stock upon conversion of a share of 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 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 Preferred Stock outstanding, constituting all the shares validly
tendered. Following the transaction, there were 9,198,375 shares of IntegraMed
America's Common Stock outstanding and 165,644 shares of Preferred Stock
outstanding.
Under the Second Offer, Preferred Stockholders received four shares of
Common Stock for each share of Preferred Stock and respective accrued dividends
converted. This Second Offer represented an increase from the original terms of
the Preferred Stock which provided for 1.45 shares of Common Stock for each
share of 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
1,550,997 shares of Common Stock in the conversion offer compared to the shares
that would have been issued under the original terms of the 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
$(.47) for the year ended December 31, 1996. While this charge is 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 balance sheet and the conversion will save the
Company from accruing annual dividends of $486,000 and the need to include these
dividends in earnings per share calculations. The conversion has also eliminated
a $6.1 million liquidation preference related to the shares of Preferred Stock
converted.
F-17
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dividends on the 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 result of the
Company's Board of Directors suspending four quarterly dividend payments,
holders of the Preferred Stock became entitled to one vote per share of
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. The Company does not anticipate the
payment of any cash dividends on the Preferred Stock in the foreseeable future;
11 quarterly dividend payments have been suspended as of March 31, 1997
resulting in $364,000 of dividend payments being in arrears as of such date.
As a result of the issuance of the Common Stock pursuant to the Company's
acquisition of the WMDC in June 1996 and the anti-dilution rights of the
Preferred Stock, the conversion rate of the Preferred Stock is subject to
increase and each share of Preferred Stock was convertible into Common Stock at
a conversion rate equal to 1.57 shares of Common Stock for each share of
Preferred Stock as of March 31, 1997.
On November 30, 1994, the Company announced it may purchase up to 300,000
shares of its outstanding Preferred Stock at such times and prices as it deems
advantageous. The Company has no commitment or obligation to purchase any
particular number of shares, and it may suspend the program at any time.
In conjunction with the Second Offer, the Company entered into an
agreement with two representatives of the underwriters of such offering (the
"Representatives") to issue warrants to one or both of the Representatives.
Pursuant to this agreement (the "Warrant Agreement"), the Company issued to the
Representatives warrants to purchase through May 21, 1998 (a) up to an aggregate
200,000 shares of Preferred Stock at an initial price of $16.00 per share, (b)
up to 220,000 shares, subject to certain adjustments, of Common Stock at an
initial exercise price of $14.54 per share of Common Stock or (c) any
combination of such securities at the respective exercise prices which results
in an aggregate exercise price of $3,200,000, all subject to the terms and
conditions of the Warrant Agreement. No warrants have been exercised through
March 31, 1997.
NOTE 12 -- STOCK OPTIONS:
Under the 1988 Stock Option Plan (as amended), (the "1988 Plan") and the
1992 Stock Option Plan (the "1992 Plan"), 144,567 and 1,300,000 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.
F-18
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On April 19, 1994, the Compensation Committee of the Board of Directors of
the Company approved a stock option exchange program under which incentive stock
options to purchase an aggregate of 107,992 shares of Common Stock at an
exercise price of $2.50 per share were granted to employees holding options to
purchase an identical number of shares at exercise prices ranging from $8.00 to
$11.75, contingent upon the surrender of the old stock options. The new stock
options expire on April 18, 2004 and are exercisable, with respect to 25% of the
underlying shares, one year from the date of grant; thereafter the options
become exercisable every three months at the rate of 6.25% of the total number
of shares subject to each such option. Stock options to purchase an aggregate of
105,559 shares of Common Stock were surrendered.
On April 19, 1994, the Board of Directors approved the 1994 Outside
Director Stock Purchase Plan, reserving for issuance thereunder 125,000 shares
of Common Stock, pursuant to which 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, 1995 and
1996, there were no options outstanding under the 1994 Outside Director Stock
Purchase Plan.
Stock option activity, under the 1988 and 1992 Plans combined, is
summarized as follows:
<TABLE>
<CAPTION>
Number of
shares of
Common Stock
underlying Weighted Average
options exercise price
------- ------------
<S> <C> <C>
Options outstanding at December 31, 1993 .......... 181,377 $6.37
Granted
Option Price = Fair Market Value .............. 437,627 $1.38
Option Price > Fair Market Value .............. 206,992 $2.25
Option Price < Fair Market Value .............. 95,000 $0.63
Exercised ......................................... (11,677) $1.44
Canceled .......................................... (176,692) $6.77
--------
Options outstanding at December 31, 1994 .......... 732,627 $1.44
Granted
Option Price = Fair Market Value .............. 130,250 $2.62
Canceled ...................................... (19,675) $2.06
--------
Options outstanding at December 31, 1995 .......... 843,202 $1.63
Granted
Option Price = Fair Market Value .............. 119,500 $3.42
Option Price > Fair Market Value .............. 225,000 $2.37
Exercised ......................................... (44,045) $1.31
Canceled .......................................... (76,841) $2.37
Options outstanding at December 31, 1996 .......... 1,066,816 $1.92
Options exercisable at:
December 31, 1994 ............................. 57,060 $1.17
December 31, 1995 ............................. 270,035 $1.47
December 31, 1996 ............................. 406,968 $1.54
</TABLE>
Included in options that were canceled during 1994, 1995 and 1996 were
forfeitures (representing canceled unvested options only) of 133,723, 16,034 and
56,710, with weighted average exercise prices of $6.20, $2.10 and $2.30,
respectively.
The average remaining life of the 1,066,816 options outstanding at
December 31, 1996, under the 1988 and 1992 Plan combined, was 8.2 years at
exercise prices ranging from $0.63 to $3.75.
F-19
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
income would be $38,000 lower and loss per share would be $0.01 higher for the
year ended December 31, 1995. Pro forma net loss and earnings per share for the
years ended December 31, 1996 would be $313,000 and $0.04 higher, respectively,
versus reported amounts. The weighted average fair value of options granted
during the year ended December 31, 1996 was $2.91 for options granted at prices
equal to market value and $1.99 for options granted at prices higher than fair
value ($2.28 for options granted during 1995). 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, 1995 and 1996, respectively; dividend yield of 0% in
both years; volatility of 115.18% and 108.72% for the years ended December 31,
1995 and 1996; risk-free interest rate of 6.3% and 6.7% in 1995 and 1996,
respectively; and an expected term of 6 years for both years.
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, 1995
and 1996 and at March 31, 1997 was $314,000, $357,000 and $352,000,
respectively. Total compensation cost recognized in income for the years ended
December 31, 1995 and 1996 and for the three months ended March 31, 1996 and
1997 was $81,000, $43,000, $11,000 and $5,000, respectively.
NOTE 13 -- QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for 1995, 1996 and 1997 (in thousands,
except per share data) appear below:
<TABLE>
<CAPTION>
Network Sites' Net loss per
Revenues, net contribution Net (loss) income share (1)
-------------------------- --------------------- ----------------------- ------------------------
1995 1996 1997 1995 1996 1997 1995 1996 1997 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First quarter ... $ 4,132 $ 4,175 $5,088 $ 618 $ 818 $1,077 $(122) $ (74) $(45) $ (.05) $(0.04) $(0.01)
Second quarter .. 4,288 4,822 -- 1,079 1,116 -- 128 85 -- (.01) (0.01) --
Third quarter ... 4,088 5,016 -- 999 577 -- 12 (693) -- (.02) (0.08) --
Fourth quarter .. 4,203 4,330 -- 966 754 -- 52 (808) -- (.02) (0.09) --
-------- -------- ------ ------- ------- ------ ----- ------- ---- ------ ----- ------
Total year ...... $ 16,711 $ 18,343 $5,088 $ 3,662 $ 3,265 $1,077 $ 70 $(1,490) $(45) $ (.09) (0.21) $(0.01)
======== ======== ====== ======= ======= ====== ===== ======= ==== ====== ===== ======
</TABLE>
- ---------------
(1) Refer to Note 11 -- Shareholders' Equity -- regarding the impact of the
Company's Second Offer on net loss per share in 1996.
NOTE 14 -- COMMITMENTS AND CONTINGENCIES:
Clinical Services Development
The Company has commitments to fund clinical services development pursuant
to various collaboration agreements. Effective July 1, 1995, the Company entered
into a new three-year agreement with Monash University which provides for Monash
to conduct research in ART and human fertility to be funded by a minimum annual
payment of 220,000 in Australian dollars, the results to be jointly owned by the
Company and Monash. If certain milestones are met as specified in the Agreement,
the Company's annual payment may be a maximum of 300,000 Australian dollars in
year two and 380,000 Australian dollars in year three. Minimum payments of
55,000 Australian dollars and payments for the attainment of certain research
milestones will be
F-20
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
made quarterly throughout the term of the Agreement, July 1, 1995 through June
30, 1998. The Company expensed approximately $88,000, $189,000, $48,000 and
$36,000 under this agreement for the years ended December 31, 1995 and 1996 and
for the three months ended March 31, 1996 and 1997, respectively.
Under its contract for a joint development program for genetic testing
with Genzyme Genetics ("Genzyme"), the Company funded approximately $134,000 and
$56,000 in the years ended December 31, 1995 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 Network sites under the RSC Division are dependent on three
third-party vendors that produce patient fertility medications (lupron, metrodin
and fertinex)which are vital to the provision of ART services. Should any of
these vendors experience a supply shortage of medication, it may have an adverse
impact on the operations of the Network sites. To date, the Network sites under
the RSC Division have not experienced any such adverse impacts.
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,
1996 and March 31, 1997 was approximately $1.7 million.
Commitments to Medical Practices
Pursuant to most new management contracts entered into by the Company in
1995, the Company is obligated to perform the following: (i) advance funds to
the Network Site to guarantee a minimum physician salary and/or 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. The Company may guarantee the Medical
Practice a certain amount of compensation (i.e. medical practice distributions)
during the first twelve months of the agreement. Minimum physician salary
guaranteed at December 31, 1996 was $1.0 million.
Under certain management agreements which expire through 2001, the Company
pays the affiliated Medical Practice a fee for the use of space and other
facility services. Such fee is a fixed amount and/or a fee based upon the number
of "procedures" or "cycles", as defined in the respective agreement, performed
at the Network Site. The aggregate amount expensed pursuant to such agreements
was $1,443,000, $1,136,000, $856,000, $131,000 and $270,000 for the years ended
December 31, 1994, 1995 and 1996 and for the three months ended March 31, 1996
and 1997, respectively.
Commitments to the National Menopause Foundation
In connection with its acquisition of 51% of the outstanding stock of NMF
in June 1996, the Company committed to provide funding to and for the
development of NMF on an as-needed basis during the four year period commencing
June 6, 1996 in amounts not to exceed $500,000 in the aggregate; as of January
1, 1997 the Company had not provided any funding and pursuant to an agreement
between the Company and the minority owner of NMF, the Company is no longer
obligated to provide such funding.
F-21
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Litigation
On or about December 14, 1994, a holder of the Company's Series A
Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock")
commenced a class action, Bernstein v. IVF America, et. al, in the Chancery
Court of New Castle County, Delaware, against the Company and its Directors
asserting that the Company's offer to convert each share of Convertible
Preferred Stock into three shares of the Company's Common Stock plus $.20 in
cash (the "Conversion Offer") had triggered the anti-dilution provisions of the
Certificate of Designations (which sets out the rights and privileges of the
Convertible Preferred Stock) and that this necessitated an adjustment of the
conversion rate of the Convertible Preferred Stock remaining outstanding. On
September 5, 1996, the plaintiff in Bernstein v. IVF America, et. al. withdrew
his appeal of the Delaware Court of Chancery's earlier decision denying the
plaintiff's claim that Preferred Stockholders were entitled to expanded
anti-dilution rights as a result of the Company's November 1994 Conversion Offer
with respect to the Preferred Stock. As a result of the plaintiff's appeal being
withdrawn, the case has been dismissed.
In November 1994, the Company was served with a complaint in a matter
captioned Karlin v. IVF America, et. al., filed in the Supreme Court of the
State of New York, County of Westchester. The suit also named, as co-defendants,
Vicki L. Baldwin, a Director of the Company, United Hospital and Dr. John
Stangel. The action purported to be a class action, initiated by plaintiffs on
behalf of themselves and a class of persons similarly situated. The complaint
alleged that the defendants, individually and collectively, had, in the
communication of clinical outcome statistics, inaccurately stated success rates
or failed to communicate medical risks attendant to ART procedures. These
allegations gave rise to the central issue of the case, that of informed
consent. The plaintiffs' application for class certification was denied by the
court. The court ruled that the potential class of patients treated at the
Westchester Network Site did not meet the criteria for class action status as
required by New York law. The plaintiffs appealed this decision. In June 1997,
the Appellate Division of the Supreme Court of the State of New York, Second
Department, affirmed the lower court's decision.
There are several other 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 or the results
of operations 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 is not aware of
any claims against it or its affiliated Medical Practices which might have a
material impact on the Company's financial position or results of operations.
NOTE 15 -- RELATED PARTY TRANSACTIONS:
In connection with the Company's acquisition of WMDC in June 1996 (see
Note 7), Morris Notelovitz, M.D., Ph.D. (the "Physician") became a member of the
Company's Board of Directors, and under two long term employment agreements (the
"Employment Agreements"), one being with the Company and the other with AWMC,
the Physician agreed to serve as Vice President for Medical Affairs and Medical
Director of the AWM Division and agreed to provide medical services under the
AWM Division, as defined, respectively. Effective January 1, 1997, Dr.
Notelovitz resigned from his position as a director of the Company and
terminated the Employment Agreements (medical services under the Employment
Agreement with AWMC will be terminated effective March 31, 1997). At December
31, 1996, Dr. Notelovitz was a greater than 5% shareholder of the Company's
outstanding Common Stock and remains a consultant to the Company (see Note 9).
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 1995 and 1996 for aggregate fees of approximately $22,000 and
$17,000, respectively.
F-22
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Under its contract for a joint development program for genetic testing
with Genzyme, the Company funded approximately $134,000 and $56,000 in the
year-ended December 31, 1995 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
such date.
NOTE 16 -- RESTRICTED CASH:
Included in other assets at December 31, 1995 was restricted cash of
$100,000 which represented a security deposit for a letter of credit outstanding
in connection with the lease for the Long Island Network Site. As of December
31, 1996, a security deposit was no longer required for this letter of credit.
NOTE 17 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
AND NON-CASH TRANSACTIONS:
In connection with the Company's acquisition of WMDC and NMF in June 1996,
the Company issued 666,666 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, the Company entered into a management agreement with W.F.
Howard, M.D., P.A. located near Dallas, Texas. Pursuant to this agreement, the
Company incurred a $550,000 obligation for the exclusive right to manage this
facility.
Pursuant to its management agreement with the Philadelphia Network Site,
the Company incurred a $1,000,000 obligation for the exclusive right to manage
these facilities and assumed capital lease obligations of $89,000.
At December 31, 1995 and 1996 and March 31, 1997 there were accrued
dividends on Preferred Stock outstanding of $946,000, $331,000 and $364,000,
respectively, (see Note 11).
Pursuant to the Offer (see Note 11), 1,136,122 shares of Preferred Stock
were converted into 3,408,366 shares of Common Stock and $227,224 in cash.
Included in recapitalization costs in 1994 was the $227,224 paid to converting
holders of Preferred Stock.
Pursuant to the Second Offer (see Note 11), 608,234 shares of Preferred
Stock were converted into 2,432,936 shares of Common Stock.
Controlled cash of Medical Practices decreased $34,000, $193,000 and
$105,000 for the year ended December 31, 1994, 1995, and 1996, respectively.
State taxes, which primarily reflect Massachusetts income taxes and
Connecticut capital taxes, of $150,000, $155,000 and $119,000 were paid in the
years ended December 31, 1994, 1995 and 1996, respectively.
Interest paid in cash during the year ended December 31, 1994, 1995 and
1996, amounted to $40,000, $20,000 and $35,000, respectively. Interest received
during the year ended December 31, 1994, 1995 and 1996 amounted to $498,000,
$648,000 and $412,000, respectively.
NOTE 18 -- SUBSEQUENT EVENTS -- (Unaudited):
Subsequent to December 31, 1996, the Company entered into two new asset
purchase and management agreements and terminated one management agreement under
the RSC Division as described below.
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
F-23
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 333,333 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.
On February 28, 1997, the Company entered into agreements to acquire
certain assets of and the right to manage the Fertility Centers of Illinois, S.
C., a five physician group practice with six locations (the "Pending
Acquisition"). The aggregate purchase price for the Pending Acquisition is
approximately $8.6, approximately $6.6 million of which is payable in cash and
approximately $2.0 million of which is payable in shares of Common Stock, the
exact number of which will be determined based upon the average market price of
the Common Stock for the ten trading day period prior to closing of the Pending
Acquisition, subject to a minimum and maximum price per share. The closing of
the Pending Acquisition is conditioned upon the Company's raising at least $6
million in capital by August 28, 1997.
In June 1997, the Company acquired certain assets of and the right to
manage the Reproductive Sciences Center, Inc. ("RSMC"), a California
professional corporation located near San Diego (the "San Diego Acquisition").
The aggregate purchase price for the San Diego Acquisition was approximately
$900,000, consisting of $50,000 in cash and 145,454 shares of Common Stock. An
additional $650,000 is payable upon the achievement of certain milestones, at
RSMC's option, in cash or in shares of Common Stock, based on the closing market
price of the Common Stock on the third business day prior to issuance.
Effective January 31, 1997, the Company terminated its management
agreement with the Network Site in East Longmeadow, MA. Concurrently, the
Medical Practice at the Boston Network Site entered into an affiliate and
satellite agreement with the respective physician.
F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Bay Area Fertility and Gynecology Medical Group
In our opinion, the accompanying balance sheet and related statements of
operations and of cash flows present fairly, in all material respects, the
financial position of the Bay Area Fertility and Gynecology Medical Group (the
"Partnership") at December 31, 1996, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit 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 audit provides a
reasonable basis for the opinion expressed above.
As discussed in Note 7 to the financial statements, on January 7, 1997,
IntegraMed America, Inc. acquired certain assets of the Partnership and acquired
the right to manage the Bay Area Fertility and Gynecology Medical Group, Inc., a
California professional corporation ("Bay Area Fertility") which, effective with
this transaction, became the successor to the Partnership's medical practice.
Bay Area Fertility simultaneously entered into an Employment Agreement with each
physician pursuant to which each physician will provide medical services, as
defined.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Stamford, Connecticut
March 24, 1997
F-25
<PAGE>
BAY AREA FERTILITY AND GYNECOLOGY MEDICAL GROUP
BALANCE SHEET
ASSETS
December 31,
1996
------------
Current assets:
Cash ........................................................... $ 4,000
Patient accounts receivable, less allowance for doubtful
accounts of $12,000 .......................................... 127,000
Other current assets ........................................... 12,000
--------
Total current assets ......................................... 143,000
Fixed assets, net .............................................. 29,000
--------
Total assets ................................................. $172,000
========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable ............................................... $ 9,000
Accrued profit sharing ......................................... 15,000
Other accrued liabilities ...................................... 10,000
Patient deposits ............................................... 71,000
--------
Total current liabilities .................................... 105,000
Partners' capital ................................................ 67,000
--------
Total liabilities and partners' capital ...................... $172,000
========
See accompanying notes to the financial statements.
F-26
<PAGE>
BAY AREA FERTILITY AND GYNECOLOGY MEDICAL GROUP
STATEMENT OF OPERATIONS
For the
year ended
December 31,
1996
------------
Revenues, net (see Note 2) ................................ $2,097,000
Costs of services rendered ................................ 923,000
----------
Contribution .............................................. 1,174,000
General and administrative expenses ....................... 228,000
----------
Net income ................................................ $ 946,000
==========
See accompanying notes to the financial statements.
F-27
<PAGE>
BAY AREA FERTILITY AND GYNECOLOGY MEDICAL GROUP
STATEMENT OF CASH FLOWS
For the
year ended
December 31,
1996
-----------
Cash flows from operating activities:
Net income ............................................. $ 946,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................ 19,000
Changes in assets and liabilities--
(Increase) decrease in assets:
Patient accounts receivable ........................ (10,000)
Increase (decrease) in liabilities:
Accounts payable ................................... (6,000)
Accrued profit sharing ............................. 4,000
Other accrued liabilities .......................... 5,000
Patient deposits ................................... (28,000)
---------
Net cash provided by operating activities ................ 930,000
---------
Cash flows used in financing activities
Distributions to partners .............................. (926,000)
---------
Net increase in cash ..................................... 4,000
Cash at beginning of period .............................. --
---------
Cash at end of period .................................... $ 4,000
=========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
There was no significant interest paid and/or received in cash for the
year ended December 31, 1996.
See accompanying notes to the financial statements
F-28
<PAGE>
BAY AREA FERTILITY AND GYNECOLOGY MEDICAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 -- THE PARTNERSHIP:
The Bay Area Fertility and Gynecology Medical Group is a general
California partnership (the "Partnership") established on January 1, 1992, which
specializes in providing gynecology and infertility services. The Partnership is
comprised of three professional corporations which are licensed to practice
medicine in the state of California: Arnold Jacobson, M.D., Inc.; Donald I.
Galen, M.D., Inc.; and Louis N. Weckstein, M.D., Inc. (the "Partners"). Each
professional corporation has employed a physician, Arnold Jacobson, M.D., Donald
I. Galen, M.D., and Louis N. Weckstein, M.D., (the "Physicians") respectively,
to specialize in providing gynecology and infertility service.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue and cost recognition --
Revenues consist of services rendered for patients and are recognized upon
performance of such services.
Patient revenues are recorded on a net realizable basis after deducting
contractual allowances and consist of patient fees earned by the Partnership for
gynecology and infertility services performed by the Partnership. Patient
revenues and related direct costs are recognized in the period in which the
clinical and/or laboratory services are rendered. Net realization is dependent
upon benefits provided by the patient's insurance policy or agreements between
the Partnership and the third-party payor. Payments collected from patients in
advance for services are included in patient deposits.
Patient accounts receivable --
Patient accounts receivable represent receivables from patients for
medical services provided by the Partnership. Such amounts are recorded net of
contractual allowances and estimated bad debts.
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. The
Partnership periodically reviews the fair value of long-lived assets, the
results of which have had no material effect on the Partnership's financial
position or results of operation.
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.
Income taxes --
The Partnership is not subject to federal and state income taxes since
income is taxed at the individual partner level.
Use of estimates in the preparation of the financial statements --
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management of the Partnership to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures 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.
F-29
<PAGE>
BAY AREA FERTILITY AND GYNECOLOGY MEDICAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 3 -- FIXED ASSETS, NET:
Fixed assets, net at December 31, 1996 consisted of the following (000's
omitted):
Furniture, office and other equipment ..................... $ 179
Medical equipment ......................................... 119
Leasehold improvements .................................... 29
-----
Total ................................................. 327
Less -- Accumulated depreciation and amortization ......... (298)
-----
$ 29
=====
Depreciation and amortization expense totaled $19,000 for the year ended
December 31, 1996.
NOTE 4 -- OPERATING LEASES:
In January 1995, the Partnership entered into an operating lease for its
main medical office space with the Partners individually, and on behalf of the
Weckstein Family Trust, the Galen Family Trust and Jo-Ann Jacobson,
respectively, the owners of such property.
The Partnership also entered into an operating lease for additional
medical office space from two of the Partners and, in turn, subleased a portion
of such space to a third party. Effective in October 1996, the Partnership no
longer used this space as an additional medical office and entered into a second
sublease with a third party.
For the year ended December 31, 1996, aggregate rental expense for medical
office space was $230,000 which was higher than what the Partnership would have
paid if the lessor had been an unrelated party. Rental income on the subleased
office space totaled $33,000 in 1996.
NOTE 5 -- RELATED PARTY TRANSACTIONS:
Refer to Note 4 -- Operating Leases.
NOTE 6 -- PARTNER'S CAPITAL:
During 1996, the following changes in Partners' capital were shared
equally by the Partners (000's omitted):
Balance at January 1, 1996 ................................ $ 47
Net income ................................................ 946
Distributions to Partners ................................. (926)
----
Balance at December 31, 1996 .............................. $ 67
====
NOTE 7 -- SUBSEQUENT EVENT:
On January 7, 1997, IntegraMed America, Inc. (the "Company") acquired
certain assets of the Partnership and acquired the right to manage the Bay Area
Fertility and Gynecology Medical Group, Inc., a California professional
corporation ("Bay Area Fertility") which, effective with this transaction,
became the successor to the Partnership's medical practice. Bay Area Fertility
simultaneously entered into an Employment Agreement with each Physician pursuant
to which each Physician will provide medical services, as defined. The aggregate
purchase price was approximately $2.0 million, of which $1.5 million was paid by
the Company in cash and $0.5 million was paid in the form of the Company's
Common Stock (333,333 shares) at closing. The other assets acquired by the
Company 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.
F-30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Fertility Centers of Illinois, S.C.
In our opinion, the accompanying combined balance sheet and related
combined statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of the
Fertility Centers of Illinois, S.C. and its affiliated companies (the "Company")
at December 31, 1996 and 1995, and the results of their operations and their
cash flows for the years then ended 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.
As discussed in Note 10 to the combined financial statements, the Company
entered into agreements to sell certain assets and give IntegraMed America, Inc.
the right to manage the Company over a twenty-year period. The closing of the
agreements is subject to certain conditions including IntegraMed America, Inc.
raising at least $6 million in capital.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Stamford, Connecticut
April 28, 1997
F-31
<PAGE>
FERTILITY CENTERS OF ILLINOIS, S.C.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
----------------------- March 31,
1995 1996 1997
---- ---- ----
(unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ............................................... $ 426,972 $ 427,707 $ 543,089
Patient accounts receivable, less allowance for doubtful
accounts of $81,901, $165,352 and $180,779 in 1995, 1996
and 1997, respectively ............................................... 1,021,587 1,583,230 1,742,379
Receivable from IVF Illinois ............................................ 63,575 106,312 114,280
Note receivable from related party ...................................... -- 100,000 100,000
Other current assets .................................................... 90,143 64,385 61,669
---------- ---------- ----------
Total current assets ................................................ 1,602,277 2,281,634 2,561,417
---------- ---------- ----------
Fixed assets, net ....................................................... 606,026 598,462 585,847
Investment in IVF Illinois .............................................. 75,000 75,000 75,000
Other assets ............................................................ 65,183 57,784 57,369
---------- ---------- ----------
Total assets ........................................................ $2,348,486 $3,012,880 $3,279,633
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ................................ $ 204,500 $ 207,700 $ 123,644
Equipment payable ....................................................... -- 76,259 5,653
Taxes payable ........................................................... 88,285 215,039 364,882
Employee loans .......................................................... 66,768 33,520 13,520
Accrued pension and profit sharing ...................................... 354,400 90,241 81,370
Current portion of long-term debt ....................................... 246,935 162,060 158,172
Patient deposits ........................................................ 39,458 504,381 543,804
Other liabilities ....................................................... -- 5,602 28,378
---------- ---------- ----------
Total current liabilities ........................................... 1,000,346 1,294,802 1,319,423
---------- ---------- ----------
Long-term debt .......................................................... -- 159,568 29,906
Commitments and contingencies ........................................... -- -- --
Stockholders' equity:
Common stock (4,050 shares issued and outstanding at
December 31, 1995 and 1996 and March 31, 1997) ....................... 4,500 4,500 4,500
Capital in excess of par ................................................ 29,000 29,000 29,000
Accumulated earnings .................................................... 1,314,640 1,525,010 1,896,804
---------- ---------- ----------
Total stockholders' equity .......................................... 1,348,140 1,558,510 1,930,304
---------- ---------- ----------
Total liabilities and stockholders' equity .......................... $2,348,486 $3,012,880 $3,279,633
========== ========== ==========
</TABLE>
See accompanying notes to the combined financial statements.
F-32
<PAGE>
FERTILITY CENTERS OF ILLINOIS, S.C.
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the three
For the years ended months ended
December 31, March 31,
------------------- ------------------
1995 1996 1996 1997
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Revenues, net ...................................... $7,044,850 $8,338,791 $2,007,601 $2,231,137
Costs of services rendered ......................... 5,601,743 6,735,923 1,434,268 1,483,510
--------- --------- ----------- -----------
Contribution ....................................... 1,443,107 1,602,868 573,333 747,627
General and administrative expenses ................ 1,073,302 1,122,407 157,048 155,475
Interest income .................................... (4,486) (11,679) (1,364) (1,993)
Interest expense ................................... 24,296 33,168 8,186 6,965
--------- --------- ----------- -----------
Total other expenses ............................... 1,093,112 1,143,896 163,870 160,447
--------- --------- ----------- -----------
Income before income taxes ......................... 349,995 458,972 409,463 587,180
Provision for taxes ................................ 92,823 145,102 147,576 189,386
--------- --------- ----------- -----------
Net income ......................................... $ 257,172 $ 313,870 $ 261,887 $ 397,794
========= ========= =========== ===========
</TABLE>
See accompanying notes to the combined financial statements.
F-33
<PAGE>
FERTILITY CENTERS OF ILLINOIS, S.C.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Capital Total
----------------- in Excess Accumulated Stockholders'
Shares Amount of Par Earnings Equity
------ ------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance as of January 1, 1995 .......... 4,050 $4,500 $29,000 $ 1,187,468 $ 1,220,968
Net income ............................. -- -- -- 257,172 257,172
Distributions to stockholders .......... -- -- -- (130,000) (130,000)
----- ------ ------- ----------- -----------
Balance as of December 31, 1995 ........ 4,050 4,500 29,000 1,314,640 1,348,140
Net income ............................. -- -- -- 313,870 313,870
Distributions to stockholders .......... -- -- -- (103,500) (103,500)
----- ------ ------- ----------- -----------
Balance as of December 31, 1996 ........ 4,050 4,500 29,000 1,525,010 1,558,510
Net income ............................. -- -- -- 397,794 397,794
Distributions to stockholders .......... -- -- -- (26,000) (26,000)
----- ------ ------- ----------- -----------
Balance as of March 31, 1997 (unaudited) 4,050 $4,500 $29,000 $ 1,896,804 $ 1,930,304
===== ====== ======= =========== ===========
</TABLE>
See accompanying notes to the combined financial statements.
F-34
<PAGE>
FERTILITY CENTERS OF ILLINOIS, S.C.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the three
For the years ended months ended
December 31, March 31,
------------------- ------------------
1995 1996 1996 1997
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ......................................... $ 257,172 $ 313,870 $ 261,887 $ 397,794
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................... 112,517 137,146 33,672 32,925
Loss (gain) on sale of fixed assets .............. 27,956 42,268 -- (2,481)
Bad debt reserve ................................. 41,081 83,451 18,205 15,427
Changes in assets and liabilities:
(Increase) decrease in assets:
Patient accounts receivable .................... (345,827) (645,094) (249,294) (174,576)
Other assets ................................... (50,346) (11,580) (5,270) (5,250)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities ....... 76,655 3,200 (119,195) (84,056)
Taxes payable .................................. 85,783 126,754 146,101 149,843
Employee loans ................................. 2,905 (33,248) (13,438) (20,000)
Accrued pension and profit sharing ............. 354,400 (264,159) (227,900) (8,871)
Patient deposits ............................... 31,958 464,923 14,577 39,423
Other accrued liabilities ...................... (10,000) 81,861 -- (47,830)
--------- --------- --------- ---------
Net cash provided by operating activities ............ 584,254 299,392 (140,655) 292,348
--------- --------- --------- ---------
Cash flows used in investing activities:
Purchase of fixed assets and leasehold
improvements .................................... (238,270) (169,850) (40,456) (17,416)
--------- --------- --------- ---------
Cash flows (used in) provided by financing activities:
Net (decrease) increase in debt .................... (41,379) 74,693 204,798 (133,550)
Note receivable .................................... -- (100,000) (100,000) --
Distributions to stockholders ...................... (130,000) (103,500) (20,000) (26,000)
--------- --------- --------- ---------
Net cash used in financing activities ................ (171,379) (128,807) 84,798 (159,550)
Net increase (decrease) in cash ...................... 174,605 735 (96,313) 115,382
Cash at beginning of period .......................... 252,367 426,972 426,972 427,707
--------- --------- --------- ---------
Cash at end of period ................................ $ 426,972 $ 427,707 $ 330,659 $ 543,089
========= ========= ========= =========
Supplemental information:
Taxes paid in cash ................................. $ 8,765 $ 20,990 $ 1,475 $ 34,879
========= ========= ========= =========
Interest paid in cash .............................. $ 24,296 $ 33,168 $ 8,186 $ 6,965
========= ========= ========= =========
</TABLE>
See accompanying notes to the combined financial statements.
F-35
<PAGE>
FERTILITY CENTERS OF ILLINOIS, S.C.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY:
The Fertility Centers of Illinois, S.C. and its affiliated companies (the
"Company") is a five physician group practice with six locations in the Chicago
area. Four of the physicians own 100% of the common stock of the Company. The
Company specializes in providing infertility and related ultrasound services in
the Chicago area. The Company owns a 42.9% interest in IVF Illinois,
Incorporated ("IVF Illinois") which provides in-vitro services. (See Note 8)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of combination:
The accompanying combined financial statements of the Company comprise the
accounts of the Fertility Centers of Illinois, S.C. and the following entities,
each of which is owned by one of the physician shareholders of the Fertility
Centers of Illinois, S.C. (the "affiliated companies"): F.R.E.A. Ultrasound
Services, Ltd.; Fertility and Reproductive Medicine Associates, S.C.; Fertility
and Reproductive Endocrinology Associates, S.C.; and Jacob Moise, M.D.S.C. The
combination of these entities has been reflected at historical cost. All
significant intercompany transactions have been eliminated. The Company accounts
for its 42.9% interest in IVF Illinois under the equity method of accounting.
Interim results--
In the opinion of management, accompanying unaudited interim financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position at March 31, 1997,
and the results of operations and cash flows for the interim period presented.
Operating results for the interim period are not necessarily indicative of
results that may be expected for the year ending December 31, 1997.
Revenues and cost recognition:
Revenues consist of services rendered for patients and are recognized upon
performance of such services. Revenues are recorded on a net realizable basis
after deducting contractual allowances and consist of patient fees for
infertility and related services performed by the Company. Related direct costs
are recognized in the period in which the clinical and/or laboratory services
are rendered. Net realization is dependent upon benefits provided by the
patient's insurance policy or agreements between the Company and third-party
payors. Payments collected from patients in advance for services are included in
patient deposits.
Cash and cash equivalents:
The Company considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents.
Patient accounts receivable and deposits:
Patient accounts receivable represent receivables from patients for
medical services provided by the Company. Such amounts are recorded net of
contractual allowances and estimated bad debts. Contractual allowances were
$389,021, $709,240 and $785,551 at December 31, 1995 and 1996 and March 31,
1997, respectively. Patient deposits represent patient deposits for medical
services to be provided by the Company.
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 five to ten years.
Leasehold improvements are amortized over the shorter of the asset life or the
remaining term of the lease. 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.
F-36
<PAGE>
FERTILITY CENTERS OF ILLINOIS, S.C.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
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
a gain or loss. Routine maintenance and repairs are charged to expenses as
incurred, while costs of betterments and renewals are capitalized.
Income taxes:
The Company accounts for income taxes utilizing the asset and liability
approach. Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws.
Financial instruments:
The carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable, and long-term debt,
as reported in the accompanying combined balance sheet, approximates fair value.
Major payors:
The majority of the Company's receivables and revenues at and during the
years ended December 31, 1995 and 1996 and at and during the three months ended
March 31, 1997 were from insurance companies. Revenues from one company
approximated 22% for the year ended December 31, 1996.
Common stock:
The Company has 4,050 shares of common stock outstanding at December 31,
1995 and 1996 and March 31, 1997, of which 3,000 shares each have a par value of
$1; 1,000 shares have a stated value of $1,000; and 50 shares each have a par
value of $10.
Use of estimates in the preparation of the combined financial statements:
The preparation of these combined financial statements in conformity with
generally accepted accounting principles requires management of the Company to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures 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.
NOTE 3 -- FIXED ASSETS, NET:
Fixed assets, net at December 31, 1995 and 1996 and March 31, 1997
consisted of the following:
1995 1996 1997
---- ---- ----
(unaudited)
Furniture, office and other equipment $ 496,801 $ 575,820 $ 593,237
Medical equipment ................... 477,284 510,412 492,109
Leasehold improvements .............. 138,998 144,316 144,315
----------- ----------- -----------
Total ............................ 1,113,083 1,230,548 1,229,661
Less-- accumulated depreciation and
amortization ..................... (507,057) (632,086) (643,814)
----------- ----------- -----------
$ 606,026 $ 598,462 $ 585,847
=========== =========== ===========
Depreciation and amortization expense totaled $112,517 and $137,146,
respectively, for the years ended December 31, 1995 and 1996 and $32,925 and
$33, 672, respectively, for the three months ended March 31, 1997 and 1996.
F-37
<PAGE>
FERTILITY CENTERS OF ILLINOIS, S.C.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 4 -- DEBT:
Debt at December 31, 1995 and 1996 and March 31, 1997 consisted of the
following:
1995 1996 1997
---- ---- ----
(unaudited)
Business term loan ............. $ 196,935 $ 321,628 $ 188,078
Business line of credit ........ 50,000 -- --
--------- --------- ---------
Total debt ..................... 246,935 321,628 188,078
Less -- current portion ........ (246,935) (162,060) (158,172)
--------- --------- ---------
Long-term debt ................. $ -- $ 159,568 $ 29,906
========= ========= =========
The Company amended an existing term loan and outstanding line of credit
into a new business term loan ($427,814) in June 1996 with principal and
interest payments of $13,505 due monthly. The bank maintains a first security
interest in the Company's assets. Interest is fixed at 8.5%. The Company also
maintains a $160,000 line of credit, none of which was outstanding at December
31, 1996 and March 31, 1997. The line of credit expired in March 1997 and was
extended through March 1998.
NOTE 5 -- OPERATING LEASES:
The Company leases certain office space and equipment under lease
agreements extending one to five years.
At December 31, 1996, the minimum lease payments for noncancelable
operating leases in future years were as follows:
1997 ................................................. $ 406,378
1998 ................................................. 344,794
1999 ................................................. 226,649
2000 and thereafter .................................. 57,274
----------
Total minimum operating lease payments ............... $1,035,095
==========
Rent expense under operating leases was $227,712 and $463,428 for the
years ended December 31, 1995 and 1996, respectively, and $117,170 and $117,304
for the three months ended March 31, 1997 and 1996, respectively.
NOTE 6 -- INCOME TAXES:
The Company's tax provision primarily represents current federal and state
income taxes for the years ended December 31, 1995 and 1996. The Company had no
significant deferred tax assets or liabilities at December 31, 1995 and 1996.
Certain of the affiliated companies have elected, under the Internal
Revenue Code, S corporation status. As a result, no provision for federal income
taxes has been included for these companies.
The income tax provision differed from income taxes determined by applying
the statutory federal income tax rate to the income from the years ended
December 31, 1995 and 1996 as a result of the following:
1995 1996
---- ----
Tax expense at federal statutory rate .................. 35% 35%
State income taxes, net of federal benefit ............. 5% 5%
Rate differential for S corporation status ............. (13%) (8%)
--- ---
Provision for income taxes ............................. 27% 32%
=== ===
F-38
<PAGE>
FERTILITY CENTERS OF ILLINOIS, S.C.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 7 -- COMMITMENTS AND CONTINGENCIES:
The Company is subject to certain federal and state laws and regulations,
many of which have not been the subject of judicial or regulatory
interpretation. Management believes the Company's operations are in substantial
compliance with applicable laws and regulations. Although an adverse review or
determination by any such authority could be significant to the Company,
management believes the effects of any such review or determination would not be
material to the Company's financial condition or results of operations.
NOTE 8 -- RELATED PARTY TRANSACTIONS:
The Company owns a 42.9% interest in IVF Illinois. The physicians of the
Company perform certain procedures for IVF Illinois for which the Company
receives a fee. Fees earned for the years ended December 31, 1995 and 1996 were
$906,193 and $1,213,536, respectively, and fees earned for the three months
ended March 31, 1996 and 1997, were $284,472 and $290,530, respectively, have
been reflected in revenues, net in the statement of operations. Accounts
receivable from IVF Illinois were $63,575, $106,312 and $114,280 at December 31,
1995 and 1996 and at March 31, 1997, respectively. The Company's interest in
earnings of IVF Illinois was insignificant for the years ended December 31, 1995
and 1996 for the three months ended March 31, 1996 and 1997, respectively.
The $100,000 note receivable at December 31, 1996 and March 31, 1997
represents a note receivable from one physician which is due on demand with
interest payable of 6%.
Physician compensation and benefits were $2,161,538 and $3,033,101 for the
years ended December 31, 1995 and 1996, respectively, and $568,336 and $609,808
for the three months ended March 31, 1996 and 1997, respectively.
NOTE 9 -- EMPLOYEE BENEFIT PLANS:
The Company has a defined benefit pension plan (the "plan") covering
certain of the Company's physicians and certain employees as specified under the
plan's eligibility requirements. The plan is funded through a trust agreement
and has met the minimum funding requirements for 1995 and 1996, based on the
funding requirements of U.S. federal governmental laws and regulations.
Net periodic pension costs for the years ended December 31, 1995 and 1996
included the following components:
1995 1996
---- ----
Service costs - benefits earned during period ...... $264,704 $ 278,176
Interest cost on projected benefit obligation ...... -- 15,882
Actual return on assets ............................ -- (16,531)
Net amortization and deferral ...................... -- 1,984
-------- ---------
Net periodic pension costs ......................... $264,704 $ 279,511
======== =========
The following table sets forth the plan's funded status at December 31,
1995 and 1996:
1995 1996
---- ----
Actuarial present value of:
Vested benefit obligations ............................ $ 182,385 $405,357
========= ========
Accumulated benefit obligation ........................ $ 264,704 $563,045
========= ========
Projected benefit obligations ......................... $ 264,704 $563,045
========= ========
Plan assets at fair value ............................... $ -- $534,360
Unrecognized net loss ................................... -- 6,874
--------- --------
Projected benefit obligation in excess of plan assets ... $ 264,704 $ 21,811
========= ========
F-39
<PAGE>
FERTILITY CENTERS OF ILLINOIS, S.C.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
The assumptions used in the determination of net periodic pension cost and
the plan's funded status for the years ended December 31, 1995 and 1996 were as
follows:
1995 1996
---- ----
Rate of increase in future compensation levels ............ 0% 0%
Discount rate ............................................. 7.65% 7.5%
Expected long-term rate of return on plan assets .......... 6.0% 6.0%
The Company also maintains a profit sharing plan for certain physicians
and employees of the Company. Contributions to the plan amounted to $39,696 and
$47,346 for the years ended December 31, 1995 and 1996, respectively.
NOTE 10 -- SUBSEQUENT EVENT:
On February 28, 1997, the Company entered into agreements with IntegraMed
America, Inc. subject to certain conditions. Under the terms of these
agreements, IntegraMed America, Inc. will acquire certain assets and receive the
right to manage the Company over a twenty-year period. The closing of the
agreements is subject to certain conditions including IntegraMed America, Inc.
raising at least $6 million in capital.
F-40
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of
MPD Medical Associates (MA), P.C.
In our opinion, the accompanying balance sheet and related statement of
operations present fairly, in all material respects, the financial position of
MPD Medical Associates (MA), P.C. (the "P.C.") at December 31, 1995 and 1996,
and the results of its operations for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the P.C.'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.
As described in Note 5, a statement of cash flows has been excluded from
the presentation of financial data related to the P.C., as under the terms of a
management agreement, IntegraMed America, Inc. controls all cash inflows and
outflows related to the P.C.'s operations.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Stamford, Connecticut
February 24, 1997
F-41
<PAGE>
MPD MEDICAL ASSOCIATES (MA), P.C.
BALANCE SHEET
(all dollar amounts in thousands, except per share amounts)
ASSETS
December 31, March 31,
------------ ---------
1995 1996 1997
---- ---- ----
(unaudited)
Current assets:
Cash .............................................. $2 $2 $2
-- -- --
Total current assets ............................ 2 2 2
-- -- --
Total assets .................................... $2 $2 $2
== == ==
SHAREHOLDER'S EQUITY
Shareholder's equity:
Common Stock, $.01 par value -- 200,000
shares authorized, issued and outstanding
in 1995, 1996 and 1997, respectively............... $2 $2 $2
-- -- --
Total shareholder's equity ...................... $2 $2 $2
== == ==
See accompanying notes to the financial statements.
F-42
<PAGE>
MPD MEDICAL ASSOCIATES (MA), P.C.
STATEMENT OF OPERATIONS
(all amounts in thousands)
For the three
For the years ended months ended
December 31, March 31,
-------------------------- ------------------
1994 1995 1996 1996 1997
-------------------------- ------------------
(unaudited)
Revenues, net (see Note 2)..... $5,960 $6,594 $7,063 $1,813 $1,653
Physician compensation ........ 451 556 1,015 276 258
Management fee expense
(see Notes 1 and 2) ........ 5,509 6,038 6,048 1,537 1,395
------- ------ ------- ------- -------
Net income..................... $ -- $ -- $ -- $ -- $ --
======= ====== ======= ======= =======
See accompanying notes to the financial statements.
F-43
<PAGE>
MPD MEDICAL ASSOCIATES (MA), P.C.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY:
MPD Medical Associates (MA), P.C. (the "P.C.") is a medical practice
located in the greater Boston, Massachusetts area which specializes in providing
gynecology and infertility services. The P.C. is 100% owned by Patricia McShane,
M.D.
The P.C. is managed by IntegraMed America, Inc. ("INMD") a public physician
practice management company. INMD has managed this practice since July 1988 and
the term of its current management agreement with the P.C. (the "management
agreement") expires in January 2006. Pursuant to the management agreement, the
medical providers employed by the P.C. provide all medical services and INMD
provides all management and administrative services to the P.C.'s medical
practice. Under the management agreement, INMD has guaranteed physician
compensation, or medical practice retainage, and is liable for all liabilities
incurred by the P.C. and is at risk for any loss in the operation thereof. As
compensation for its management services, the P.C. pays INMD any revenues
remaining after payment of physician compensation. Out of these remaining
revenues INMD pays all other costs of services related to the P.C. and the
balance, if any, represents INMD's net management fee.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue and cost recognition --
Revenues consist of patient service revenues. Patient revenues are recorded
on a net realizable basis after deducting contractual allowances and consist of
patient fees collected by INMD on behalf of the P. C. for gynecology and
infertility services performed by the P.C. Patient revenues and related direct
costs are recognized in the period in which the clinical and/or laboratory
services are rendered. Net realization is dependent upon benefits provided by
the patient's insurance policy or agreements between the P.C. and the third
party payor.
Operating Assets and Liabilities --
Under the management agreement, INMD owns all operating assets of the P.C.
and is liable for all expenses and obligations of the P.C., therefore all
operating assets and liabilities related to the P.C.'s operations are reported
by INMD on its consolidated balance sheet.
Fixed assets --
INMD owns all of the fixed assets utilized by the P.C.'s medical providers.
Management fee expense --
Management fee expense represents payment to INMD for management and
administrative services to the P.C.
Use of estimates in the preparation of the financial statements --
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management of the P.C. to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures 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.
Interim results --
In the opinion of management, the accompanying unaudited interim financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position at March 31, 1997,
and the results of operations for the interim periods presented. Operating
results for the interim period are not necessarily indicative of results that
may be expected for the year ending December 31, 1997.
F-44
<PAGE>
MPD MEDICAL ASSOCIATES (MA), P.C
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 3 -- DEPENDENCE UPON REIMBURSEMENT BY THIRD PARTY PAYORS:
In Massachusetts, state mandate requires insurance coverage of convential
infertility services as well as certain assisted reproductive technology
services. Approximately 85% to 91% of the P.C.'s revenues for the years ended
December 31, 1994, 1995 and 1996 and for the three months ended March 31, 1996
and 1997 were derived from revenues received from third party payors.
NOTE 4 -- RELATED PARTY INFORMATION:
Patricia McShane, M.D., who owns 100% of the outstanding common stock of
the P.C., has been a vice president of INMD in charge of Medical Affairs since
September 1992.
NOTE 5 -- CASH FLOW INFORMATION:
Under the management agreement INMD controls all cash inflows and outflows
related to the P.C.'s operations, therefore all operating, investing, and
financing cash flow activity is reported by INMD on its consolidated statement
of cash flows.
NOTE 6 -- SUBSEQUENT EVENT (unaudited):
Effective February 28, 1997, Patricia McShane, M.D. resigned as the vice
president of INMD in charge of Medical Affairsand in March 1997 she became a
director of INMD.
F-45
<PAGE>
================================================================================
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations in connection with this offering,
other than those made in this Prospectus, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or the Placement Agent. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any securities other than the
shares of Common Stock to which it relates, or an offer to, or a solicitation
of, any person in any jurisdiction where such an offer or solicitation would be
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
changes in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to the date
hereof.
-----------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary ........................................................ 3
Risk Factors .............................................................. 7
Use of Proceeds ........................................................... 18
Dividend Policy ........................................................... 19
Price Range of Common Stock ............................................... 19
Capitalization ............................................................ 20
Dilution .................................................................. 21
Selected Consolidated and Pro Forma
Combined Financial Data ................................................. 22
Unaudited Pro Forma Combined
Financial Information ................................................... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .............................................................. 30
Business .................................................................. 39
Management ................................................................ 57
Certain Transactions ...................................................... 65
Principal Stockholders .................................................... 66
Description of Capital Stock .............................................. 68
Shares Eligible for Future Sale ........................................... 72
Plan of Distribution ...................................................... 73
Legal Matters ............................................................. 73
Experts ................................................................... 74
Available Information ..................................................... 74
Index to Financial Statements ............................................. F-1
================================================================================
================================================================================
6,400,000 Shares
[LOGO]
INTEGRAMED (R)
AMERICA
Common Stock
-----------------------
PROSPECTUS
-----------------------
Vector Securities International, Inc.
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered (other than
Placement Agent's fee) are as follows:
Amount
-------
SEC Registration Fee ................................ $ 3,030.30
NASD Filing Fee ..................................... 1,500.00
Nasdaq Listing Fee .................................. 17,500.00
Printing and Engraving Expenses ..................... 175,000.00
Accounting Fees and Expenses ........................ 100,000.00
Legal Fees and Expenses ............................. 175,000.00
Blue Sky Fees and Expenses .......................... 20,000.00
Transfer Agent's Fees and Expenses .................. 2,000.00
Miscellaneous Expenses .............................. 5,969.70
-----------
Total ......................................... $500,000.00
===========
Item 14. Indemnification of Directors and Officers
The Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") and Amended and Restated By-Laws (the "By-Laws") of the
Registrant provide that the Registrant shall indemnify any person to the full
extent permitted by the DGCL. Section 145 of the DGCL, relating to
indemnification, is hereby incorporated herein by reference.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or controlling persons of the Registrant
pursuant to the Certificate of Incorporation, By-laws and the DGCL, the
Registrant has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
The Certificate of Incorporation includes certain provisions permitted
pursuant to Delaware law whereby officers and directors of the Registrant are to
be indemnified against certain liabilities. The Certificate of Incorporation
also limits, to the fullest extent permitted by Delaware law, a director's
liability for monetary damages for breach of fiduciary duty, including gross
negligence, except liability for (i) breach of the director's duty of loyalty,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of the law, (iii) the unlawful payment of a dividend or
unlawful stock purchase or redemption and (iv) any transaction from which the
director derives an improper personal benefit. Delaware law does not eliminate a
director's duty of care and this provision has no effect on the availability of
equitable remedies such as injunction or rescission based upon a director's
breach of the duty of care.
In accordance with Section 102(a)(7) of the DGCL, the Certificate of
Incorporation eliminates the personal liability of directors to the Registrant
or its stockholders for monetary damages for breach of fiduciary duty as a
director with certain limited exceptions set forth in Section 102(a)(7).
Reference is made to Section 7(b) of the Placement Agency Agreement
(Exhibit 1.1) which provides for indemnification by the Placement Agent of the
Registrant, its officers and directors.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
The following sets forth all of the unregistered sales of securities by the
Registrant during the past three years.
1. In connection with the Registrant's conversion offer of its
Convertible Preferred Stock, in October 1994, the Registrant issued
warrants to purchase 70,826 shares of Common Stock to Raymond James &
Associates, Inc., with an exercise price of $1.25.
2. In June 1996, the Registrant consummated the acquisition of all of the
outstanding stock of three related Florida corporations. The
Registrant issued 666,666 shares of Common Stock as partial payment of
the consideration for this acquisition.
3. In January 1997, the Registrant consummated the acquisition of certain
assets of and the right to manage Bay Area Fertility and Gynecology
Medical Group. The Registrant issued 333,333 shares of Common Stock as
partial payment of the consideration for this acquisition.
4. In June 1997, the Registrant consummated the acquisition of certain
assets of and the right to manage the Reproductive Sciences Medical
Center, Inc. The Registrant issued 145,454 shares of Common Stock as
partial payment of the consideration for this acquisition.
5. In June 1997, the Registrant issued 41,058 shares of Common Stock to
the MPD Medical Associates, P.C., as partial payment of the
consideration for entering into a new management agreement relating to
the Long Island Network Site.
The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
of 1933, as amended, pursuant to Section 4(2) thereof. Except as otherwise
indicated, the sale of securities was without the use of an underwriter, and the
certificates evidencing the shares bear a restrictive legend permitting the
transfer thereof only upon registration of the shares or an exemption under the
Securities Act of 1933, as amended.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit
Number Exhibit
- ------- -------
1.1 -- Form of Placement Agency Agreement with form of Escrow Agreement
as an exhibit thereto**
3.1(a) -- Amended and Restated Certificate of Incorporation of Registrant
effecting, inter alia, reverse stock split (ii)
3.1(b) -- Certificate of Amendment of the 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) -- Amendment to Amended and Restated Certificate of Incorporation
changing Registrant's name to IntegraMed America, Inc.**
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)
4.1 -- Warrant Agreement of Robert Todd Financial Corporation. (i)
4.2 -- Copy of Warrant, as amended, issued to IG Laboratories, Inc.
(currently known as Genzyme Genetics, a division of Genzyme
Corp.). (i)
4.3 -- RAS Securities Corp. and ABD Securities Corporation's Warrant
Agreement. (ii)
4.4 -- Form of Warrants issued to Raymond James & Associates, Inc. (vii)
4.5 -- Form of Warrant issuable to Vector Securities International,
Inc.*
5.1 -- Opinion of Bachner, Tally, Polevoy & Misher LLP
10.1 -- Copy of Registrant's 1988 Stock Option Plan, including form of
option (i)
II-2
<PAGE>
Exhibit
Number Exhibit
- ------- -------
10.2 -- Copy of Registrant's 1992 Stock Option Plan, including form of
option (i)
10.4 -- Severance Agreement 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 -- Copy of lease for Registrant's executive offices in 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 (relating to the Long
Island Network Site) (vii)
10.10(a) -- Copy of Agreement with MPD Medical Associates, P.C. for Center in
Mineola, New York dated September 1, 1994 (relating to the Long
Island Network Site) (vii)
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. (currently known as Genzyme Genetics, a
division of Genzyme Corp.) (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)
II-3
<PAGE>
Exhibit
Number Exhibit
- ------- -------
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)
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)
10.38(a) -- Management Agreement between Registrant and MPD Medical
Associates (MA) P.C. dated January 1, 1996 (relating to the
Boston Network Site).**
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 (relating to the New Jersey Network Site) (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.
(relating to the Philadelphia Network Site) (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. (relating to the Philadelphia
Network Site) (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. (relating to the Philadelphia Network
Site) (ix)
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. (relating to the Long Meadow Network Site) (x)
10.47(a) -- P.C. Funding Agreement between Registrant and Robert Howe, M.D.
(relating to the Long Meadow Network Site) (x)
10.48 -- Management Agreement among Registrant and Reproductive Endocrine
Fertility Consultants, P.A. and Midwest Fertility Foundations
Laboratory, Inc. (relating to the Kansas City Network Site) (x)
10.48(a) -- Asset Purchase Agreement among Registrant and Reproductive
Endocrine & Fertility Consultants, Inc. and Midwest Fertility
Foundations & Laboratory, Inc. (relating to the Kansas City
Network Site) (x)
10.49 -- Copy of Sublease Agreement for office space in Kansas City,
Missouri (relating to the Kansas City Network Site) (x)
II-4
<PAGE>
Exhibit
Number Exhibit
- ------- -------
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, Inc. by the Department of the Army, Walter Reed Army
Medical Center for In Vitro Fertilization Laboratory Services
(relating to the Walter Reed Network Site) (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
(relating to the AWM Network Site) (xii)
10.53 -- Employment Agreement between Morris Notelovitz, M.D., Ph.D. and
Registrant (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 Registrant ("INMD") (relating to
the AWM Network Site) (xii)
10.55 -- Management Agreement between Registrant and W.F. Howard, M.D.,
P.A. (relating to the Dallas Network Site) (xii)
10.56 -- Asset Purchase Agreement between Registrant and W.F. Howard M.D.,
P.A. (relating to the Dallas Network Site) (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
Registrant and Bay Area Fertility and Gynecology Medical Group,
Inc. (relating to the Bay Area Acquisition) (xiv)
10.62 -- Asset Purchase Agreement dated January 7, 1997 by and between
Registrant and Bay Area Fertility and Gynecology Medical Group, a
California partnership. (relating to the Bay Area Acquisition)
(xiv)
10.63 -- Physician Employment Agreement between Robin E. Markle, M.D. and
Women's Medical & Diagnostic Center, Inc. (relating to the AWM
Network Site) (xv)
10.64 -- Physician Employment Agreement between W. Banks Hinshaw, Jr.,
M.D. and Women's Medical & Diagnostic Center, Inc. (relating to
the AWM Network Site) (xv)
10.65 -- Agreement between Registrant, Women's Medical & Diagnostic
Center, Inc., f/k/a INMD Acquisition Corp, and Morris Notelovitz,
M.D. (relating to the AWM Network Site) (xv)
10.66 -- Personal Responsibility Agreement between Registrant, Bay Area
Fertility and Gynecology Medical Group, Inc. and Donald I. Galen,
M.D. (relating to the Bay Area Acquisition) (xv)
10.67 -- Personal Responsibility Agreement between Registrant, Bay Area
Fertility and Gynecology Medical Group, Inc. and Louis N.
Weckstein, M.D. (relating to the Bay Area Acquisition) (xv)
10.68 -- Personal Responsibility Agreement between Registrant, Bay Area
Fertility and Gynecology Medical Group, Inc. and Arnold Jacobson,
M.D. (relating to the Bay Area Acquisition) (xv)
10.69 -- Executive Retention Agreement between Registrant and Glenn G.
Watkins (xv)
II-5
<PAGE>
Exhibit
Number Exhibit
- ------- -------
10.70 -- Management Agreement between Registrant and Fertility Centers of
Illinois, S.C. dated February 28, 1997 (relating to the Pending
Acquisition)**
10.71 -- Asset Purchase Agreement between Registrant and Fertility Centers
of Illinois, S.C. dated February 28, 1997 (relating to the
Pending Acquisition)**
10.72 -- Physician-Shareholder Employment Agreement between Fertility
Centers of Illinois, S.C. and Aaron S. Lifchez, M.D. dated
February 28, 1997 (relating to the Pending Acquisition)**
10.73 -- Physician-Shareholder Employment Agreement between Fertility
Centers of Illinois, S.C. and Brian Kaplan, M.D. dated February
28, 1997 (relating to the Pending Acquisition)**
10.74 -- Physician-Shareholder Employment Agreement between Fertility
Centers of Illinois, S.C. and Jacob Moise, M.D. dated February
28, 1997 (relating to the Pending Acquisition)**
10.75 -- Physician-Shareholder Employment Agreement between Fertility
Centers of Illinois, S.C. and Jorge Valle, M.D. dated February
28, 1997 (relating to the Pending Acquisition)**
10.76 -- Personal Responsibility Agreement among Registrant, Fertility
Centers of Illinois, S.C. and Aaron S. Lifchez, M.D. dated
February 28, 1997 (relating to the Pending Acquisition)**
10.77 -- Personal Responsibility Agreement among Registrant, Fertility
Centers of Illinois, S.C. and Jacob Moise, M.D. dated February
28, 1997 (relating to the Pending Acquisition)**
10.78 -- Personal Responsibility Agreement among Registrant, Fertility
Centers of Illinois, S.C. and Brian Kaplan dated February 28,
1997 (relating to the Pending Acquisition)**
10.79 -- Personal Responsibility Agreement among Registrant, Fertility
Centers of Illinois, S.C. and Jorge Valle, M.D. dated February
28, 1997 (relating to the Pending Acquisition)**
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. (relating to the
Walter Reed Network Site)**
10.81 -- Management Agreement between Registrant and Reproductive Sciences
Medical Center, Inc. (relating to the San Diego Acquisition)**
10.82 -- Asset Purchase Agreement between Registrant and Samuel H. Wood,
M.D., Ph.D. (relating to the San Diego Acquisition)**
10.83 -- Personal Responsibility Agreement between Registrant and Samual
H. Wood, M.D., Ph.D. (relating to the San Diego Acquisition)**
10.84 -- Physician-Shareholder Employment Agreement between Reproductive
Sciences Medical Center, Inc. and Samuel H. Wood, M.D., Ph.D.
(relating to the San Diego Acquisition)**
10.85 -- Physician-Shareholder Employment Agreement between Reproductive
Endocrine & Fertility Consultants, P.A. and Elwyn M. Grimes, M.D.
(relating to the Kansas City Network Site)**
10.86 -- Amendment to Management Agreement between Registrant and
Reproductive Endocrine & Fertility Consultants, P.A. (relating to
the Kansas City Network Site)**
10.87 -- Amendment to Management Agreement between Registrant and
Fertility Centers of Illinois, S.C. dated May 2, 1997 (relating
to the Pending Acquisition)**
II-6
<PAGE>
Exhibit
Number Exhibit
- ------- -------
10.88 -- Management Agreement between Registrant and MPD Medical
Associates, P.C. dated June 2, 1997 (relating to the Long Island
Network Site)**
10.89 -- Physician-Shareholder Employment Agreement between MPD Medical
Associates P.C. and Gabriel San Roman, M.D. (relating to the Long
Island Network Site)**
10.90 -- Amendment No. 2 to Management Agreement between Registrant and
Fertility Centers of Illinois, S.C. dated June 18, 1997.
(relating to the Pending Acquisition)**
10.91 -- Commitment Letter dated June 30, 1997 between Registrant and
First Union National Bank
11 -- Computation of Net Loss Per Share**
21.1 -- Subsidiaries of Registrant (xv)
23.1 -- Consent of Bachner, Tally, Polevoy & Misher LLP (Included as
Exhibit 5.1)
23.2 -- Consent of Price Waterhouse LLP (Included in this Part II)
24 -- Powers of Attorney (Included in this Part II)
(b) Schedules
Schedule II -- Valuation and Qualifying Accounts (Included in this Part II)
- ----------
(i) Filed as Exhibit with identical exhibit number to Registrant's
Registration 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
Registration 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.
(vi) Filed as Exhibit with identical exhibit number to Registrant's Annual
Report on Form 10-K for the period ended December 31, 1993.
(vii) Filed as Exhibit with identical exhibit number to Registrant's
Registration 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 period ended December 31,1994.
(ix) Filed as Exhibit with identical exhibit number to Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1995.
(x) Filed as Exhibit with identical exhibit number to Registrant's Quarterly
Report on Form 10-Q for the period ended September 30, 1995.
(xi) Filed as Exhibit with identical exhibit number to Registrant's Annual
Report on Form 10-K for the period ended December 31, 1995.
(xii) Filed as Exhibit with identical exhibit number to Registrant's Current
Report on Form 8-K dated June 20, 1996.
(xiii) Filed as Exhibit with identical exhibit number to Registrant's Current
Report on Form 8-K/A dated August 20, 1996.
(xiv) Filed as Exhibit with identical exhibit number to Registrant's Current
Report on Form 8-K dated January 20, 1997.
(xv) Filed as Exhibit with identical exhibit number to Registrant's Annual
Report on Form 10-K for the period ended December 31, 1996.
- ----------
* To be filed by amendment
** Previously filed
II-7
<PAGE>
Item 17. Undertakings
Undertaking Required by Regulation S-K, Item 512(h).
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Undertakings required by Regulation S-K, Item 512(i).
The undersigned Registrant hereby undertakes that:
(1)For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497 (h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2)For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-8
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 24, 1997
relating to the consolidated financial statements of IntegraMed America, Inc.,
our report dated March 24, 1997 relating to the financial statements of Bay Area
Fertility and Gynecology Medical Group, and our report dated April 28, 1997
relating to the combined financial statements of Fertility Centers of Illinois,
S.C., and its affiliates and our report dated February 24, 1997 relating to the
financial statements of MPD Medical Associates (MA), P.C. which appear in such
Prospectus. We also consent to the application of such reports to the Financial
Statement Schedule for the three years ended December 31, 1996 listed under Item
16(b) of this Registration Statement when such schedule is read in conjunction
with the financial statements referred to in our reports. The audits referred to
in such reports also included this schedule. We also consent to the reference to
us under the heading "Experts" in such Prospectus.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Stamford, CT
July 17, 1997
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Purchase, State of New
York on the 17th day of July, 1997.
INTEGRAMED AMERICA, INC.
/S/ GERARDO CANET
---------------------------------------------
By: Gerardo Canet, President, Chief Executive
Officer and Director
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ GERARDO CANET President, Chief Executive July 17, 1997
- ----------------------------- Officer and Director
Gerardo Canet (Principal Executive
Officer)
/S/ DWIGHT P. RYAN Vice President, July 17, 1997
- ----------------------------- Chief Financial Officer
Dwight P. Ryan (Principal Financial and
Accounting Officer)
* Director July 17, 1997
- -----------------------------
Vicki L. Baldwin
* Director July 17, 1997
- -----------------------------
Elliot D. Hillback, Jr.
* Director July 17, 1997
- -----------------------------
Sarason D. Liebler
* Director July 17, 1997
- -----------------------------
Patricia M. McShane, M.D.
* Director July 17, 1997
- -----------------------------
Lawrence J. Stuesser
/S/ DWIGHT P. RYAN
- -----------------------------
*By: Dwight P. Ryan
Attorney-in-Fact
II-10
<PAGE>
SCHEDULE II
INTEGRAMED AMERICA, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions-
Balance at Charged to Balance
Beginning Costs and at End
of Period Expenses Deductions(1) of Period
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
IntgraMed America, Inc.:
Year Ended December 31, 1996
Allowance for doubtful accounts .... $ 89,000 $344,000 $124,000 $309,000
Year Ended December 31, 1995
Allowance for doubtful accounts .... $125,000 $119,000 $155,000 $ 89,000
Year Ended December 31, 1994
Allowance for doubtful accounts .... $193,000 $289,000 $357,000 $125,000
Bay Area Fertility and Gynecology
Medical Group:
Year Ended December 31, 1996
Allowance for doubtful accounts .... $ 12,000 $-- $-- $ 12,000
Fertility Centers of Illinois, S.C.:
Year Ended December 31, 1996
Allowance for doubtful accounts .... $ 82,000 $ 83,000 $-- $165,000
Year Ended December 31, 1995
Allowance for doubtful accounts .... $ 41,000 $ 41,000 $-- $ 82,000
- ---------------------
(1) Uncollectible accounts written off.
</TABLE>
S-1
BACHNER, TALLY, POLEVOY & MISHER
Attorneys at Law
380 Madison Avenue
New York, New York 10017-2590
(212) 687-7000
Fax: (212) 682-5729
July 18, 1997
IntegraMed America, Inc.
One Manhattanville Road
Purchase, New York 10577
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel for IntegraMed America, Inc., a Delaware
corporation (the "Company"), in connection with the preparation and filing by
the Company of a registration statement (the "Registration Statement") on Form
S-1 under the Securities Act of 1933, as amended (the "Act"), relating to the
public offering of shares of the Company's Common Stock, $.01 par value (the
"Common Stock").
We have examined the Certificate of Incorporation, as amended and restated,
and ByLaws of the Company, as amended and restated, the minutes of the various
meetings and consents of the Board of Directors of the Company, drafts of the
Placement Agency Agreement relating to the offering of the shares, draft forms
of certificates representing the Common Stock, originals or copies of all such
records of the Company, agreements, certificates of public officials,
certificates of officers and representatives of the Company and others, and such
other documents and records as we have deemed necessary to form the basis of the
opinion expressed below. In such examination, we have assumed the genuineness of
all signatures, the authenticity of all documents submitted to us as originals
and the conformity to originals of all documents submitted to us as copies
thereof. As to various questions of fact material to such opinion, we have
relied upon statements and certificates of officers and representatives of the
Company and others.
<PAGE>
IntegraMed America, Inc.
July 18, 1997
Page 2
Based upon the foregoing, we are of the opinion that the shares have been
duly authorized and, when issued and sold in accordance with the terms described
in the Prospectus forming a part of the Registration Statement (the
"Prospectus"), will be validly issued, fully paid and nonassessable.
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement, and to the use of our name under the caption "Legal
Matters" in the Prospectus and in any subsequent registration statement filed
solely to increase the offering by up to 20%. In giving this consent, we do not
thereby concede that we come within the categories of persons whose consent is
required by the Act or the rules and regulations promulgated thereunder.
Very truly yours,
/s/ Bachner, Tally, Polevoy & Misher LLP
----------------------------------------
BACHNER, TALLY, POLEVOY
& MISHER LLP
Dwight Ryan, CFO June 30, 1997
IntegraMed America, Inc.
One Manhattan Road
Purchase, NY 10577
Re: Loan Commitment to IntegraMed of Illinois, Inc.
Dear Mr. Ryan:
First Union National Bank ("First Union") is pleased to offer you a commitment
to lend on the following terms and conditions:
BORROWER:
IntegraMed of Illinois, Inc., a wholly-owned subsidiary of IntegraMed America,
Inc.
AMOUNT:
The amount of this facility shall be $4,000,000.00 in the form of a
non-restoring Line of Credit with the balance converting to a four year fully
amortizing term loan at maturity.
PURPOSE:
This facility shall be used to finance leasehold improvements and equipment
purchases and working capital needs relating to the acquisition of the assets
and management rights of additional medical practices. The maximum principal
amount First Union is committed to lend from time to time shall be the lesser of
(i) $4,000,000.00 or (ii) 50% of the amount of Eligible Accounts plus 75% of the
purchase price of new medical equipment and 75% of the appraised value of
existing medical equipment; less the amount of any reserve required by First
Union. The maximum principal amount First Union is committed to lend will be
reduced by the amount of any outstandings under Borrower's revolving credit
facility with First Union.
"Eligible Account" refers to an account receivable not more than 90 days from
the date of the original invoice that arises in the ordinary course of
Borrower's business, and meets the following eligibility requirements: (a) the
sale of goods or services reflected in such account is final and such goods and
services have been delivered or provided and accepted by the account debtor and
payment for such is owing; (b) the invoices comprising an account are not
subject to any claims, returns or disputes of any kind; (c) the account debtor
is not insolvent; (d) the account debtor has its principal place of business in
the United States; (e) the account debtor is not an affiliate of Borrower and is
not a supplier of Borrower and the account is not otherwise exposed to risk of
set-off.
Page 1
<PAGE>
INTEREST RATE:
First Union's Prime Rate plus 1.0% (100 basis points), as that rate may change
from time to time. "Prime rate" shall be the rate announced by First Union from
time to time as its Prime Rate, and is not necessarily the lowest rate offered
by First Union.
REPAYMENT:
This facility shall be repayable in monthly payments of accrued interest only
until September 30, 1998 when all outstanding principal shall be converted to
fully amortizing term loan, repayable in equal monthly principal payments in an
amount sufficient to amortize the loan over a four year period plus accrued
interest.
Upon the maturity date of September 30, 1998, First Union will, at its sole
discretion, consider a request by the Borrower to extend availability for the
unused portion of this facility for a period of twelve months upon which the
balance due thereunder will convert to a four year fully amortizing term loan
under the aforementioned terms and conditions, provided that no Event of Default
has occurred under any existing agreement with First Union.
COLLATERAL:
A security interest in all tangible and intangible property of the Borrower and
Guarantor including, but not limited to, accounts receivable, inventory,
machinery, equipment, furniture, fixtures, chattel paper and general
intangibles. This collateral is free and clear of all liens, security interests,
and claims whatsoever, other than (i) those granted to First Union, (ii)
security interests required by the loan documents, (iii) liens for taxes
contested in good faith, (iv) liens accruing by law for employee benefits and
(v) liens on equipment that were granted to other creditors prior to this
commitment. This collateral will be kept free and clear from all other liens,
security interests and claims and shall have a value satisfactory to First
Union.
This Facility will be cross-collateralized and cross-defaulted with the existing
First Union loans to IntegraMed, America, Inc.
GUARANTORS:
The unconditional guaranty of IntegraMed America, Inc. will be required. The
guaranty shall be in form acceptable to First Union.
BORROWER FINANCIAL STATEMENTS:
Annual Financial Statements.
Borrower shall deliver to First Union, within 120 days after the close of each
fiscal year, reviewed financial statements reflecting its operations during such
fiscal year, including, without limitation, a balance sheet, profit and loss
statement and statement of cash flow, with supporting schedules; all in
reasonable detail, prepared in conformity with generally accepted accounting
principles, applied on a basis consistent with that of the preceding year. All
such statements shall be examined by an independent certified public accountant
acceptable to First Union. The opinion of such independent certified public
accountant shall not be acceptable to First Union if qualified due to any
limitations in scope imposed by Borrower. Any other qualification of the
Page 2
<PAGE>
opinion by the accountant shall render the acceptability of the financial
statements subject to First Union's approval.
Periodic Financial Statements.
Borrower will also provide unaudited management-prepared quarterly financial
statements, including, without limitation, a balance sheet, profit and loss
statement, and statement of cash flows, with supporting schedules.
GUARANTOR'S FINANCIAL STATEMENTS:
Annual Financial Statements.
Guarantor shall deliver to First Union, within 120 days after the close of each
fiscal year, audited financial statements and form 10-K reflecting its
operations during such fiscal year, including, without limitation, a balance
sheet, profit and loss statement of cash flow, with supporting schedules; all in
reasonable detail, prepared in conformity with generally accepted accounting
principles, applied on a basis consistent with that of the preceding year. All
such statements shall be examined by an independent certified public accountant
acceptable to First Union. The opinion of such independent certified public
account shall not be acceptable to First Union if qualified due to any
limitations in scope imposed by Borrower. Any other qualification of the opinion
by the accountant shall render the acceptability of the financial statements
subject to First Union's approval.
Periodic Financial Statements.
Guarantor will also provide unaudited management-prepared quarterly financial
statements and form 10-Q, including, without limitation, a balance sheet, profit
and loss statement, and statement of cash flows, with supporting schedules.
Tax Returns.
Guarantor shall deliver to First Union, within 30 days of filing, complete
copies of federal and state tax returns, as applicable, together with all
schedules thereto, including, without limitation, K-1 statements for all
Partnerships and Sub Chapter S Corporations, each of which shall be signed and
certified by Guarantor to be true, correct and complete copies of such returns.
In the event an extension is filed, Guarantor shall also deliver a copy of such
extension within 30 days of filing.
CONDITIONS PRECEDENT:
This commitment is subject to fulfillment of certain conditions, to First
Union's satisfaction in its sole discretion, including the following:
1. Evidence of filing of UCC-1 financing statements for all accounts
receivable which IntegraMed America, Inc. purchases in the ordinary course
of business from third parties.
Page 3
<PAGE>
2. Evidence of completion and funding of a minimum of $6,000,000 (net) in
additional capital raised as the result of the issuance of additional
common stock as outlined in the draft Securities and Exchange Commission
form S-1 dated May, 1997.
3. Evidence of completion of the purchase of Fertility Centers of Illinois,
S.C. by IntegraMed America, Inc.
4. Guarantor shall deliver to First Union, a certificate signed by Borrower or
by a principal financial officer of Guarantor warranting that no "Default"
as specified in the Loan Documents of its existing First Union Revolving
Credit Facility, nor any event which, upon the giving of notice or lapse of
time or both, would constitute such a Default, has occurred.
COVENANTS:
In addition to the covenants customarily required by First Union for similar
loans, the covenants described on the Covenants Schedule to this letter will be
required.
DOCUMENTS:
The loan will be evidenced by documents prepared by and acceptable to First
Union, including a Loan Agreement.
COMMITMENT FEES:
The Borrower shall pay First Union $40,000 (1.0% of $4,000,000) as a commitment
fee due 50% upon acceptance of this commitment, with the balance due at closing.
COSTS:
Borrower shall pay all costs, expenses and fees (including, without limitation,
insurance, recording and attorneys' fees) associated with this transaction.
The preceding terms and conditions are not exhaustive, and this commitment is
subject to certain other terms and closing conditions customarily required by
First Union for similar transactions. First Union may be referred to as "First
Union" in this commitment letter and other related documents. This commitment
will expire unless it is accepted by July 8, 1997 and closed on or before
September 1, 1997 This commitment letter shall not survive closing.
Borrower represents and agrees that all financial statements and other
information delivered to First Union are correct and complete. No material
adverse change may occur in, nor may any adverse circumstance be discovered as
to, the business or financial condition of the Borrower or and Guarantor(s)
prior to closing. First Union's obligations under this commitment are
conditioned on the fulfillment to First Union's sole satisfaction of each term
and condition referenced by this commitment.
This commitment supersedes all prior commitments and proposals with respect to
this transaction, whether written or oral, including any previous loan proposals
made by First Union or anyone acting with its authorization. No modification
shall be valid unless made in writing and signed by an authorized officer of
First Union. This commitment is not assignable, and no party other than Borrower
shall be entitled to rely on this commitment.
Page 4
<PAGE>
Thank you for allowing First Union to be of service. Please do not hesitate to
give me a call at 914-286-5044 if I can be of further assistance.
Sincerely,
FIRST UNION NATIONAL BANK
By: _____________________
Suzette LaBonne
Vice President
ACCEPTANCE OF LOAN COMMITMENT:
The above commitment is agreed to and accepted on the terms and conditions
provided in this letter.
IntegraMed of Illinois, Inc.
By: /s/ Dwight Ryan 7/3/97
---------------------- -------------
Dwight Ryan Date
CFO
GUARANTOR'S ACCEPTANCE OF LOAN COMMITMENT:
The above commitment is agreed to and accepted on the terms and conditions
provided in this letter.
IntegraMed America, Inc.
By: /s/ Dwight Ryan 7/3/97
---------------------- -------------
Dwight Ryan Date
CFO
Page 5
<PAGE>
COVENANTS SCHEDULE
Attached to Commitment Letter to IntegraMed Illinois, Inc.
FINANCIAL COVENANTS.
o Current Ratio. Guarantor shall, at all times, maintain a Current Ratio of
not less than 1.50 to 1.00. "Current Ratio" shall mean the ratio of current
assets divided by current liabilities. This covenant will be tested on a
quarterly basis.
o Capital Expenditures. Guarantor shall not expend more than $6,000,000. on
gross fixed assets (including gross leases to be capitalized under
generally accepted accounting principles and leasehold improvements) in any
fiscal year excluding acquisitions. This covenant will be tested on an
annual basis.
o Tangible Net Worth. Guarantor shall, from closing until fiscal year-end
1997, maintain a Tangible Net Worth of at least Six Million, Five Hundred
Thousand dollars ($6,500,000.). For each fiscal year thereafter, Tangible
Net Worth shall increase by not less than Eighty percent (80%) of net
income. "Tangible Net Worth" shall mean total assets minus total
liabilities. For purposes of this computation, the aggregate amount of any
intangible assets of Guarantor including without limitation, goodwill,
franchises, licenses, patents, trademarks, trade names, copyrights, service
marks, and brand names, shall be subtracted from total assets, and total
liabilities shall include subordinated debt. This covenant will be tested
on an annual basis.
o Total Liabilities to Tangible Net Worth Ratio. Guarantor shall, at all
times, maintain a ratio of Total Liabilities, including subordinated debt,
divided by Tangible Net Worth of not more than 2.00 to 1.00. For purposes
of this computation, "Total Liabilities" shall mean all liabilities,
including capitalized leases and all reserves for deferred taxes and other
deferred sums appearing on the liabilities side of a balance sheet, in
accordance with generally accepted accounting principles applied on a
consistent basis. "Tangible Net Worth" shall mean total assets minus total
liabilities. For purposes of this computation, the aggregate amount of any
intangible assets of Guarantor including without limitation, goodwill,
franchises, licenses, patents, trademarks, trade names, copyrights, service
marks, and brand names, shall be subtracted from total assets, and total
liabilities shall include subordinated debt. This covenant will be tested
on a quarterly basis.
o Working Capital. Guarantor shall, at all times, maintain Working Capital of
at least $3,000,000 dollars. "Working Capital" shall mean current assets
minus current liabilities. This covenant will be tested on an annual basis.
o Fixed Charge Coverage Ratio. Guarantor shall, at all times, maintain a
Fixed Charge Coverage Ratio of not less than 2.00 to 1.00. "Fixed Charge
Coverage" shall mean the sum of earnings before interest expense, taxes,
depreciation, amortization and lease expense divided by the sum of lease
expense and interest expense. This covenant will be tested on a quarterly
basis.
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AFFIRMATIVE COVENANTS:
o Deposit Relationship. Guarantor will maintain its primary depository and
Cash Management relationship with First Union.
NEGATIVE COVENANTS:
o Change in Fiscal Year. Guarantor shall not change its fiscal year without
the consent of First Union.
o Judgment Entered. Borrower and Guarantor shall not permit the entry of any
monetary judgment or the assessment against, the filing of any tax lien
against, or the issuance of any writ of garnishment or attachment against
any property of or debts due Borrower and that is not discharged or
execution is not stayed within 30 days of entry.
o Cross-Default. No default shall occur in payment or performance of any
obligation under any other loans, contracts, or agreements of Borrower or
Guarantor, any subsidiary or affiliate of Borrower or Guarantor, any
general partner of or the holder(s) of the majority ownership interests of
Borrower or Guarantor, with First Union or its affiliates.
o Prepayment of Other Debt. Borrower and Guarantor shall not retire any long
term debt at a date in advance of its legal obligation to do so with the
exception of obligations due to First Union, without prior consent of First
Union.
o Default on Other Contracts or Obligations. Borrower and Guarantor shall not
default on any material contract with or obligation when due to a third
party or default in the performance of any obligation to a third party
incurred for money borrowed.
o Investments. Purchase any capital stock, securities, or evidence of
indebtedness of any other person or entity, except (i) mutual funds offered
by the Bank or an Affiliate, (ii) investments in direct obligations of the
United States of America, (iii) certificates of deposit in United States
commercial banks having a tier 1 capital ratio of not less than 6% but in
any event not greater than 10% of the issuing bank's unimpaired capital and
surplus, (iv) investments in securities which have, and continue to have, a
rating of "A-1" (by Moody's) or "P-1" (by Standard & Poor's) or better, or
(v) equity securities of an entity for which the publicly traded debt for
such entity has, and continues to have, a rating of not less than "Baa3"
(by Moody's) or "BBB-" (by Standard & Poor's), all of which may be
reasonably acceptable to the Bank, exclusive of Management agreements.
o Guarantees. Borrower and Guarantor shall not guarantee or otherwise become
responsible for obligations of any other person or entity without prior
written contents of First Union, except as to those assumed in an
acquisition and/or management agreement up to $500,000 in the aggregate
annually.
o Encumbrances. Borrower and Guarantor shall not create, assume, or permit to
exist any mortgage, security deed, deed of trust, pledge, lien, charge or
other encumbrance on any of its
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assets, whether now owned or hereafter acquired, other than: (i) security
interests required by the loan documents; (ii) liens for taxes contested in
good faith, (iii) liens accruing by law for employee benefits and (iv)
Permitted Liens.
FINANCIAL REPORTS.
o Accounts Receivable Aging. Guarantor shall, from time to time hereafter but
not less than monthly, deliver to First Union within 15 days of the end of
each such period, a detailed aging of accounts receivable by total, a
summary aging of accounts receivable by customer and customer address, and
a reconciliation statement. Said aging should also include the original
date of each invoice and borrowing base certificate in form satisfactory to
First Union.
o Reports and Proxies. Guarantor shall deliver to First Union, promptly, a
copy of all financial statements, reports, notices, and proxy statements,
sent by Guarantor to stockholders, and all regular or periodic reports
required to be filed by Guarantor with any governmental agency or
authority.
o Non-Default Certificate From Borrower. Guarantor shall deliver to First
Union, with the financial statements required, a certificate signed by
Borrower or by a principal financial officer of Guarantor warranting that
no "Default" as specified in the Loan Documents, nor any event which, upon
the giving of notice or lapse of time or both, would constitute such a
Default, has occurred.
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