================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-20260
Commission File No. 1-11440
INTEGRAMED AMERICA, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
One Manhattanville Road
Purchase, New York
(Address of principal executive offices)
06-1150326
(I.R.S. employer identification no.)
10577
(Zip code)
(914) 253-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The aggregate number of shares of the Registrant's Common Stock, $.01
par value, outstanding on July 31, 1998 was 21,372,369.
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<PAGE>
INTEGRAMED AMERICA, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at June 30, 1998 (unaudited)
and December 31, 1997................................... 3
Consolidated Statement of Operations for the three and
six-month periods ended June 30, 1998 and
1997 (unaudited)........................................ 4
Consolidated Statement of Cash Flows for the six-month
periods ended June 30, 1998 and 1997 (unaudited)........ 5
Notes to Consolidated Financial Statements (unaudited)...6-15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................. 16-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk...22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................23
Item 2. Changes in Securities........................................23
Item 3. Defaults upon Senior Securities..............................23
Item 4. Submission of Matters to a Vote of Security Holders..........24
Item 5. Other Information............................................24
Item 6. Exhibits and Reports on Form 8-K.............................24
SIGNATURES ......................................................25
INDEX TO EXHIBITS.............................................................26
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
<TABLE>
INTEGRAMED AMERICA, INC.
CONSOLIDATED BALANCE SHEET
(all dollars in thousands)
ASSETS
<CAPTION>
June 30, December 31,
1998 1997
------- -------
(unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents .......................................................... $ 2,553 $ 1,930
Patient accounts receivable, less allowance for doubtful accounts of $460 and $180
in 1998 and 1997, respectively.................................................... 11,465 7,061
Management fees receivable, less allowance for doubtful accounts of $170 and $214
in 1998 and 1997, respectively.................................................... 1,385 1,600
Other current assets ............................................................... 1,947 1,757
------- -------
Total current assets............................................................ 17,350 12,348
------- -------
Fixed assets, net .................................................................. 5,192 4,742
Intangible assets, net.............................................................. 20,221 18,445
Other assets........................................................................ 575 566
------- -------
Total assets.................................................................... $43,338 $36,101
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 669 $ 1,475
Accrued liabilities................................................................. 4,658 2,260
Due to Medical Practices (see Note 2)............................................... 2,016 1,745
Dividends accrued on Preferred Stock................................................ 530 464
Notes payable and current portion of long-term debt................................. 2,138 614
Current portion of exclusive management rights obligation........................... 289 472
Patient deposits ................................................................... 1,985 1,236
------- -------
Total current liabilities....................................................... 12,285 8,266
------- -------
Long-term debt ....................................................................... 3,171 451
Exclusive management rights obligation................................................ 891 1,391
Commitments and Contingencies......................................................... -- --
Shareholders' equity
Preferred Stock, $1.00 par value -
3,165,644 shares authorized in 1998 and 1997, respectively - 2,500,000
undesignated; 665,644 shares designated as Series A Cumulative Convertible
of which 165,644 shares were issued and outstanding in 1998 and
1997, respectively................................................................ 166 166
Common Stock, $.01 par value - 50,000,000 and 25,000,000 shares authorized;
21,372,369 and 17,198,616 shares issued and outstanding in 1998 and 1997,
respectively...................................................................... 213 172
Capital in excess of par ........................................................... 53,366 46,471
Accumulated deficit ................................................................ (26,754) (20,816)
------- -------
Total shareholders' equity ..................................................... 26,991 25,933
------- -------
Total liabilities and shareholders' equity...................................... $43,338 $36,101
======= =======
See accompanying notes to the consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
INTEGRAMED AMERICA, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(all amounts in thousands, except per share amounts)
<CAPTION>
For the For the
three-month period six-month period
ended June 30, ended June 30,
------------------- ------------------
1998 1997 1998 1997
------- ------ ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues, net (see Note 2).................................................... $9,830 $4,389 $18,171 $8,413
Costs of services incurred on behalf of Network Sites:
Employee compensation and related expenses................................. 3,753 1,959 7,316 3,915
Direct materials........................................................... 1,453 330 2,206 627
Occupancy costs............................................................ 723 356 1,395 734
Depreciation............................................................... 348 176 633 361
Other expenses............................................................. 1,229 223 2,396 426
------- ------ ------- ------
Total costs of services.................................................... 7,506 3,044 13,946 6,063
------- ------ ------- ------
Network Sites' contribution................................................... 2,324 1,345 4,225 2,350
General and administrative expenses........................................... 1,358 1,046 2,471 2,023
Amortization of intangible assets............................................. 266 97 447 188
Interest income............................................................... (9) (33) (21) (67)
Interest expense.............................................................. 108 23 180 33
------- ------ ------- ------
Total other expenses.......................................................... 1,723 1,133 3,077 2,177
Restructuring and other charges (see Note 8).................................. 2,084 -- 2,084 --
(Loss) income from continuing operations before income taxes.................. (1,483) 212 (936) 173
Provision for income taxes.................................................... 102 33 151 65
------- ------ ------- ------
(Loss) income from continuing operations...................................... (1,585) 179 (1,087) 108
Discontinued operations (see Note 7):
Loss from operations of discontinued AWM Division (less applicable
income taxes of $0)..................................................... 635 85 923 59
Loss from disposal of AWM Division, including provision of $243,000
for operating losses during phase-out period (less applicable
income taxes of $0)..................................................... 3,928 -- 3,928 --
------- ------ ------- ------
Net (loss) income............................................................. $(6,148) $ 94 $(5,938) $ 49
Less: Dividends accrued on Preferred Stock.................................... 33 33 66 66
------- ------ ------- ------
Net (loss) income applicable to Common Stock.................................. $(6,181) $ 61 $(6,004) $ (17)
======= ====== ======= ======
Basic and diluted (loss) earnings per share of Common Stock:
Continuing operations...................................................... $ (0.08) $ 0.02 $ (0.06) $ 0.00
Discontinued operations.................................................... (0.21) (0.01) (0.23) (0.00)
------- ------ ------- ------
Net (loss) earnings........................................................ $ (0.29) $ 0.01 $ (0.29) $(0.00)
======= ====== ======= ======
Weighted average shares - basic............................................... 21,348 9,630 20,667 9,587
======= ====== ======= ======
Weighted average shares - diluted............................................. 21,348 9,772 20,667 9,752
======= ====== ======= ======
See accompanying notes to the consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
INTEGRAMED AMERICA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(all amounts in thousands)
<CAPTION>
For the
six-month period
ended June 30,
------------------
1998 1997
------ ------
(unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net (loss) income .............................................................. $(5,938) $ 49
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization.................................................. 1,306 759
Writeoff of tangible and intangible assets .................................... 5,541 95
Changes in assets and liabilities-- (Increase) decrease in assets:
Patient accounts receivable............................................... (3,324) (650)
Management fees receivable................................................ (675) (578)
Other current assets...................................................... (298) (523)
Other assets.............................................................. (9) (176)
Increase (decrease) in liabilities:
Accounts payable......................................................... (1,106) 2
Accrued liabilities...................................................... 915 (46)
Due to Medical Practices................................................. 271 25
Patient deposits......................................................... 537 233
------- -------
Net cash used in operating activities.......................................... (2,780) (810)
------- -------
Cash flows (used in) provided by investing activities:
Proceeds from short term investments......................................... -- 2,000
Purchase of net liabilities (assets) of acquired businesses.................. 487 (61)
Payments for exclusive management rights and related acquisition costs....... (3,218) (2,165)
Purchase of fixed assets and leasehold improvements.......................... (802) (258)
Proceeds from sale of fixed assets........................................... 57 139
------- -------
Net cash used in investing activities........................................... (3,476) (345)
------- -------
Cash flows provided by (used in) financing activities:
Proceeds from issuance of Common Stock....................................... 5,500 --
Used for stock issue costs................................................... (74) --
Proceeds from bank under Credit Facility..................................... 2,000 250
Principal repayments on debt................................................. (540) (131)
Principal repayments under capital lease obligations......................... (69) (66)
Proceeds from exercise of Common Stock options............................... 62 14
------- -------
Net cash provided by financing activities......................................... 6,879 67
------- -------
Net increase (decrease) in cash and cash equivalents.............................. 623 (1,088)
Cash and cash equivalents at beginning of period.................................. 1,930 3,952
------- -------
Cash and cash equivalents at end of period........................................ $ 2,553 $ 2,864
======= =======
See accompanying notes to the consolidated financial statements.
</TABLE>
5
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 -- INTERIM RESULTS:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, accordingly, do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the accompanying unaudited interim financial statements contain all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position at June 30, 1998, 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, 1998. These financial statements should be read
in conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of consolidation --
The consolidated financial statements comprise the accounts of IntegraMed
America, Inc. and its wholly owned subsidiaries, IVF America (NY), Inc., IVF
America (MA), Inc., IVF America (PA), Inc., IVF America (NJ), Inc., IVF America
(MI), Inc., IntegraMed America of Illinois, Inc., Shady Grove Fertility Centers,
Inc. (see Note 6) and the Adult Women's Medical Center, Inc. ("AWMC"). All
significant intercompany transactions have been eliminated. The Company derives
its revenues from management agreements and, with respect to one managed Network
Site and AWMC, from patient service revenues. The Company does not consolidate
the results of its managed Network Sites. In June 1998, the Company committed
itself to a formal plan to dispose of the AWMC operations which it anticipates
to occur by September 30, 1998. Effective August 6, 1998, IVF America (NY),
Inc., IVF America (MA), Inc., IVF America (PA), Inc. and IVF America (MI), Inc.
were merged into IntegraMed America, Inc.
In 1997, the Emerging Issues Task Force of the Financial Accounting
Standards Board (the "EITF") issued EITF No. 97-2. The EITF reached a consensus
concerning certain matters relating to the physician practice management ("PPM")
industry with respect to the consolidation of professional corporation revenues
and the accounting for business corporations. As an interim step before the
consensus, the EITF allowed PPMs to display the revenues and expenses of managed
physician practices in the statement of operations (the "display method") if the
terms of the management agreement provided the PPM with a "net profits or
equivalent interest" in the medical services furnished by the respective medical
practices. It is the Company's understanding that the EITF did not and would not
object to the use of the display method in PPM financial statements for periods
ending before December 15, 1998. As the Company does not consolidate its managed
Network Sites, the adoption of EITF 97-2 in 1998 does not have a material impact
on the Company's financial position, cash flows or results of operations. As
discussed below, the Company has discontinued the display of revenues for its
Long Island and Boston Network Sites due to changes in the respective management
agreements.
Since inception through December 31, 1997, the management agreements
related to the Long Island and Boston Network Sites have been incorporated in
the Company's consolidated financial statements via the display method as the
Company believed that these management agreements provided it with a "net
profits or equivalent interest" in the medical services furnished by the Medical
Practices at the Long Island and Boston Network Sites. Consequently, for the
Long Island and Boston Network Sites, the Company has historically presented the
Medical Practices' patient services revenue, less amounts retained by the
Medical Practices, or "Medical Practice retainage", as "Revenues after Medical
Practice retainage" in its consolidated statement of operations (the "display
method"). Due to changes in the terms of the management agreements related to
the Long Island and Boston Network Sites, effective in October 1997 and January
1998, respectively, the Company no longer displays the patient services revenue
of the Long Island and Boston Medical Practices. As a result, the Company no
longer displays the patient services revenue and Medical Practice retainage
related to these Network Sites in the accompanying consolidated statement of
operations for the periods prior to January 1, 1998. The revised management
agreements provide for the Company to receive a specific management fee which
the Company has reported in "Revenues, net" in the accompanying Consolidated
Statement of Operations.
6
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles which requires the use of management's
estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue and cost recognition -
Reproductive Science Center Division ("RSC Division")
The RSC Division currently consists of ten Network Sites. During the three
and six-month periods ended June 30, 1998, the RSC Division derived its revenues
pursuant to eleven management agreements, including three of which were entered
into subsequent to June 1, 1997 and one which was terminated effective July 1,
1998. During the three and six-month periods ended June 30, 1997, the RSC
Division principally derived its revenues pursuant to eight management
agreements.
Under eight of the agreements, including the revised management agreement
for the Boston Network Site, the Company receives as compensation for its
management services a three-part management fee comprised of: (i) a fixed
percentage of net revenues generally equal to 6%, (ii) reimbursed costs of
services (costs incurred in managing a Medical Practice and any costs paid on
behalf of the Medical Practice) and (iii) a fixed or variable percentage of
earnings after management fees which is currently generally equal to 20%, or an
additional variable percentage of net revenues generally ranging from 7% to
9.5%. Under the revised management agreement for the Long Island Network Site,
as compensation for its management services, the Company receives a fixed fee
(currently equal to $480,000 per annum), plus reimbursed costs of services.
Two of the Company's Network Sites are affiliated with medical centers.
Under one of these management agreements, the Company primarily provides
endocrine testing and administrative and finance services for a fixed percentage
of revenues, equal to 15% of net revenues, and reimbursed costs of services.
Under the second of these management agreements, the Company's revenues are
derived from certain ART laboratory services performed, and directly billed to
the patients by the Company; out of these patient service revenues, the Company
pays its direct costs and the remaining balance represents the Company's Network
Site contribution. All direct costs incurred by the Company are recorded as
costs of services.
All management fees are reported as "Revenues, net" by the Company. Direct
costs incurred by the Company in performing its management services and costs
incurred on behalf of the Medical Practices are recorded in operating expenses
incurred on behalf of Network Sites. The physicians receive as compensation all
remaining earnings after payment of the Company's management fee.
Prior to January 1, 1998, under another form of management agreement which
had been in use at the Long Island and Boston Network Sites, the Company
recorded all patient service revenues and, out of such revenues, the Company
paid the Medical Practices' expenses, physicians' and other medical
compensation, direct materials and certain hospital contract fees. Under these
agreements, the Company guaranteed a minimum physician compensation based on an
annual budget jointly determined by the Company and the physicians. The
Company's management fee was payable only out of remaining revenues, if any,
after the payment of physician compensation and all direct administrative
expenses of the Medical Practice which were recorded as costs of service. Under
these arrangements, the Company had been liable for payment of all liabilities
incurred by the Medical Practices and had been at risk for any losses incurred
in the operation thereof. Due to changes in the management agreements related to
the Long Island and Boston Network Sites, effective in October 1997 and January
1998, respectively, the Company no longer displays patient service revenues of
the Long Island and Boston Medical Practices which had been reflected in
"Revenues, net" in the Company's consolidated statement of operations. The
revised management agreements provide for the Company to receive a specific
management fee which the Company will report in "Revenues, net" in its
consolidated statement of operations. Under the revised management agreement for
the Long Island Network Site, as compensation for its management services, the
Company receives a fixed fee (currently equal to $480,000 per annum), plus
reimbursed costs of services. Under the revised management agreement for the
Boston Network Site, as compensation for its management services, the Company
7
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
receives a three-part management fee consistent with the majority of the
Company's existing management agreements. The revised agreements provide for
increased incentives and risk-sharing for the Company's affiliated medical
providers.
AWM Division
In June 1998, the Company committed itself to a formal plan to dispose of
the AWM Division which it anticipates to occur by September 30, 1998. The
operating results of the AWM Division for the three and six-month periods ended
June 30, 1998 and the charges recorded by the Company related to its disposal
are reflected under "Discontinued Operations" in the accompanying Consolidated
Statement of Operations (See Note 7).
The AWM Division's operations had been comprised of one Network Site with
two locations which were directly owned by the Company and a 51% interest in the
National Menopause Foundation ("NMF"), a company which had developed
multifaceted educational programs regarding women's healthcare. The Network Site
had also been involved in clinical trials with major pharmaceutical companies.
The Company had billed and recorded all patient service revenues of the
Network Site and had recorded all direct costs incurred as costs of services.
The medical providers had received a fixed monthly draw which had been adjusted
quarterly by the Company based on the respective Network Site's actual operating
results.
Revenues in the AWM Division had also included amounts earned under
contracts relating to clinical trials between the Network Site and various
pharmaceutical companies. The Network Site had contracted with major
pharmaceutical companies (sponsors) to perform women's medical care research
mainly to determine the safety and efficacy of a medication. Research revenues
had been recognized pursuant to each respective contract in the period which the
medical services (as stipulated by the research study protocol) had been
performed and collection of such fees had been considered probable. Net
realization had been dependent upon final approval by the sponsor that
procedures were performed according to study protocol. Payments collected from
sponsors in advance for services are included in accrued liabilities, and costs
incurred in performing the research studies had been included in costs of
services rendered.
The Company's 51% interest in NMF had been included in the Company's
consolidated financial statements. The Company had recorded 100% of the patient
service revenues and costs of NMF and had reported 49% of any profits of NMF as
minority interest on the Company's consolidated balance sheet. Minority interest
at June 30, 1998 and December 31, 1997 was $0.
Patient accounts receivable--
Patient accounts receivable represent receivables from patients for medical
services provided by the Medical Practices. Such amounts are recorded net of
contractual allowances and estimated bad debts. As of June 30, 1998 and December
31, 1997, of total patient accounts receivable of $11.5 million and $7.1
million, respectively, approximately $10.9 million and $4.5 million of patient
accounts receivable were a function of Network Site revenue (i.e., the Company
purchased the accounts receivable, net of contractual allowances, from the
Medical Practice (the "Purchased Receivables")) and the remaining balances of
$0.6 million and $2.6 million, respectively, were a function of net revenues of
the Company (see -- "Revenue and cost recognition" above). Risk of loss in
connection with non-collectiblity of Purchased Receivables is partially borne by
the Company in an amount equal to the Company's proportionate share of revenues
and/or earnings which are paid to the Company from the Medical Practice as its
management fee. Risk of loss in connection with non-collectibility of patient
accounts receivable which are a function of net revenues of the Company is borne
by the Company.
8
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management fees receivable --
Management fees receivable represent fees owed to the Company primarily for
repayment of advances by the Company to certain of the Medical Practices
pursuant to the respective management agreements with these Medical Practices
(see -- "Revenue and cost recognition" above).
Intangible assets --
Intangible assets at June 30, 1998 and December 31, 1997 consisted of the
following (000's omitted):
June 30, December 31,
-------- ------------
1998 1997
-------- ---------
Exclusive management rights......... $21,193 $15,539
Goodwill............................ -- 3,890
Trademarks.......................... 395 395
------- -------
Total.......................... 21,588 19,824
Less-- accumulated amortization.... (1,367) (1,379)
------- -------
Total.......................... $20,221 $18,445
======= =======
Exclusive Management Rights, Goodwill and Other Intangible Assets
Exclusive management rights, goodwill and other intangible assets represent
costs incurred by the Company for the right to manage and/or acquire certain
Network Sites and are valued at cost less accumulated amortization.
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 to twenty-five years. Goodwill
and other intangibles are amortized over periods ranging from three to forty
years. Trademarks are amortized over five to seven years. During the three-month
period ended June 30, 1998, the Company incurred a charge for the write-off of
approximately $3.3 million of goodwill associated with the AWM Division and
recorded an aggregate exclusive management right impairment charge of $1.4
million related to certain of the managed single-physician practices (see Notes
7 and 8). The fully depreciated asset balances related to the AWM Division and
the certain single-physician practices were removed from the Company's records
as of June 30, 1998. As of June 30, 1998, accumulated amortization of exclusive
management rights and trademarks was $1,051,000 and $316,000, respectively. As
of December 31, 1997, accumulated amortization of exclusive management rights,
goodwill and trademarks was $802,000, $283,000 and $294,000, respectively.
9
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Due to Medical Practices --
Due to Medical Practices primarily represents amounts owed by the Company
to the Medical Practices for the medical providers' share of the respective
Medical Practice earnings net of the Company's advances to the Medical Practice,
if any. Due to Medical Practices excludes amounts owed by the Company to Medical
Practices for exclusive management rights.
Earnings per share --
The Company determines earnings (loss) per share in accordance with
Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128) which the
Company adopted in December 1997. All historical earnings (loss) per share have
been presented in accordance with FAS 128.
NOTE 3 -- REVENUES AND NETWORK SITES' CONTRIBUTION:
The following table sets forth for the three and six-month periods ended
June 30, 1998 and 1997, Revenues, net and Network Sites' contribution for each
of the Company's four types of management agreements (three-part management fee,
percent of revenues plus reimbursed operating expenses, fixed fee plus
reimbursed operating expenses, and patient service revenues):
<TABLE>
<CAPTION>
For the For the
three-month period six-month period
ended June 30, ended June 30,
-------------------- -----------------
1998 1997 1998 1997
------- -------- ------ -------
Revenues, net:
<S> <C> <C> <C> <C>
Management fees-- three-part management fee (1).............. $7,346 $1,314 $13,652 $2,492
Management fees-- percent of revenues plus reimbursed
operating expenses of the New Jersey Network Site.......... 1,267 974 2,269 1,853
Management fees-- fixed fee plus reimbursed operating
expenses for the Long Island Network Site (2).............. 876 -- 1,667 --
Patient service revenues (1), (2)............................ 341 2,101 583 4,068
------ ------ ------- ------
Total RSC Division revenues, net......................... $9,830 $4,389 $18,171 $8,413
------ ------ ------- ------
Network Sites' contribution
RSC Division --
Management fees.............................................. $2,199 $ 681 $ 4,065 $1,216
Patient service revenues..................................... 125 664 160 1,134
------ ------ ------- ------
Total RSC Division Network Sites' contribution........... $2,324 $1,345 $ 4,225 $2,350
(1) Historically, revenues from the Boston Network Site have consisted of
patient service revenues. Effective January 1, 1998, due to changes in
the management agreement related to the Boston Network Site, revenues
from this site consist of a three-part management fee.
(2) Historically, revenues from the Long Island Network Site have consisted
of patient service revenues. Effective October 1, 1997, due to changes in
the management agreement related to the Long Island Network Site,
revenues from this site consist of a fixed management fee plus reimbursed
costs of services.
</TABLE>
10
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six-month periods ended June 30, 1998 and 1997, the
Boston, New Jersey, FCI (acquired in mid- August 1997), and Shady Grove
(acquired in mid-March 1998) Network Sites provided greater than 10% of the
Company's Revenues, net and Network Sites' contribution as follows:
<TABLE>
<CAPTION>
Percent of Company Percent of Network Percent of Company Percent of Network
Revenues, net Sites' contribution Revenues, net Sites' contribution
for the three-month for the three-month for the six-month for the six-month
period ended June 30, period ended June 30, period ended June 30, period ended June 30,
--------------------- --------------------- --------------------- ---------------------
1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Boston.......... 15.40 32.95 21.94 39.63 16.43 33.79 22.58 40.20
New Jersey...... 12.89 22.19 27.41 43.57 12.49 22.03 28.19 47.47
FCI............. 24.78 -- 25.56 -- 27.22 -- 28.78 --
Shady Grove..... 16.33 -- 11.10 -- 10.65 -- 7.22 --
</TABLE>
NOTE 4 -- NOTES PAYABLE:
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 June 30, 1998, was 9.25%. The term of the
Credit Facility has been extended to October 1, 1998 and is secured by the
Company's assets. At June 30,1998 and December 31, 1997, $1.5 million and
$250,000, respectively, were outstanding under the Credit Facility.
On November 13, 1997, the Company entered into a $4.0 million non-restoring
line of credit dated November 13, 1997 with the Bank (the "Second Credit
Facility"). Borrowings under the Second Credit Facility bear interest at the
Bank's prime rate plus 1% per annum. Accrued interest only on borrowings is
payable commencing December 1, 1997 and all principal and accrued interest is
due and payable on April 30, 1999. The Second Credit Facility is cross
collateralized and cross-defaulted with the Credit Facility and is secured by
the Company's assets. As of June 30, 1998 and December 31, 1997, $750,000 and
$0, respectively, were outstanding under the Second Credit Facility.
As part consideration for the acquisition of the capital stock of Shady
Grove Fertility Centers, Inc., the Company issued $1.1 million in promissory
notes which are payable in two equal annual installments, due on April 1, 1999
and 2000, respectively, and bear interest at an annual rate of 8.5%.
Also included in notes payable is the Company's aggregate obligation of
approximately $1.6 million in the form of cash, stock, and a note to acquire the
balance of the capital stock of Shady Grove Fertility Centers, Inc., on or about
November 1, 1998 (see Note 6).
NOTE 5 -- EQUITY:
During the first quarter of 1998, the Company consummated an equity private
placement of $5.5 million with entities affiliated with Morgan Stanley Venture
Partners ("Morgan Stanley") providing for the purchase of 3,235,294 shares of
the Company's Common Stock at a price of $1.70 per share and 240,000 warrants to
purchase shares of the Company's Common Stock, at a nominal exercise price. The
Company used or will use approximately half of these funds to acquire the
capital stock of Shady Grove Fertility Centers, Inc. (see Note 6).
In March and April 1998, pursuant to amendments to the Bay Area, FCI and
Shady Grove management agreements, the Company issued warrants to purchase an
aggregate of 150,000 shares of Common Stock, at a weighted average exercise
price of $1.77 per share to the shareholder physicians of the respective medical
practices in exchange for an extension of the term of the Company's respective
management agreements from twenty to twenty-five years.
11
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 -- RECENT ACQUISITIONS:
In January 1998, the Company completed its second in-market merger with the
addition of two physicians to the FCI practice. The Company acquired certain
assets of Advocate Medical Group, S.C. ("AMG") and Advocate MSO, Inc. and
acquired the right to manage AMG's infertility practice conducted under the name
Center for Reproductive Medicine ("CFRM"). Simultaneous with the consummation of
this transaction, the Company amended its management agreement with FCI to
include two of the three physicians practicing under the name CFRM. The
aggregate purchase price was approximately $1.5 million, consisting of
approximately $1.2 million in cash and 184,314 shares of Common Stock.
The majority of the purchase price was allocated to exclusive management rights.
On March 12, 1998, the Company acquired the majority of the capital stock
of Shady Grove Fertility Centers, Inc. ("Shady Grove"), currently a Maryland
business corporation which provides management services, and formerly a Maryland
professional corporation engaged in providing infertility services. Prior to the
consummation of the transaction, Shady Grove had entered into a twenty-year
management agreement with Levy, Sagoskin and Stillman, M.D., P.C. (the " Shady
Grove P.C."), an infertility physician group practice comprised of six
physicians and four locations surrounding the greater Washington, D.C. area. The
Company will acquire the balance of the Shady Grove capital stock on or about
November 1, 1998. The aggregate purchase price for all of the Shady Grove
capital stock was $5.7 million, consisting of approximately $2.8 million in
cash, approximately $1.4 million in Common Stock, and approximately $1.5 million
in promissory notes. The purchase price was allocated to the various assets and
liabilities assumed and the balance was allocated to exclusive management
rights. On March 12, 1998, the Closing Date, the following consideration was
paid: (i) approximately $1.8 million in cash, (ii) approximately $1.2 million in
stock or 639,551 shares of Common Stock, and (iii) approximately $1.1 million in
promissory notes. The Company will pay the balance of the aggregate purchase
price of approximately $1.6 million in the form of cash, stock and a note on or
about November 1, 1998 (the "Second Closing Date"), when the balance of the
Shady Grove capital stock is transferred to the Company. The $1.1 million of
promissory notes currently outstanding are payable in two equal annual
installments due on April 1, 1999 and 2000, respectively, and bear interest at
an annual rate of 8.5%. The number of shares of Company Common Stock to be
issued on the Second Closing Date, which will have a fair market value of
approximately $200,000, will be determined based upon the average closing price
of the Company's Common Stock for the ten-day trading period prior to the third
business day before the Second Closing Date, provided, however, that in no event
will the price per share exceed $2.00 or be less than $1.70 for purposes of this
calculation.
The following unaudited pro forma results of operations for the three and
six-month periods ended June 30, 1998 and 1997 have been prepared by management
based on the unaudited financial information for Shady Grove, the Maryland
professional corporation, which management arrangement was entered into in March
1998, and Fertility Centers of Illinois, S.C. which management agreement was
entered into in August 1997, adjusted where necessary, with respect to
pre-acquisition periods, to the basis of accounting used in the historical
financial statements of the Company. Such adjustments include modifying the
results to reflect operations as if the Shady Grove management agreement had
been consummated on January 1, 1998 and 1997, respectively, and as if the FCI
management agreement, excluding the in-market mergers in 1997 and 1998, had been
consummated on January 1, 1997. Additional general corporate expenses which
would have been required to support the operations of the new Network Sites are
not included in the pro forma results. The unaudited pro forma results may not
be indicative of the results that would have occurred if the management
agreement had been in effect on the dates indicated or which may be obtained in
the future.
12
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
For the three-month For the six-month
period ended June 30, period ended June 30,
(000's omitted) (000's omitted)
--------------------- --------------------
1998 1997 1998 1997
-------- ------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues, net................................................. $ 9,830 $7,242 $19,677 $13,713
Net income from continuing operations (1)..................... $(1,585) $ 586 $ (920) $ 788
Basic and diluted earnings per share of Common Stock
from continuing operations................................. $ (0.08) $ 0.05 $ (0.05) $ 0.06
(1) Pro forma income from continuing operations before restructuring and other
charges for the three and six-month periods ended June 30, 1998 was
$499,000 and approximately $1.2 million, respectively.
</TABLE>
NOTE 7 -- DISCONTINUED OPERATIONS:
In June 1998, the Company committed itself to a formal plan to dispose of
the AWM Division operations which it anticipates to occur by September 30, 1998.
The plan for disposal includes selling certain of the fixed assets to a third
party and the third party's assumption of the employees, building lease,
research contracts, and medical records for a sales price ranging between
approximately $400,000 and $500,000. As of June 30, 1998, the Consolidated
Balance Sheet includes approximately $247,000 of accounts receivable, $138,000
of fixed assets, $580,000 of accrued liabilities, including a $243,000 reserve
for estimated operating losses during the phase-out period and $136,000 for
operating lease obligations, $332,000 in short-term notes, and $50,000 in
capital lease obligations. During the three-month period ended June 30, 1998,
the Company reported a loss from the disposal of the AWM Division of
approximately $3.9 million, which included approximately $3.3 million related to
the write-off of goodwill and $243,000 for estimated operating losses during the
phase-out period. During the three-month periods ended June 30, 1998 and 1997,
the AWM Division recorded revenues of $305,000 and $616,000, respectively.
During the six-month periods ended June 30, 1998 and 1997, the AWM Division
recorded revenues of $711,000 and approximately $1.3 million, respectively.
NOTE 8 -- RESTRUCTURING AND OTHER CHARGES:
The Company recorded approximately $2.1 million in restructuring and other
charges in the three-month period ended June 30, 1998. Such charges included
approximately $1.4 million associated with its termination of its management
agreement with the Reproductive Science Center of Greater Philadelphia ("RSC of
Greater Philadelphia"), a single physician Network Site, effective July 1, 1998,
which primarily consisted of exclusive management right impairment and other
asset write-offs. Such charges also included approximately $700,000 for
exclusive management right impairment losses related to two other single
physician Network Sites.
NOTE 9 -- EARNINGS PER SHARE:
The reconciliation of the numerators and denominators of the basic and
diluted EPS computations for the three and six-month periods ended June 30, 1998
and 1997 is as follows (000's omitted, except for per share amounts):
13
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
For the For the
three-month period six-month period
ended June 30, ended June 30,
------------------- ----------------
1998 1997 1998 1997
------ ------- ------ -----
Numerator
<S> <C> <C> <C> <C>
(Loss) income from continuing operations............. $(1,585) $ 179 $(1,087) $ 108
Less: Preferred stock dividends accrued.............. 33 33 66 66
------- ------ ------- -----
(Loss) income from continuing operations
available to Common stockholders.................. (1,618) 146 (1,153) 42
(Loss) from discontinued operations.................. (4,563) (85) (4,851) (59)
------- ------ ------- -----
Net (loss) income available to Common Stockholders... $(6,181) $ 61 $(6,004) $ (17)
======= ====== ======= =====
Denominator
Weighted average shares outstanding.................. 21,348 9,630 20,667 9,587
Effect of dilutive options and warrants.............. -- 142 -- 165
------- ------ ------- -----
Weighted average shares and dilutive potential
Common shares..................................... 21,348 9,772 20,667 9,752
======= ====== ======= =====
Basic and diluted EPS:
Continuing operations................................ $ (0.08) $ 0.02 $ (0.06) $0.00
Discontinued operations.............................. (0.21) (0.01) (0.23) (0.00)
------- ------ ------- -----
Net (loss) earnings.................................. $ (0.29) $ 0.01 $ (0.29) $0.00)
======= ====== ======= =====
</TABLE>
For the three and six-month periods ended June 1998, the effect of the
assumed exercise of options to purchase approximately 590,000 shares of Common
Stock and warrants to purchase 540,453 shares of Common Stock at exercise prices
ranging from $0.625 to $1.81 and from $0.01 to $1.81, respectively, were
excluded in computing the diluted per share amount as they were antidilutive due
to the Company's net loss during these periods. For the three and six-month
periods ended June 30, 1998, the effect of the assumed exercise of options to
purchase approximately 898,000 shares of Common Stock and warrants to purchase
12,500 shares of Common Stock at exercise prices ranging from $1.84 to $3.75 per
share and an exercise price of $10.34 per share, respectively, were excluded in
computing the diluted per share amount as the exercise price of the options and
warrants exceeded the average market price of the Common Stock during the
period. For the three and six-month periods ended June 30, 1998, the 600,739
shares of Common Stock from the assumed conversion of Preferred Stock were
excluded in computing the diluted per share amount as they were antidilutive due
to the Company's net loss during these periods.
For the three and six-month periods ended June 30, 1997, the effect of the
assumed exercise of options to purchase 526,237 shares of Common Stock and
warrants to purchase 232,500 shares of Common Stock at exercise prices ranging
from $2.00 to $3.75 and $1.81 to approximately $14.00 per share, respectively,
were excluded in computing the diluted per share amount as the exercise price of
the options and warrants exceeded the average market price of the Common Stock
during the period. For the three and six-month periods ended June 30, 1997, the
277,453 shares of Common Stock from the assumed conversion of Preferred Stock
were excluded in computing the diluted earnings per share as the amount of the
dividend declared for these periods per share of Common Stock obtainable on
conversion exceeded basic earnings per share.
NOTE 10 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH
TRANSACTIONS:
In connection with the Company's termination of its management agreement
with the RSC of Greater Philadelphia and due to this Network Site's historical
operating losses, approximately $583,000 of the Company's exclusive right to
manage obligation to the physician owner was applied against the Company's
receivable from the physician owner during the six-month period ended June 30,
1998.
14
<PAGE>
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
In connection with its acquisition of the exclusive right to manage CFRM in
January 1998, the Company issued 184,314 shares of Common Stock with an
aggregate fair value equal to approximately $300,000.
In connection with its acquisition of the exclusive right to manage the
Shady Grove P.C., in March 1998, the Company issued 639,551 shares of Common
Stock with an aggregate fair value equal to approximately $1.2 million and
approximately $1.1 million in promissory notes. The Company also recorded an
additional aggregate obligation of approximately $1.6 million in the form of
cash, stock and a note to acquire the balance of the capital stock of Shady
Grove, which should occur on or about November 1, 1998.
In connection with its acquisition of the exclusive right to manage Bay
Area Fertility in January 1997, the Company issued 333,333 shares of Common
Stock with an aggregate fair value equal to approximately $500,000.
In March and April 1998, pursuant to amendments to the Bay Area, FCI and
Shady Grove management agreements, the Company issued warrants to purchase an
aggregate 150,000 shares of the Company's Common Stock at a weighted average
exercise price of $1.77 per share to the shareholder physicians of the
respective medical practices in exchange for an extension of the term of the
Company's respective managements agreement from twenty to twenty-five years.
In the three-month period ended June 30, 1997, the Company entered into a
capital lease obligation in the amount of $105,000 for medical equipment.
Accrued dividends on Convertible Preferred Stock outstanding increased by
$66,000 to $530,000 and by $66,000 to $397,000, in the six-month periods ended
June 30, 1998 and 1997, respectively.
State taxes, which primarily reflect various state income taxes, of
$341,000 and $66,000 were paid in the six-month periods ended June 30, 1998 and
1997, respectively.
Interest paid in cash in the six-month periods ended June 30, 1998 and 1997
amounted to $180,000 and $33,000, respectively. Interest received in the
six-month periods ended June 30, 1998 and 1997 amounted to $21,000 and $67,000,
respectively.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto included in this
quarterly report and with the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
Overview
During the first half of 1998, the Company consummated an equity private
placement of $5.5 million with entities affiliated with Morgan Stanley Venture
Partners. A portion of these funds was used by the Company to purchase the
capital stock of Shady Grove Fertility Centers, Inc. ("Shady Grove") and the
right to manage Levy, Sagoskin and Stillman M.D., P.C. (the "Shady Grove P.C."),
an infertility physician group practice comprised of six physicians and four
locations in the greater Washington, D.C. area. In addition, in July 1998, the
Company signed a commitment letter with Fleet Bank, National Association for a
$13.0 million credit facility to fund acquisitions over approximately the next
one to two years, to provide working capital, and to refinance its existing bank
debt.
During the twelve-month period ended June 30, 1998, the Reproductive
Science Center ("RSC") Division has doubled its number of locations and has
generated strong same-site growth. In contrast, the Adult Women's Medical
("AWM") Division has continued to generate operating losses. As such, in June
1998, the Company committed itself to a formal plan to dispose of the operations
of the AWM Division which it anticipates to occur by September 30, 1998. The
six-month period ended June 30, 1998 reflects an aggregate charge of
approximately $4.9 million related to the operating losses and the disposal of
the AWM Division. In addition, the Company recorded restructuring and other
charges of approximately $2.1 million associated with its termination of its
management agreement with the Reproductive Science Center of Greater
Philadelphia ("RSC of Greater Philadelphia"), a single- physician Network Site,
effective July 1, 1998, and exclusive management right impairment losses related
to two other single-physician Network Sites.
Since inception through December 31, 1997, the management agreements
related to the Long Island and Boston Network Sites have been incorporated in
the Company's consolidated financial statements via the display method as the
Company believed that these management agreements provided it with a "net
profits or equivalent interest" in the medical services furnished by the Medical
Practices at the Long Island and Boston Network Sites. Consequently, for the
Long Island and Boston Network Sites, the Company has historically presented the
Medical Practices' patient services revenue, less amounts retained by the
Medical Practices, or "Medical Practice retainage", as "Revenues after Medical
Practice retainage" in its consolidated statement of operations ("display
method"). Due to changes in the management agreements related to the Long Island
and Boston Network Sites effective in October 1997 and January 1998,
respectively, the Company no longer displays the patient services revenue of the
Long Island and Boston Medical Practices. As a result, the Company no longer
displays the patient services revenue and Medical Practice retainage related to
these Network Sites in the accompanying consolidated statement of operations for
the periods prior to January 1, 1998. The revised management agreements provide
for the Company to receive a specific management fee which the Company has
reported in "Revenues, net" in the accompanying consolidated statement of
operations. The revised agreements provide for increased incentives and
risk-sharing for the Company's affiliated Medical Practices.
The RSC Network currently consists of ten Network Sites. During the three
and six-month periods ended June 30, 1998, the RSC Division derived its revenues
pursuant to eleven management agreements, including three of which were entered
into subsequent to the June 1, 1997 and one which was terminated in June 1998.
During the three and six-month periods ended June 30, 1997, the RSC Division
principally derived its revenues pursuant to eight management agreements.
16
<PAGE>
Results of Operations
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Revenues, net for the three months ended June 30, 1998 (the "second quarter
of 1998") were approximately $9.8 million as compared to approximately $4.4
million for the three months ended June 30, 1997 (the "second quarter of 1997"),
an increase of 124%.
For the second quarter of 1998, Company revenues from Network Sites
existing in the comparable period in 1997, excluding revenues derived from the
RSC of Greater Philadelphia, increased by 31.3%, due to increases in reimbursed
costs of services and increases in volume primarily attributable to new service
offerings at certain Network Sites. Revenues under the RSC Division were
comprised of (i) three-part management fees, (ii) management fees based on a
percentage of revenues and reimbursed costs of services, (iii) management fees
based on a fixed fee plus reimbursed costs of services, and (iv) patient service
revenues. Three-part management fee revenues were approximately $7.3 million in
the second quarter of 1998 compared to approximately $1.3 million in the second
quarter of 1997. The significant increase in three-part management fee revenues
was attributable to new management agreements entered into in the first quarter
of 1998 and the second and the third quarters of 1997, and to the change in the
Boston Network Site management agreement pursuant to which the Company's
compensation was revised to consist of a three-part management fee as opposed to
patient service revenues. Management fees based on a percentage of revenues and
reimbursed costs of services were approximately $1.3 million in the second
quarter of 1998 compared to approximately $974,000 in the second quarter of
1997, an increase of 30.1%, primarily due to an increase in reimbursed costs of
services at the New Jersey Network Site. Management fees based on a fixed fee
plus reimbursed costs of services were approximately $876,000 in the second
quarter of 1998 compared to $0 in the second quarter of 1997 due to the change
in the Long Island Network Site management agreement pursuant to which the
Company's compensation was revised to consist of a fixed fee plus reimbursed
costs of services as opposed to patient service revenues. Patient service
revenues decreased to approximately $341,000 in the second quarter of 1998
compared to approximately $2.1 million for the second quarter of 1997 due to the
changes in the terms of the Company's management agreements related to the Long
Island and Boston Network Sites.
Costs of services incurred on behalf of the Network Sites more than doubled
to approximately $7.5 million in the second quarter of 1998 as compared to
approximately $3.0 million in the second quarter of 1997. This increase was
primarily attributable to new management agreements entered into in the first
quarter of 1998 and the second and the third quarters of 1997. This increase was
also partly attributable to additional costs associated with increases in volume
at existing Network Sites. As a percentage of Revenues, net, costs of services
increased to 76.4% in the second quarter of 1998 as compared to 69.4% in the
second quarter of 1997.
Network Sites' contribution almost doubled to approximately $2.3 million in
the second quarter of 1998 as compared to $1.3 million in the second quarter of
1997 as a result of new management agreements entered into in the first quarter
of 1998 and the second and the third quarters of 1997 and to the increases in
revenues at existing Network Sites. As a percentage of revenues, Network Sites'
contribution decreased to 23.6% in the second quarter of 1998 as compared to
30.6% in the second quarter of 1997. A significant portion of the Company's
revenues are derived from the reimbursed costs of services component of its
three-part management fee on which there is no contribution margin. During the
second quarter of 1998, reimbursed costs of services represented approximately
76% of revenues compared to approximately 69% in the second quarter of 1997.
Accordingly, the Company's decrease in contribution margin was primarily a
result of the increase in the reimbursed costs of services component of
revenues. The decline in contribution margin was also due to the negative
contribution to earnings from operations at the RSC of Greater Philadelphia and
to the lower contribution margin primarily attributable to the service mix at
the Company's newest Network Site, the Shady Grove Network Site, acquired in the
first quarter of 1998.
General and administrative expenses for the second quarter of 1998 were
approximately $1.4 million as compared to approximately 1.0 million in the
second quarter of 1997, an increase of 29.8%. As a percentage of revenues,
general and administrative expenses decreased to approximately 13.8% from
approximately 23.8% primarily due to the increase in revenues discussed above.
17
<PAGE>
Amortization of intangible assets was $266,000 in the second quarter of
1998 as compared to $97,000 in the second quarter of 1997. This increase was
attributable to the Company's acquisitions of new management agreements in the
first quarter of 1998 and the second and third quarters of 1997.
Interest income for the second quarter of 1998 decreased to $9,000 from
$33,000 for the second quarter of 1997, due to a lower invested cash balance.
Interest expense for the second quarter of 1998 increased to $108,000 from
$23,000 in the second quarter of 1997, due to an increase in bank borrowings and
notes payable to Medical Providers.
The provision for income taxes primarily reflected various state income
taxes in both the second quarter of 1998 and the second quarter of 1997.
Restructuring and other charges were approximately $2.1 million in the
second quarter of 1998. Such charges included approximately $1.4 million
associated with its termination of its management agreement with the
Reproductive Science Center of Greater Philadelphia ("RSC of Greater
Philadelphia"), a single physician Network Site, effective July 1, 1998, which
primarily consisted of exclusive management right impairment and other asset
write-offs. Such charges also included approximately $700,000 for exclusive
management right impairment losses related to two other single physician Network
Sites.
Loss from continuing operations was approximately $1.6 million in the
second quarter of 1998 as compared to income from continuing operations of
$179,000 in the second quarter of 1997. The loss was primarily due to the
restructuring and other charges of approximately $2.1 million which were
partially offset by an approximate $1 million increase in Network Site
contribution. In addition, the loss/income from continuing operations for the
first half of 1998 and 1997 includes approximately $92,000 and $3,000,
respectively, in negative Network Site contribution from the RSC of Greater
Philadelphia Network Site which management agreement was terminated effective
July 1, 1998.
In June 1998, the Company committed itself to a formal plan to dispose of
the AWM Division operations which it anticipates to occur by September 30, 1998.
The plan for disposal includes selling certain of the fixed assets to a third
party and the third party's assumption of the employees, building lease,
research contracts, and medical records for a sales price ranging between
approximately $400,000 and $500,000. Discontinued operations in the second
quarter of 1998 reflect an aggregate charge of approximately $4.6 million of
which $635,000 represented loss from operations and approximately $3.9 million
represented loss from the disposal of the AWM Division. The $3.9 million loss
from disposal of the AWM Division included approximately $3.3 million related to
the write-off of goodwill and $243,000 for estimated losses during the phase-out
period. During the second quarter of 1998 and 1997, the AWM Division recorded
revenues of $305,000 and $616,000, respectively.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Revenues, net for the six months ended June 30, 1998 (the "first half of
1998") were approximately $18.2 million as compared to approximately $8.4
million for the six months ended June 30, 1997 (the "first half of 1997"), an
increase of 116%.
For the first half of 1998, Company revenues from Network Sites existing in
the comparable period in 1997, excluding the RSC of Greater Philadelphia,
increased by 30.4%, due to increases in reimbursed costs of services and
increases in volume primarily attributable to new service offerings at certain
Network Sites. Revenues under the RSC Division were comprised of (i) three-part
management fees, (ii) management fees based on a percentage of revenues and
reimbursed costs of services, (iii) management fees based on a fixed fee plus
reimbursed costs of services, and (iv) patient service revenues. Three-part
management fee revenues were approximately $13.7 million in the first half of
1998 compared to approximately $2.5 million in the first half of 1997. The
significant increase in three-part management fee revenues was attributable to
new management agreements entered into in the first quarter of 1998 and the
second and the third quarters of 1997, and to the change in the Boston Network
Site management agreement pursuant to which the Company's compensation was
18
<PAGE>
revised to consist of a three-part management fee as opposed to patient service
revenues. Management fees based on a percentage of revenues and reimbursed costs
of services were approximately $2.3 million in the first half of 1998 compared
to approximately $1.9 in the first half of 1997, an increase of 22.5%, primarily
due to an increase in reimbursed costs of services. Management fees based on a
fixed fee plus reimbursed costs of services were approximately $1.7 million in
the first half of 1998 compared to $0 in the first half of 1997 due to the
change in the Long Island Network Site management agreement pursuant to which
the Company's compensation was revised to consist of a fixed fee plus reimbursed
costs of services as opposed to patient service revenues. Patient service
revenues decreased to approximately $583,000 in the first half of 1998 compared
to approximately $4.1 million for the first half of 1997 due to the changes in
the terms of the Company's management agreements related to the Long Island and
Boston Network Sites.
Costs of services incurred on behalf of the Network Sites more than doubled
to approximately $13.9 million in the first half of 1998 as compared to
approximately $6.1 million in the first half of 1997. This increase was
primarily attributable to new management agreements entered into in the first
quarter of 1998 and the second and the third quarters of 1997. This increase was
also partly attributable to additional costs associated with increases in volume
at existing Network Sites. As a percentage of Revenues, net, costs of services
increased to 76.7% in the first half of 1998 as compared to 72.1% in the first
half of 1997.
Network Sites' contribution was approximately $4.2 million in the first
half of 1998 as compared to $2.4 million in the first half of 1997, an increase
of approximately 80%, as a result of new management agreements entered into in
the first quarter of 1998 and the second and the third quarters of 1997 and to
the increases in revenues at existing Network Sites. As a percentage of
revenues, Network Sites' contribution decreased to 23.3% in the first half of
1998 as compared to 28% in the first half of 1997. A significant portion of the
Company's revenues are derived from the reimbursed costs of services component
of its three-part management fee on which there is no contribution margin.
During the first half of 1998, reimbursed costs of services represented
approximately 77% of revenues compared to approximately 72% in the first half of
1997. Accordingly, the Company's decrease in contribution margin was primarily a
result of the increase in the reimbursed costs of services component of
revenues. The decline in contribution margin was also due to the negative
contribution to earnings from operations at the RSC of Greater Philadelphia and
to the lower contribution margin primarily attributable to the service mix at
the Company's newest Network Site, the Shady Grove Network Site, acquired in the
first quarter of 1998.
General and administrative expenses for the first half of 1998 were
approximately $2.5 million as compared to approximately $2.0 million in the
first half of 1997, an increase of 22.1%. As a percentage of revenues, general
and administrative expenses decreased to approximately 13.6% from approximately
24% primarily due to the increase in revenues discussed above.
Amortization of intangible assets was $447,000 in the first half of 1998 as
compared to $188,000 in the first half of 1997. This increase was attributable
to the Company's acquisitions of new management agreements in the first quarter
of 1998 and the second and third quarters of 1997.
Interest income for the first half of 1998 decreased to $21,000 from
$67,000 for the first half of 1997, due to a lower invested cash balance.
Interest expense for the first half of 1998 increased to $180,000 from $33,000
in the first half of 1997, due to an increase in bank borrowings and notes
payable to Medical Providers.
The provision for income taxes primarily reflected various state income
taxes in both the first half of 1998 and the first half of 1997.
Restructuring and other charges were approximately $2.1 million in the
first half of 1998. Such charges included approximately $1.4 million associated
with its termination of its management agreement with the Reproductive Science
Center of Greater Philadelphia ("RSC of Greater Philadelphia"), a single
physician Network Site, effective July 1, 1998, which primarily consisted of
exclusive management right impairment and other asset write-offs. Such charges
also included approximately $700,000 for exclusive management right impairment
losses related to two other single physician Network Sites.
19
<PAGE>
Loss from continuing operations was approximately $1.1 million in the first
half of 1998 as compared to income from continuing operations of $108,000 in the
first half of 1997. The loss was primarily due to the restructuring and other
charges of approximately $2.1 million. In addition, general and administrative
expenses, amortization of intangible assets and interest expense increased by
$448,000, $259,000 and $147,000, respectively, primarily attributable to the
Company's acquisitions in the second and third quarter of 1997 and the first
quarter of 1998. The restructuring and other charges and increases in costs
associated with recent acquisitions were partially offset by an approximate $1.9
million increase in Network Site contribution. In addition, the loss/income from
continuing operations for the first half of 1998 and 1997 includes approximately
$153,000 and $3,000, respectively, in negative Network Site contribution from
the RSC of Greater Philadelphia which management agreement was terminated
effective July 1, 1998.
In June 1998, the Company committed itself to a formal plan to dispose of
the AWM Division operations which it anticipates to occur by September 30, 1998.
The plan for disposal includes selling certain of the fixed assets to a third
party and the third party's assumption of the employees, building lease,
research contracts, and medical records for a sales price ranging between
approximately $400,000 and $500,000. Discontinued operations in the first half
of 1998 reflect an aggregate charge of approximately $4.9 million of which
$923,000 represented loss from operations and approximately $3.9 million
represented loss from the disposal of the AWM Division. The $3.9 million loss
from disposal of the AWM Division included approximately $3.3 million related to
the write-off of goodwill and $243,000 for estimated losses during the phase-out
period. During the first half of 1998 and 1997, the AWM Division recorded
revenues of $711,000 and approximately $1.3 million, respectively.
Liquidity and Capital Resources
Historically, the Company has financed its operations primarily through
sales of equity securities. More recently, the Company has commenced using bank
financing for working capital and acquisition purposes. The Company anticipates
that its acquisition strategy will continue to require substantial capital
investment. Capital is needed not only for additional acquisitions, but also for
the effective integration, operation and expansion of the Company's existing
Network Sites. The Medical Practices may require capital for renovation and
expansion and for the addition of medical equipment and technology. In July
1998, the Company signed a commitment letter with Fleet Bank, National
Association for a $13.0 million credit facility to fund acquisitions over
approximately the next one to two years, to provide working capital, and to
refinance its existing bank debt.
During the first quarter of 1998, the Company consummated an equity private
placement of $5.5 million with entities affiliated with Morgan Stanley Venture
Partners providing for the purchase of 3,235,294 shares of the Company's Common
Stock at a price of $1.70 per share and 240,000 warrants to purchase shares of
the Company's Common Stock, at a nominal exercise price. Approximately half of
these funds were or will be used by the Company to purchase the capital stock of
Shady Grove and the right to manage the Shady Grove P.C.'s infertility medical
practice. The balance of these funds have been used for working capital
purposes.
At June 30, 1998, the Company had working capital of approximately $5.1
million, approximately $2.6 million of which consisted of cash and cash
equivalents, compared to working capital of approximately $4.1 million at
December 31, 1997, approximately $1.9 million of which consisted of cash and
cash equivalents. The net increase in working capital at June 30, 1998 was
principally due to the $5.5 million proceeds received from the equity private
placement with Morgan Stanley, $2.0 million in bank loan proceeds, and a
$675,000 increase in management fees receivable, partially offset by
approximately $3.2 million in payments for exclusive management rights, and an
approximate $1.9 million increase in short-term debt related to the Shady Grove
transaction. In addition, patient accounts receivable increased by approximately
$3.3 million which represented an approximate increase of $5.3 million in
purchased patient accounts receivable and an approximate decrease of $2.0
million in patient accounts receivable which were a function of Company revenue.
During the first quarter of 1998, the Company completed its second
in-market merger with the addition of two physicians to the FCI practice and
entered into a new management agreement with the Shady Grove, P.C. The aggregate
purchase price of these transactions, exclusive of acquisition costs, was
approximately $7.2 million, consisting of approximately $4.0 million in cash,
$1.5 million in promissory notes, 823,865 shares of the Company's Common Stock,
and approximately an additional $200,000 in shares of the Company's Common
20
<PAGE>
Stock. A portion of the aggregate purchase price related to the Shady Grove
acquisition will be paid in November 1998 as follows: approximately $1.0 million
in cash, $403,000 in promissory notes and approximately $200,000 in shares of
the Company's Common Stock. The $1.1 million of promissory notes currently
outstanding are payable in two equal annual installments, due on April 1, 1999
and 2000, respectively, and bear interest at an annual rate of 8.5%. The number
of shares of Common Stock of the Company to be issued in November 1998 will be
determined based upon the average closing price of the Company's Common Stock
for the ten-day trading period prior to the third business day before the Second
Closing Date, provided, however, that in no event will the price per share
exceed $2.00 or be less than $1.70 for purposes of this calculation.
As of June 30, 1998, the entire balance of the Company's $1.5 million
revolving credit facility (the "Credit Facility") dated November 21, 1996 with
First Union National Bank (the "Bank") was outstanding. Borrowings under the
Credit Facility bear interest at the Bank's prime rate plus 0.75% per annum. The
term of the Credit Facility has been extended to October 1, 1998. As of June 30,
1998, $750,000 was outstanding under the Company's $4.0 million non-restoring
line of credit with the Bank. Borrowings under the non-restoring line of credit
bear interest at the Bank's prime rate plus 1% per annum. Accrued interest only
on borrowings is payable commencing monthly and all principal and accrued
interest is due and payable on April 30, 1999.
As previously noted, in July 1998, the Company signed a commitment letter
with Fleet Bank, National Association ("Fleet") for a $13.0 million credit
facility (the "New Credit Facility") and the definitive documentation relating
to the New Credit Facility is currently being negotiated. The New Credit
Facility will be comprised of a $4.0 million three-year working capital
revolver, a $5.0 million three-year acquisition revolver and a $4.0 million 5.5
year term loan. Each component of the New Credit Facility shall bear interest by
reference to Fleet's prime rate or LIBOR, at the option of the Company, plus a
margin ranging from 0.00% to 0.25% in the case of prime-based loans or 2.75% to
3.00% in the case of LIBOR-based loans, which margins vary based on a leverage
test. Interest on the prime-based loans is payable monthly and interest on
LIBOR-based loans is payable on the last day of each interest period applicable
thereto provided that, in the case of interest periods in excess of three
months, interest is payable at three-month intervals during such periods.
Borrowings under the term loan will require only interest payments for the first
twenty months. Upon closing of the New Credit Facility, the Company intends to
draw $2,250,000 under the term loan to repay in full its balance outstanding
with First Union National Bank. Unused amounts under the working capital and
acquisition revolvers will bear a commitment fee of 0.25% and 0.20%,
respectively. Availability of borrowings under the working capital revolver will
be based on eligible accounts receivable as defined. Availability of borrowings
under the acquisition revolver will be based on financial covenants and
eligibility criteria with respect to each proposed acquisition. The full amount
of the term loan will be available upon closing and it is anticipated that in
the aggregate approximately $5.5 million will be available under the working
capital and acquisition revolvers, for an estimated total availability of $9.5
million upon closing. The New Credit Facility will be secured by all of the
Company's assets.
As of June 30, 1998, dividend payments of $530,000 on the Series A
Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock") were
in arrears. The Company does not anticipate the payment of any dividends on the
Convertible Preferred Stock in the foreseeable future.
Year 2000 Issue
The Year 2000 issue (i.e., the ability of computer systems to accurately
identify and process dates beginning with Year 2000 and beyond) affects
virtually all companies and organizations. The Company recognizes that
information systems are integral to its operations. As all of the Company's
software is acquired from third-party vendors, the Company's efforts to limit
problems associated with Year 2000 software failures are focused on
investigating and ensuring that all such software is Year 2000 compliant. As a
result of these efforts, the Company believes that the Year 2000 issue will not
pose significant internal problems for the Company's business. The Company is
also communicating with its medical equipment and other suppliers, financial
institutions and third-party payors (such as managed care companies) to
determine their plans to limit problems associated with the Year 2000 issue. The
Company does not anticipate that there will be a material cost associated with
addressing its potential exposure to Year 2000 problems. Despite these efforts,
21
<PAGE>
the Year 2000 issue is complex and may present unforeseen problems in the
Company's systems and from third parties with which the Company deals, such as
third-party vendors and payors. Failure of the Company's or third parties'
computer systems could materially and adversely impact the Company's operations.
New Accounting Standards
On June 17, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). The Company has not determined
the impact, if any, that SFAS 133 will have on the Company's financial
statements.
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.
Forward Looking Statements
This Form 10-Q and discussions and/or announcements made by or on behalf of
the Company, contain certain forward-looking statements regarding events and/or
anticipated results within the meaning of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, the attainment of which
involve various risks and uncertainties. Forward-looking statements may be
identified by the use of forward-looking terminology such as, "may," "will,"
"expect," "believe," "estimate," "anticipate," "continue," or similar terms,
variations of those terms or the negative of those terms. The Company's actual
results may differ materially from those described in these forward-looking
statements due to the following factors: the Company's ability to acquire
additional management agreements, including the Company's ability to raise
additional debt and/or equity capital to finance future growth, the loss of
significant management agreement(s), the profitability or lack thereof at
Network Sites managed by the Company, the Company's ability to transition sole
practitioners to group practices, increases in overhead due to expansion, the
exclusion of infertility and ART services from insurance coverage, government
laws and regulation regarding health care, changes in managed care contracting,
and the timely development of and acceptance of new infertility, ART and/or
genetic technologies and techniques.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
22
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
On March 10, 1998, the Company received notice from
Reproductive Sciences Medical Center, Inc. ("RSMC")
claiming that the Company materially breached its
management agreement with RSMC and demanding that alleged
breaches be remedied. Contrary to RSMC's allegations, the
Company believes that it has materially performed its
obligations under the management agreement and that RSMC
has materially breached the management agreement. The
Company served a notice of breach on March 23, 1998.
The Company believes that the breaches by RSMC have not
been cured and as a result, on June 10, 1998, the Company
initiated an arbitration proceeding at JAMS/ENDISPUTE (as
required by the management agreement) in San Diego. The
Company's notice of claim seeks recision and/or termination
of all Agreements with RSMC and Samuel H. Wood, M.D.,
repayment of the asset purchase price, the right to manage
fee, advances made to the practice, damages in excess of
$750,000 (in the nature of lost profits) and attorneys'
fees.
RSMC responded with the filing of a counterclaim before the
arbitration panel, claiming a breach of fiduciary duty,
breach of contract and a variety of claims sounding in
fraud or negligent misrepresentation. While the
counterclaim is highly general, RSMC claims special damages
and punitive damages in an amount of $9,187,500.
Litigation counsel in charge of the arbitration on behalf
of the Company has advised the Company that the claims of
breach are exceedingly general and it is exceedingly early
in the proceedings to make a final evaluation of the
merits, and to predict the amount of recovery by (or
against) the Company. However, counsel has indicated to the
Company that the claims of fraud and punitive damages carry
little likelihood of success, and the case will be
prosecuted, and defended, vigorously. During the
dispute-resolution process, the Company continues to
perform under the management agreement.
Item 2. Changes in Securities.
The following sets forth all of the unregistered sales of
securities by the Company during the second quarter of 1998:
i. In April 1998, the Company issued warrants to acquire
45,000 shares of Common Stock at an exercise price of
$1.75 per share to the shareholders of Bay Area
Fertility and Gynecology Medical Group, Inc. in
consideration of extending the Company's management
agreement with Bay Area Fertility and Gynecology Medical
Group, Inc. from 20 to 25 years.
ii.In April 1998, the Company issued warrants to acquire
45,000 shares of Common Stock at an exercise price of
$1.75 per share to the shareholders of the Shady Grove
Fertility Centers, Inc. in consideration of extending
the Company's management agreement with Shady Grove
Fertility Centers, Inc. from 20 to 25 years.
Item 3. Defaults Upon Senior Securities.
As of July 30, 1998, dividend payments of $530,000 on the
Convertible Preferred Stock were in arrears.
23
<PAGE>
Item 4. Submission of Matters to Vote of Security Holders.
At an annual shareholders' meeting held on June 9, 1998,
the following matters were approved: 1) election of eight
directors, 2) approval and ratification of an amendment to
the Company's Amended and Restated Certificate of
Incorporation increasing from 25,000,000 to 50,000,000 the
number of authorized shares of Common Stock, 3) approval
and ratification of amendments to the Company's 1992
Incentive and Non-Incentive Stock Option Plan, 4) the
appointment of Price Waterhouse LLP as the independent
accountants of the Company.
The respective vote tabulations are detailed below:
<TABLE>
<CAPTION>
Withhold
Proposal 1 - Directors For Authority
---------------------- --- ---------
<S> <C> <C>
Gerardo Canet 18,058,776 58,400
M. Fazle Husain 18,059,976 57,200
Michael J. Levy, M.D. 18,059,976 57,200
Sarason D. Liebler 18,059,976 57,200
Aaron S. Lifchez, M.D. 18,059,976 57,200
Patricia M. McShane, M.D. 18,058,976 58,200
Lawrence Stuesser 18,059,976 57,200
Elizabeth E. Tallett 18,059,976 57,200
</TABLE>
<TABLE>
<CAPTION>
Proposal 2 For Against Abstentions
---------- --- ------- -----------
<S> <C> <C> <C>
Amendment to the Company's
Amended and Restated
Certificate of Incorporation 17,935,719 127,715 53,742
Proposal 3
----------
Amendment to the Company's
1992 Incentive and
Non-IncentiveStock
Option Plan 17,236,285 856,947 23,944
Proposal 4
----------
Reappointment of Price
Waterhouse LLP 18,066,279 26,350 24,547
</TABLE>
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
See Index to Exhibits on page 26.
(b) Reports on Form 8-K.
On May 26, 1998, the Company filed with the Securities
and Exchange Commission a Form 8-K/A reporting the
required audited financial statements and pro forma
information associated with the business acquired by the
Company in March 1998.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRAMED AMERICA, INC.
(Registrant)
Date: August 12, 1998 By: /s/ Eugene R. Curcio
--------------------
Eugene R. Curcio
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
25
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit
3.1(d) -- Certificate of Amendment to Amended and Restated Certificate of
Incorporation increasing authorized Common Stock to 50,000,000
shares.
10.48(b) -- Amendment No. 2 to Management Agreement among IntegraMed America,
Inc. and Reproductive Endocrine & Fertility Consultants, P.A. and
Midwest Fertility Foundations & Laboratory, Inc. dated July 1,
1998.
10.81(a) -- Amendment Dated July 11, 1997 to Agreement with Reproductive
Sciences Medical Center, Inc.
10.88(a) -- Amendment to Management Agreement between IntegraMed America, Inc.
and MPD Medical Associates, P.C. dated as of January 1, 1998.
10.113 -- Commitment letter with Fleet Bank, National Association
27 -- Financial Data Schedule
26
Certificate of Amendment
to
the Amended and Restated Certificate of Incorporation
of
IntegraMed America, Inc.
IntegraMed America, Inc., a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), hereby
certifies as follows:
FIRST: The name of the corporation is IntegraMed America,
Inc.
SECOND: The Amended and Restated Certificate of Incorporation
is hereby amended to delete paragraph A of Article IV in its entirety and
replace it with a new paragraph A, to read as follows:
Article IV
Capital Stock
A. The authorized capital stock of the Corporation shall
consist of fifty-five million (55,000,000) shares,
consisting of fifty million (50,000,000) shares of
Common Stock, each having a par value of $.01 (the
"Common Stock"), and five million (5,000,000) shares
of Preferred Stock, each having a par value of $1.00
(the "Preferred Stock").
THIRD: This amendment has been duly adopted in accordance
with the provisions of Section 242 of the General Corporation law of the State
of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
subscribed by its President and Chief Executive Officer, this 9th day of June
1998.
INTEGRAMED AMERICA, INC.
/s/Gerardo Canet
----------------------------
Gerardo Canet, President and
Chief Executive Officer
AMENDMENT NO. 2 TO MANAGEMENT AGREEMENT
Among
INTEGRAMED AMERICA, INC.
AND
REPRODUCTIVE ENDOCRINE & FERTILITY CONSULTANTS, P.A.
And
MIDWEST FERTILITY FOUNDATIONS & LABORATORY, INC.
THIS AMENDMENT NO. 2 TO MANAGEMENT AGREEMENT ("Amendment No. 2"), dated
July 1, 1998 by and among IntegraMed America, Inc., a Delaware corporation, with
its principal place of business at One Manhattanville Road, Purchase, New York
10577 ("INMD") and Reproductive Endocrine & Fertility Consultants, P.A., a
professional association, doing business as Reproductive Science Associates,
having its principal place of business at Two Brush Creek, Suite 500, Kansas
City, Missouri 64112, and Midwest Fertility Foundations & Laboratory, Inc., a
Kansas corporation, having its principal place of business at Two Brush Creek,
Suite 500, Kansas City, Missouri 64112. (Reproductive Endocrine & Fertility
Consultants, P.A. and Midwest Fertility Foundations & Laboratory, Inc. are
collectively referred to as "PA").
RECITALS:
WHEREAS, INMD and PA entered into a Management Agreement dated November
1, 1995 (the "Management Agreement"), which was amended May 22, 1997 ("Amendment
No. 1"), pursuant to which INMD agreed to provide certain management and
administrative services to PA; and
WHEREAS, INMD and PA wish to amend further the Management Agreement, in
pertinent part, to, among other things, (i) modify the management fee payment
and (ii) provide for joint responsibilities and duties under the Management
Agreement, as amended.
NOW THEREFORE, in consideration of the mutual promises and covenants
herein contained, and as contained in the Management Agreement, as amended, INMD
and PA agree as follows:
1. Section 7.1.4 of the Management Agreement is hereby deleted in its
entirety and the following hereby substituted therefor, effective July 1, 1998:
<PAGE>
"7.1.4 an additional Service Fee equal to 20% of PDE, paid monthly but
reconciled to PA's annual results of operations evidenced by PA's Financial
Statements; provided, however, the first $25,000 of PDE, quarterly, shall inure
to the benefit of PA. INMD shall be paid 20% of all PDE in excess of $25,000,
quarterly, during the term of this Agreement."
2. Paragraph 2 of Amendment No. 1 is hereby deleted in its entirety
effective July 1, 1998 and the resultant Section 7.3.1 of the Management
Agreement is hereby amended by deleting the same and substituting the following
therefor, effective July 1, 1998:
"7.3.1 Any amounts advanced hereunder shall be considered Service Fees
as provided for in Section 7.1 and shall be repaid by INMD retaining 55% of PA's
80% PDE allocation provided for in Section 7.1.4, after the first $25,000 of PDE
is received by PA on a quarterly basis; provided, however, INMD agrees to delay
effecting retention of 55% of PA' 80% PDE in excess of $25,000 on a quarterly
basis until January 1, 1999 in order for PA to develop a sustained profit stream
between the date hereof and January 1, 1999."
3. Paragraph 3 of Amendment No 1 is hereby deleted in its entirety,
effective July 1, 1998 and the resultant Section 7.4 of the Management Agreement
is hereby amended by deleting the same and substituting the following therefor:
"7.4 INMD will seek, at its sole costs and expense, with PA's
assistance on a best-efforts basis, a medical practice practicing in a medical
area complimentary to PA's medical practice ("Co- Tenant") to occupy the
Facility on a co-extensive basis with PA. INMD will, after identification of and
negotiations with such Co-Tenant, establish a reasonable occupancy fee
("Occupancy Fee") to be paid to INMD by the Co-Tenant, and will establish an
appropriate method for PA's and Co- Tenant's sharing of INMD's management and
administrative services, with Co-Tenant paying a reasonable cost ("Co-Tenant's
Prorata Costs") for such services and INMD crediting PA's Costs of Services,
monthly, for Co-Tenant's Prorata Costs and Occupancy Fee. The selection of a
Co-Tenant shall be subject to PA's approval which will not be unreasonably
withheld and INMD will determine which INMD employees and services will be made
available to Co-Tenant, all on a non-exclusive basis, with PA's consent which
will not be unreasonably withheld."
4. The Management Agreement is hereby amended to add the following
Article:
"Article 13
JOINT DUTIES AND RESPONSIBILITIES
13.1 FORMATION AND OPERATION OF JOINT PRACTICE MANAGEMENT BOARD. INMD
and PA will establish a Joint Practice Management Board which will be
responsible for developing management and administrative policies for the
overall operation of PA. The Joint Practice Management Board will consist of
designated management representative(s) from INMD, one or more PA owners, as
determined by PA, such other practice physicians, as appropriate. In the case of
any matter requiring a formal vote, PA shall have one (1) vote and INMD shall
likewise have one (1) vote.
<PAGE>
13.2 DUTIES AND RESPONSIBILITIES OF THE JOINT PRACTICE MANAGEMENT
BOARD. The Joint Practice Management Board shall have the following duties and
responsibilities:
13.2.1 ANNUAL BUDGETS. All annual capital and operation
budgets prepared by INMD shall be subject to the review, amendment,
approval and disapproval of the Joint Practice Management Board.
13.2.2 CAPITAL IMPROVEMENTS AND EXPANSION. Except as otherwise
provided herein, any renovation and expansion plans, and capital
equipment expenditures with respect to PA shall be reviewed and
approved by the Joint Practice Management Board and shall be based upon
the best interests of PA, and shall take into account capital
priorities, economic feasibility, physician support, productivity and
then current market and regulatory conditions.
13.2.3 ADVERTISING BUDGET. All annual advertising and other
marketing budgets prepared by INMD shall be subject to the review,
amendment, approval and disapproval of the Joint Practice Management
Board.
13.2.4 PATIENT FEES. The Joint Practice Management Board shall
review and approve the fee schedule for all physician and ancillary
services rendered by PA.
13.2.5 ANCILLARY SERVICES. The Joint Practice Management Board
shall approve ancillary services rendered by PA.
13.2.6 PROVIDER AND PAYER RELATIONSHIPS. Decisions regarding
the establishment or maintenance of relationship with institutional
health care providers and payers shall be made by the Joint Practice
Management Board in consultation with PA; provided, however, that
unanimous consent of PA designated members of the Joint Practice
Management Board shall be necessary to discontinue any existing PA
institutional relationship.
13.2.7 STRATEGIC PLANNING. The Joint Practice Management Board
shall develop long-term strategic plans, from time to time.
13.2.8 PHYSICIAN HIRING. The Joint Practice Management Board
shall determine, except as otherwise provided for herein, the number
and type of physicians required for the efficient operation of PA. The
approval of the Joint Practice Management Board shall be required for
any modifications to the restrictive covenants contained in any
physician agreement.
13.2.9 PROVIDER CONTRACTS. The Joint Practice Management Board
shall approve, disapprove, or amend all managed care, PPO, HMO,
Medicare risk and other provider contracts negotiated by INMD."
4. All other provisions of the Management Agreement and Amendment
No. 1 not in conflict with this Amendment No. 2 remain in full force and effect.
<PAGE>
5. This Amendment No. 2 may be executed in any number of separate
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have signed this Amendment No. 2 as the
date first written above.
INTEGRAMED AMERICA, INC.
By:/s/Donald S. Wood
----------------------------------
Donald S. Wood, Pd.D., President,
Reproductive Science Center Division
REPRODUCTIVE ENDOCRINE & FERTILITY CONSULTANTS, P.A.
By:/s/Elwyn M. Grimes
---------------------------------------------
Elwyn M. Grimes, M.D., President
MIDWEST FERTILITY FOUNDATIONS & LABORATORY, INC.
By:Elwyn M. Grimes
---------------------------------------------
Elwyn M. Grimes, M.D., President
AMENDMENT
This agreement, dated July 11, 1997, by and between IntegraMed America,
Inc., a Delaware Corporation with its principal place of business at One
Manhattanville Road, Purchase, New York 10577 ("INMD"), Reproductive Sciences
Medical Center, Inc., a California professional corporation, with its principal
place of business at 4150 Regents Row, Suite 280, LaJolla, California ("PC") and
Dr. Samuel H. Wood, M.D., Ph.D., an individual having a post office address at
P.O. Box 1208, Rancho Sante Fe, California 92067 ("Physician"), is an amendment
to the Management Agreement ("Management Agreement"), Personal Responsibility
Agreement ("PR Agreement") and Asset Purchase Agreement ("Asset Agreement") all
dated June 6, 1997, between the parties.
WHEREAS, INMD has received a certain anecdotal reports which make
allegations impugning the operation of the IVF Laboratory at Pomerado Hospital
and
WHEREAS, INMD has disclosed to PC and Physician the nature of such
allegations and both PC and Physician unequivocally refute them; and
WHEREAS, INMD has communicated to Physician and PC that such
allegations, if true, would be material to the validity of the management
Agreement and PR Agreement; and
WHEREAS, PC and Physician wish to provide assurance to INMD, in the
form of written representations.
Now, therefore, INMD, PC and Physician agree as follows:
1. The Management Agreement, PR Agreement and Asset Agreement are
hereby amended to include the following representation by PC
and Physician:
a. PC and Physician have not been advised or informed of
any facts, circumstances, or allegations that
indicate, suggest or imply that the Reproductive
Sciences Center at Pomerado Hospital was closed for
any reason other than purely administrative decisions
by the Pomerado Hospital;
b. PC and Physician have no knowledge or any facts
suggesting, nor have they been advised by any person,
entity or governmental unit, that the operation of
the IVF Laboratory at Pomerado Hospital, or the
operation of the Reproductive Sciences Center at
Pomerado Hospital (during the period that Physician
was medical Director) is, or will be, the subject of
any investigation by any governmental officer or
unit, licensing or regulatory agency, administrative
or judicial tribunal, insurance department or entity,
SART or ASRM.
<PAGE>
c. Physician and PC have no knowledge, and are not in
possession of any facts or representations
suggesting, that there is any impediment to the PC
and/or Physician's securance of Licensure as a tissue
bank, clinical laboratory or andrology laboratory at
the Facilities (as such term is utilized in the
Management Agreement).
d. Physician and PC have no knowledge, and are not in
possession of any facts or representations
suggesting, that during the operation of the
Reproductive Sciences Center at Pomerado Hospital
there has been any improper record keeping,
mishandling of any tissue or specimens or failure to
obtain appropriate consent, by Dr. Wood (Physician)
Catherine Adams and/or Linda Anderson, except to the
extent that, as with any laboratory or IVF Program,
there is a potential for an occasional claim of
negligence or medical malpractice in the treatment of
an individual patient or specimen.
e. The Physician and PC have no knowledge, and are not
in possession of any facts suggesting that the
Physician or PC have engaged in any insurance or
billing irregularities.
2. The Parties agree that the representations contained in
paragraph 1(a) - (e) are material to the Management Agreement,
PR Agreement and Asset Agreement.
3. PC and Physician acknowledge that the obtaining, and
maintaining of the licensures referred to in Section 4.6.7 of
the Management Agreement are a material term of such
management Agreement and that any federal or state agency
action which limits, revokes suspends, or fails to renew such
licensure(s) shall be treated as a "Professional Disciplinary
Action" and shall be governed by Section 8.2 of such
Management Agreement, as if it were a suspension, revocation
or non-renewal of a physician's authorization to practice
medicine.
4. The parties agree that failure to obtain at least provisional
licensures as delineated in Section 4.6.7 of the Management
Agreement within six months of the date hereof shall be a
material breach, by the PC, of the Management Agreement.
5. This Agreement shall be considered in addition to the terms
and conditions of the Management Agreement, PR Agreement and
Asset Agreement and shall be read in connection therewith.
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed, by original
signatures on a faxed copy, by the parties hereto, as of the day and year first
above written.
INTEGRAMED AMERICA, INC.
By: /s/Gerardo Canet
--------------------------------------
Gerardo Canet, Chief Executive Officer
REPRODUCTIVE SCIENCES MEDICAL CENTER, INC.
By: /s/Samuel H. Wood
--------------------------------------
Samuel H. Wood, M.D., Ph.D., President
AMENDMENT TO MANAGEMENT AGREEMENT
Between
INTEGRAMED AMERICA, INC.
and
MPD MEDICAL ASSOCIATES, P.C.
THIS AMENDMENT, dated as of January 1, 1998, to the MANAGEMENT
AGREEMENT, dated as of June 2, 1997, by and between IntegraMed America, Inc., a
Delaware corporation, with its principal place of business at One Manhattanville
Road, Purchase, New York 10577 ("INMD") and MPD Medical Associates, P.C., a New
York professional services corporation, with its principal place of business at
200 Old Country Road, Mineola, New York 11501 ("PC").
RECITALS
WHEREAS, INMD and PC entered into a Management Agreement, dated as of
June 2, 1997 ["Management Agreement"]; and
WHEREAS, INMD has provided the full complement of services outlined in
the Management Agreement since its Effective Date (as stated therein); and
WHEREAS, in recognition of the additional services and capital provided
to PC and its shareholder, Gabriel San Roman, M.D. ["San Roman"], the parties
have agreed to increase the Basic Management Fee (as such term is used in the
Management Agreement).
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration, PC and INMD agree to
the following amendment to the Management Agreement ["Amendment"].
1. Section 6.3.4(a) is hereby nullified and deleted, effective
January 1, 1998 and the Basic Management Fee of INMD shall be
controlled solely by the Management Agreement.
2. Section 7.1.5 is hereby amended to read as follows:
7.1.5(a) for the period between The Effective Financial Date
and December 31, 1997, INMD shall waive Fifteen Thousand
Dollars ($15,000) ["First Monthly Waiver Amount"] of its Basic
Management Fee. For the period between January 1, 1998 and
March 31, 1998, INMD shall waive Five Thousand Dollars
($5,000) of its Basic Management Fee ["Second Monthly Waiver
Amount"]. Commencing with the date April 1, 1998, INMD shall
be entitled to its full Basic Management Fee. The First and
Second Waiver amounts shall be inoperable, retroactive to the
<PAGE>
Effective Financial Date, if this Agreement is the subject of
a material breach by PC during the first twelve calendar
months of this Agreement which is not cured pursuant to
Section 8.1.2.
7.1.5(b) for the first twelve (12) months after the Effective
Financial Date of this Agreement, INMD shall, at its expense
provide Dr. San Roman with professional liability coverage, as
a named insured under INMD's professional liability coverage,
which policy shall be in the minimum amount of $1 million per
incident, $3 million in the aggregate, with an A carrier, on a
claims made basis ["IntegraMed Insurance Period"]. This
coverage shall not be a Cost of Service of Advance and this
paragraph does not alter the provisions of section 10.2
hereof.
3. This Amendment is made pursuant to Section 12.5 of the Management
Agreement.
IN WITNESS WHEREOF, this Amendment has been executed by the parties
hereto as of the day and year first above written.
INTEGRAMED AMERICA, INC.
By: /s/Donald S. Wood
--------------------
Donald S. Wood, Ph.D.
President and Chief Operating Officer of
Reproductive Science Center Division
MPD MEDICAL ASSOCIATES, P.C.
By: /s/Gabriel San Roman
-----------------------
Gabriel San Roman, M.D.
July 16, 1998
IntegraMed America, Inc.
One Manhattenville Road
Purchase, New York 10577-2100
Gentlemen:
We are pleased to advise you that Fleet Bank, National Association (the
"Bank") has approved for IntegraMed America, Inc. (the "Company") a $4,000,000
three year working capital revolving credit facility, a $5,000,000 three year
acquisition revolving credit facility and a $4,000,000 five and one-half year
term loan, each subject to the following terms and conditions (the
"Commitment"):
Borrower: IntegraMed America, Inc.
Facility:
Subject to the limitation on indebtedness discussed below:
A. $4,000,000 three-year revolving credit facility to provide additional
working capital (the "W/C Revolver").
B. $5,000,000 three-year revolving credit facility for future permitted
acquisitions of Network Sites and related fixed assets (the
"Acquisition Revolver").
C. $4,000,000 five and one-half year term loan (the "Term Loan") to
refinance existing indebtedness owing to First Union National Bank and
a portion of the costs associated with the Company's acquisition of
Reproductive Health Associates of Minneapolis.
(A, B and C are at times individually referred to as a "Loan" and collectively
as the "Loans" and the three facilities described above may be collectively
referred to as the "Facility").
Interest Rates and Interest Periods:
At the Company's option, any advance made to it will be available at the rates
and for the Interest Periods stated below:
(a) Prime Rate - a fluctuating rate equal to (i) the Bank's "Prime
Rate" (360 day basis) plus (ii) the Applicable Margin. Interest based on the
Prime Rate shall be payable monthly in arrears. Loans bearing interest at this
rate are referred to herein as "Prime Loans."
(b) LIBOR - a periodic fixed rate equal to (i) LIBOR (360 day basis)
plus (ii) the Applicable Margin. Loans bearing interest at this rate are
referred to herein as "LIBOR Loans."
Interest Periods for LIBOR Loans shall be one, two, three or six months, as
selected by the Company. Interest based on LIBOR shall be payable in arrears on
the last day of the applicable Interest Period provided that, in the case of
interest periods in excess of three months, interest shall be payable at the end
of each three month interval of such interest period.
(c) The "Applicable Margin" with respect to LIBOR Loans and Prime
Loans means at any time and from time to time the rate per annum above Fleet's
Prime Rate, or LIBOR, as the case may be, based upon a leverage test of
Consolidated Senior Funded Debt to EBITDA, as follows:
<PAGE>
(a) Acquisition Revolver:
<TABLE>
<CAPTION>
Applicable Margin for Applicable Margin
Consolidated Senior Funded Debt/EBITDA Prime Loans for LIBOR Loans
-------------------------------------- --------------------- -----------------
<S> <C> <C> <C>
Level I Greater than 1.50 to 1.00 0.25% 3.00%
Level II Equal to or less than 1.50 to 1.00 but 0.00% 2.75%
greater than 1.00 to 1.00
Level III Less than or equal to 1.00 to 1.00 0.00% 2.25%
</TABLE>
(b) Term Loan and W/C Revolver:
<TABLE>
<CAPTION>
Applicable Margin for Applicable Margin
Consolidated Senior Funded Debt/EBITDA Prime Loans for LIBOR Loans
-------------------------------------- --------------------- ------------------
<S> <C> <C> <C>
Level I Greater than 1.50 to 1.00 0.00% 2.75%
Level II Equal to or less than 1.50 to 1.00 but 0.00% 2.50%
greater than 1.00 to 1.00
Level III Less than or equal to 1.00 to 1.00 0.00% 2.25%
</TABLE>
During the continuance of any default under the loan documentation, the
Applicable Margins on all obligations owing under the loan
documentation shall increase by 4% per annum.
Pricing Adjustments:
The adjustments are based on the ratio of Consolidated Senior Funded Debt to
EBITDA for the four fiscal quarters preceding such adjustment. Adjustments will
become effective upon the delivery of the quarterly financial statements
evidencing the right to such adjustment. From the Closing Date to the date of
delivery of Borrower's March 31, 1999 financial statements, the Applicable
Margin shall be at Level I as shown in the table above.
All payments (including prepayments) to be made by the Company on account of
principal or interest with respect to any Loan or on account of fees or any
other obligations of the Company to the Bank hereunder shall be made to the Bank
in lawful money of the United States of America in immediately available funds.
Fees:
There shall be a $25,500 origination fee payable for the W/C Revolver, a $25,500
origination fee payable for the Acquisition Revolver and a $49,000 origination
fee payable for the Term Loan. Such fees shall be payable as follows: 15%
(aggregate $15,000) of each fee has already been paid to the Bank, 35% of each
fee (aggregate $35,000) shall be payable upon acceptance of the Commitment and
the 50% balance of each fee (aggregate $50,000) shall be payable upon the
Closing. The Company agrees that the aggregate $35,000 fee payable upon
acceptance of the Commitment and the aggregate $15,000 previously paid to the
Bank have been earned by the issuance of the Commitment and are non-refundable
whether or not the facility described herein is closed.
There shall be commitment fees equal to .25% per annum of the average daily
unused portion of the W/C Revolver and .20% per annum of the daily unused
portion of the Acquisition Revolver, payable quarterly in arrears. Such fees
shall be increased by an amount sufficient to compensate the Bank for any
increased capital requirement imposed by law or regulation with respect to the
Bank's obligation under the revolving credit commitments.
Fees and Expenses:
The Company shall pay the fees of the Bank's counsel and all expenses incurred
by the Bank relating to the Loans, including, without limitation, appraisal
fees, examination fees, search fees and filing fees. Such expenses shall be
payable even if the transaction is not closed. The legal fees are not expected
to exceed $20,000 plus disbursements.
<PAGE>
Limitation on Indebtedness (Borrowing Base):
The outstanding amount of all borrowings under the W/C Revolver shall at no time
exceed in the aggregate 50% of Eligible Receivables. Such percentage may be
adjusted downward based on the Bank's examination of the Company's books and
records. As used herein "Eligible Receivables" means the Company's then
outstanding accounts receivable less than 90 days past due and otherwise
satisfying the Bank's standard criteria, as reasonably agreed upon between the
Company and the Bank prior to closing.
W/C Revolver and Acquisition Revolver Availability:
In multiple drawings from time to time. Each borrowing shall be in amounts
agreed between the Bank and the Company as reflected in the definitive loan
document.
Availability for further acquisitions will be subject to compliance with
financial covenants (to be determined by the Bank) on a pro forma basis based on
a compliance certificate furnished by an authorized officer of the Company,
subject to the Company's provided summary financial information relating to the
proposed target, including purchase price, number of physicians and forecasts of
operations and shall meet various acquisition restrictions which shall include:
(a) The purchase price for any single acquisition not to
exceed an amount to be agreed to in the loan
documentation;
(b) The aggregate purchase price for all acquisitions in
any 12 month period not to exceed an amount to be
agreed to in the loan documentation;
(c) As used herein "acquisition" shall mean and shall take
the form of the Company's entering into a management
agreement with an entity consisting of a physician or
group of physicians and the Company's acquisition of
certain fixed assets in connection therewith;
(d) Any acquired company shall be in the infertility and
assisted reproductive technology services business;
(e) The acquisition shall have the approval of the target
company's board of directors (or similar governing
body);
(f) The acquisition shall have been consummated in
accordance with the definitive acquisition agreement,
without any waiver or amendment of any term or
condition therein not consented to by the Bank and in
compliance with all applicable laws and all necessary
approvals;
(g) The Bank shall be satisfied that any otherwise
applicable state takeover law and any applicable
supermajority charter provisions are not applicable to
the acquisition or that any conditions to avoiding such
restrictions have been satisfied; and
(h) All governmental and third party consents and approvals
necessary in connection with each aspect of the
acquisition shall have been obtained (without the
imposition of any conditions that are not acceptable to
the Bank) and shall remain in effect; all applicable
waiting periods shall have expired without any adverse
action being taken by any authority having
jurisdiction; and no law or regulation shall be
applicable in the judgment of the Bank that restrains,
prevents or imposes material adverse conditions upon
any aspect of the acquisition.
<PAGE>
Furthermore, any acquisition with a total consideration in excess of $1,000,000
(including liabilities assumed) or any acquisition occurring after the Company
has paid, during any twelve month period, in excess of $3,000,000 in respect of
all such acquisitions during such period, will also require the consent of the
Bank.
Maturity/Expiration Date:
W/C Revolver - Three years from Closing.
Acquisition Revolver - Three years from Closing.
Term Loan - Five and one-half years from Closing.
Repayment:
Term Loan - Equal quarterly principal payments based upon a four year payment
schedule, such principal payments to begin on the first day of the twenty-first
month following the Closing.
Collateral:
First priority perfected security interest in all personal property of the
Company and the Guarantors, assignments of all financing statements in favor of
the Company and/or Guarantors in connection with its (their) purchase of
accounts receivable, a first priority perfected security interest in all the
issued and outstanding capital stock of each subsidiary that is or becomes a
Guarantor, and all proceeds and products of the forgoing to secure all direct
and indirect obligations of such parties to the Bank.
Guarantors:
Unconditional guarantees of each present and future material direct or indirect
subsidiary of the Company, as reasonably determined by the Bank.
Interest Rate Protection Arrangement:
A portion of the principal of the Term Loan (the amount to be agreed upon prior
to Closing) shall bear interest at a fixed rate pursuant to an interest rate
protection arrangement.
Optional Commitment Reduction:
The Company may, upon at least three business days' notice, terminate in whole
or reduce ratably in part, the unused portion of the W/C Revolver and/or
Acquisition Revolver; provided, however, that each partial reduction shall be in
an amount of $500,000 or an integral multiple of $100,000 in excess thereof.
Optional Prepayment:
The Company may, upon at least one business day's notice in the case of Prime
Loans and three business days' notice in the case of LIBOR Loans, prepay, in
full or in part, any Loan without premium or penalty; provided, however, that
each partial prepayment shall be in an amount of $100,000 or an integral
multiple of $100,000 in excess thereof, and provided further that no prepayment
of LIBOR Loans shall be made other than on the last day of the applicable
Interest Period therefor. Any prepayment of LIBOR Loans made other than on the
last day of the applicable Interest Period therefor shall be subject to LIBOR
yield maintenance fees. Prepayments of the Term Loan shall be applied in inverse
order of the respective maturities thereof.
Late Fee:
If the entire amount of any principal and/or interest on any Loan is not paid in
full within ten (10) days after the same is due, the Company shall pay to the
Bank a late fee equal to five percent (5%) of the required payment.
Cross-collateral:
All obligations of the Company and Guarantors to the Bank to be
cross-collateralized.
Cross-default:
All obligations of the Company to the Bank and of the Company, in respect of
material indebtedness, to third parties to be cross-defaulted.
Payments:
All payments of principal, interest and other charges are authorized to be
charged to any demand deposit account maintained by the Company with the Bank.
<PAGE>
Financial Reports:
The Company shall deliver the following financial documents to the Bank: (i)
within 90 days after the close of each fiscal year, the annual consolidated
financial statements of the Company, each corporate Guarantor and its respective
subsidiaries, certified by a firm of independent certified public accountants
reasonably acceptable to the Bank, (ii) within 45 days after the end of each
fiscal month, monthly consolidated financial statements of the Company, each
corporate Guarantor and its respective subsidiaries, certified by the Company's
chief financial or accounting officer as having been prepared in accordance with
GAAP (exclusive of footnotes and subject to year-end audit adjustments), (iii)
within 30 days after the last day of each month, accounts receivable agings
reports accompanied by a borrowing base certificate executed by the chief
financial or accounting officer of the Company, (iv) when filed, copies of all
reports filed with or distributed to the United States Securities and Exchange
Commission; (v) within 45 days after the close of each fiscal quarter, a
certificate of the Company's president and chief financial or accounting officer
evidencing the Company's compliance (including supporting detail of
calculations) with all financial covenants and stating that except as disclosed
on such certificate, the person making such certificate has no knowledge of any
event of default and (vi) all other financial statements and reports reasonably
requested by the Bank.
Financial Covenants:
During the periods indicated, on a consolidated basis the Company and its
subsidiaries shall maintain:
(a) As at the last day of each fiscal quarter, a minimum Fixed Charge Coverage
Ratio of not less than 1.2 to 1.0.
(b) As at the last day of each fiscal quarter, a maximum ratio of Consolidated
Senior Funded Debt to Consolidated Adjusted EBITDA of no more than 2.5 to
1.0.
(c) As at the last day of each fiscal quarter, minimum Effective Net Worth in
an amount not less than the sum of $26,750,000, plus 50% of the
consolidated net income, on a cumulative basis, of the Company and its
subsidiaries for the fiscal quarter then ending (without any reduction for
any net loss) plus 80% of the net proceeds, on a cumulative basis, received
by the Company in connection with any issuance of securities (whether for
cash or otherwise) by the Company during the fiscal quarter then ending.
Limitation on Capital Expenditures:
On a consolidated basis, the Company and its subsidiaries shall not expend or
agree to expend in excess of $1,500,000 in any fiscal year for the acquisition
of fixed assets, including assets acquired under capitalized leases (excluding
amounts paid in connection with permitted acquisitions).
Legal Opinion:
The Company to furnish the Bank with an opinion of counsel in form and substance
customarily found in credit agreements for similar secured financings and
otherwise appropriate in the judgment of the Bank.
Annual Examination:
The Bank shall be authorized to conduct, by itself or through its designee, at
the Company's expense, an annual examination of the Company's books and records
and the books and records of each Network Site (subject to applicable laws and
regulations relating to patient confidentiality).
Operating Accounts:
The Company shall maintain all of its primary operating accounts with the Bank,
unless such accounts are required to be maintained elsewhere for geographical
purposes.
Closing Date:
The date all appropriate documentation is executed by all relevant parties to
the transaction, but no later than September 30, 1998 (the "Closing"). If the
Closing fails to occur on or prior to such date, the Commitment shall expire and
become unenforceable against the Bank unless extended in writing by the Bank.
Notwithstanding such date, the Bank and the Company have established a
preliminary closing date of August 14, 1998.
Conditions Precedent to Initial Extension of Credit:
Those customarily found in credit agreements for similar secured financings and
others appropriate in the judgment of the Bank. The Bank reserves the right to
terminate its obligations under the Commitment after acceptance thereof by the
Company, and the Bank shall be under no obligation to make any Loan hereunder,
unless and until the satisfaction of each of the following events:
<PAGE>
(a) All documentation relating to the Facility, including a credit
agreement incorporating substantially the terms and conditions
outlined herein, together with such other representations,
warranties, events of default and financial and other
covenants acceptable to the Bank, shall be in form and
substance satisfactory to the Bank.
(b) The Bank shall be satisfied with the corporate and legal
structure and capitalization of the Company, including,
without limitation, the charter and bylaws of the Company and
each agreement or instrument relating thereto.
(c) The Bank shall have conducted an examination of the Company's
books and records and the books and records of the Network
Sites (subject to applicable laws and regulations relating to
patient confidentiality), at the Company's expense, by an
examiner satisfactory to the Bank and such examination shall
be in form and substance satisfactory to the Bank.
(d) There shall exist no action, suit, investigation, litigation
or proceeding pending or threatened in any court or before any
arbitrator or governmental or regulatory agency or authority
that (i) could reasonably be expected to (A) have a material
adverse effect on the business, condition (financial or
otherwise), operations, performance, properties or prospects
of the Company, except for claims or litigation previously
disclosed to the Bank in writing; (B) adversely affect the
ability of the Company to perform its obligations under the
loan documentation or (C) adversely affect the rights and
remedies of the Bank under the loan documentation or (ii)
purports to adversely affect any aspect of the Facility
(collectively, a "Material Adverse Effect").
(e) All governmental and third party consents and approvals
necessary in connection with each aspect of the Facility shall
have been obtained (without the imposition of any conditions
that are not acceptable to the Bank) and shall remain in
effect; all applicable waiting periods shall have expired
without any adverse action being taken by any authority having
jurisdiction; and no law or regulation shall be applicable in
the judgment of the Bank that restrains, prevents or imposes
material adverse conditions upon any aspect of the Facility.
(f) All of the information provided by or on behalf of the Company
or any of its subsidiaries to the Bank prior to its commitment
shall be true and correct in all material aspects; and no
development or change shall have occurred, and no additional
information shall have come to the attention of the Bank, that
(i) has resulted in or could reasonably be expected to result
in a material adverse change in, or material deviation from,
such information or (ii) has had or could reasonably be
expected to have a Material Adverse Effect.
(g) The Bank shall have received all additional financial,
business and other information regarding the Company and its
subsidiaries as it shall have reasonably requested.
(h) The Bank shall have received such corporate resolutions,
certificates and other documents as the Bank shall reasonably
request.
(i) There shall exist no default under any of the loan
documentation, and the representations and warranties of the
Company and each of their respective subsidiaries therein
shall be true and correct immediately prior to, and after
giving effect to, the initial extension of credit under the
loan documentation.
(j) All accrued fees and expenses of the Bank (including the fees
and expenses of counsel for the Bank) shall have been paid.
(k) The Loans shall be in full compliance with all applicable
laws, including, without limitation, Regulations G, T, U and X
of the Board of Governors of the Federal Reserve System.
(l) The Bank and its counsel to be satisfied as to all legal
matters.
(m) Such other conditions that are customarily found in credit
agreements for similar secured financings and others
appropriate in the judgment of the Bank.
<PAGE>
Conditions Precedent to Subsequent Extensions of Credit:
There shall exist no default under any of the loan documentation, and the
representations and warranties of the Company and its subsidiaries therein shall
be true and correct immediately prior to, and after giving effect to such
extension of credit and for the W/C Revolver the Company shall be in compliance
with the Borrowing Base after giving effect to such extension of credit.
Representation and Warranties:
Those customarily found in credit agreements for similar secured financings and
others appropriate in the judgment of the Bank.
Additional Covenants:
Those customarily found in credit agreements for similar secured financings and
others appropriate in the judgment of the Bank. Negative covenants shall
include, without limitation, restrictions on changing the nature of its
business, accounting policies or reporting practices; limitations on restricted
payments (excluding dividends relating to preferred stock not in excess of
$133,000 on an annualized basis); limitations on additional indebtedness in an
amount in excess of $1,125,000 in any fiscal year or in excess of $3,000,000 in
the aggregate at any one time outstanding, including capitalized lease
obligations, but excluding indebtedness and capitalized lease obligations
incurred in connection with acquisitions permitted pursuant to the loan
documents; limitations on additional liens with exceptions agreed to between the
Company and the Bank (which shall include purchase money liens to secure
indebtedness incurred in connection with acquisitions permitted pursuant to the
loan documents) and limitations on the sale, transfer or other disposition of
assets except those agreed to between the Bank and the Company and permitted
pursuant to the loan documents.
Events of Default:
Those customarily found in credit agreements for similar secured financings and
others appropriate in the judgment of Bank, including, without limitation: (a)
failure to pay principal when due, or to pay interest, fees and other amounts
within two business days after the same become due, under the loan
documentation; (b) any representation or warranty proving to have been
materially incorrect when made or confirmed; (c) failure to perform or observe
covenants set forth in the loan documentation within a specified period of time,
where customary and appropriate, after notice or knowledge of such failure; (d)
cross-defaults to other indebtedness in an amount to be agreed in the loan
documentation; (e) bankruptcy and insolvency defaults (with grace period for
involuntary proceedings); (f) monetary judgment defaults in an amount to be
agreed in the loan documentation and non-monetary judgment defaults that could
reasonably be expected to have a Material Adverse Effect; (g) impairment of loan
documentation or security; (h) change of operating control of the Company or the
Guarantors; and (i) standard ERISA defaults.
Assignments and Participants:
Assignments and participations by the Bank shall be unrestricted.
Miscellaneous:
Standard yield protection (including compliance with risk-based capital
guidelines, increased costs, payments free and clear of withholding taxes and
interest period breakage indemnities), LIBOR illegality and similar provisions,
waiver of jury trial and the right to interpose any setoff or counterclaim and
submission to jurisdiction.
Governing Law: New York.
Changed Circumstances:
The Bank reserves the right to terminate its obligations under the Commitment
after acceptance thereof by the Company, and the Bank shall be under no
obligation to make any Loan hereunder, in any of the following events:
(a) The failure of the Company to comply, within the times
specified, with any of the provisions or conditions provided
for in this Commitment.
(b) Non-payment of the fees provided for in this Commitment.
(c) Any change in the prospects or financial condition of the
Company or of any Guarantor which the Bank deems materially
adverse, or one or more conditions exist or events have
occurred with respect to the Company or any Guarantor which
the Bank deems materially adverse.
(d) The Company or any Guarantor shall be in default beyond
applicable grace periods, if any, in the performance of any
obligation to the Bank or any third party under any then
existing agreement between the Company and/or any Guarantor
and the Bank or under any material agreement (that is not the
subject of a good faith dispute) between the Company and/or
any guarantor and any such third party.
<PAGE>
Prior Communications:
This Commitment supersedes all prior communications between the Company and the
Bank, whether written or oral.
Survival:
This Commitment and all of its conditions not satisfied at the Closing, or to
the extent not inconsistent with the provisions of the documents evidencing the
Loans, shall survive the Closing.
Certain Definitions:
As used in this commitment letter:
"Consolidated Debt Service": for any period, the sum of (i) Consolidated
Interest Expense for such period and (ii) all scheduled payments of principal on
Consolidated Funded Debt during such period, including payments made on account
of capitalized leases.
"Consolidated Adjusted EBITDA" means, for any period, (i) with respect to
Network Sites owned by the Company for more than 12 months, Consolidated EBITDA
and (ii) with respect to Network Sites owned by the Company for less than 12
months, the sum of (A) Consolidated EBITDA for each full month the Network Site
was owned by the Company for which the Bank has received financial statements,
plus (B) pro forma Consolidated EBITDA for that number of months immediately
prior to the Borrower's acquisition equal to 12 months minus the number of
months the Network Site was owned by the Company as calculated by the Company in
good faith and satisfactory to the Bank, plus (C) any adjustments satisfactory
to the Bank.
"Consolidated EBITDA" means, for any period, net income of the Company and its
subsidiaries, determined on a consolidated basis in accordance with GAAP for
such period plus (i) the sum of, without duplication, (a) Consolidated Interest
Expense, (b) provision for income taxes of the Company and its subsidiaries, (c)
depreciation, amortization and other non-cash charges of the Company and its
subsidiaries, (d) extraordinary losses from sales, exchanges and other
dispositions of property not in the ordinary course of business, each to the
extent utilized in determining such net income for such period, minus (ii) the
sum of, without duplication, each of the following with respect to the Company
and its subsidiaries, to the extent utilized in determining such net income: (a)
extraordinary gains from sales, exchanges and other dispositions of property not
in the ordinary course of business, and (b) other non-recurring items.
"Consolidated Effective Net Worth" means, at any date of determination, the sum
of capital surplus, earned surplus, capital stock, preferred stock, additional
paid in capital and indebtedness of the Company completely subordinated to all
of the Company's obligations to the Bank pursuant to the Bank's standard form of
subordination agreement.
"Consolidated Funded Debt" means, at any date of determination, the aggregate
funded indebtedness of the Company and its subsidiaries, determined on a
consolidated basis in accordance with GAAP, on such date.
"Consolidated Interest Expense" means for any period, interest expense of the
Company and its subsidiaries determined on a consolidated basis in accordance
with GAAP.
"Consolidated Senior Funded Debt" means, at any date of determination, the
aggregate funded indebtedness of the Company and its subsidiaries that is not
subordinate to the Company's obligations to the Bank, determined on a
consolidated basis in accordance with GAAP, on such date.
"Fixed Charge Coverage Ratio" shall be determined on a rolling four quarter
basis and means, for any such four quarter period, the ratio of (A) Consolidated
Adjusted EBITDA for such period minus the sum of capital expenditures during
such period that have not been financed (excluding amounts paid in connection
with permitted acquisitions), and cash dividends paid during such period and
income taxes paid during such period to (B) Consolidated Debt Service.
"GAAP" means generally accepted accounting principles consistently applied.
<PAGE>
"LIBOR" means, as applicable to any LIBOR Loan, the rate per annum (rounded
upward, if necessary, to the nearest 1/32 of one percent) as determined on the
basis of the offered rates for deposits in U.S. dollars, for a period of time
comparable to the interest period applicable to such LIBOR Loan which appears on
the Telerate page 3750 as of 11:00 a.m. London time on the day that is two
London Banking Days preceding the first day of such LIBOR Loan; provided,
however, if the rate described above does not appear on the Telerate System on
any applicable interest determination date, the LIBOR rate shall be the rate
(rounded upwards as described above, if necessary) for deposits in dollars for a
period substantially equal to the interest period on the Reuters Page "LIBO" (or
such other page as may replace the LIBO Page on that service for the purpose of
displaying such rates), as of 11:00 a.m. (London Time), on the day that is two
(2) London Banking Days prior to the beginning of such interest period. "Banking
Day" shall mean, in respect of any city, any date on which commercial banks are
open for business in that city. If both the Telerate and Reuters system are
unavailable, then the rate for that date will be determined on the basis of the
offered rates for deposits in U.S. dollars for a period of time comparable to
the interest period applicable to such LIBOR Loan which are offered by four
major banks in the London interbank market at approximately 11:00 a.m. London
time, on the day that is two (2) London Banking Days preceding the first day of
the interest period applicable to such LIBOR Loan as selected by the Bank. The
principal London office of each of the four major London banks will be requested
to provide a quotation of its U.S. dollar deposit offered rate. If at least two
such quotations are provided, the rate for that date will be the arithmetic mean
of the quotations. If fewer than two quotations are provided as requested, the
rate for that date will be determined on the basis of the rates quoted for loans
in U.S. dollars to leading European banks for a period of time comparable to the
interest period applicable to such LIBOR Loan offered by major banks in New York
City at approximately 11:00 a.m. New York City time, on the day that its two
London Banking Days preceding the first day of such LIBOR Loan. In the event
that Bank is unable to obtain any such quotation as provided above, it will be
deemed that LIBOR pursuant to a LIBOR Loan cannot be determined. In the event
that the Board of Governors of the Federal Reserve System shall impose a Reserve
Percentage with respect to LIBOR deposits of the Bank then for any period during
which such Reserve Percentage shall apply, LIBOR shall be equal to the amount
determined above divided by an amount equal to 1 minus the Reserve Percentage.
"Network Site" means each location with respect to which an entity, or a number
of entities, each consisting of a physician or group of physicians, enter into a
single management agreement with the Company.
"Prime Rate" means the variable per annum rate of interest so designated from
time to time by the Bank as its prime rate. The Prime Rate is a reference rate
and does not necessarily represent the lowest or best rate being charged to any
customer."
If the above terms are acceptable to you, please sign and return by July 22,
1998 the enclosed copy of this letter together with your check in the amount of
$35,000 representing the non-refundable portion of the origination fee. This
Commitment shall terminate and become unenforceable against the Bank unless
returned to the Bank within the stated period.
Very truly yours,
FLEET BANK, NATIONAL ASSOCIATION
By: /s/Thomas G. Carley
------------------
Name: Thomas G. Carley
Title: Vice President
AGREED AND ACCEPTED
this 16th day of July, 1998:
INTEGRAMED AMERICA, INC.
By: /s/Eugene R. Curcio
--------------------
Name: Eugene R. Curcio
Title: Vice President Finance & CFO
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<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Jun-30-1998
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<RECEIVABLES> 13,480
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0
166
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PP&E is net of accumulated depreciation.
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