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As filed with the Securities and Exchange Commission on February 8, 2010
Registration No. 333-162276
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
AMENDMENT NO. 2 TO

FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 
 
IntegraMed America, Inc.
(Exact name of registrant as specified in its charter)
 
         
Delaware   8011   06-1150326
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)
 
 
Two Manhattanville Road
Purchase, New York 10577
(914) 253-8000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
 
Jay Higham
Chief Executive Officer
Two Manhattanville Road
Purchase, New York 10577
(914) 253-8000
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
 
With copies to:
 
     
Steven Khadavi, Esq.
Dorsey & Whitney LLP
250 Park Avenue
New York, New York 10177
Telephone: (212) 415-9200
Facsimile: (212) 953-7201
  David B. Miller, Esq.
Michael K. Coddington, Esq.
Faegre & Benson LLP
2200 Wells Fargo Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Telephone: (612) 766-7000
Facsimile: (612) 766-1600
 
 
Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)                             
 
 
CALCULATION OF REGISTRATION FEE
 
                         
            Proposed Maximum
    Proposed Maximum
     
Title of Each Class of
    Amount to be
    Offering Price Per
    Aggregate Offering
    Amount of
Securities to be Registered     Registered(1)     Share(2)     Price(1)(2)     Registration Fee(3)
Common stock, $0.01 par value per share     2,800,000     $9.22     $25,816,000     $1,841
                         
(1) Includes common stock issuable upon exercise of the underwriters’ over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933 and based on the average of the high and low sale prices for such common stock on September 28, 2009, as reported on the Nasdaq Global Market.
(3) Previously paid the amount of $2,367 in connection with the initial filing of this registration statement on October 2, 2009.
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
Subject to completion, dated February 5, 2010
 
2,500,000 Shares
 
[INTEGRAMED LOGO]
INTEGRAMED AMERICA, INC.
 
Common Stock
 
$      per share
 
 
 
 
•  IntegraMed America, Inc. is offering 2,500,000 shares. Of these shares, 2,000,000 are being offered through the underwriters named in this prospectus and 500,000 are being offered by IntegraMed America, Inc. directly to IAT Reinsurance Company Ltd., IntegraMed America, Inc.’s largest stockholder.
 
•  The last reported sale price of our common stock on February 4, 2010 was $8.26 per share.
 
•  Trading symbol: Nasdaq Global Market — INMD
 
 
 
 
This investment involves risk. See “Risk Factors” beginning on page 11.
 
 
                 
    Per Share   Total
 
Price to IAT Reinsurance Company Ltd.
  $       $    
Public offering price through the underwriters
  $                $             
Underwriting discount
  $       $    
Proceeds, before expenses, to IntegraMed America, Inc. 
  $       $  
 
The underwriters will not receive any compensation with respect to the shares being offered by IntegraMed America, Inc. directly to IAT Reinsurance Company Ltd.
 
The underwriters have a 30-day option to purchase up to 300,000 additional shares of common stock from us to cover over-allotments, if any.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved of anyone’s investment in these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
Piper Jaffray
 
Dougherty & Company LLC
 
The date of this prospectus is          , 2010.


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IntegraMed Centers and Clinics ' IntegraMed Partner Fertility Centers IntegraMed Affiliate Fertility Centers IntegraMed Vein Clinics


 

 
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 EX-1.1
 EX-10.64
 EX-23.1
 
 
 
You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.


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SUMMARY
 
The items in the following summary are described in more detail later in this prospectus. This summary does not contain all the information you should consider before investing in our common stock. You should carefully read the more detailed information set out in this prospectus, especially the risks related to our business and investing in our common stock that we discuss under the heading “Risk Factors,” as well as the consolidated financial statements and related notes appearing elsewhere in this prospectus. References in this prospectus to “we,” “us,” “our,” “the Company,” “our Company” and “IntegraMed” refer to IntegraMed America, Inc. and its consolidated subsidiaries, unless the context requires otherwise.
 
Our Business
 
We manage highly specialized outpatient centers in emerging, technology-based, niche medical markets. Currently, we are a leading manager of fertility centers and vein clinics in the United States. We believe our network of Partner fertility centers is the largest managed network of fertility centers in the United States, with 66 locations and 100 physicians and PhD scientists, accounting for approximately 14% of the total in vitro fertilization (“IVF”) procedures performed in the United States in 2007, which is the latest period for which third-party data are available. We also believe our vein clinics are the single largest network of vein care providers in the United States. We have a centralized corporate infrastructure that provides clinical and financial information systems, revenue cycle management, sales and marketing services, group purchasing and other operational support functions to our fertility centers and vein clinics. These services remove administrative burdens from the physicians, allowing them more time to practice medicine, which we believe results in increased patient treatment volumes and improved patient care. We also provide physicians access to capital to finance fertility center and vein clinic operations, including access to current technologies and facilities, which we believe aids in patient and physician recruitment. We deliver these services through three operating divisions: Fertility Centers, Consumer Services and Vein Clinics.
 
Our Fertility Centers Division is comprised of 14 contracted fertility centers (including one fertility center in Utah that is scheduled to begin seeing patients in the first quarter of 2010), referred to as our Partner Program, serving 16 metropolitan markets across the United States. The centers provide a wide range of fertility services to patients, including diagnostic testing and fertility treatments such as IVF, intrauterine insemination and surgical correction of anatomical reproductive problems. We receive fees and cost reimbursement from these fertility centers for providing the technology, equipment, facilities, non-physician personnel and support necessary to operate the fertility centers, but we do not employ or control the physicians who provide or direct the treatment of patients. For the nine months ended September 30, 2009, our Fertility Centers Division generated approximately 68% of our revenues and 56% of our contribution.
 
Our Consumer Services Division offers services directly to fertility patients. The division offers a family of programs, including our Attaintm IVF Refund Program and our recently introduced Attain IVF Multi-Cycle Program, collectively referred to as our Attain IVF programs, which are designed to help patients attain their goal of starting a family. IVF treatments are typically paid for out-of-pocket by the patient and a patient usually requires more than one IVF treatment cycle. The average cost of one fresh IVF cycle as of August 2009 was approximately $12,000 according to Marketdata Enterprises, Inc. and, in 2007, the likelihood of a live birth occurring after one fresh IVF cycle was 31% according to the Society for Assisted Reproductive Technology. Our Attain IVF Refund Program allows medically cleared patients to pay an up-front deposit of approximately twice the average cost of a fresh IVF cycle in return for up to six treatment cycles (consisting of three fresh IVF cycles and three frozen embryo transfers) with a specified percentage refund if treatment does not result in a baby. Our Attain IVF
 


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Multi-Cycle Program allows all patients, including those who are not medically cleared for our Attain IVF Refund Program, to pay a single fee, which is slightly less than the average cost of two fresh IVF cycles, in return for up to four treatment cycles (consisting of two fresh IVF cycles and two frozen embryo transfers). Our Attain IVF Multi-Cycle Program offers a partial refund under certain circumstances. We provide Attain IVF patients with the improved success rates associated with multiple fertility treatment cycles, as well as increased financial certainty for the IVF process. Additionally, we provide Attain IVF patients with a roadmap for treatment, including patient education, on-going case management and treatment plan monitoring, which provide visibility and ease to the process.
 
In addition to being offered to our Partner fertility centers, the division offers our Attain IVF programs through a contracted network that consisted of 25 independent fertility centers as of September 30, 2009, referred to as our Affiliate Program. Our Affiliate Program allows fertility centers to pay fees to receive selected management and consumer services we provide. The benefits that our fertility centers realize from offering our Attain IVF programs include: allowing patients to commit to multiple fertility treatments, which improves treatment volume and revenues; insulating the centers from refund risk; managing cash and administrative details associated with our Attain IVF programs; and enabling physicians to maintain a traditional fee for service arrangement without the appearance of conflicts of interest that otherwise might arise from self administering a refund program. We bind our Partner and Affiliate fertility centers, which provide the IVF treatments, to abide by the terms of the program through participation agreements that support our packaged pricing model, but we do not employ or control the physicians who provide or direct the treatment of patients. For the nine months ended September 30, 2009, our Consumer Services Division generated approximately 9% of our revenues and 24% of our contribution.
 
Our Vein Clinics Division began operations on August 8, 2007, with the purchase of Vein Clinics of America, Inc. (“VCA”), a company that had been in business since 1981. Our Vein Clinics Division currently operates a network of 34 clinics located in 13 states. These vein clinics provide specialized outpatient treatment for patients suffering from vein diseases and other vein disorders. Our current treatment options are alternatives to more invasive outpatient surgical procedures and include Endovenous Laser Treatment (“ELT”), a minimally invasive laser treatment, and sclerotherapy, which involves injecting veins with a solution designed to immediately shrink and then dissolve such veins over a period of weeks. We offer business services and support to the vein clinics and have a controlling financial interest in their operations. Medical services or treatments are provided to vein clinic patients by physicians who are employed by professional corporations, whose financial condition, results of operations and cash flows are consolidated with our consolidated financial statements. For the nine months ended September 30, 2009, our Vein Clinics Division generated approximately 23% of our revenues and 20% of our contribution.
 
Our Industries
 
We are currently focused on the following industries:
 
  •  Reproductive Medicine.  According to a recent industry estimate, approximately 10% of U.S. couples have trouble conceiving. In addition, women are increasingly delaying starting families. In 2006, approximately one out of every 12 first births was to a woman age 35 or older, compared with one out of every 100 first births in 1970, according to the U.S. Centers for Disease Control and Prevention. There are approximately 1,400 practicing reproductive endocrinologists offering fertility services across 480 fertility centers in the United States. Fertility services include diagnostic tests performed on both the female and the male, as well as fertility treatments. Treatment options may include fertility drug therapy, artificial insemination, fertility surgeries to correct anatomical problems and assisted reproduction
 


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  technology (“ART”) services. Current types of ART services include IVF, frozen embryo transfers and donor egg programs, as well as more specialized treatments. IVF treatments are the most frequently employed form of ART, with 103,367 fresh IVF cycles performed in the United States in 2007. Expenditures relating to fertility services in the U.S. market are estimated at approximately $4 billion for 2008, according to Marketdata Enterprises, Inc.
 
  •  Vein Disease.  Common venous diseases and their symptoms can take many forms, including varicose veins, spider veins and venous leg ulcers. We believe that approximately 25 million people are currently affected by vein disease in the United States, but only approximately one million receive treatment for such vein disease. Historically, the most common treatment for vein disease was vein stripping, which is the surgical removal of surface veins that is generally done as an outpatient procedure while the patient is under general anesthesia and which requires an extended recovery time. More recently, minimally invasive alternatives such as ELT and sclerotherapy have been growing as alternatives to invasive surgical options. Annual expenditures related to vein care in the United States are approximately $2 billion and projected to grow 12% per year through 2010, according to our estimates. The U.S. Food and Drug Administration’s approval of lasers for thermal ablation of veins and subsequent establishment of an American Medical Association Current Procedural Terminology code for reimbursement by the Centers for Medicare and Medicaid Services has opened this market to rapid growth and development over the last several years.
 
Our Strengths
 
We believe that our strengths include:
 
  •  Leading Network of Fertility Centers.  We believe our network of 14 Partner fertility centers is the largest managed network of fertility centers in the United States, with 66 locations and 100 physicians and PhD scientists, accounting for approximately 14% of the total IVF procedures performed in the United States in 2007, which is the latest period for which third-party data are available. Additionally, we are affiliated with four of the top five fertility practices in the United States, based on volume of procedures. Our centralized infrastructure and ability to leverage economies of scale result in our Partner fertility centers demonstrating faster growth than the industry average, based on volume of procedures.
 
  •  Strong and Replicable Vein Clinic Model.  We believe our 34 vein clinics are the single largest network of vein care providers in the United States. This network allows for marketing, operational and revenue cycle efficiencies by leveraging resources, knowledge and infrastructure as well as providing a strong base and replicable model for new clinic expansion.
 
  •  Attain IVF Programs.  We created our family of Attain IVF programs as innovative offerings for patients of our Partner and Affiliate fertility networks. Marketing for our Attain IVF programs facilitates recruitment and retention of self-pay patients, which comprise the majority of the IVF treatment market. We have developed a sophisticated statistical model and case management program, which we believe allows us to appropriately screen patients for our Attain IVF Refund Program and reduce our financial risk. Our Attain IVF programs are non-capital intensive and generated operating margins of approximately 24% for the nine months ended September 30, 2009.
 
  •  State-of-the-Art Information Systems.  We have internally developed, integrated information systems that collect and analyze clinical, patient, financial and marketing data, which
 


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  we believe allow us to more effectively control expenses and improve cash collections at our Partner fertility centers and vein clinics. Our proprietary ARTworks® clinical software provides electronic medical records, treatment plan and success rate research capabilities, decision support functionality and clinical risk management services, which we believe makes our physicians more efficient and improves quality of care. We provide our vein clinics access to our proprietary Virtual Physician Assistant information system, which is an end-to-end patient and clinic operating system that provides decision support and revenue cycle functions.
 
  •  Access to Capital.  We provide our Partner fertility centers and vein clinics with efficient access to capital which allows them to obtain current technologies, equipment and facilities that enable them to provide a full spectrum of services to effectively compete for patients. We believe this access to capital helps us to recruit Partner practices.
 
  •  Sophisticated Sales and Marketing Organization.  Our sales and marketing department specializes in the development of sophisticated programs that give our Partner and Affiliate fertility centers and vein clinics access to patient recruitment tools such as direct-to-consumer marketing, physician referral development and a vein care centralized call center. We believe these sales and marketing efforts are often too expensive for many individual physician practices, resulting in a competitive advantage to our Partner and Affiliate fertility centers and vein clinics with respect to patient recruitment.
 
  •  Experienced Management Team.  Our senior management has extensive industry experience with average health care services experience of 25 years. This industry experience, combined with extensive merger and acquisition and financial expertise allows us to effectively execute our strategy.
 
Our Strategy
 
Our mission is to strengthen our position as a leading manager of fertility centers and vein clinics by increasing revenues and improving profitability, as well as continuing to provide value to patients and our physician network. Our strategy to achieve our mission is outlined below.
 
  •  Make Selective Contract Acquisitions of Partner Fertility Centers.  The U.S. market for fertility services is highly fragmented and we believe that it is ripe for consolidation. We believe that our competitors’ ability to compete with us for contract acquisitions is currently limited due to our experience acquiring Partner center contracts, our position as the manager of what we believe is the largest network of fertility centers in the United States and our developed infrastructure and experience in delivering valuable services to support fertility center operations. Recruitment into our Partner Program has traditionally focused on fertility centers that first participate as Affiliates serviced by our Consumer Services Division; as such, we had an established pipeline of 25 fertility centers as of September 30, 2009. In addition to recruiting from Affiliate centers, we have a development staff that targets leading physician groups with established practices in selected metropolitan markets. These candidates are then evaluated against our contract acquisition criteria, which includes factors such as size of practice, physician reputation and the physicians’ growth-oriented outlook.
 
  •  Expand our Network of Affiliate Fertility Centers.  We intend to expand our network of Affiliate fertility centers to other metropolitan markets across the United States. Our development staff is focused on the top 100 largest metropolitan markets, where we expect the highest demand for fertility centers to occur.
 


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  •  Develop De Novo Vein Clinics.  We intend to develop new vein clinics in markets where we already have existing clinics that have not fully penetrated their market and to identify attractive contiguous markets to develop new clinics. Our development staff focuses on locations where there are attractive demographics, reasonable media costs and a favorable reimbursement environment. We believe our vein clinic model can be predictably and profitably replicated in these new markets. De novo vein clinics require relatively little capital investment, typically $300,000, and usually reach break-even in nine months or less after opening of the clinic. Following the acquisition of VCA, we made significant investments in physician recruiting and training, regional managers, revenue cycle management, sales and marketing, as well as new clinic development staff, all of which is designed to allow us to open new clinics at a more rapid and sustained pace utilizing a replicable model.
 
  •  Increase the Total Number of Patients Treated.  We intend to work with our fertility centers and vein clinics to increase the total number of patients they treat. We expect future patient volume to be driven by our sales program, centralized direct-to-consumer advertising strategy, direct physician referrals and processes designed to retain patients who make contact with our call centers and receive an initial consultation. We intend to continue providing products and services to centers and clinics that help attract patients, including access to state-of-the-art equipment, access to our Attain IVF programs and access to our clinical and information technology applications.
 
  •  Increase Penetration of Our Attain IVF Programs.  For the nine months ended September 30, 2009, approximately 12.2% of self-pay patients in our Partner and Affiliate network utilized our Attain IVF Refund Program. We formally introduced our Attain IVF Multi-Cycle Program in July 2009. For the three months ended September 30, 2009, approximately 9% of total enrollment in our Attain IVF programs consisted of Attain IVF Multi-Cycle Program patients. We believe that the penetration of our Attain IVF programs can be meaningfully increased by educating patients on the improved success rates associated with multiple treatment cycles and the packaged pricing features of our Attain IVF programs, which allow for multiple treatment cycles and, in the case of our Attain IVF Refund Program, a significant financial refund if the treatments are unsuccessful. We also believe we can increase overall market penetration of our Attain IVF programs by demonstrating to physicians at potential Affiliate and Partner practices the benefit of increased patient volume and retention that we believe result from offering our Attain IVF programs. We have demonstrated the ability to increase Attain IVF program penetration because certain of our fertility centers had Attain IVF program penetration rates in excess of 25% during the nine months ended September 30, 2009.
 
  •  Continue Improving Operating Efficiencies.  We continuously seek opportunities to lower costs and realize operating efficiencies through the implementation of a centralized infrastructure focused on improved accounts receivable management, along with leveraging economies of scale in support functions such as procurement, finance, information technology, human resources, risk management and legal services. We expect to further leverage our corporate infrastructure as we expand our network of Partner fertility centers and vein clinics.
 
Recent Developments
 
On December 1, 2009, we acquired the rights to manage three new Partner fertility centers in the western United States: the Nevada Center for Reproductive Medicine in Reno, Nevada; the Idaho
 


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Center for Reproductive Medicine in Boise, Idaho; and the Utah Fertility Center, which will be located in Pleasant Grove, Utah. The Nevada and Idaho fertility centers are established centers, and the Utah center is scheduled to begin seeing patients in the first quarter of 2010. We entered into 25-year agreements with each of the centers to provide them with our full range of fertility business, marketing and facility services.
 
On January 8, 2010, we announced plans to open a new vein clinic in Columbia, Maryland in mid-2010. This will be the 35th clinic in our Vein Clinics Division and will add interventional radiology treatments at this clinic to the full range of vein treatments provided at our existing vein clinics. Interventional radiology involves minimally invasive procedures performed using image guidance. Adding interventional radiology will allow this vein clinic to offer patients more high value and complex vascular procedures including uterine fibroid embolization, fallopian tube recanalization as well as procedures for varicoceles and pelvic congestion, among others.
 
On January 12, 2010, we announced plans to open a new vein clinic in Chevy Chase, Maryland in early May 2010. This will be the 36th clinic in our Vein Clinics Division and our seventh clinic in the greater Baltimore/Washington D.C. region.
 
On February 4, 2010, we announced that Tennessee Reproductive Medicine would be joining our Affiliate Program. This will be the 26th center in our Affiliate Program and the first in Tennessee.
 
Corporate Information
 
We were incorporated in Delaware on June 4, 1985. Our headquarters are located at Two Manhattanville Road, Purchase, New York 10577. Our telephone number is (914) 253-8000. Our website address is www.integramed.com. The information on our website is not incorporated as a part of this prospectus.
 


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The Offering
 
Common stock offered by us(1) 2,500,000 shares
 
2,800,000 shares if the underwriters exercise their over-allotment option in full
 
Common stock outstanding immediately after this offering(2) 11,355,866 shares
 
Use of proceeds We estimate that the net proceeds to us from this offering will be approximately $18.8 million, or approximately $21.1 million if the underwriters exercise their over-allotment option in full, based on the assumed offerings price and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us related to this offering.
 
We intend to use the net proceeds of this offering to accelerate the addition of new Partner fertility centers and to accelerate the pace to target the opening of eight new vein clinics in 2010 or for general working capital and other corporate purposes.
 
You should read the discussion in this prospectus under the heading “Use of Proceeds” for more information.
 
Risk factors See “Risk Factors” and all other information included in this prospectus for a discussion of factors that you should carefully consider before deciding to invest in shares of our common stock.
 
Nasdaq Global Market symbol: INMD
(1) Includes 500,000 shares offered directly by us to IAT Reinsurance Company Ltd. (“IAT”), our largest stockholder, at the same price as the price to the public (excluding underwriting discounts and commissions) set forth on the cover page of this prospectus. While IAT has indicated interest in purchasing these shares, an indication of interest is not a binding commitment or agreement to purchase shares and, as a result, IAT may purchase fewer or no shares in this offering.
 
(2) Excludes shares issuable upon exercise of the underwriters’ over-allotment option. The number of shares of our common stock outstanding immediately after this offering is based on 8,855,866 shares outstanding as of February 1, 2010 and excludes 253,389 shares of common stock issuable upon exercise of outstanding stock options as of February 1, 2010 at a weighted average exercise price of $7.06 per share and 268,107 shares of common stock reserved for issuance under our 2007 Long-Term Compensation Plan and our 2000 Long-Term Compensation Plan.
 
The information in this prospectus assumes that none of our outstanding stock options has been exercised or forfeited since February 1, 2010. All information in this prospectus assumes the issuance and sale of our common stock in this offering at an offering price of $8.26 per share, the last reported sale price for our common stock on February 4, 2010, as reported by the Nasdaq Global Market.
 


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Summary Consolidated Financial Data
 
The following table sets forth our summary consolidated financial data as of and for the periods presented. The summary consolidated financial data as of December 31, 2007 and 2008 and for each of the years ended December 31, 2006, 2007 and 2008 have been derived from our audited annual consolidated financial statements, which are included elsewhere in this prospectus. The summary consolidated financial data as of December 31, 2006 have been derived from our audited annual consolidated financial statements, which have not been included in this prospectus. The summary consolidated financial data as of and for the nine months ended September 30, 2008 and 2009 have been derived from our unaudited consolidated financial statements, which are included elsewhere in this prospectus. In the opinion of management, our unaudited consolidated financial statements include all adjustments, consisting only of normal recurring items, except as noted in the notes to the consolidated financial statements, necessary for a fair statement of interim periods. The financial information presented for the interim periods has been prepared in a manner consistent with our accounting policies described elsewhere in this prospectus, and should be read in conjunction therewith. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full year period. You should read this data together with the consolidated financial statements and related notes appearing elsewhere in this prospectus, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other financial information included elsewhere in this prospectus. Historical results are not necessarily indicative of future performance.
 
We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”), including Financial Accounting Standards Board Interpretation No. 46 (revised December 2003) (“FIN No. 46R”), “Consolidation of Variable Interest Entities.” In accordance with FIN No. 46R, we do not consolidate the results of the fertility centers to which we provide services because we do not have a controlling financial interest in such centers and we are not the primary beneficiary or obligor of such centers’ financial results. We do, however, have a controlling financial interest in individual vein clinics where we are the primary beneficiary and obligor of their financial results. As such, we consolidate the financial condition, results of operations and cash flows of those clinics’ operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Off-Balance Sheet Arrangements.”
 
                                         
    Year Ended December 31,     Nine Months Ended September 30,  
    2006     2007(1)     2008     2008     2009  
    (restated)     (restated)     (restated)     (unaudited)  
    (dollars in thousands, except per share amounts)  
 
Statement of Operations Data:
                                       
Revenues, net:
                                       
Fertility Centers
  $ 112,767     $ 121,078     $ 138,440     $ 104,302     $ 109,538  
Consumer Services
    13,553       16,460       19,763       14,367       15,242  
Vein Clinics
    N/A       14,284       39,950       29,264       37,288  
                                         
Total revenues
    126,320       151,822       198,153       147,933       162,068  
                                         
Costs of services and sales:
                                       
Fertility Centers
    104,357       111,059       128,224       96,685       100,860  
Consumer Services
    9,421       12,336       14,344       10,333       11,501  
Vein Clinics
    N/A       13,304       37,299       27,337       34,257  
                                         
Total costs of services and sales
    113,778       136,699       179,867       134,355       146,618  
                                         
 


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    Year Ended December 31,     Nine Months Ended September 30,  
    2006     2007(1)     2008     2008     2009  
    (restated)     (restated)     (restated)     (unaudited)  
    (dollars in thousands, except per share amounts)  
 
Contribution:
                                       
Fertility Centers
    8,410       10,019       10,216       7,617       8,678  
Consumer Services
    4,132       4,124       5,419       4,034       3,741  
Vein Clinics
    N/A       980       2,651       1,927       3,031  
                                         
Total contribution
    12,542       15,123       18,286       13,578       15,450  
                                         
General and administrative expenses
    9,380       10,537       10,654       7,951       9,333  
Interest income
    (1,073 )     (1,256 )     (383 )     (324 )     (187 )
Interest expense
    695       1,136       1,563       1,208       869  
                                         
Total other expenses
    9,002       10,417       11,834       8,835       10,015  
                                         
Income before income taxes
    3,540       4,706       6,452       4,743       5,435  
Income tax provision
    1,291       1,662       2,537       1,909       2,173  
Income tax benefit
    (821 )(4)                        
                                         
Net income
  $ 3,070 (4)   $ 3,044     $ 3,915     $ 2,834     $ 3,262  
                                         
Basic and diluted net earnings per share:
                                       
Basic earnings per share
  $ 0.38     $ 0.37     $ 0.45     $ 0.33     $ 0.37  
Diluted earnings per share
  $ 0.37     $ 0.36     $ 0.45     $ 0.33     $ 0.37  
Weighted average shares — basic
    8,090       8,310       8,618       8,607       8,770  
Weighted average shares — diluted
    8,194       8,410       8,691       8,685       8,833  
Balance Sheet Data(2):
                                       
Working capital(3)
  $ 11,685     $ (3,435 )   $ (2,445 )   $ (2,507 )   $ (2,560 )
Total assets
    76,323       114,171       121,443       113,315       128,456  
Total indebtedness
    8,774       25,460       30,219       23,200       27,180  
Retained earnings (accumulated deficit)
    (9,139 )     (6,095 )     (2,178 )     (3,260 )     1,084  
Total shareholders’ equity
    40,178       47,634       52,266       51,251       56,586  
(1) Our Vein Clinics Division began operations on August 8, 2007 with our purchase of VCA.
(2) As of the last day of the reported period.
(3) Represents current assets less current liabilities.
(4) In December 2006, we determined that we no longer needed a valuation allowance related to deferred tax assets generated by net operating loss carry-forwards of prior years. As a result, we recorded a tax benefit of $821,000 for the year ended December 31, 2006.
 

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Summary Operating Data
 
The following table sets forth our summary operating data for the years ended December 31, 2006, 2007 and 2008 and for the nine months ended September 30, 2008 and 2009. This summary operating data is unaudited. Historical results are not necessarily indicative of future performance.
 
                                         
    Year Ended December 31,     Nine Months Ended September 30,  
    2006     2007     2008     2008     2009  
 
Summary operating data:
                                       
Partner fertility centers(1)
    8 Partners       9 Partners       11 Partners       11 Partners       11 Partners  
Fresh IVF cycles
    11,142       12,483       13,554       10,216       10,610  
Consumer Services Affiliates(1)
    22 Affiliates       20 Affiliates       23 Affiliates       22 Affiliates       25 Affiliates  
Vein clinics(1),(2)
    N/A       26 clinics       32 clinics       30 clinics       34 clinics  
Vein clinics procedures(2),(3)
    N/A       7,865       9,273       7,157       9,467  
(1) As of the last day of the reported period.
(2)Our Vein Clinics Division began operations on August 8, 2007 with our purchase of VCA.
(3)One vein care procedure represents a corrective procedure performed on a leg.
 


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RISK FACTORS
 
Investing in our common stock involves a high degree of risk. Before you invest in our common stock, you should carefully consider the various risks of the investment, including those described below, together with all of the other information included in this prospectus. Additional risks may also impair our business operations and adversely affect our prospects. If any of the following risks actually occur, our business, financial condition or operating results could be adversely affected. In that case, the trading price of our common stock could decline and you could lose all or part of your investment.
 
Risks Related to Our Business
 
The loss of one or more of our Partner fertility centers would lead to a decline in our revenues and profit.
 
The contracts that we enter into with our Partner fertility centers typically have terms that range from 10 to 25 years and contain automatic renewal provisions. Some of these agreements also contain provisions that allow the Partner fertility center to terminate the agreement, upon 12 months’ prior notice, at any time after five years from the agreement’s effective date. Our two largest Partner fertility centers provided approximately 34% of our Fertility Centers Division revenues for the year ended December 31, 2008. If either of these Partner fertility centers, or any of our other Partner fertility centers, were to terminate its agreement with us, we would lose all of the revenues associated with such Partner fertility center, but would not experience any meaningful reduction in our infrastructure costs.
 
We may not be able to find suitable Partner candidates or successfully integrate the operations of the fertility centers with which we enter into Partner contracts.
 
A key part of our business strategy is to enter into additional Partner contracts. We cannot assure you that we will be able to find suitable Partner candidates or that the fertility centers that we enter into Partner contracts with will be successful. Even if suitable Partner candidates are identified, negotiation over suitable terms and conditions may be protracted and unsuccessful, and we may not be able to achieve planned increases in the number of Partner centers. Further, achieving the anticipated benefits of current and possible future Partner contracts will depend in part upon whether we can integrate the operations of those fertility centers with our operations in a timely and cost-effective manner. The process of integrating the operations of Partner fertility centers with our operations is complex, expensive and time consuming and involves a number of risks, including, but not limited to:
 
  •  difficulties in integrating or retaining key medical providers of the Partner fertility center;
 
  •  difficulties in integrating the operations of the Partner fertility center, such as information technology resources and financial and operational data;
 
  •  diversion of our management’s attention; and
 
  •  potential incompatibility of cultures.
 
We are dependent on the medical providers in our fertility centers and vein clinics to successfully execute our business strategy.
 
Although we manage our fertility centers and vein clinics, the medical providers at those centers and clinics provide medical services directly to patients and we do not have control over their medical activities. We cannot guarantee any medical provider’s ability to generate positive patient outcomes, build a positive reputation for their practice or to comply with our expectations. If the medical providers in our fertility centers and vein clinics act negligently or unethically, allow their medical


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practices to deteriorate or do not meet our growth expectations, it could diminish the value of our brand and our results of operations could be adversely affected.
 
We may have difficulty attracting and retaining physicians for our fertility centers and vein clinics.
 
A key part of our business strategy is to enter into additional Partner contracts and open new vein clinics. The success of our fertility centers is dependent upon our ability to retain the key medical providers associated with those centers. If one or more key medical providers were to depart from a fertility center, our business could suffer. Our ability to open new vein clinics is dependent upon identifying, recruiting and retaining qualified physicians to perform procedures at these clinics. We have had difficulties staffing new vein clinics because some third-party payors require that the physicians performing procedures at these clinics have certain specified credentials. We will not be able to implement successfully our business strategy if we are unable to properly staff our fertility centers and vein clinics.
 
A reduction in reimbursements or an inability to negotiate attractive reimbursement rates from third-party payors for the services that our Partner centers or vein clinics provide could adversely affect our revenues and growth.
 
A significant portion of our fertility Partner and vein clinic revenues depends on reimbursements to the underlying physician practices from third-party payors. These third parties include private health insurers and other organizations, such as health maintenance organizations, as well as government authorities. Third parties are systematically challenging prices charged for medical treatment. A third-party payor may deny or reduce reimbursement if it determines that a prescribed treatment is not used in accordance with cost-effective treatment methods, as determined by the payor, or is experimental, unnecessary or inappropriate. In addition, although third parties may approve reimbursement, such approvals may be under terms and conditions that discourage use of our services, even if those services are safer or more effective than alternative services. A reduction in reimbursements from third-party payors, whether in the form of changes to reimbursement contracts, such as by limiting reimbursement for certain procedures to specialists, loss of reimbursement contracts, solvency issues on the part of the payors, or in the case of our vein clinics, changes in Medicare reimbursement, would cause patients to reduce their treatments or obtain services from other providers and could reduce our revenues and profitability. Our ability to profitably open vein clinics in new markets also significantly depends on our ability to obtain attractive reimbursement rates from third-party payors in those new markets. If we are unable to obtain satisfactory reimbursement rates from third-party payors for vein clinics in new markets, our growth would suffer.
 
In early 2009, one of our top fertility centers in the Midwest terminated a reimbursement contract with an important third-party payor. Contribution from this fertility center in 2008 was approximately $2.3 million and this third-party payor represented approximately 20% of this contribution, or approximately $460,000.
 
Health care reform could impact the demand for our services.
 
There are currently numerous proposals on the federal and state levels for comprehensive reforms relating to health care that could affect payment and reimbursement for health care services in the United States. The U.S. Congress is considering legislation that could dramatically overhaul the health care system, including the possibility of a government health care plan. We cannot predict whether any such reforms will ultimately be adopted or the impact that such reforms may have on the demand or payment for our services. Because our Attain IVF programs are self-pay programs for patients that do not have insurance coverage for fertility treatments, health care reform that increases insurance coverage for fertility treatments could lead to a decrease in demand for our Attain IVF programs.


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We face competition from existing providers, as well as new providers entering our markets.
 
Our business divisions operate in highly competitive areas. Our fertility centers compete with national, regional and local physician practice fertility centers, hospitals and university medical centers, some of which have programs that compete with our Attain IVF programs. Our fertility centers may also compete with fertility centers located outside of the United States, due to the self-pay nature of IVF treatment. Our vein clinics compete with other vein care clinic providers, dermatologist and surgical clinics that provide ELT and sclerotherapy as an ancillary offering, vascular surgeons and interventional radiologists. Barriers to entry in the vein care industry are low. New health care providers that enter our markets impact our market share, patient volume and growth rates. Increased competitive pressures require us to commit resources to marketing efforts, which impacts our margins and profitability. There can be no assurance that our fertility centers or vein clinics will be able to compete effectively with existing providers in our markets or that new competitors will not enter into our markets. These existing and new competitors may have greater financial and other resources than we or our fertility centers or vein clinics do. Increased competition could also make it more difficult for us to expand our business by entering into new contracts with fertility centers or opening new vein clinics.
 
The development of alternative treatments could diminish demand for our services.
 
The fertility and vein care industries are dynamic, and new, technologically intensive treatments are constantly under development. New treatments that are more effective or provide better reimbursement could decrease patient demand or profitability for the treatments that our fertility centers or vein clinics currently offer. If our fertility centers or vein clinics do not adopt new treatments as they are developed, patients could seek treatment elsewhere.
 
If we are found not to be in compliance with applicable laws and regulations, we could be subject to significant fines or penalties, be forced to curtail certain of our operations or rearrange material agreements to our detriment.
 
We are subject to numerous federal and state laws and regulations, including, but not limited to, federal and state anti-kickback laws, controlled substances laws, the federal Stark law and state self-referral laws, false claims laws, the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), Medicare and Medicaid regulations and laws regulating the business of insurance. These laws and regulations are extremely complex and could be subject to various interpretations. Our fertility centers and vein clinics are also subject to these statutes, but we do not oversee, nor are we responsible for, their compliance with these laws. Many aspects of our business, to date, have not been the subject of federal or state regulatory review and we, and any of our fertility centers or vein clinics, may not have been in compliance at all times with all applicable laws and regulations. If we, or our fertility centers or vein clinics, are found by a court or regulatory authority to have violated any applicable laws or regulations, we could be subject to significant fines or penalties or be forced to curtail certain of our operations.
 
Further, the laws of many states prohibit physicians from splitting fees with non-physicians, or other physicians, and prohibit non-physician entities from practicing medicine. These laws vary from state to state and are enforced by the courts and by regulatory authorities with broad discretion. Many aspects of our business, to date, have not been the subject of judicial or regulatory interpretation; thus, a review of our business by courts or regulatory authorities may result in determinations that could adversely affect our operations. In addition, the health care regulatory environment could change so as to restrict our existing operations or their expansion. State corporate practice of medicine laws may be interpreted as prohibiting corporations or associations from exercising control over physicians or employing nurse practitioners or physician assistants and may prohibit physicians from practicing medicine in partnership with, or as employees of, any person not licensed to practice medicine.


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State regulators may seek to challenge the arrangements that we have with our fertility centers and vein clinics. A determination in any state that we are engaged in the corporate practice of medicine or any unlawful fee-splitting arrangement could render any management agreement between us and a practice located in such state unenforceable or subject to modification, which could have an adverse effect on our financial condition and results of operations. Regulatory authorities or other parties may assert that we are or a practice is engaged in the corporate practice of medicine or that the management fees paid to us by the managed practices constitute unlawful fee-splitting or the corporate practice of medicine. If such a claim were asserted successfully, we could be subject to civil and criminal penalties, managed physicians could have restrictions imposed upon their licenses to practice medicine, parts or all of our existing management agreements could be rendered unenforceable and we could be required to restructure our contractual arrangements with the managed practices, all of which could have an adverse effect on our financial condition and results of operations.
 
Although we view our Attain IVF Refund program as a guaranty or warranty of our fertility centers’ performance and our Attain IVF Multi-Cycle program as a lower-cost alternative, our Attain IVF Refund program and our Attain IVF Multi-Cycle program each have several characteristics that are present in an insurance contract. As such, an insurance regulator in a particular state may find that we have been and are engaged in the business of insurance without a license, which could subject us to criminal and civil liabilities and would subject either or both of our Attain IVF programs to substantial regulation in that state as an insurance contract, including burdensome reserve requirements. In addition, in states that prohibit physicians from splitting professional fees with non-physicians, we could be required to restructure our Attain IVF programs if a state concluded that our Attain IVF programs constituted fee splitting because we retain a portion of the payments patients pay directly to us for their medical treatment by our fertility centers. The imposition of any such liabilities and any such changes in our method of doing business would likely reduce revenues and contribution from our Consumer Services Division.
 
Additionally, our management agreements with our vein clinics provide that the vein clinics will pay us a fee equal to 150% of our expenses of operating and managing the vein clinics. These fees have historically exceeded the operating margin generated by any particular vein clinic prior to payment of the management fee. Accordingly, each vein clinic only pays the portion of the management fee that is equal to the amount of revenue generated by the clinic annually up to the 150% amount. As a result, our vein clinics do not generate any net profits at year end. A state regulator could find that such a compensation model is actually based on a percentage of the revenue of a particular vein clinic or that our management fee is not commensurate with the services we provide, in which case our management agreements would be violating fee-splitting laws of certain states where we operate vein clinics. We could be forced to restructure the fee structure under the management agreements to our material financial detriment or the providers affiliated with our vein clinics who have been found to violate the fee-splitting statutes or regulations may be subject to disciplinary action or criminal sanctions, which could lead to the closure of one or more of our vein clinics.
 
Our arrangements with our fertility centers and vein clinics may trigger the application of federal and various state franchise laws. We have never sought to comply with any such franchise laws, nor have we ever sought any exemptions from such laws. The U.S. Federal Trade Commission could bring an enforcement action against us for failure to comply with federal franchise laws and could impose significant fines against us, order us to pay restitution to the fertility centers and vein clinics that are found to be franchisees (and the physicians that own or operate them) and/or seek criminal sanctions against us. Under the laws of certain of the states in which we operate, the physicians that own or operate our fertility centers and vein clinics may bring private causes of actions against us for violating such laws. In many of these jurisdictions, in addition to a judgment for actual damages, a court could award the physicians rescission, attorney’s fees and costs and treble damages. Additionally, we could be subject to fines and criminal sanctions. Even if we were to comply with these federal and state franchise


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laws, we would still be potentially liable for prior violations that occurred prior to the time we came into compliance with such laws.
 
New or enhanced laws and regulations affecting the fertility industry could increase our costs of compliance and force us to alter certain of our operations.
 
A number of high profile events have occurred recently related to ART and fertility practices generally, such as the implantation of a greater than recommended number of embryos, resulting in extraordinarily high-order multiple births, or the implantation of incorrect patient embryos. Federal and state regulators may more carefully scrutinize the fertility industry as a result of these events, and may adopt more stringent laws and regulations that could increase our compliance costs or force us to alter certain of our operations.
 
We and our Partner fertility centers and vein clinics may not have sufficient liability insurance to cover potential claims.
 
The medical procedures performed by physicians and other medical personnel in our network of fertility centers and vein clinics can involve significant complications, including genetically defective births, embryo loss and patient death. We are likely to be, and from time to time have been, named as a party in legal proceedings involving medical malpractice or other injuries that occur at one of our fertility centers or vein clinics, particularly in those fertility centers where we provide the services of a physician assistant or nurse practitioner. A successful malpractice claim could exceed the limits of insurance that we maintain, in which case we would have to fund any settlement in excess of our insurance coverage. We also maintain medical malpractice insurance coverage for our Partner fertility centers and vein clinics, and a successful malpractice claim against one of those centers or clinics in excess of the coverage we maintain for them would adversely affect the revenues we derive from those centers and clinics. In addition, the captive insurance company that provides a portion of our insurance coverage does not maintain reserves in amounts that would be required of other, larger insurers, and therefore may not have adequate capital to fund a claim against us or the Partner fertility centers covered by the captive insurance company. A malpractice claim, whether or not successful, could be costly to defend, could consume management resources and could adversely affect our reputation and business and the reputations and businesses of our Partner fertility centers and vein clinics. We also cannot assure you that we or our Partner fertility centers or vein clinics will be able to obtain insurance coverage in the future on commercially reasonable terms, or at all.
 
Our success depends on retaining key members of our management team.
 
The success of our business strategy depends on the continued contribution of key members of our management team. The loss of key members of this team could disrupt our growth plans and our ability to implement our business strategy.
 
We rely on a limited number of third-party vendors for medicine and supplies.
 
Our fertility centers and vein clinics rely on a limited number of third-party vendors that produce medications and supplies vital to patient treatment, such as AngioDynamics, Inc., which provides the only U.S. Food and Drug Administration approved solution used in sclerotherapy. If any of these vendors were to experience a supply shortage or cease doing business, and we were unable to find an alternative third-party vendor, we might not be able to properly serve our patients.


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Our credit agreement contains covenants that impose restrictions on us that may limit our operating flexibility, prevent us from entering into extraordinary transactions that benefit our stockholders and limit our growth.
 
Our credit agreement contains covenants that restrict our flexibility to conduct business. These covenants prohibit or limit, among other things:
 
  •  the payment of dividends to our stockholders;
 
  •  the incurrence of additional indebtedness;
 
  •  the making of certain types of restricted payments and investments;
 
  •  sales of assets; and
 
  •  consolidations, mergers and transfers of all or substantially all of our assets.
 
The credit agreement also requires that we maintain certain leverage and fixed charge ratios and minimum levels of earnings before interest, taxes, depreciation and amortization. Our failure to comply with any of these covenants could cause the lenders to declare a default and accelerate amounts due to them under the credit agreement.
 
In addition, our credit agreement places certain restrictions on our ability to acquire the business, assets or capital stock of fertility centers. For example, our credit agreement prevents us from acquiring a fertility center for a purchase price in excess of $5.5 million (increasing to $6.0 million after August 31, 2010) without the prior written consent of our lender. In addition, our credit agreement prevents us from making acquisitions of fertility centers that aggregate in excess of $11 million for the period from August 1, 2009 through July 31, 2010, or that exceed $12 million for the period after August 1, 2010. If we identify fertility centers that we want to acquire in excess of limits in our credit agreement and do not obtain the consent of our lender to those acquisitions, we may not be able to execute on our strategy.
 
Our failure to maintain effective internal control over financial reporting could lead to inaccuracies in our reported financial results.
 
On October 28, 2009, management concluded that our audited financial statements for the years ended December 31, 2006, 2007 and 2008 needed to be restated for the correction of errors. In addition, we identified a material weakness in the design of our internal control over financial reporting in connection with the accounting for our Attain IVF Refund Program. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. If our independent registered public accounting firm were to determine that this deficiency were to still exist, or another new or related deficiency were to develop, or if we were otherwise unable to achieve and maintain effective internal controls on a timely basis, management would not be able to conclude that we have effective internal control over financial reporting for purposes of Section 404 of the Sarbanes-Oxley Act of 2002. In addition, our independent registered public accounting firm would not be able to certify as to the effectiveness of our internal control over financial reporting. Moreover, any failure to establish and maintain effective systems of internal control and procedures may impair our ability to accurately report our financial results. Such failures and the reporting that our system of internal controls over financial reporting was not effective could result in a restatement of our financial statements and cause investors to lose confidence in the reliability of our financial statements, which could result in a decline in our stock price.


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We may not have adequate protection for our intellectual property rights.
 
Trade secrets and other proprietary information not protected by patents are critical to our business. Our sole means of protecting this information is to utilize confidentiality agreements with employees, third parties and consultants. If these agreements are breached, another entity could obtain our trade secrets and proprietary information and attempt to replicate our business model, which could have an adverse effect on our business.
 
We could be subject to additional income tax liabilities
 
We are subject to income taxes in various states within the United States. Judgment is often required in evaluating our provision for income taxes. During the ordinary course of business, there are certain transactions for which the ultimate tax determination is uncertain. For example, certain taxing authorities may take the position that we are providing services in jurisdictions where our Partner fertility centers operate. The final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on our operating results or cash flows.
 
Risks Relating to an Investment in our Common Stock
 
The trading price of our common stock could be subject to volatility.
 
The average daily trading volume of our shares of common stock on the Nasdaq Global Market for the nine months ended September 30, 2009 was approximately 7,158 shares. Because the shares of our common stock are lightly traded, they are subject to volatile price fluctuations, which may make it difficult for you to sell our common stock when you want or at prices you find attractive. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of management’s attention and resources, and could have a material adverse effect on our financial condition.
 
Future sales or the potential for future sales of our common stock may cause the trading price of our common stock to decline.
 
Sales of a substantial number of shares of our common stock by our two largest stockholders, or by any of our other significant stockholders, or the perception that these sales may occur, could cause the market price of our common stock to decline. Approximately 43.5% of our outstanding common stock is currently held by two investor groups. If either of these groups, or any other significant stockholders, were to attempt to sell all or part of their positions in the public market, our stock price could fall substantially.
 
In addition, our directors and executive officers and IAT, who beneficially owned an aggregate of 3,485,318 shares of our common stock as of February 1, 2010, are subject to lock-up agreements that restrict their ability to transfer their shares of our common stock for 90 days following the date of this prospectus. The market price of shares of our common stock may decrease if a significant number of these shares are sold when the restrictions on their sale lapse.


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We will have broad discretion in applying the net proceeds of this offering and may not use those proceeds in ways that will enhance the market value of our common stock.
 
We have significant flexibility in applying the net proceeds we will receive in this offering. Although we may use the net proceeds that we receive in this offering to accelerate the addition of new Partner fertility centers and the pace of opening new vein clinics, we have no obligation to do so and we may apply the net proceeds of this offering for working capital and general corporate purposes. As part of your investment decision, you will not be able to assess or direct how we apply these net proceeds. If we do not apply these funds effectively, we may lose significant business opportunities. Furthermore, our stock price could decline if the market does not view our use of the net proceeds from this offering favorably.
 
You will incur immediate and substantial dilution as a result of this offering.
 
The public offering price per share of our common stock in this offering is substantially higher than the net tangible book value per share of our outstanding common stock. As a result, you will incur immediate and substantial dilution of $8.07 per share, representing the difference between the assumed public offering price of $8.26 per share and our tangible net book value per share of $0.19, each as of September 30, 2009.
 
Our future capital needs could result in dilution of your investment.
 
Our board of directors may determine from time to time that there is a need to obtain additional capital through the issuance of additional shares of our common stock or other securities. These issuances would likely dilute the ownership interests of the investors in this offering and may dilute the net tangible book value per share of our common stock. Investors in subsequent offerings may also have rights, preferences and privileges senior to our current stockholders which may adversely impact our current stockholders.
 
We do not intend to pay cash dividends on our common stock for the foreseeable future.
 
We have not paid cash dividends on our common stock during the last two fiscal years, and we do not expect to pay cash dividends on our common stock at any time in the foreseeable future. The future payment of dividends directly depends upon our future earnings, capital requirements, financial requirements and other factors that our board of directors will consider. In addition, our credit agreement prohibits us from paying cash dividends on our common stock. Because we do not anticipate paying cash dividends on our common stock in the foreseeable future, the return on your investment on our common stock will depend solely on a change, if any, in the market value of our common stock.
 
Our certificate of incorporation, by-laws and Delaware law could limit another party’s ability to acquire us, even if an acquisition would be beneficial to our stockholders.
 
A number of provisions in our certificate of incorporation and by-laws make it difficult for another company to acquire us, even if doing so would benefit our stockholders. For example, our certificate of incorporation authorizes our board of directors to issue “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval. The rights of holders of our common stock could be adversely affected by the terms of any preferred stock that may be issued in the future. In addition, our by-laws limit the ability of our stockholders to call special meetings or fill vacancies on the board.


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Also, Section 203 of the Delaware General Corporation Law generally limits our ability to engage in any business combination with certain persons who own 15% or more of our outstanding voting stock or any of our associates or affiliates who at any time in the past three years have owned 15% or more of our outstanding voting stock. These provisions may have the effect of entrenching our management team and may deprive you of the opportunity to sell your shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.


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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
The information included in this prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the attainment of which involves various risks and uncertainties. All statements other than statements of historical fact included in this prospectus are forward-looking statements. 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.
 
These forward-looking statements are based on assumptions that we have made in light of our experience in the industry in which we operate, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this prospectus, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond our control) and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial condition or results of operations and cause actual results to differ materially from those in the forward-looking statements. These factors include, among other things:
 
  •  termination of any of our Partner fertility center agreements for any reason;
 
  •  an inability to identify attractive candidates for our Partner Program, successfully negotiate contract acquisition terms with Partner candidates or effectively integrate new Partners;
 
  •  an inability to recruit or retain suitable physicians to open and operate our vein clinics;
 
  •  less than expected growth in the vein care market, especially for minimally invasive procedures in which our vein clinics specialize;
 
  •  termination or adverse changes to the terms of our reimbursement arrangements with third-party payors;
 
  •  decreases in reimbursement rates from third-party payors, either in markets where we and our Partner and Affiliate fertility centers and vein clinics currently operate or into which we plan to expand;
 
  •  adoption of new laws or regulations applicable to fertility centers or vein clinics, either in markets where we and our Partner and Affiliate fertility centers and vein clinics currently operate or into which we plan to expand;
 
  •  changing patterns of enforcement or new interpretations of existing laws and regulations;
 
  •  the occurrence of adverse medical outcomes at one or more of our Partner or Affiliate fertility centers or vein clinics, or other events that adversely affect the reputation of those centers or clinics or the physicians who work at those centers or clinics;
 
  •  development of new technologies that our Partner or Affiliate fertility centers or vein clinics do not adopt;
 
  •  an increase in litigation against us, our Partner fertility centers or vein clinics or the physicians who work at those centers and clinics;


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  •  an inability to obtain insurance on commercially reasonable terms, the adequacy of insurance to address claims to which we, or our Partner fertility centers or vein clinics, are subject, or the inability of an insurer to pay amounts owed to us or our Partner fertility centers or vein clinics for a claim;
 
  •  an increase in the competition that we and our Partners fertility centers or vein clinics face; and
 
  •  other factors discussed under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.”
 
Because of these factors, we caution that you should not place undue reliance on any of our forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We are under no obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.


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USE OF PROCEEDS
 
We estimate that the net proceeds to us from this offering will be approximately $18.8 million, or approximately $21.1 million if the underwriters exercise their over-allotment option in full, based on the assumed offering price and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us related to this offering.
 
We currently intend to use all or part of the net proceeds of this offering (i) to accelerate the addition of new fertility centers to our Partner Program, and are targeting fertility centers with annual revenues of between $6 million and $25 million, and (ii) to accelerate the pace to target the opening of eight new vein clinics in 2010. However, we have no obligation to apply the net proceeds of this offering as set forth above and there can be no assurance that we will successfully identify any acquisition candidates or markets for new centers or clinics. If we do not apply the net proceeds of this offering as set forth above, we intend to use the net proceeds for general working capital and other corporate purposes.


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PRICE RANGE OF COMMON STOCK
 
Our common stock is traded on the Nasdaq Global Market under the symbol “INMD.” The following table sets forth, for the periods indicated, the high and low closing sales prices per share of our common stock, as reported on the Nasdaq Global Market:
 
                 
    High     Low  
 
2010
               
First Quarter (through February 4, 2010)
  $ 8.85     $ 7.95  
2009
               
Fourth Quarter
  $ 9.37     $ 7.55  
Third Quarter
  $ 10.25     $ 7.03  
Second Quarter
  $ 7.99     $ 5.81  
First Quarter
  $ 7.45     $ 5.60  
2008
               
Fourth Quarter
  $ 6.97     $ 4.80  
Third Quarter
  $ 8.17     $ 6.01  
Second Quarter
  $ 10.23     $ 7.07  
First Quarter
  $ 11.95     $ 8.50  
 
On February 4, 2010, the closing sale price per share of our common stock was $8.26, as reported on the Nasdaq Global Market. On February 1, 2010, there were 104 holders of record of our common stock. This figure does not include persons or entities who hold their common stock in nominee or “street” name.
 
DIVIDEND POLICY
 
We have not paid cash dividends on our common stock during the last two fiscal years, and we currently anticipate retaining all available funds for use in the operation and expansion of our business. In addition, our credit agreement prohibits us from paying cash dividends on our common stock. Therefore, we do not anticipate paying any cash dividends on our common stock in the foreseeable future.


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CAPITALIZATION
 
The following table describes our capitalization as of September 30, 2009 on an actual basis and as adjusted to reflect our sale of 2,500,000 shares of common stock in this offering at an assumed offering price of $8.26 per share, the last reported sale price for our common stock on February 4, 2010, as reported by the Nasdaq Global Market, after deducting estimated underwriting discounts and commissions and offering expenses payable by us related to this offering.
 
You should read this capitalization table together with the consolidated financial statements and related notes appearing elsewhere in this prospectus, as well as “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other financial information included elsewhere in this prospectus.
 
                 
    As of September 30, 2009  
    Actual     As Adjusted(1)  
    (unaudited)  
    (in thousands, except share data)  
 
Debt:
               
Current portion of long-term notes payable and other obligations
  $ 11,335     $ 11,335  
Long-term notes payable and other obligations
    15,845       15,845  
                 
Total notes payable and other obligations(2)
    27,180       27,180  
                 
Shareholders’ equity:
               
Common stock, $0.01 par value; 15,000,000 shares authorized, actual and as adjusted; 8,781,150 shares issued and outstanding, actual; 11,281,150 shares issued and outstanding as adjusted(3)
    88       113  
Capital in excess of par
    56,011       74,794  
Other comprehensive loss
    (222 )     (222 )
Treasury stock, at cost; 46,408 shares, actual and as adjusted
    (375 )     (375 )
Retained earnings
    1,084       1,084  
                 
Total shareholders’ equity
    56,586       75,394  
                 
Total capitalization
  $ 83,766     $ 102,574  
                 
 
(1) Assumes no exercise of the underwriters’ over-allotment option.
(2) As of September 30, 2009, we had $2,500,000 available under our line of credit that was unused.
(3) Excludes 209,685 shares of common stock issuable upon exercise of outstanding stock options as of September 30, 2009 at a weighted average exercise price of $5.98 per share and 458,777 shares of common stock reserved for issuance under our 2007 Long-Term Compensation Plan and our 2000 Long-Term Compensation Plan.


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RECENT FINANCIAL RESULTS (UNAUDITED)
 
The following tables set forth our recent financial results (unaudited) as of and for the periods presented. We and our auditors have not completed each of our and their normal audit finalization procedures for the year ended December 31, 2009 and there can be no assurance that our audited results for the periods presented will not differ from these results. In addition, these results should not be viewed as a substitute for full financial statements prepared in accordance with GAAP. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full year period. You should read these financial results together with the consolidated financial statements and related notes appearing elsewhere in this prospectus, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other financial information included elsewhere in this prospectus. Historical results are not necessarily indicative of future performance.
 
We prepare our consolidated financial statements in accordance with GAAP, including FIN No. 46R. In accordance with FIN No. 46R, we do not consolidate the results of the fertility centers to which we provide services because we do not have a controlling financial interest in such centers and we are not the primary beneficiary or obligor of such centers’ financial results. We do, however, have a controlling financial interest in individual vein clinics where we are the primary beneficiary and obligor of their financial results. As such, we consolidate the financial condition, results of operations and cash flows of those clinics’ operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Off-Balance Sheet Arrangements.”
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
                                 
    Three Months Ended
    Year Ended
 
    December 31,     December 31,  
    2009     2008     2009     2008  
    (unaudited)     (unaudited)     (restated)  
    (all amounts in thousands, except per share amounts)  
 
Revenues:
                               
Fertility Centers
  $ 35,771     $ 34,138     $ 145,309     $ 138,440  
Consumer Services
    5,584       5,396       20,826       19,763  
Vein Clinics
    13,337       10,686       50,625       39,950  
                                 
Total Revenues
    54,692       50,220       216,760       198,153  
                                 
Costs of services and sales:
                               
Fertility Centers
    32,846       31,539       133,706       128,224  
Consumer Services
    4,138       4,011       15,639       14,344  
Vein Clinics
    12,268       9,962       46,525       37,299  
                                 
Total cost of services and sales
    49,252       45,512       195,870       179,867  
                                 
Contribution:
                               
Fertility Centers
    2,925       2,599       11,603       10,216  
Consumer Services
    1,446       1,385       5,187       5,419  
Vein Clinics
    1,069       724       4,100       2,651  
                                 
Total contribution
    5,440       4,708       20,890       18,286  
                                 
General and administrative expenses
    2,822       2,703       12,155       10,654  
Interest income
    (63 )     (59 )     (250 )     (383 )
Interest expense
    291       355       1,160       1,563  
                                 
Total other expenses
    3,050       2,999       13,065       11,834  
                                 
Income before income taxes
    2,390       1,709       7,825       6,452  
Income tax provision
    1,158       629       3,331       2,537  
                                 
Net income
  $ 1,232     $ 1,080     $ 4,494     $ 3,915  
                                 
Basic and diluted net earnings per share:
                               
Basic earnings per share
  $ 0.14     $ 0.13     $ 0.51     $ 0.45  
Diluted earnings per share
  $ 0.14     $ 0.12     $ 0.51     $ 0.45  
Weighted average shares — basic
    8,783       8,618       8,773       8,618  
Weighted average shares — diluted
    8,839       8,691       8,834       8,691  


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CONSOLIDATED BALANCE SHEETS
 
                 
    December 31,
    December 31,
 
    2009     2008  
    (unaudited)     (restated)  
    (all amounts in thousands)  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 28,865     $ 28,275  
Patient and other receivables, net
    6,964       6,681  
Deferred tax assets
    2,883       5,744  
Other current assets
    7,653       6,466  
                 
Total current assets
    46,365       47,166  
Fixed assets, net
    16,705       16,618  
Intangible assets, Business Service Rights, net
    24,210       21,956  
Goodwill
    30,334       29,478  
Trademarks
    4,442       4,442  
Other assets
    2,253       1,781  
                 
Total assets
  $ 124,309     $ 121,441  
                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
               
Accounts payable
  $ 2,846     $ 2,853  
Accrued liabilities
    15,119       17,818  
Current portion of long-term notes payable and other obligations
    11,317       11,351  
Due to Fertility Medical Practices, net
    6,424       6,354  
Attain IVF Refund Program and other patient deposits
    13,362       11,237  
                 
Total current liabilities
    49,068       49,613  
Deferred tax liabilities
    2,199       696  
Long-term notes payable and other obligations
    14,849       18,868  
                 
Total liabilities
    66,116       69,177  
Commitments and Contingencies Shareholders’ equity:
               
Common stock
    88       87  
Capital in excess of par
    56,354       54,943  
Other comprehensive loss
    (188 )     (375 )
Treasury stock
    (375 )     (211 )
Retained earnings (accumulated deficit)
    2,314       (2,180 )
                 
Total shareholders’ equity
    58,193       52,264  
                 
Total liabilities and shareholders’ equity
  $ 124,309     $ 121,441  
                 


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CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                                 
    Three Months Ended
    Year Ended
 
    December 31,     December 31,  
    2009     2008     2009     2008  
    (unaudited)     (unaudited)     (restated)  
    (all amounts in thousands)  
 
Cash flows from operating activities:
                               
Net income
  $ 1,232     $ 1,080     $ 4,494     $ 3,915  
Adjustments to reconcile net income to net cash provided by operating activities:
                               
Depreciation and amortization
    1,737       1,829       7,119       7,288  
Deferred income tax provision
    4,269       (692 )     3,433       (1,068 )
Deferred stock based compensation
    298       241       1,336       858  
Changes in assets and liabilities —
                               
Decrease (increase) in assets:
                               
Patient and other accounts receivable
    626       65       (283 )     (1,170 )
Other current assets
    (1,587 )     (1,076 )     (1,187 )     (643 )
Other assets
    (323 )     162       (473 )     (162 )
(Decrease) increase in liabilities:
                               
Accounts payable
    797       371       (7 )     958  
Accrued liabilities
    (3,706 )     217       (2,864 )     (1,097 )
Due to medical practices
    (4,127 )     (664 )     70       (2,689 )
Attain IVF Refund Program patient deposits
    366       (542 )     2,125       677  
                                 
Net cash provided by (used in) operating activities
    (418 )     991       13,763       6,867  
                                 
Cash flows used in investing activities:
                               
Purchase of business service rights
    (3,550 )           (3,550 )     (950 )
Cash paid to purchase VCA, net of cash acquired
                      (119 )
Other intangibles
          160             50  
Purchase of fixed assets and leasehold improvements
    (1,444 )     (1,799 )     (5,910 )     (5,695 )
                                 
Net cash used in investing activities
    (4,994 )     (1,639 )     (9,460 )     (6,714 )
                                 
Cash flows used in financing activities:
                               
Proceeds from issuance of debt
          7,500             7,880  
Principal repayments on debt
    (915 )     (912 )     (3,750 )     (3,648 )
Common stock transactions, net
    6       (111 )     37       150  
                                 
Net cash provided by (used in) financing activities
    (909 )     6,477       (3,713 )     4,382  
                                 
Net increase in cash and cash equivalents
    (6,321 )     5,829       590       4,535  
Cash and cash equivalents at beginning of period
    35,186       22,446       28,275       23,740  
                                 
Cash and cash equivalents at end of period
  $ 28,865     $ 28,275     $ 28,865     $ 28,275  
                                 
Supplemental Information:
                               
Interest paid
  $ 255     $ 620     $ 1,067     $ 1,632  
Income taxes paid
  $ 238     $ 43     $ 3,896     $ 1,526  


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Fertility Centers Division
 
Fertility Centers Division revenue growth was driven by same-center patient revenue growth of 3.2% during the fourth quarter of 2009 and 3.2% in the full year 2009, as well as by improved operating efficiency across the division. Economic challenges continued to modestly temper consumer demand for high cost IVF treatments as patients substituted other treatments with better insurance coverage.
 
Consumer Services Division
 
The improved fourth quarter of 2009 results for the Consumer Services Division principally reflect the reestablishment of a third-party financing capability in the fourth quarter of 2009 following the termination of an earlier funding source during the second quarter of 2009, as well as the launch of our Attain IVF Multi-Cycle Program, which broadens the pool of patients who are eligible to enroll in our Attain IVF programs and has a lower price point than our Attain IVF Refund Program.
 
Consumer Services Division margins improved slightly on a quarter-over-quarter basis to 25.9% for the fourth quarter of 2009, but fell to 24.9% for the full year 2009 as compared to 27.4% for the full year 2008. The full year decline in margins is attributable to a reduction in pregnancy rates from 43.2% and 44.4% in the fourth quarter of 2008 and the full year 2008, respectively, to 39.8% and 43.8% in the fourth quarter of 2009 and the full year 2009, respectively. The variation of pregnancy rates, though within a normal range, will continue to be a meaningful factor in year-over-year margin comparisons.
 
Vein Clinics Division
 
Contribution from our Vein Clinics Division increased to $1.1 million in the fourth quarter of 2009 from $700,000 in the fourth quarter of 2008, representing a 48% increase. For the full-year period, contribution grew 55% to $4.1 million.
 
Margins in our Vein Clinics Division improved on a quarterly as well as full year basis to 8.0% in the fourth quarter of 2009 from 6.8% in fourth quarter of 2008 and to 8.1% for the full year 2009 from 6.6% for the full year 2008. The margin improvements were principally due to the impact of higher revenues on a relatively fixed overhead, as well as from the slower pace of new clinic openings during 2009, as start-up losses from the first several months of new clinics create a short-term drag on divisional operating performance.
 
Cash Flow and Balance Sheet
 
Our total assets grew to $124.3 million at December 31, 2009 from $121.4 million at December 31, 2008, with cash and cash equivalents increasing by 2% to $28.9 million at December 31, 2009 versus $28.3 million at December 31, 2008. The increase in cash and cash equivalents was achieved despite investments across our businesses, including approximately $3.6 million for acquisitions in our Fertility Centers Division. Cash provided by operating activities rose to $13.8 million for 2009, versus $6.9 million for 2008. We expect to use some of our cash and cash equivalents in the first quarter of 2010 to fund our growth strategy, as well as for fertility physician draw-downs of accrued compensation, upfront outlays for marketing, advertising and media purchases and for the payment of medical malpractice and other insurance premiums. In response to an inquiry from a state taxing authority, we accrued for additional tax obligations for taxes owed, as well as a reserve for potential tax obligations in an aggregate amount equal to $.02 of our earnings per share for the fourth quarter of 2009.


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SELECTED CONSOLIDATED FINANCIAL DATA
 
The following table sets forth our selected consolidated financial data as of and for the periods presented. The selected consolidated financial data as of December 31, 2007 and 2008 and for each of the years ended December 31, 2006, 2007 and 2008 have been derived from our audited annual consolidated financial statements, which are included elsewhere in this prospectus. The selected consolidated financial data as of December 31, 2004, 2005 and 2006 and for each of the years ended December 31, 2004 and 2005 have been derived from our audited annual consolidated financial statements, which have not been included in this prospectus. The selected consolidated financial data as of and for the nine months ended September 30, 2008 and 2009 have been derived from our unaudited consolidated financial statements, which are included elsewhere in this prospectus. In the opinion of management, our unaudited consolidated financial statements include all adjustments, consisting only of normal recurring items, except as noted in the notes to the consolidated financial statements, necessary for a fair statement of interim periods. The financial information presented for the interim periods has been prepared in a manner consistent with our accounting policies described elsewhere in this prospectus, and should be read in conjunction therewith. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full year period. You should read this data together with the consolidated financial statements and related notes appearing elsewhere in this prospectus, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other financial information included elsewhere in this prospectus. Historical results are not necessarily indicative of future performance.
 
We prepare our consolidated financial statements in accordance with GAAP, including FIN No. 46R. In accordance with FIN No. 46R, we do not consolidate the results of the fertility centers to which we provide services because we do not have a controlling financial interest in such centers and we are not the primary beneficiary or obligor of such centers’ financial results. We do, however, have a controlling financial interest in individual vein clinics where we are the primary beneficiary and obligor of their financial results. As such, we consolidate the financial condition, results of operations and cash flows of those clinics’ operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Off-Balance Sheet Arrangements.”
 
                                                         
    Year Ended December 31,     Nine Months Ended September 30,  
    2004     2005     2006     2007(1)     2008     2008     2009  
    (restated)     (restated)     (restated)     (restated)     (restated)     (unaudited)  
    (dollars in thousands, except per share amounts)  
 
Statement of Operations Data:
                                                       
Revenues, net:
                                                       
Fertility Centers
  $ 86,079     $ 105,277     $ 112,767     $ 121,078     $ 138,440     $ 104,302     $ 109,538  
Consumer Services
    21,224       23,684       13,553       16,460       19,763       14,367       15,242  
Vein Clinics
    N/A       N/A       N/A       14,284       39,950       29,264       37,288  
                                                         
Total revenues
    107,303       128,961       126,320       151,822       198,153       147,933       162,068  
                                                         
Costs of services and sales:
                                                       
Fertility Centers
    77,534       95,931       104,357       111,059       128,224       96,685       100,860  
Consumer Services
    20,071       20,465       9,421       12,336       14,344       10,333       11,501  
Vein Clinics
    N/A       N/A       N/A       13,304       37,299       27,337       34,257  
                                                         
Total costs of services and sales
    97,605       116,396       113,778       136,699       179,867       134,355       146,618  
                                                         
Contribution:
                                                       
Fertility Centers
    8,545       9,346       8,410       10,019       10,216       7,617       8,678  
Consumer Services
    1,153       3,219       4,132       4,124       5,419       4,034       3,741  
Vein Clinics
    N/A       N/A       N/A       980       2,651       1,927       3,031  
                                                         
Total contribution
    9,698       12,565       12,542       15,123       18,286       13,578       15,450  
                                                         


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    Year Ended December 31,     Nine Months Ended September 30,  
    2004     2005     2006     2007(1)     2008     2008     2009  
    (restated)     (restated)     (restated)     (restated)     (restated)     (unaudited)  
    (dollars in thousands, except per share amounts)  
 
General and administrative expenses
    8,065       9,973       9,380       10,537       10,654       7,951       9,333  
Interest income
    (259 )     (480 )     (1,073 )     (1,256 )     (383 )     (324 )     (187 )
Interest expense
    295       288       695       1,136       1,563       1,208       869  
                                                         
Total other expenses
    8,101       9,781       9,002       10,417       11,834       8,835       10,015  
                                                         
Income before income taxes
    1,597       2,784       3,540       4,706       6,452       4,743       5,435  
Income tax provision
    641       1,053       1,291       1,662       2,537       1,909       2,173  
Income tax benefit
                (821 )(4)                        
                                                         
Net income
  $ 956     $ 1,731     $ 3,070 (4)   $ 3,044     $ 3,915     $ 2,834     $ 3,262  
                                                         
Basic and diluted net earnings per share:
                                                       
Basic earnings per share
  $ 0.12     $ 0.21     $ 0.38     $ 0.37     $ 0.45     $ 0.33     $ 0.37  
Diluted earnings per share
  $ 0.12     $ 0.21     $ 0.37     $ 0.36     $ 0.45     $ 0.33     $ 0.37  
Weighted average shares — basic
    8,090       8,090       8,090       8,310       8,618       8,607       8,770  
Weighted average shares — diluted
    8,194       8,194       8,194       8,410       8,691       8,685       8,833  
Balance Sheet Data(2):
                                                       
Working capital(3)
  $ 1,157     $ 6,148     $ 11,685     $ (3,435 )   $ (2,445 )   $ (2,507 )   $ (2,560 )
Total assets
    54,119       67,190       76,323       114,171       121,443       113,315       128,456  
Total indebtedness
    5,239       10,147       8,774       25,460       30,219       23,200       27,180  
Retained earnings (accumulated deficit)
    (13,940 )     (12,209 )     (9,139 )     (6,095 )     (2,178 )     (3,260 )     1,084  
Total shareholders’ equity
    33,933       36,298       40,178       47,634       52,266       51,251       56,586  
 
(1) Our Vein Clinics Division began operations on August 8, 2007 with our purchase of VCA.
(2) As of the last day of the reported period.
(3) Represents current assets less current liabilities.
(4) In December 2006, we determined that we no longer needed a valuation allowance related to deferred tax assets generated by net operating loss carry-forwards of prior years. As a result, we recorded a tax benefit of $821,000 for the year ended December 31, 2006.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with the historical consolidated financial statements and related notes and the other financial information appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of events could differ materially from those anticipated in the forward-looking statements as a result of many factors, including those discussed under the caption “Risk Factors” and elsewhere in this prospectus.
 
Overview
 
We manage highly specialized outpatient centers in emerging, technology-based, niche medical markets. Currently, we are a leading manager of fertility centers and vein clinics in the United States. We provide services and products through our three operating divisions (Fertility Centers, Consumer Services and Vein Clinics) and shared support services for providers through our corporate offices. Each of our operating divisions is presented as a separate segment for financial reporting purposes.
 
Our Fertility Centers Division is a provider network of 14 contracted fertility centers (including one fertility center in Utah that is scheduled to begin seeing patients in the first quarter of 2010), referred to as our Partner Program, serving 16 metropolitan markets across the United States. We offer products and services to these providers designed to support the fertility center’s growth. All fertility Partners also have full access to our Consumer Services Division offerings. The division also sponsors a Council of Physicians and Scientists for fertility providers. Physicians affiliated with our Partner fertility centers obtain a portion of their malpractice insurance through ARTIC — Assisted Reproductive Technology Insurance Company, a captive insurance company which we helped organize in 2005.
 
Our Consumer Services Division offers our Attain IVF programs to fertility patients. The division’s Attain IVF programs are designed to make the treatment process easier and more affordable for patients. Currently, this division maintains a contracted network of 26 independent fertility centers (23 as of December 31, 2008) under its Affiliate Program, which is designed to distribute the division’s products and services to a wider group of patients than those serviced by our Partner locations.
 
Our Vein Clinics Division began operations on August 8, 2007, with the purchase of Vein Clinics of America, Inc. (“VCA”), a company that had been in business since 1981. The Vein Clinics Division currently manages a network of 34 clinics (32 as of December 31, 2008) located in 13 states, which specialize in the treatment of vein disease and other vein disorders.
 
The primary elements of our business strategy include:
 
  •  Making selective contract acquisitions of Partner fertility centers;
 
  •  Expanding our network of Affiliate fertility centers;
 
  •  Developing de novo vein clinics;
 
  •  Increasing the total number of patients treated;
 
  •  Increasing the penetration of our Attain IVF programs; and
 
  •  Continuing to improve operating efficiencies.


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Major Events Impacting Financial Condition and Results of Operations
 
2010
 
On January 12, 2010, we announced plans to open a new vein clinic in Chevy Chase, Maryland in early May 2010. This will be the 36th clinic in our Vein Clinics Division and our seventh clinic in the greater Baltimore/Washington D.C. region.
 
On January 8, 2010, we announced plans to open a new vein clinic in Columbia, Maryland in mid-2010. This will be the 35th clinic in our Vein Clinics Division and will add interventional radiology treatments to the full range of vein treatments provided at our existing vein clinics, enabling patients to undergo a host of additional procedures.
 
2009
 
On December 1, 2009, we acquired the rights to supply a complete range of business, marketing and facility services to three new Partner fertility centers in the western United States: the Nevada Center for Reproductive Medicine in Reno, Nevada; the Idaho Center for Reproductive Medicine in Boise, Idaho; and the Utah Fertility Center, which will be located in Pleasant Grove, Utah. The Idaho and Nevada fertility centers are established centers, and the Utah center is scheduled to begin seeing patients in the first quarter of 2010. Under the terms of these 25-year agreements, our service fees are comprised of a fixed percentage of revenues, reimbursed costs of services and an additional fixed percentage of each center’s earnings. We also committed up to $1.0 million to fund any necessary capital needs of these three practices.
 
On October 28, 2009, management concluded and subsequently reported to the audit committee of our board of directors that our audited consolidated financial statements as of December 31, 2007 and 2008 and for the years ended December 31, 2006, 2007 and 2008 should no longer be relied upon and should be restated for the correction of errors due to an understatement in revenue recognized in connection with our Attain IVF Refund Program (formerly our Shared Risk Refund Program). As a result, we restated our audited consolidated financial statements as of December 31, 2007 and 2008 and for the years ended December 31, 2006, 2007 and 2008 with respect to the revenue recognized for our Attain IVF Refund Program within our Consumer Services Division. See Note 2 of our consolidated financial statements included elsewhere in this prospectus. The financial data included in this prospectus reflects this restatement.
 
On April 20, 2009, we announced the opening of a new vein clinic in Cleveland, Ohio. This represents the 34th clinic in our Vein Clinics Division, our entry into the Cleveland market and the expansion of our presence in the State of Ohio.
 
On April 1, 2009, we elected to exercise the option contained in our business service agreement with Arizona Reproductive Medicine Specialists, based in Phoenix, Arizona, and expand our service offerings from a limited range of services to those offered to our other fertility Partners.
 
On January 20, 2009, we announced the opening of a new vein clinic in Cincinnati, Ohio. This represents the 33rd clinic in our Vein Clinics Division and our first entry into the State of Ohio and the Cincinnati market.


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2008
 
From June 2008 through March 2009, our 2007 annual and our 2008 periodic interim Securities and Exchange Commission reports were the subject of a standard comment and review process by the Staff of the Division of Corporation Finance of the Securities and Exchange Commission. The application of generally accepted accounting principles to our Attain IVF Refund Program’s multiple element revenue arrangements is complex and management’s interpretation of the applicable authoritative literature related to the timing of the recognition of the fair value of revenues for the non-refundable portion of the Attain IVF Refund Program fees differed from that of the Securities and Exchange Commission, which caused us to re-evaluate our revenue recognition policies. As a result, we restated our prior financial statements for the correction of an error with respect to the timing of revenue recognition for our Attain IVF Refund Program within our Consumer Services Division. Our previous revenue recognition policy had generally recognized the non-refundable patient fees (generally 30% of the contract amount) as revenues upon the completion of the first treatment cycle. We now recognize the non-refundable fees based on the relationship of the fair value of each treatment to the total fair value of the treatment package available to each patient. We also recognize a “warranty reserve” representing the estimated cost of services to be provided in the event a qualified patient miscarries, as well as a reserve for potential refunds should a patient elect to discontinue participation in the program prior to full treatment. This restatement does not impact our cash flows from operations or the ultimate profits from our Attain IVF Refund Program, only the timing of the revenue recognition for the non-refundable portion of the Attain IVF Refund Program fees paid by patients. See Note 2 of our consolidated financial statements included elsewhere in this prospectus. The financial data included in this prospectus reflects this restatement.
 
On December 17, 2008, we announced the opening of a new vein clinic in Skokie, Illinois. This clinic represents our ninth vein care clinic in the greater Chicago metropolitan area and benefits from the operational and marketing leverage we have developed in that market.
 
On December 8, 2008, we announced the opening of a new vein clinic in Monroeville, Pennsylvania. This clinic is our first vein clinic in Pennsylvania and is designed to provide state-of-the-art vein care to patients in the greater Pittsburgh area.
 
On July 9, 2008, we entered into a business services agreement to provide discrete business services to Arizona Reproductive Medicine Specialists, based in Phoenix, Arizona. Under the terms of this 25-year agreement, our service fees were initially comprised of a fixed percentage of the fertility practice’s net revenues. We also had the exclusive option, which we exercised on April 1, 2009, at any point during the life of the contract to expand our service offerings into a complete range of business, marketing and financial services. After we exercised the option on April 1, 2009, our fees also included a fixed percentage of the fertility practice’s earnings.
 
On June 23, 2008, we announced that we entered into a new Affiliate services contract with the University of North Carolina (“UNC”) School of Medicine’s Department of Obstetrics and Gynecology in Chapel Hill, North Carolina. As an Affiliate, UNC School of Medicine’s Department of Obstetrics and Gynecology receives distribution rights to our consumer products and services. In addition, UNC School of Medicine’s Department of Obstetrics and Gynecology has the right to receive other products and services uniquely designed to support the business needs of successful, high-growth fertility centers.
 
On June 5, 2008, we announced the opening of a new vein clinic in Marietta, Georgia. This clinic was our fourth vein clinic in Georgia.


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On April 29, 2008, we announced the opening of a new vein clinic in Alexandria, Virginia. This addition to our Vein Clinics Division provides focused vein care treatment solutions to the Washington, D.C. metropolitan area.
 
On April 24, 2008, we entered into a business service agreement to supply a complete range of business, marketing and facility services to Southeastern Fertility Centers, P.A., located in Mount Pleasant, South Carolina. Under the terms of this 25-year agreement, our service fees are comprised of reimbursed costs of services, a tiered percentage of revenues and an additional fixed percentage of the practice’s earnings. We also committed up to $600,000 to fund any necessary capital needs of the practice.
 
On April 1, 2008, we entered into an Affiliate services contract with OU Physicians Reproductive Health in Oklahoma City, Oklahoma. As a result of this agreement, OU Physicians Reproductive Health provides another opportunity for our Consumer Services Division to distribute its product offerings.
 
2007
 
On August 30, 2007, we entered into a business service agreement to supply a complete range of business, marketing and facility services to the Center for Reproductive Medicine in Orlando, Florida. The Center for Reproductive Medicine is a fertility practice comprised of four physicians. Under the terms of this 25-year agreement, our service fees are comprised of reimbursed costs of services, a tiered percentage of revenues and an additional fixed percentage of the Center for Reproductive Medicine’s earnings. We also committed up to $1.0 million to fund any necessary capital needs of the practice.
 
On August 8, 2007, we acquired all of the outstanding stock of VCA for a total cost of approximately $29 million in cash and common stock. The results of VCA are included in our financial statements from the date of the acquisition.
 
Also on August 8, 2007, we entered into an amended credit agreement with Bank of America, N.A. (“Bank of America”). The term loan under the amended credit agreement is in the amount of $25 million (the proceeds of which were applied to repay our original term loan and finance, in part, the VCA transaction). Interest on the new term loan is, at our option, at the prime rate less up to 0.50% or at LIBOR plus 2.00% to 2.75%, depending upon the level of the ratio of consolidated debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”). The amended credit agreement also contains provisions for a revolving line of credit in the amount of $10 million. Interest on the revolving line of credit is at the prime rate less up to 0.50% or at LIBOR plus 1.5% to 2.5%, depending on the level of the ratio of consolidated debt to EBITDA.
 
Effective July 1, 2007, we expanded our fertility center Partner service arrangement with Shady Grove Fertility Reproductive Science Center, P.C. (“Shady Grove”) with the addition of the Fertility Center of the Greater Baltimore Medical Center (the “Center”) in Baltimore, Maryland, where we now provide a full range of business, marketing and financial services. Under the terms of this agreement, we purchased the assets of the Center from Greater Baltimore Medical Center and have committed additional resources to support further growth and development of the Center. Under the terms of this agreement, we are paid service fees comprised of reimbursed costs of services and a fixed percentage of revenues, plus an additional fixed amount of the Center’s earnings.
 
On March 19, 2007, we declared a 25% common stock split effected in the form of a common stock dividend for all holders of record as of April 13, 2007. As a result of this dividend, 1,628,907 new shares of common stock were issued on the payment date of May 4, 2007. No fractional shares were issued as all fractional amounts were rounded up to the next whole share. All weighted average shares outstanding and earnings per share calculations in this prospectus have been restated to reflect this common stock dividend.


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2006
 
In December 2006, we determined that we no longer needed a valuation allowance related to deferred tax assets generated by net operating loss carry-forwards of prior years. As a result, we recorded a tax benefit of $821,000, which reduced our overall tax provision and increased net income by the same amount while adding $0.10 to earnings per share.
 
During October 2006, we provided notification that our financial statements for 2005 and the first two quarters of 2006 could not be relied on, and were restated due to an accounting error. The restatements consisted of non-cash adjustments to deferred tax and intangible balances and did not result in any changes to net income or earnings per share for any period. All periods affected by this error have been restated throughout this prospectus.
 
On May 22, 2006, we declared a 25% common stock split effected in the form of a common stock dividend for all holders of record as of June 7, 2006. As a result of this dividend, 1,291,368 new shares of common stock were issued on the payment date of June 21, 2006. No fractional shares were issued as all fractional amounts were rounded up to the next whole share. All weighted average shares outstanding and earnings per share calculations in this prospectus have been restated to reflect this common stock dividend.
 
Significant Accounting Policies and Use of Estimates
 
Our significant accounting policies are described in Note 3 of our consolidated financial statements included elsewhere in this prospectus.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States, including our significant accounting policies, 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 periods. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowance for uncollectible accounts and contractual allowance reserves, contingencies and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our consolidated financial statements. The most significant use of estimates and assumptions in the preparation of our consolidated financial statements relates to the determination of net revenues and accounts receivable and reserves for estimated refunds due to pregnancy losses in our Attain IVF Refund Program.
 
Contractual allowance and uncollectible reserve amounts are determined based on historical collection performance data and are reviewed and adjusted monthly as necessary. We make periodic estimates for pregnancy loss based upon Company specific data.


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Results of Operations
 
The following table shows the percentage of net revenues represented by various expenses and other income items reflected in our statements of operations for the nine months ended September 30, 2009 and 2008 and the years ended December 31, 2008, 2007 and 2006:
 
                                         
          Nine Months Ended
 
    Year Ended December 31,     September 30,  
    2008     2007(1)     2006     2009     2008  
                      (unaudited)  
 
Revenues, net:
                                       
Fertility Centers
    69.9 %     79.8 %     89.3 %     67.6 %     70.5 %
Consumer Services
    10.0 %     10.8 %     10.7 %     9.4 %     9.7 %
Vein Clinics
    20.1 %     9.4 %     N/A       23.0 %     19.8 %
                                         
Total revenues
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
Costs of services incurred:
                                       
Fertility Centers
    64.7 %     73.2 %     82.7 %     62.2 %     65.4 %
Consumer Services
    7.3 %     8.1 %     7.4 %     7.1 %     7.0 %
Vein Clinics
    18.8 %     8.7 %     N/A       21.2 %     18.4 %
                                         
Total costs of services incurred
    90.8 %     90.0 %     90.1 %     90.5 %     90.8 %
Contribution:
                                       
Fertility Centers
    5.2 %     6.6 %     6.6 %     5.4 %     5.2 %
Consumer Services
    2.7 %     2.7 %     3.3 %     2.3 %     2.7 %
Vein Clinics
    1.3 %     0.7 %     N/A       1.8 %     1.3 %
                                         
Total contribution
    9.2 %     10.0 %     9.9 %     9.5 %     9.2 %
General and administrative expenses
    5.4 %     6.9 %     7.4 %     5.7 %     5.4 %
Interest income
    (0.2 )%     (0.8 )%     (0.9 )%     (0.1 )%     (0.2 )%
Interest expense
    0.8 %     0.8 %     0.6 %     0.5 %     0.8 %
                                         
Total other expenses
    6.0 %     6.9 %     7.1 %     6.1 %     6.0 %
Income from operations before income taxes
    3.2 %     3.1 %     2.8 %     3.4 %     3.2 %
Income tax provision
    1.2 %     1.1 %     0.4 %(2)     1.3 %     1.3 %
                                         
Net income
    2.0 %     2.0 %     2.4 %(2)     2.1 %     1.9 %
                                         
 
(1) Our Vein Clinics Division began operations on August 8, 2007 with our purchase of VCA.
 
(2) In December 2006, we determined that we no longer needed a valuation allowance related to deferred tax assets generated by net operating loss carry-forwards of prior years. As a result, we recorded a tax benefit of $821,000 for the year ended December 31, 2006.
 
Revenues
 
For the nine months ended September 30, 2009, total revenues of $162.1 million increased approximately $14.1 million, or 9.6%, from the same period in 2008. Approximately $8.0 million of this increase was generated by our Vein Clinics Division, $5.2 million from our Fertility Centers Division and $0.9 million from our Consumer Services Division.
 
For the year ended December 31, 2008, total revenues of $198.2 million increased approximately $46.3 million, or 30.5%, from the year ended December 31, 2007. We experienced year-over-year


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organic revenue increases in both of our fertility business segments. Our Fertility Centers Division revenues increased as a result of growth within our existing medical practices, as well as the addition of two new Partner arrangements and the full year of results of a Partner added in the third quarter of 2007. Expansion continued in our Consumer Services Division, driven by the continued expansion of our Attain IVF Refund Program. In addition to growth in our two fertility segments, our performance for the year ended December 31, 2008 included full year results from our Vein Clinics Division which was purchased on August 8, 2007.
 
For the year ended December 31, 2007, total revenues of $151.8 million increased approximately $25.5 million, or 20.2%, from the year ended December 31, 2006. Our Fertility Centers Division revenues increased as a result of growth within the underlying medical practices, the addition of one new Partner arrangement and the expansion of the Shady Grove contract. Expansion continued in our Consumer Services Division, driven by the growth of our Attain IVF Refund Program. In addition to growth within our two fertility segments, on August 8, 2007, we acquired VCA. VCA, which we believe has the single largest network of vein care providers in the United States, became our third operating segment and contributed $14.3 million to our 2007 revenues.
 
A segment-by-segment discussion is presented below.
 
Fertility Centers Segment
 
In providing clinical care to patients, each of our Partner fertility centers generates patient revenues which we do not report in our financial statements. Although we do not consolidate the Partner fertility center practice financials with our own, these financials do directly affect our revenues.
 
Generally, the components of our revenues from our Partner fertility centers are:
 
  •  A base service fee calculated as a percentage of patient revenues as reported by the Partner fertility center (this percentage generally varies from 6% down to 3% depending on the level of patient revenues);
 
  •  Cost of services equal to reimbursement for the expenses which we advanced to the Partner fertility center during the month (representing substantially all of the expenses incurred by the center); and
 
  •  Our additional fees which represent our share of the net income of the Partner fertility center (which varies from 10% to 20% or a fixed amount depending on the underlying center, subject to limits in some circumstances).
 
However, our revenues from our Fertility Centers of Illinois, S.C. (“FCI”) Partner fertility center are not based on this three-part structure. Rather, effective as of November 1, 2009, our revenues from FCI are generally equal to the operating expenses associated with managing FCI’s medical practice plus 9.5% of such expenses. Our revenues from FCI prior to November 1, 2009 were, pursuant to our current Partner agreement with FCI, set at a fixed annual amount paid monthly.
 
In addition to these revenues generated from our fertility centers, we often receive miscellaneous other revenues related to providing services to medical practices. From the total of our revenues, we subtract the annual amortization of our business service rights under most agreements, which are the rights to provide business services to each of the centers.


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During the first nine months of 2009, Fertility Centers Division revenues increased by $5.2 million, or 5.0%, relative to the same period in the prior year. This increase was the result of service fees assessed on a 2.2% rise in same-center patient revenue, as well as a comparable 4.2% rise in center contribution. These increases are net of the reduction in business at one of our top fertility centers in the Midwest as a result of termination of a contract with one of the center’s third-party payors, as well as a slight moderation in demand that we believe is attributable to the prolonged recession. Contribution from this facility in 2008 was approximately $2.3 million and this third-party payor represented approximately 20% of this contribution, or approximately $460,000.
 
Fertility Centers Division revenues in the year ended December 31, 2008 increased by $17.4 million, or 14.3%, from the year ended December 31, 2007. This compares to an increase of $8.3 million, or 7.4%, for the year ended December 31, 2007 versus the year ended December 31, 2006. During 2008 and 2007, growth was largely attributable to same center year-over-year growth in our network of underlying medical practices. Influencing this growth is our focus on increasing patient revenues through effective multi-faceted marketing programs, as well as our continued focus on expense management, which drives operational efficiency and higher contribution margins. Revenues for the year ended December 31, 2008 also benefited from:
 
  •  the inclusion of a new fertility Partner in Mount Pleasant, South Carolina, which contributed $3.5 million to our net revenues from its addition in April 2008 through December 31, 2008;
 
  •  full year results from our Orlando, Florida Partner added in September 2007; and
 
  •  the full year impact from the expansion of Shady Grove into the Baltimore, Maryland market in July 2007.
 
In July 2008, we also entered into a 25-year contract with Arizona Reproductive Medicine Specialists, based in Phoenix, Arizona. Under the terms of this agreement, we phased in the implementation of our full suite of Partner services over time. Under this arrangement, our fees were originally calculated as a fixed percentage of the center’s revenues with an option to expand into our standard three-tiered fee structure, in line with expanded Partner services, based upon the center meeting certain performance targets. We exercised this option on April 1, 2009.


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The table below illustrates the components of the Fertility Centers Division revenues in relation to the Partner fertility center practice financials for the nine months ended September 30, 2009 and 2008 and the years ended December 31, 2008, 2007 and 2006 (in thousands):
 
                                         
          Nine Months Ended
 
    Year Ended December 31,     September 30,  
    2008     2007     2006     2009     2008  
 
Partner Fertility Center Financials
                                       
(a) Patient revenues
  $ 192,380     $ 168,653     $ 152,632     $ 149,365     $ 142,973  
(b) Cost of services
    125,156       109,132       102,625       98,603       94,442  
(c) Base service fee
    8,798       7,791       7,170       7,005       6,555  
                                         
(d) Practice contribution (a-b-c)
    58,426       51,730       42,837       43,757       41,976  
(e) Physician compensation
    52,863       46,678       38,577       38,943       37,813  
(f) IntegraMed additional fee
    5,563       5,052       4,260       4,814       4,163  
IntegraMed Financials
                                       
(g) IntegraMed gross revenues (b+c+f)
    139,517       121,975       114,055       110,422       105,160  
(h) Amortization of business service rights
    (1,300 )     (1,343 )     (1,495 )     972       972  
(i) Other revenues(1)
    223       446       207       88       114  
                                         
(j) IntegraMed fertility services revenues (g+h+i)
  $ 138,440     $ 121,078     $ 112,767     $ 109,538     $ 104,302  
                                         
 
(1) Other revenues includes administrative fees we receive from ARTIC, the captive insurance company, fees from Arizona Reproductive Medicine Specialists, as well as other miscellaneous fees.
 
The following summarized quarterly data for the nine months ended September 30, 2009 and the years ended December 31, 2008, 2007 and 2006 is presented for additional analysis and demonstration of the slight seasonality of our Fertility Centers Division. New patients visits are an indicator of initial patient interest in fertility treatment and IVF cases completed are an indicator of billable charges. IVF cases completed in the fourth quarter of each year are typically lower, as many patients do not wish to undergo the IVF procedure during the year end holidays. Contributing to the lower number of IVF cases completed are voluntary laboratory closures at year end at several of our laboratories in order to undergo normal maintenance (in thousands, except new patient visits and IVF cases completed).
 


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    Revenues, Net     Contribution  
    2009     2008     2007     2006     2009     2008     2007     2006  
 
First quarter
  $ 36,284     $ 32,746     $ 29,092     $ 27,497     $ 2,640     $ 2,304     $ 2,315     $ 2,059  
Second quarter
    37,290       35,051       29,728       28,648       3,057       2,570       2,526       2,031  
Third quarter
    35,964       36,505       31,046       28,256       2,979       2,743       2,714       2,174  
Fourth quarter
    N/A       34,138       31,212       28,366       N/A       2,599       2,464       2,146  
                                                                 
Total year
  $ 109,538     $ 138,440     $ 121,078     $ 112,767     $ 8,676     $ 10,216     $ 10,019     $ 8,410  
                                                                 
                                                                 
                                                                 
    New Patient Visits     IVF Cases Completed  
    2009     2008     2007     2006     2009     2008     2007     2006  
 
First quarter
    6,979       6,765       5,917       5,303       3,643       3,141       3,038       2,433  
Second quarter
    7,090       7,093       5,867       5,452       3,543       3,314       3,088       2,630  
Third quarter
    7,063       7,186       5,930       5,578       3,424       3,474       3,069       2,750  
Fourth quarter
    N/A       7,173       6,279       5,400       N/A       3,219       2,971       2,652  
                                                                 
Total year
    21,132       28,217       23,993       21,733       10,610       13,148       12,166       10,465  
                                                                 
 
Consumer Services Segment
 
Revenues from our Consumer Services Division increased by 6.1%, or $900,000, for the nine months ended September 30, 2009 versus the same period in the prior year. Attain IVF program revenues accounted for approximately 93% of the division’s revenues during the first nine months of 2009, which was comparable with the same period in 2008. Patients enrolled in our Attain IVF Refund Program pay us an up-front fee (deposit) in return for up to six treatment cycles (consisting of three fresh IVF cycles and three frozen embryo transfers). Any non-refundable portion of these fees is recognized as revenues based on the relative fair value of each treatment cycle completed relative to the total fair value of the contracted treatment package available to the patient. The refundable portion of the program contract amount is recognized as revenue when the patient becomes pregnant. At the time of pregnancy, we establish a reserve for future medical costs should the patient miscarry and require additional contracted treatment cycles, as well as a reserve for potential refunds should a patient elect to discontinue participation in the program prior to full treatment. The two main factors that impact Attain IVF Refund Program financial performance are:
 
  •  the number of patients enrolled and receiving treatment, and
 
  •  clinical pregnancy rates.
 
Patients enrolled in our Attain IVF Multi-Cycle Program pay us a single fee, which is slightly less than the average cost of two fresh IVF cycles, in return for up to four treatment cycles (consisting of two fresh IVF cycles and two frozen embryo transfers). Our Attain IVF Multi-Cycle Program offers a refund ranging from 10% to 85% of the contract amount depending on where in the process either we or the patient elects to terminate the program, as long as termination is prior to a second fresh IVF cycle. With respect to our Attain IVF Multi-Cycle Program, we recognize a pro rata share of the contract amount as revenue as each treatment cycle is completed. The refundable portion of the program contract amount is recognized as revenue when the patient becomes pregnant. Under such revenue recognition methodology, we never recognize more revenue than the potential refundable amount under the program. At the time of pregnancy, we establish a reserve for future medical costs should the patient miscarry and

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require additional contracted treatment cycles. The main factor that impacts Attain IVF Multi-Cycle Program financial performance is the number of patients enrolled and receiving treatment.
 
During the first nine months of 2009, the loss, in the second quarter of 2009, of a primary third-party lender that provided financing programs for Attain IVF patients and a general tightening of credit standards and higher interest rates caused a decline in new patient enrollments that adversely affected the program. In October 2009, we entered into a referral agreement with a new third-party lender to provide financing options for Attain IVF patients, as well as for certain other fertility treatments.
 
Our Affiliate Program generated revenues of $941,000 during the first nine months of 2009, up slightly from $894,000 for the prior year period. This increase in revenues is attributable to pricing adjustments for the program’s services. Although our Affiliate Program produces revenues on a stand alone basis, the primary value of the Affiliate Program is to serve as a distribution channel for our Attain IVF programs and as an introduction to our services for medical practices that may become full fertility Partners. As of September 30, 2009, this network was comprised of 25 independent fertility centers, three more than the year earlier period.
 
Pharmaceutical revenues for the nine months ended September 30, 2009 were $35,000 compared to $85,000 for the same period in the prior year. Our pharmaceutical revenues are comprised of marketing support fees we earn based upon underlying product margin as reported by a third-party pharmaceutical distributor. Over the past several years we have seen flat or declining revenues due to pharmaceutical cost increases which the distributor has been unable to pass on to the consumer as a result of competitive pressures. We view these pricing and margin developments as longer-term structural elements within the pharmaceutical market and do not expect significant improvement. As such we did not renew our contract with the third-party distributor when it expired on June 30, 2009 and we anticipate no further revenues from this source during the last quarter of 2009 and beyond.
 
For the year ended December 31, 2008, revenues of $18.4 million from our Attain IVF Refund Program represented approximately 93.1% of our Consumer Services Division revenues. This compares to revenues of $15.1 million, or slightly over 91.8%, of Consumer Services Division revenues in 2007. Revenue growth in our Attain IVF Refund Program of $3.3 million, or 21.8%, in 2008 compared to 2007 was the result of enrolling more patients into the program and increasing patient throughput by maintaining high pregnancy success rates. Similarly, Attain IVF Refund Program revenue growth of $3.2 million, or 26.6%, in 2007 versus 2006 was also attributable to expanded enrollments relative to the earlier year, coupled with high pregnancy rates. From the beginning of 2005 through the end of 2008, while pregnancy success rates have either been maintained or increased, enrollments in our Attain IVF Refund Program grew at a compound annual rate of 32.8%. Because the patients in our Attain IVF Refund Program prepay for their suite of services, and a significant portion of the fees received by us are not recognized until the patient achieves pregnancy, our Attain IVF Refund Program deposits and deferred revenue balance continues to grow each year the number of enrolled patients grows.
 
Our Affiliate Program generated revenues of $1.2 million for the year ended December 31, 2008, which is approximately unchanged from the years ended December 31, 2007 and 2006. During 2008, four independent fertility centers joined our Affiliate Program and two left in Partner related transactions for a net increase of two centers. For the year ended December 31, 2007, our Affiliate Program had a net reduction of one center as one practice moved to our Partner Program.
 
Pharmaceutical revenues of $154,000 for the year ended December 31, 2008 were approximately equal to pharmaceutical revenues for the year ended December 31, 2007, and down from $400,000 in 2006 due to the pharmaceutical cost increases discussed above.


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The following summarized Consumer Services Division quarterly data for the nine months ended September 30, 2009 and the years ended December 31, 2008, 2007 and 2006 is presented for additional analysis and demonstration of the fluctuations of enrollments and pregnancies in our Attain IVF programs (in thousands, except enrollments and pregnancies).
 
                                                                 
    Revenues, Net     Contribution  
    2009     2008     2007     2006     2009     2008     2007     2006  
 
First quarter
  $ 5,225     $ 4,196     $ 3,235     $ 3,036     $ 1,512     $ 1,235     $ 751     $ 765  
Second quarter
    5,004       4,807       4,179       3,127       1,161       1,446       1,125       1,266  
Third quarter
    5,013       5,364       4,557       3,512       1,068       1,352       1,171       1,081  
Fourth quarter
    N/A       5,396       4,489       3,878       N/A       1,386       1,077       1,020  
                                                                 
Total year
  $ 15,242     $ 19,763     $ 16,460     $ 13,553     $ 3,741     $ 5,419     $ 4,124     $ 4,132  
                                                                 
                                                                 
                                                                 
    Enrollments     Pregnancies  
    2009     2008     2007     2006     2009     2008     2007     2006  
 
First quarter
    253       212       250       159       219       167       114       111  
Second quarter
    239       280       241       194       203       189       167       113  
Third quarter
    288       307       247       227       180       217       173       134  
Fourth quarter
    N/A       250       222       207       N/A       205       183       150  
                                                                 
Total year
    780       1,049       960       787       602       778       637       508  
                                                                 
 
Vein Clinics Segment
 
Revenues in this segment are generated from direct billings to patients or their insurer for vein disease treatment services and these revenues are consolidated directly into our financials.
 
Revenues for the nine months ended September 30, 2009 were $37.3 million, up 27.4%, or $8.0 million from the comparable period in 2008. During the first nine months of 2009, we opened new vein clinic locations in Cincinnati and Cleveland, marking our entry into the State of Ohio and these two markets. These additional clinics brought our total number of vein clinics to 34, or three new clinics since the end of the third quarter of 2008. These three clinics accounted for $1.5 million of the growth in revenues for the nine months ended September 30, 2009, with the remaining $6.9 million generated by legacy clinics.
 
Revenues for the year ended December 31, 2008 were approximately $40.0 million versus partial year revenues of $14.3 million in 2007. Revenues for the year ended December 31, 2007 represent operating results only since VCA was purchased on August 8, 2007.
 
We continue progress towards opening additional new vein clinics in locations across the United States and have targeted several new markets; however this pace could be affected by challenges in physician recruitment. To address this issue we have assembled a physician recruitment task force to develop a strategy and plan to raise the profile of the vein care career opportunity to high-quality physicians across the United States.
 
New consultations, which are an indication of patient interest in vein care treatment, rose 43% for the first nine months of 2009 versus the year earlier period. First leg starts, which signify the beginning of a billable treatment cycle, rose 32% for the first nine months of 2009 versus the year earlier period. We have included the results of VCA in our financial statements since the date of its acquisition on August 8,


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2007. Vein Clinics Division quarterly data for the nine months ended September 30, 2009 and the years ended December 31, 2008 and 2007 appear below (in thousands, except first leg starts).
 
                                                                         
    Revenues, Net     Contribution     First Leg Starts  
    2009     2008     2007     2009     2008     2007     2009     2008     2007  
 
First quarter
  $ 10,846     $ 8,842       N/A     $ 754     $ 322       N/A       1,574       1,208       N/A  
Second quarter
    13,821       10,062       N/A       1,282       713       N/A       2,085       1,572       N/A  
Third quarter
    12,621       10,360     $ 4,580       995       892     $ 542       1,959       1,500       1,266 (1)
Fourth quarter
    N/A       10,686       9,704       N/A       724       438       N/A       1,187       1,127  
                                                                         
Total year
  $ 37,288     $ 39,950     $ 14,284     $ 3,031     $ 2,651     $ 980       5,618       5,467       2,393  
                                                                         
(1) Includes the period from July 1, 2007 through August 7, 2007, which is prior to the VCA acquisition.
 
Our Vein Clinics Division managed 34 clinics as of September 30, 2009, 32 clinics as of December 31, 2008 and 28 clinics as of December 31, 2007.
 
Contribution
 
For the first nine months of 2009, contribution increased by $1.9 million, or 13.8%, from the same period in 2008, driven primarily by growth in our Fertility Centers and Vein Clinics Divisions.
 
For the year ended December 31, 2008, total contribution of $18.3 million was up approximately $3.2 million, or 20.9%, from the year ended December 31, 2007. Increased contribution in our Fertility Centers Division in 2008 was the result of increased profitability in our platform of existing centers as well as the addition of contract acquisition related results. The continued growth of our Attain IVF Refund Program and full year results from our Vein Clinics Division were also major contributors to the improvement.
 
For the year ended December 31, 2007, contribution growth was $2.6 million, or 20.6%, versus the year ended December 31, 2006. The increase in contribution in 2007, versus 2006, was fueled mainly by organic growth in our Fertility Centers Division coupled with partial year results from our Vein Clinics Division acquired in August 2007. Contribution results for our Consumer Services Division in 2007 were essentially even with 2006, as growth in our Attain IVF Refund Program was offset by declining fees from pharmaceutical sales.
 
A segment-by-segment discussion is presented below.
 
Fertility Centers Segment
 
Fertility Centers Division contribution for the first nine months of 2009 was $8.7 million, up $1.1 million from the prior year period based on a $5.2 million increase in revenues. Period-to-period contribution growth for our legacy centers, those open prior to January 1, 2008, was up 9.3% for the nine months based on a combination of organic growth and expense management.
 
Fertility Centers Division contribution of $10.2 million for the year ended December 31, 2008 increased approximately $200,000, or 2.0%, from prior year levels. Although this segment experienced revenue growth of 14.3% in 2008, versus the prior year, margin growth was tempered by additional division level infrastructure investments. These investments, which totaled $1.2 million during 2008, were designed to support continuing growth and new contract acquisitions within this segment.


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Fertility Centers Division contribution for 2007 increased approximately $1.6 million, or 19.1%, from 2006. This increase was primarily attributable to the continued revenue and margin growth of our existing fertility centers, and entry into new fertility markets in Baltimore, Maryland and Orlando, Florida. Contribution growth rates for our existing Partners averaged 14.9% in 2007, versus the prior year. The new markets entered into during the second half of 2007 generated contribution of more than $400,000 during that year.
 
Consumer Services Segment
 
Contribution from our Consumer Services Division for the nine months ended September 30, 2009 was $3.7 million versus $4.0 million in the year earlier period. This decrease reflects slowing enrollments into the program resulting from the loss of our financing partner and disruptions in the credit markets, which make it more difficult for patients to finance treatments.
 
Contribution from our Consumer Services Division grew by $1.3 million to $5.4 million for the year ended December 31, 2008 versus a contribution of $4.1 million in the year ended December 31, 2007. This growth was driven by our Attain IVF Refund Program in which the two key profitability metrics, the number of patients receiving treatment and pregnancy success rates, showed year-over-year improvement in 2008 versus 2007.
 
Contribution from both our Affiliate and pharmaceutical programs in 2008 were on par with results in 2007. Although our Affiliate Program grew by a net of two fertility centers during 2008, the underlying value of this program is to serve as a distribution channel for our Attain IVF programs, as well as a source of future Partner fertility centers. Also, the market for pharmaceutical products in which we participate has been subject to external pricing pressures which have restricted revenues and profitability.
 
For the year ended December 31, 2007, contribution of $4.1 million from our Consumer Services Division was even with contribution of $4.1 million earned in the prior year. While enrollments in our Attain IVF Refund Program grew in 2007 versus 2006, pregnancy rates during 2007 were at the low end of our expected range and impacted the amount of revenues recognized as we record the bulk of our revenues at the time of pregnancy.
 
In 2007, contribution from our pharmaceutical line was down $400,000, or 71.3%, from 2006 due to the previously mentioned unfavorable pricing and reimbursement environment.
 
Vein Clinics Segment
 
For the first nine months of 2009, Vein Clinics Division contribution of $3.0 million was $1.1 million, or 57.3%, higher then the prior year period. The improved performance for the nine-month period was largely attributable to the additional operational and marketing infrastructure put in place during 2008. This infrastructure allowed the division to conduct ongoing direct-to-consumer marketing initiatives and provided the resources necessary to service the resulting increase in patient flow.
 
For the year ended December 31, 2008, contribution from our Vein Clinics Division of $2.7 million was up $1.7 million from 2007. Year versus year comparisons for this segment are not directly comparable as 2007 results only include contribution generated since we acquired VCA in August 2007.


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General and Administrative Expenses
 
General and administrative expenses are comprised of salaries and benefits, administrative, regulatory compliance and operational support costs defined as our Shared Services group, which are not specifically related to individual center or clinic operations or other product offerings.
 
General and administrative expenses totaled $9.3 million for the first nine months of 2009, an increase from the $8.0 million recorded in the same period of the prior year. The increased general and administrative expenses in the nine-month period is attributable to higher service and infrastructure activities designed to provide operational support to our three growing business segments. We measure our performance in part by relating general and administrative expenses to operating contribution. For the nine months ended September 30, 2009, general and administrative expenses were 60.4% of contribution compared to a ratio of 58.6% for the nine months ended September 30, 2008.
 
General and administrative expenses totaled $10.7 million in 2008, $10.5 million in 2007 and $9.4 million in 2006. For the year ended December 31, 2008, general and administrative expenses were 58.2% of contribution which compares favorably to ratios of 69.7% and 74.8% in 2007 and 2006, respectively. We continue to actively manage general and administrative expenses in an effort to leverage our Shared Services group and extract economies of scale as those opportunities arise.
 
Interest
 
Net interest expense was $682,000 for the first nine months of 2009 as compared to net interest expense of $884,000 for the first nine months of 2008. The reduction in net interest expense for the nine-month period is the result of scheduled debt repayments which reduced our outstanding loan balances coupled with lower market interest rates on certain portions of the remaining balances.
 
Net interest expense for the year ended December 31, 2008 totaled $1.2 million, compared to net interest income of $100,000 for the year ended December 31, 2007, and net interest income of $400,000 for the year ended December 31, 2006. The change in net interest income/expense for the three years ended December 31, 2008 is primarily the result of utilizing cash on hand and additional borrowings as the principal means of financing our acquisition of VCA in August 2007. This acquisition used approximately $14 million of cash from our balance sheet in addition to us obtaining $17 million of new borrowings.
 
Coupled with this cash outlay is a reduction in the general level of interest rates as well as a slow-down in various credit markets which has resulted in restrictions on the interest income we are able to earn on our cash balances. Subject to interest rate fluctuations, we anticipate interest expense to decrease gradually in the coming quarters as scheduled debt repayments reduce our outstanding principal balances.
 
Interest income of $400,000 for the year ended December 31, 2008 was below that of the prior year by $900,000, or a reduction of 69.5%, primarily as a result of lower market interest rates and conditions in the credit markets which limited investment opportunities. Interest expense of $1.6 million for the year ended December 31, 2008 exceeded that of the prior year by $400,000, or 37.5%, primarily due to interest charges on new borrowings done in August 2007, associated with the VCA acquisition.
 
For the year ended December 31, 2007, interest income increased $200,000, or 17.1%, from the year ended December 31, 2006, as a result of earnings on idle cash balances during the first seven months of 2007. Interest expense of $1.1 million for the year ended December 31, 2007 increased by $400,000 from the year ended December 31, 2006 as a result of mid-year borrowings associated with the VCA acquisition.


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Income Tax Provision
 
Our provision for income tax was approximately $2.2 million for the nine months ended September 30, 2009, or 40% of pre-tax income. This compared to $1.9 million, or 40.2% of pre-tax income, for the nine months ended September 30, 2008. Our effective tax rates for 2009 and 2008 reflect provisions for both current and deferred federal and state income taxes. The effective tax rates for the nine months ended September 30, 2009 and 2008 include additional interest for tax exposure items. We expect the effective tax rate to approximate 40% for the full year ending December 31, 2009.
 
Our provision for income tax was approximately $2.5 million, $1.7 million and $470,000 for the three years ended December 31, 2008, 2007 and 2006, respectively, or 39.3%, 35.3% and 13.3% of pre-tax income, respectively. Our effective tax rates for all periods reflect provisions for both federal and state income taxes. The low effective tax rate of 13.3% for the year ended December 31, 2006 was mainly due to an $821,000 tax benefit related to the elimination of the valuation allowance on deferred tax assets. The lower effective tax rate of 35.3% for the year ended December 31, 2007 was mainly due to benefits received from tax-exempt interest income.
 
We file income tax returns in the U.S. federal jurisdiction and various states. For federal income tax purposes, our 2007 and 2008 tax years remain open for examination by the tax authorities under the normal three year statute of limitations. A federal income tax examination for tax years through 2006 was completed during 2008 resulting in no adjustment to our income tax liability. For state tax purposes, our 2004 through 2008 tax years remain open for examination.
 
Off-Balance Sheet Arrangements
 
FASB Interpretation No. 46 (revised 2003) (“FIN No. 46R”), “Consolidation of Variable Interest Entities” addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. For all periods subsequent to August 8, 2007, as a result of our acquisition of VCA, we have controlling financial interests in individual vein clinics where we are the primary beneficiary and obligor of their financial results. As such, we have consolidated these vein clinic operations in our financial statements in accordance with the provisions of FIN No. 46R. Because we do not have a controlling financial interest in individual fertility centers and we are not the primary beneficiary or obligor of their financial results, we do not consolidate the results of the fertility centers in our accounts. Also, since we do not have a controlling interest in the captive insurance company, and we are not the primary beneficiary or obligor of the captive insurance company’s financial results, we do not consolidate the results of the captive insurance company in our accounts.
 
Liquidity and Capital Resources
 
As of September 30, 2009, we had approximately $35.2 million in cash and cash equivalents on hand as compared to $28.3 million as of December 31, 2008. We had a working capital deficit of approximately $2.6 million as of September 30, 2009, approximately the same as the working capital deficit of $2.5 million as of December 31, 2008.
 
Attain IVF program deferred revenue and other patient deposits, which are reflected as a current liability, represent funds received from patients in advance of treatment cycles and are an indication of future Consumer Services Division revenues. These deposits totaled approximately $13.0 million and $11.2 million as of September 30, 2009 and December 31, 2008, respectively. The increase in deposits


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is a direct result of patient enrollment, and through-put, in our treatment programs. These deposits are a significant source of cash flow and represent interest-free financing for us.
 
As of September 30, 2009, we did not have any significant contractual commitments for the acquisition of fixed assets or construction of leasehold improvements. However, we currently anticipate upcoming capital expenditures of approximately $5 million for 2010. These expenditures are primarily related to medical equipment, information system infrastructure and leasehold improvements.
 
We believe that working capital, specifically cash and cash equivalents, remains at adequate levels to fund our operations and our commitments for fixed asset acquisitions. We also believe that the cash flows from our operations plus our available revolving line of credit will be sufficient to provide for our future liquidity needs over the next 12 months.
 
In August 2007, as part of our acquisition of VCA, we entered into a new financing arrangement with Bank of America and secured a $25 million five-year variable interest rate term loan. Our previous term loan of $7.7 million was paid off in its entirety as part of entering into our new financing arrangement. After deducting the previous loan amount, interest and fees, our net funding from Bank of America was $17.0 million. In order to mitigate the interest rate risk associated with this term loan, we also entered into an interest rate swap agreement on 50% of the principal amount through August 2010. This swap transaction acts as an effective hedge fixing the interest rate on half of our term loan at 5.39% plus the applicable margin for the life of the swap. Other features of this credit facility include a $10 million five-year revolving line of credit.
 
Each component of our amended credit facility bears interest by reference, at our option, to Bank of America’s prime rate minus a margin or to LIBOR plus a margin. The margin is dependent upon a leverage test, ranging from 2.00% to 2.75% in the case of LIBOR-based term loans and 0.00% to 0.50% in the case of prime-based term loans. Interest on the revolving line of credit is at the prime rate less up to 0.50% or at LIBOR plus 1.50% to 2.50%, depending on a leverage test. Interest on the prime-based loans became payable quarterly beginning on November 8, 2007 and interest on LIBOR-based loans is payable on the last day of each applicable interest period. As of September 30, 2009 and December 31, 2008, interest on the term loan was payable at a rate of approximately 2.57% and 2.71%, respectively.
 
Availability of borrowings under the revolving line of credit is based on eligible accounts receivable, as defined in the amended credit facility. As of both September 30, 2009 and December 31, 2008, under the revolving line of credit, the full amount of $10.0 million was available, of which $7.5 million was outstanding. Unused amounts under the revolving line of credit bear a commitment fee of 0.25% and are payable quarterly.
 
Our amended credit facility with Bank of America is collateralized by substantially all of our assets, including the capital stock of our subsidiaries. As of both September 30, 2009 and December 31, 2008, we were in full compliance with all applicable debt covenants under our amended credit facility. We also continuously review our credit agreements and may renew, revise or enter into new agreements from time to time as deemed necessary.


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Significant Contractual Obligations and Other Commercial Commitments
 
The following summarizes our contractual obligations and other commercial commitments at December 31, 2008, and the effect such obligations are expected to have on our liquidity and cash flows in future periods.
 
                                         
    Payments Due by Period  
          Less Than
                After
 
    Total     1 Year     1 — 3 Years     4 — 5 Years     5 Years  
    (in thousands)  
 
Notes payable
  $ 22,418     $ 3,768     $ 18,650     $     $  
Line of credit outstanding
    7,500       7,500                    
Capital lease obligations
    301       83       218              
Interest on debt
    2,972       1,067       1,905              
Operating leases
    60,353       4,708       17,793       15,425       22,427  
Fertility Partners capital and other obligations
    5,747       5,747                    
                                         
Total contractual cash obligations
  $ 99,291     $ 22,873     $ 38,566     $ 15,425     $ 22,427  
                                         
 
                                         
    Amount of Commitment Expiration Per Period  
          Less Than
                After
 
    Total     1 Year     1 — 3 Years     4 — 5 Years     5 Years  
    (in thousands)  
 
Unused lines of credit
  $ 2,500     $     $ 2,500     $     $  
                                         
 
We also have commitments to provide working capital financing to member centers in our Fertility Centers Division that are not included in the above table. A significant portion of these commitments relate to our transactions with the medical practices themselves. Our responsibilities to the these medical practices are to provide financing for their accounts receivable and to hold patient deposits on their behalf, as well as undistributed physician earnings. Disbursements to the medical practices generally occur monthly. The medical practice’s repayment hierarchy consists of the following:
 
  •  We provide a cash credit to the practice for billings to patients and insurance companies;
 
  •  We reduce the cash credit for center expenses that we have incurred on behalf of the practice;
 
  •  We reduce the cash credit for the base portion of our service fee which relates to the Partner revenues;
 
  •  We reduce the cash credit for the variable portion of our service fee which relates to the Partner earnings; and
 
  •  We disburse to the medical practice the remaining cash amount which represents the physician’s undistributed earnings.
 
We are also responsible for the collection of the Partner accounts receivables, however, there is no recourse to us if such accounts receivable become uncollectible. We continuously fund these needs from


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our cash flows from operations, the collection of prior months’ receivables and deposits from patients in advance of treatment. If delays in repayment are incurred, which have not as yet been encountered, we could draw on our existing revolving line of credit. We also make payments on behalf of the Partner for costs incurred by the Partner, for which we are reimbursed in the short-term. These payments are not included in the table above. Other than these payments, as a general course, we do not make other advances to the medical practices. Other than as described or included in this paragraph or in the table above, we have no funding commitments to the Partner centers.
 
Quantitative and Qualitative Disclosures About Market Risk
 
In the normal course of business our interest income and expense items are sensitive to changes in the general level of interest rates. During the third quarter of 2007 we entered into an interest rate swap agreement designed to hedge 50% of our $25 million variable interest rate term loan maturing in 2012. As a result of this swap transaction we have partially shielded ourselves from a portion of the interest rate risks associated with that portion of the term loan, as the swap transaction essentially converts that portion of the term loan to a fixed rate instrument at 5.39% plus the applicable margin through the maturity of the swap agreement in August 2010. We are currently subject to interest rate risks associated with the remaining 50% of our term loan, as well as our short term investments and certain advances to our fertility centers, all of which are tied to either short term interest rates, LIBOR or the prime rate. As of both December 31, 2008 and September 30, 2009, a 1% change in interest rates would have impacted our pre-tax income by approximately $100,000 annually.
 
Recently Issued Accounting Pronouncements
 
Please see Note 3 (under the subheading “Recently Issued Accounting Pronouncements”) of the notes to our consolidated financial statements included elsewhere in this prospectus for a discussion on recently issued accounting pronouncements.


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BUSINESS
 
We manage highly specialized outpatient centers in emerging, technology-based, niche medical markets. Currently, we are a leading manager of fertility centers and vein clinics in the United States. We provide services and products through our three operating divisions (Fertility Centers, Consumer Services and Vein Clinics) and shared support services for providers through our corporate offices. We provide our fertility centers and vein clinics with administrative services such as finance, accounting, human resources, risk management, legal and purchasing support; marketing and sales support; internet marketing and website support; access to integrated information systems; in some instances, non-physician practitioners; and access to capital for financing clinic operations and expansion.
 
Fertility Centers Division
 
Our Fertility Centers Division provides business and management services to a network of 14 contracted fertility centers in our Partner Program (including one fertility center in Utah that is scheduled to begin seeing patients in the first quarter of 2010), serving 16 metropolitan markets across the United States. We believe these 14 Partner centers are the largest managed network of fertility centers in the United States, with 66 locations and 100 physicians and PhD scientists, accounting for approximately 14% of the total in vitro fertilization (“IVF”) procedures performed in the United States in 2007, which is the latest period for which third-party data are available. The division supports fertility centers’ operations and growth by providing access to information systems such as our proprietary ARTworks electronic medical records software as well as medical equipment and facilities, non-physician personnel and marketing and financial support services. All fertility Partners have full access to our Attain IVF programs, which are described below. We do not employ or control the physicians who provide or direct the treatment of patients.
 
Our fertility centers offer a range of diagnostic and fertility treatment options to patients. The fertility centers’ physicians perform diagnostic tests on both women and men to determine the cause of infertility and each fertility center has an endocrine and andrology laboratory on site in order to perform and expedite infertility analyses. Once the cause of infertility is identified, several treatment options are offered to patients, including IVF treatment, frozen embryo transfer, intrauterine insemination and minimally invasive surgery to correct anatomical reproductive problems. All of our fertility centers have on-site IVF laboratories in order to maintain the integrity of the IVF processes. Fertility centers are typically staffed by six to seven physicians, a scientist, embryologists, nurses, support staff and ultrasound technicians.
 
Insurance and managed care payors, depending on the plan under which a patient is covered, reimburse certain services that our Partners provide, such as diagnostic testing, surgeries and, in certain circumstances, fertility treatments. However, the charges for assisted reproduction technology (“ART”) services our Partners primarily provide are often paid directly by patients, including through programs such as our Attain IVF programs. Several states mandate offering certain benefits of varying degrees for ART services. For example, in Massachusetts, Rhode Island, Maryland and Illinois, the mandate requires coverage for many, but not necessarily all, ART services provided by our Partners. Approximately 50% of our Partner centers’ payments were derived from third-party payors for the first nine months of 2009, all of which was provided by private payors. Contractual arrangements with third-party payors typically are for a term of one year, may be terminated by either party upon 90 days’ notice any time after the initial one-year term and contain automatic annual renewal provisions. Contractual arrangements with third-party payors also typically include payment terms and schedules of rates, although those payment terms and schedules of rates are subject to renegotiation after the initial term of the contract. During the first nine months of 2009, in accordance with the terms of our contractual arrangements with them, third-party payors paid approximately 51% of the charges billed to them by


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our Partner centers. We are unaware of efforts to expand mandated coverage to additional states. If in the future mandates are enacted by additional states, we expect the impact on our Partner fertility centers to be neutral to positive, as such mandates would likely increase the market for fertility center services, but at payment rates that are lower than the amounts typically paid directly by patients.
 
When establishing a Partner relationship, we typically acquire the assets of a fertility center, enter into a long-term comprehensive business service agreement with the center and assume most administrative and financial functions of the center. The acquisition of a Partner agreement generally obligates us to pay a fixed sum for the exclusive right to service the fertility center. These agreements are typically for terms of 10 to 25 years and contain automatic renewal provisions. Some of these agreements also contain provisions that allow the Partner fertility center to terminate the agreement, upon 12 months’ prior notice, at any time after five years from the agreement’s effective date. Partners typically have obligations upon termination in certain circumstances, such as purchasing the assets used in operating the fertility center and making payments based on recent revenues. Partners also agree to promote their practices by, among other things, participating in marketing programs we develop for them. Typically, the fertility center contracting with us is a professional corporation in which the key physicians are the shareholders. Generally, no shareholder of a Partner fertility center may assign his or her interest in the Partner fertility center without our written consent.
 
We require each professional corporation operating in our Partner fertility centers to enter into employment agreements with all key physicians at that center. These employment agreements typically have five-year terms and contain provisions prohibiting the key physicians from practicing reproductive endocrinology, infertility medicine or assisted reproductive technology in competition with us, within a specified area, for the term of the agreement and for 12 to 24 months thereafter. Although it is unclear whether these non-competition provisions would be enforceable if challenged, we have not experienced significant competition from physicians who formerly practiced at our Partner centers. We also usually enter into a personal responsibility agreement directly with each physician shareholder of the practice. The personal responsibility agreement obligates a physician shareholder to repay us a proportionate amount of the exclusive right to service fee payment received by that physician shareholder if he or she leaves the practice sooner than five years after the payment.
 
Generally, under our current Partner agreements, as compensation for our services, we receive a three-part fee comprised of: a tiered percentage of net revenues, generally between 3% and 6%; reimbursed costs of services (costs incurred in providing services to a fertility center and any costs paid on behalf of the fertility center); and either a fixed amount or a percentage of the center’s earnings, which currently ranges from 10% to 20%, but may be subject to limits. However, under our current Partner agreement with Fertility Centers of Illinois, S.C. (“FCI”), we do not receive a three-part fee. Rather, we receive a fee that is generally equal to the operating expenses associated with managing FCI’s medical practice plus 9.5% of such expenses.
 
Our Fertility Centers Division also supports a Council of Physicians and Scientists (the “Council”) for leading fertility providers, which we established 14 years ago. The Council is comprised mostly of representatives from our fertility network and brings together leaders in reproductive medicine and embryology with the goal of promoting a high quality clinical environment throughout our fertility center network. The Council meets regularly and conducts bi-monthly teleconferences on topics related to improving infertility diagnosis, treatment and success rates. Additionally, the Council helps to establish the principles of our culture of safety. We believe our centers follow the Practice and Ethics Guidelines for clinical practice set forth by the American Society for Reproductive Medicine. We have also achieved accreditation from the American Association for Ambulatory Healthcare and the College of American Pathologists, which demonstrates our commitment to compliance with nationally recognized standards for laboratory services, patient safety and quality patient care.


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We assisted in the organization of, and obtained a minority equity interest in, an offshore captive insurance company called Assisted Reproductive Technology Insurance Company (“ARTIC”), which is designed to moderate the cost of malpractice insurance to members of our fertility network. Most of the equity of ARTIC is owned by various physician practices that are members of our fertility network, and we have no future obligations to provide additional funding to ARTIC. On January 1, 2005, ARTIC began providing malpractice insurance coverage to the majority of the physician practices within our Partner fertility network.
 
Consumer Services Division
 
Our Consumer Services Division offers a family of programs, including our Attain IVF Refund Program and our recently introduced Attain IVF Multi-Cycle Program, collectively referred to as our Attain IVF programs, which are designed to help patients attain their goal of starting a family. We offer our Attain IVF programs directly to fertility patients, including patients of our Partner centers and patients of the division’s contracted network of independent medical providers under its Affiliate Program.
 
Our Affiliate Program allows fertility centers to pay fees to receive selected management services we provide to our Partners, such as internet marketing and access to the Council. We also provide our Affiliates with access to our Attain IVF programs. Historically, we provided services to our Affiliates on an exclusive basis in the area in which the Affiliate operates, but Affiliates’ access to our Attain IVF programs is generally subject to achievement of certain benchmarks, including with respect to Attain IVF Refund Program enrollments; however, in July 2009 we began allowing access to our Attain IVF programs on a non-exclusive basis in new markets. As of September 30, 2009, we had contracted with 25 Affiliate fertility centers. During 2007, our Affiliate fertility centers collectively provided 8% of the total IVF procedures in the United States. Our Consumer Services Division does not provide, nor is it responsible for providing, medical services or treatments to patients.
 
Our Consumer Services Division re-launched its Shared Risk Refund Program under the name “Attain IVF” in late 2008. This re-branding was done to reflect advantages offered by the program beyond its packaged pricing features and to position the program in a leadership role among smaller, similar programs offered by other providers.
 
Beginning in July 2009, we began referring to this program as our Attain IVF Refund Program to differentiate it from our Attain IVF Multi-Cycle Program. As described in more detail below, our Attain IVF Refund Program is an offer of packaged pricing for a set of fertility treatments with a refund, equal to 70% of the contract amount for patients using their own eggs, if treatment does not result in a baby. Under circumstances where a patient uses donor eggs, 100% of the contract amount is refunded if treatment does not result in a baby. For the nine months ended September 30, 2009, approximately 18.5% of the patients in our Attain IVF programs used donor eggs.
 
Patients enrolling in our Attain IVF programs can select from various treatment and financing options which are designed to appeal to patients at different stages of their reproductive lives and with different financial needs and resources. The average cost of one fresh IVF cycle as of August 2009 was approximately $12,000 according to Marketdata Enterprises, Inc. According to our estimates, the average cost of a frozen embryo transfer is approximately $3,000. The Attain IVF Refund Program allows medically cleared patients to pay an up-front deposit of approximately twice the average cost of a fresh IVF cycle in return for up to six treatment cycles (consisting of three fresh IVF cycles and three frozen embryo transfers) with a refund if treatment does not result in a baby. The refund is equal to 70% of the contract amount for patients using their own eggs and 100% of the contract amount if the patient uses donor eggs. The Attain IVF Multi-Cycle Program allows all patients, including those who are not medically cleared for our Attain IVF Refund Program, to pay a single fee, which is slightly less than the average cost of two fresh IVF cycles, in return for up to four treatment cycles (consisting of


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two fresh IVF cycles and two frozen embryo transfers). Our Attain IVF Multi-Cycle Program offers a refund ranging from 10% to 85% of the contract amount depending on where in the process either we or the patient elects to terminate the program, as long as termination is prior to a second fresh IVF cycle. The fertility treatment cycles are provided to patients by fertility centers with which we contract for participation in the program. The benefits of our Attain IVF programs to our fertility centers include: allowing for patients to commit to multiple fertility treatments which improves treatment volume and revenues; insulating the centers from refund risk; managing cash and administrative details associated with our Attain IVF programs; and enabling physicians to maintain a traditional fee for service arrangement without the appearance of conflicts of interest that otherwise might arise from self administering a refund program. The benefits of our Attain IVF programs to patients include: improved success rates associated with multiple fertility treatment cycles; increased financial certainty relating to the cost of the fertility treatment process; and, in the case of our Attain IVF Refund Program, a significant financial refund should the treatments be unsuccessful.
 
Our Attain IVF programs serve as patient recruitment and case management vehicles where the patient contracts with us to provide the program services described below. We bind our Partners and Affiliates to abide by the terms of the program through participation agreements that support our packaged pricing. These programs are designed to make the fertility treatment process easier for patients by providing a continuum of services over an extended period, if necessary. Our Attain IVF programs achieve this objective by offering the following services:
 
  •  Patient recruitment via internet web portals and search engines, in-clinic educational materials, in-clinic contact with fertility specialists and on-line contact with patient service specialists;
 
  •  Educating patients as to the benefits of various treatment options offered by our network of contracted medical providers which have been tailored to appeal to patients at various stages of their reproductive lives and with various medical conditions;
 
  •  Explaining the financial costs and patient responsibilities of the various treatment options;
 
  •  Educating patients as to the various financing options offered by our Attain IVF programs and referring them to sources of third-party financing when requested;
 
  •  Coordinating an initial medical assessment required for entry into our Attain IVF programs;
 
  •  Arranging treatment with an Affiliate or a Partner center for all treatment cycles used by the patient; and
 
  •  Providing on-going case management, treatment plan monitoring and evaluation services.
 
We receive payment directly from patients who participate in our Attain IVF programs. By contract, 30% of the Attain IVF Refund Program contract amount is non-refundable (for the non-donor egg option) and is recognized ratably (on a fair value basis) as revenues over the course of the patient’s treatment cycles. If the patient achieves pregnancy prior to the completion of the last available treatment cycle, then the remaining unamortized portion of the non-refundable fee is immediately recognized as income. The remaining 70% of revenues are recorded upon the patient becoming pregnant and achieving a fetal heartbeat. For the donor egg option, for which 100% of the contract amount is refundable, all revenues are recorded upon the patient becoming pregnant and achieving a fetal heartbeat. We are able to record income at the time of pregnancy for our Attain IVF Refund Program, as we have substantially completed our fertility obligation to the patient and we can accurately estimate the amount of expenses or refunds that will become due if there is a pregnancy loss. We are able to


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make these estimates for pregnancy loss based upon reliable Company specific data with respect to the large homogeneous population we have served for more than seven years. Expenses prior to pregnancy related to the program are recorded as incurred. All of the amounts shown on the balance sheets in our consolidated financial statements included elsewhere in this prospectus as Attain IVF Refund Program deferred revenues and other patient deposits consist of unrecognized program enrollment/service fees and potentially refundable contract amounts for enrolled patients who have not had a successful pregnancy outcome and deposits received from patients who have not yet commenced treatment under the program.
 
Due to the characteristics of our Attain IVF programs, we pay for a patient’s treatment costs in excess of their contract amount should the initial treatment cycles be unsuccessful. In order to moderate and manage the likelihood that we will need to pay for these treatment costs, we have developed a sophisticated statistical model and case management program in which Attain IVF Refund Program patients are pre-approved prior to enrollment in the program. We also continuously review patients’ clinical criteria as they undergo treatment. If, while undergoing treatment, a patient’s clinical response falls outside our criteria for participation in Attain IVF programs, we have the right to remove that individual from the program, with an applicable refund to the patient. To date, our case management process has been effective in managing the risks associated with our Attain IVF Refund Program within expected limits. A patient has the right to withdraw from our Attain IVF Refund Program at any time and will be issued an applicable refund.
 
Vein Clinics Division
 
Our Vein Clinics Division was formed on August 8, 2007, with the purchase of Vein Clinics of America, Inc. (“VCA”), a company that had been in business since 1981. Our Vein Clinics Division provides business and management services to a network of 34 vein clinics located in 13 states. We believe our vein clinics network is the largest single network of vein care providers in the United States. These clinics provide specialized treatment for patients suffering from vein diseases and other vein disorders, such as varicose veins, spider veins and venous ulcers.
 
We offer vein clinics services and support, including training for physicians, clinical and financial information systems, revenue cycle management, yield management, sales and marketing services, group purchasing, non-physician personnel, facilities, site selection and development and other operational functions to support the clinic. The division supports vein clinics’ operations and growth by providing access to information systems such as our proprietary Virtual Physician Assistant (“VPA”) information system, which is an end-to-end patient and clinic operating system that provides decision support and revenue cycle functions. A typical vein clinic averages 2,400 square feet and is located in an affluent, growing community. Each clinic has a standardized operational structure composed of a phlebologist, nurse, ultrasound technologist, office manager and assistant. Medical services or treatments are provided to vein clinic patients by physicians who are employed by professional corporations, whose financial condition, results of operations and cash flows are consolidated with our consolidated financial statements.
 
Our Vein Clinics Division’s philosophy of patient care is based on complete disease management, from initial screening to treatment to follow up. Our vein clinics view each step in this process as critical to the patient’s successful outcome. Our clinics currently use Endovenous Laser Treatment (“ELT”) as well as sclerotherapy to treat varicose and spider veins. Our vein clinics use extensive and sophisticated ultrasound mapping prior to treatment, which we believe results in a more effective treatment plan. Rigorous post-treatment follow up is meant to identify any residual or emerging issues so that they can be quickly managed before the disease worsens.


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Our Vein Clinics Division depends upon third-party payors, including governmental and private insurance programs, to pay for most treatments provided to patients. For the first nine months of 2009, approximately 60% of charges billed by our Vein Clinics Division were to managed care programs, approximately 20% were to commercial insurers, approximately 15% were to Medicare and approximately 5% were directly to patients.
 
The private third-party payors providing reimbursement to our vein clinics include standard indemnity insurance programs as well as managed care programs, such as preferred provider organizations and health maintenance organizations. These third-party payors provide reimbursement to our vein clinics at negotiated rates, which approximate 50% of the billed charges, for medically necessary treatments. Most ELT treatments for varicose veins and venous leg ulcers provided at our vein clinics are reimbursed by third-party payors. However, third-party payors generally do not cover sclerotherapy or treatments they determine are not medically necessary, such as the cosmetic treatment of spider veins. In some cases, third-party payors require prior authorization of varicose vein treatment to provide reimbursement. Contractual arrangements with third-party payors typically are for a term of one year, may be terminated by either party upon 60 to 90 days’ notice after the initial term and contain automatic annual renewal provisions. Contractual arrangements with third-party payors also typically include payment terms and schedules of rates that are subject to change by the third-party payor upon as little as 30 days’ notice. Payments from Medicare are paid in accordance with a set fee schedule and are subject to change or review by governmental authorities.
 
Once our Vein Clinics Division has facilitated a vein clinic’s establishment, we enter into a contract with the professional corporation operating in our clinic. Unlike our Partner fertility centers, the physicians who are employed at our vein clinics typically do not have an ownership interest in the medical practice. A “friendly physician” model is often used for ownership, pursuant to which we are the primary beneficiary and obligor of the vein clinic’s operations; however, we also own and operate vein clinics through subsidiaries in two states where we are not prohibited from doing so under applicable corporate practice of medicine laws. Under the terms of our contracts with the vein clinics, we have sole and exclusive responsibility to manage the non-medical operations of the practice and the physicians have sole responsibility for the medical and clinical aspects of the practice. Our contracts with the vein clinics provide that we are responsible for the leasing of space, obtaining all equipment and services needed, providing all billing and collections functions, arranging for and supervising all non-physician personnel and providing services so they can market their own practices. In exchange for our services, our contracts with the vein clinics provide that the vein clinics pay us a fee equal to 150% of our expenses of operating and managing the vein clinics. These fees have historically exceeded the operating margin generated by any particular vein clinic prior to payment of the management fee. Accordingly, each vein clinic only pays the portion of the management fee that is equal to the amount of revenue generated by the clinic annually up to the 150% amount. As a result, our vein clinics do not generate any net profits at year end. Our contracts with the vein clinics are typically for 25 years with renewal rights. In the event of early termination, any accrued obligations remain outstanding until satisfied. We also have the right at any time to cause the “friendly physician” to transfer his or her ownership in a vein clinic to another physician designated by us.
 
We require each professional corporation operating in our vein clinics to enter into an employment agreement with the physician practicing at that clinic. The employment agreement typically has a term of one year and automatically renews for additional one-year periods unless terminated by either party. The physician generally is required to pay the clinic either $75,000 or $50,000 if the agreement is terminated prior to three years from the physician’s first employment with the clinic, with the amount due depending on the time of termination. This requirement helps defray the training expenses we incur when we assist the physician in establishing a practice. The physician also usually covenants not to compete with the clinic or provide medical services in the treatment of varicose veins or other venous diseases, within a specified area, during the agreement’s term and for two years thereafter. Although it is


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unclear whether these non-competition provisions would be enforceable if challenged, we have not experienced significant competition from physicians who formerly practiced at our vein clinics.
 
Since our acquisition of VCA in August 2007, we have made significant investments in this division’s infrastructure, which have been designed to allow us to open new clinics at a more rapid and sustained pace utilizing a replicable model. These investments include:
 
  •  Physician recruiting and training. The business model for our Vein Clinics Division depends on being able to identify, recruit and train new physicians to staff new clinics. We have invested in additional professional personnel as well as other recruiting and training assets to support scaled growth in the future.
 
  •  Regional management. We have established a regional management infrastructure to manage the day-to-day operations of the expanding Vein Clinics Division clinical network and anticipate continued investment in regional management talent as our clinic base expands.
 
  •  Revenue cycle management. Over the past several years, the market for vein care has undergone a shift from private out of pocket payment by patients to an environment where most treatment is covered by insurance. This shift has caused us to make heavy investments in physician credentialing, working capital and improved billing and collections personnel, systems and procedures. These investments will continue as the business grows.
 
  •  New clinic development. With our planned roll-out of new clinic openings, we are making investments in personnel and procedures for identifying opportunities and opening new clinics in existing and new markets.
 
  •  Marketing and sales. We have established more formal, direct-to-consumer and physician referral marketing programs.
 
Shared Services Group
 
Through our Shared Services group, we provide the following support to our Fertility Centers, Consumer Services and Vein Clinics Divisions:
 
  •  Administrative Services.  Our Shared Services group provides our contracted fertility centers and vein clinics with administrative services, including: accounting and financial services, such as accounts payable, payroll and financial reporting; human resources administration; legal services; risk management; insurance; information systems and services; and strategic planning.
 
  •  Access to Capital.  We believe we provide our Partner fertility centers and vein clinics with a competitive advantage through access to capital for funding accounts receivable, expansion and growth. We provide our Partner fertility centers and vein clinics with efficient access to capital which allows them to obtain current technologies, equipment and facilities that enable them to provide a full spectrum of services to effectively compete for patients. For example, we have built new clinical facilities housing state-of-the-art fertility laboratories for several Partners, which enable them to expand their offerings to include a number of services that they had previously outsourced, and have acquired state-of-the-art ultrasound and laser technology for our vein clinics. We believe this access to capital helps us to recruit Partner practices.


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  •  Integrated Information Systems.  Using our established base of treatment providers, we are continuously developing integrated information systems to collect and analyze clinical, patient, financial and marketing data, which we believe allow us to more effectively control expenses and improve cash collections at our Partner fertility centers and vein clinics. Our proprietary ARTworks clinical software provides electronic medical records, treatment plan and success rate research capabilities, decision support functionality and clinical risk management services, which we believe makes our physicians more efficient and improves quality of care. We provide our vein clinics access to our proprietary VPA information system, which is an end-to-end patient and clinic operating system that provides decision support and revenue cycle functions.
 
  •  Human Resources.  Our Shared Services group provides our contracted fertility centers and vein clinics with human resources services, including: policies and procedures; arranging for comprehensive benefits and managing the implementation of those benefits; wage and hour administration; performance reviews; job descriptions; and overall human capital management.
 
Our Industries
 
Reproductive Medicine
 
Reproductive medicine encompasses the medical discipline that focuses on male and female reproductive systems and processes. According to a recent industry estimate, approximately 10% of U.S. couples have trouble conceiving. There are many reasons why couples have difficulty conceiving, and accurate identification of a specific cause of infertility can be time consuming, expensive and requires access to specialized diagnostic and treatment services. Reproductive endocrinologists are specialized physicians who perform these more sophisticated medical and surgical fertility diagnoses and treatments. Reproductive endocrinologists generally have completed a minimum of four years of residency training in obstetrics and gynecology and have at least two years of additional training in an approved subspecialty fellowship program. There are approximately 1,400 practicing reproductive endocrinologists offering fertility services across 480 fertility centers in the United States. According to Marketdata Enterprises, Inc., expenditures relating to fertility services in the U.S. market were estimated at approximately $4 billion for 2008. The fertility services market is highly fragmented among providers in each major local market as well as on a national basis.
 
Fertility services include diagnostic tests performed on both the female and male. Depending on the results of the diagnostic tests performed, treatment options may include, among others, fertility drug therapy, artificial insemination and fertility surgeries to correct anatomical problems. Procedures that require gametes (sperm and eggs) to be handled in vitro (outside the body) are classified as ART services. Current types of ART services include IVF, frozen embryo transfers, donor egg programs as well as other more specialized treatments. IVF treatments are the most frequently employed form of ART, with 103,367 fresh IVF cycles performed in the United States in 2007. Current techniques used in connection with IVF services include intracytoplasmic sperm injection, assisted hatching, cryopreservation of embryos, pre-implantation genetic diagnosis and blastocyst culture and transfer.
 
Although demand for advanced reproductive medicine and treatment is highly correlated with larger demographic trends, we believe the market will continue to grow in the future for the following reasons:
 
  •  The quality of treatment is improving, increasing pregnancy success rates;


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  •  Improvements in embryo culture media and implantation rates are leading to the capability of reducing high order multiple births, which is one of the greatest risk factors in this industry;
 
  •  With improving pregnancy rates, the cost of treatment is decreasing thereby making these services more affordable;
 
  •  Demand for reproductive medical services is increasing through greater public awareness and acceptance of these treatments; and
 
  •  Couples are delaying child birth until later in life. In 2006, approximately one out of every 12 first births was to a woman age 35 or older, compared with one out of every 100 first births in 1970, according to the U.S. Centers for Disease Control and Prevention.
 
While fertility market growth has moderated recently, in line with a demographic trough of couples of family-bearing age, we believe that we are well positioned to increase our share of the fertility market due to the following factors:
 
  •  The benefits arising from consolidation, including the economies of scale that can be realized by leveraging a corporate infrastructure like ours to minimize general and administrative expenses as a percentage of fertility center revenues;
 
  •  The need for greater efficiencies to offset rising costs and decreases in revenue growth;
 
  •  The barriers to establishing new fertility centers, including the capital-intensive nature of acquiring and maintaining state-of-the-art medical equipment, laboratory and clinical facilities and the need to develop and maintain specialized information systems to meet the demands of patients and third-party payors;
 
  •  The need for support services like those we provide to address the need for seven-days-a-week service to respond to patient demands and to optimize the outcomes of patient treatments;
 
  •  The increased need for marketing services like those we provide to address increasing competition among medical providers specializing in fertility treatment; and
 
  •  Our track record of growing contracted fertility center Partners two to three times faster on average than fertility centers that are not a part of our network, based on the number of fresh IVF cycles performed.
 
Vein Disease
 
Phlebology is the medical specialty concerned with the treatment of vein diseases. Common vein diseases and their symptoms can take many forms, including:
 
  •  Varicose Veins — which are caused when small valves designed to allow blood to flow in only one direction fail or leak. This causes blood to flow backwards under the force of gravity and pool inside the vein;
 
  •  Spider Veins — which are very small varicose veins. They are thin, threadlike veins that lie close to the skin’s surface and are commonly red or purple in appearance. Spider veins can be hormonally induced and are often associated with pregnancy and menstruation;


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  •  Venous Leg Ulcers — which are non-healing open wounds that are caused by venous pump failure. It usually occurs near the inside of the ankle, but can be found anywhere below the knee. It can occur with or without visible varicose veins;
 
  •  Klippel-Trenaunay Syndrome — which is a rare, congenital disorder in which patients usually have one hypertrophied leg, a port wine stain and large varicose veins on the lateral aspect of the leg; and
 
  •  Restless Leg Syndrome — which may occur when valves fail, causing blood to reflux, or flow backwards, causing it to pool and stagnate in the veins, leading to aching, throbbing, cramping and fatigue in the legs.
 
Although there are both surgical as well as minimally invasive treatment protocols for vein disease, we specialize in minimally invasive care. Conventional vein care treatment under both protocols usually begins with an ultrasound assisted mapping to determine the extent of the disease, generally followed by a surgical or minimally invasive treatment protocol. Historically, the most common surgical treatment has been a procedure referred to as vein stripping, which is the surgical removal of surface veins. Vein stripping is generally done as an outpatient procedure and is performed while the patient is under general anesthesia. Vein stripping may leave scarring and require an extended recovery time. More recent minimally invasive treatments include ELT and sclerotherapy, which are the treatments offered by our clinics. ELT is a laser treatment which does not involve hospitalization, general surgery or the potential for significant scarring that is associated with vein stripping. With ELT, after local anesthesia is administered, a small optical fiber is inserted through a needle into the varicose vein under ultrasound guidance. The laser is activated and, as the optic fiber is removed from the vein, it heats and closes the vein. Once the vein is closed, the blood that was circulating through the vein is naturally rerouted to other healthy veins. Over time, the varicose vein is absorbed by the body. Sclerotherapy involves injecting abnormal veins with a solution called a sclerosant. This immediately shrinks the vein and causes it to dissolve over a period of weeks, allowing the body to naturally redirect the blood flow to healthy veins. A typical sclerotherapy treatment may last for 15 to 20 minutes and consists of multiple microinjections.
 
Various demographic trends are contributing to the growth in demand for vein care. Annual expenditures related to vein care in the United States are approximately $2 billion and are projected to grow 12% per year through 2010, according to our estimates. The U.S. Food and Drug Administration’s approval of lasers for thermal ablation of veins and subsequent establishment of an American Medical Association Current Procedural Terminology code for reimbursement by the Centers for Medicare and Medicaid Services has opened this market to rapid growth and development over the last several years. We also believe that the market for vein care will continue to grow in the future as awareness of minimally invasive treatment protocols grows among people with vein disease and as additional third-party payors recognize the medical necessity of treating vein disease. We believe that approximately 25 million people are currently affected by vein disease in the United States, but only approximately one million receive treatment for such vein disease.
 
We believe numerous market conditions in this industry produce business opportunities for us, including:
 
  •  The level of specialized skills required for comprehensive patient treatment;
 
  •  Favorable sociological trends including a growing demographic wave from an aging population;


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  •  The need to develop and maintain specialized management information systems to meet the increasing demands of patient billing and third-party payors;
 
  •  The current fragmented nature of the market, which is comprised of numerous smaller, independent providers, allowing the opportunity for market consolidation;
 
  •  New laser and medical technologies that make access to treatment less painful and disfiguring, coupled with insurance company reimbursement for these new technologies;
 
  •  The large number of people affected by vein disease in the United States in relation to the relatively low percentage of people who actually receive treatment for such vein disease; and
 
  •  Our experience recruiting and training physicians in treating varicose veins and the ability to produce opportunities we believe are financially attractive to physicians practicing in other areas, such as general practice or emergency medicine.
 
Our Strategy
 
Make Selective Contract Acquisitions of Partner Fertility Centers
 
The U.S. market for fertility services is highly fragmented and we believe that it is ripe for consolidation. Recruitment into our Partner Program has traditionally focused on fertility centers that first participate as Affiliates serviced by our Consumer Services Division; as such, we had an established pipeline of 25 fertility centers as of September 30, 2009. Affiliate practices have the opportunity to become familiar with the offerings we provide and our commitment to customer service, which allows the Affiliate practices to see our value proposition first hand. We, in turn, have a chance to assess a practice’s commitment to growth and utilization of our services without making a significant up-front financial commitment. In addition to recruiting from Affiliate centers, we have a development staff that targets leading physician groups with established practices in selected metropolitan markets. These candidates are then evaluated against our contract acquisition criteria, which includes factors such as size of practice, physician reputation and the physicians’ growth-oriented outlook. We believe that our competitors’ ability to compete with us for contract acquisitions is currently limited due to our experience acquiring Partner center contracts, our position as the manager of what we believe is the largest network of fertility centers in the United States and our developed infrastructure and experience in delivering valuable services to support fertility center operations.
 
Expand our Network of Affiliate Fertility Centers
 
As of September 30, 2009, we had Affiliates in 24 metropolitan markets and intend to expand our network of Affiliate fertility centers to other metropolitan markets across the United States. We primarily focus our network development activities on metropolitan markets with populations in excess of 500,000. Because of the relatively low percentage of the population that seeks fertility treatment, a large population base is required to support a sophisticated fertility center. Our fertility centers are capable of drawing consumers from a large geographic area and, as such, our development staff is focused on the top 100 largest metropolitan markets, where we expect the highest demand for fertility centers to occur.


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Develop De Novo Vein Clinics
 
We intend to develop new vein clinics in targeted markets. Our past experience suggests that the vein clinics business can generally support one clinic per one million population in metropolitan markets. Our new clinic development staff focuses on the following:
 
  •  Developing new clinics in markets where we already have existing clinics that have not fully penetrated their market to take advantage of existing investments in regional management, managed care contracts, personnel and marketing capabilities;
 
  •  Identifying attractive new markets in states that already have a vein clinic location and states contiguous to existing vein clinic locations to leverage regional management, personnel and other infrastructure assets; and
 
  •  Identifying locations where we believe there are attractive demographics, reasonable media costs and a favorable reimbursement environment.
 
We believe our vein clinic model can be predictably and profitably replicated in new markets. Our ability to develop de novo vein clinics is demonstrated by the five new vein clinics we opened during 2008 and the new vein clinics we opened in Cincinnati and Cleveland, Ohio in 2009. We continue progress towards opening additional new vein clinics in locations across the United States and have targeted several new markets; however this pace could be affected by challenges in physician recruitment. De novo vein clinics offer an attractive return on capital as they require relatively little capital investment, typically $300,000, and usually reach break-even in nine months or less after opening of the clinic.
 
Increase the Total Number of Patients Treated
 
We intend to work with our fertility centers and vein clinics to increase the total number of patients they treat. To achieve this objective we intend to:
 
  •  Offer products and services to centers and clinics that help them attract patients, including access to state-of-the-art equipment, access to our Attain IVF programs and access to our clinical and information technology applications;
 
  •  Enable fertility centers to enhance their ability to provide superior care through use of our proprietary ARTworks software, which provides electronic medical records, treatment plan and success rate research capabilities, decision support functionality and clinical risk management auditing services;
 
  •  Enable vein clinics to enhance their ability to provide superior care through use of our proprietary VPA information system, which is an end-to-end patient and clinic operating system that provides decision support and revenue cycle functions;
 
  •  Help our fertility centers and vein clinics drive additional patient volume through our sales and marketing efforts, including our direct-to-consumer advertising, internet marketing, physician referral development and providing marketing materials and programs to our fertility centers and vein clinics for their use; and
 
  •  Convert initial potential patient contacts into patients treated at our centers and clinics. We believe we can accomplish this through the protocols we established for our call center professionals and contact follow up procedures our center and clinic staff employ to ensure patients attend their consultation and all scheduled treatments.


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Increase Penetration of Our Attain IVF Programs
 
Currently, many third-party payors provide limited coverage for the diagnosis and treatment of infertility. Our Attain IVF programs, which are offered directly to patients, have been designed to offer attractive financial options to prospective patients. For the nine months ended September 30, 2009, approximately 12.2% of self-pay patients in our Partner and Affiliate network utilized our Attain IVF Refund Program. We formally introduced our Attain IVF Multi-Cycle Program in July 2009. For the three months ended September 30, 2009, approximately 9% of total enrollment in our Attain IVF programs consisted of Attain IVF Multi-Cycle Program patients. We believe that the penetration of our Attain IVF programs can be meaningfully increased by educating patients on the improved success rates associated with multiple treatment cycles and the packaged pricing features of our Attain IVF programs, which allow for multiple treatment cycles and, in the case of our Attain IVF Refund Program, a significant financial refund if the treatments are unsuccessful. We also believe we can increase overall market penetration of our Attain IVF programs by demonstrating to physicians at potential Affiliate and Partner practices the benefit of increased patient volume and retention that we believe result from offering our Attain IVF programs. We have demonstrated the ability to increase Attain IVF program penetration because certain of our fertility centers had Attain IVF program penetration rates in excess of 25% during the nine months ended September 30, 2009.
 
Continue Improving Operating Efficiencies
 
We continuously seek opportunities to lower costs and realize operating efficiencies through the implementation of a centralized infrastructure focused on improved accounts receivable management, along with leveraging economies of scale in support functions such as procurement, finance, information technology, human resources, risk management and legal services. We expect to further leverage our corporate infrastructure as we expand our network of Partner fertility centers and vein clinics.
 
Sales and Marketing
 
The marketing departments for our Fertility Centers, Consumer Services and Vein Clinics Divisions specialize in the development of sophisticated marketing and sales programs that give contracted fertility centers and vein clinics access to business-building techniques designed to facilitate growth and development. Although we believe these marketing and sales efforts are often too expensive for many individual physician practices, affiliation with us provides access to greater marketing and sales capabilities than would otherwise be available. In addition, our Consumer Services Division is focused on direct-to-consumer marketing, which we believe represents a competitive advantage over non-affiliated fertility centers. Our marketing services focus on referral enhancement, relationships with local physicians, media and public relations.
 
We operate web portals that: allow visitors access to educational material concerning infertility and vein care issues; provide links to our fertility Partner and Affiliate practices; provide links to our vein clinics; allow prospective patients to request fertility and vein care appointments or follow up contact; and allow prospective patients to request information on our Attain IVF programs and apply for treatment financing.
 
Competition
 
Our business divisions operate in highly competitive areas. Our fertility centers compete with national, regional and local physician practice fertility centers, hospitals and university medical centers, some of which have programs that compete with our Attain IVF programs. Our fertility centers may also compete with fertility centers located outside of the United States, due to the self-pay nature of IVF treatment. Our vein clinics compete with other vein care clinic providers, dermatologist and surgical clinics that provide ELT and sclerotherapy as an ancillary offering, vascular surgeons and interventional radiologists. Barriers to entry in the vein care industry are low. We do not believe that we currently face


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significant competition providing managerial services to fertility centers and vein clinics. We believe that the fertility centers and vein clinics we work with are well positioned to compete in our markets based on the reputations of the physicians providing services at those centers and clinics; however, there can be no assurance that these centers and clinics will be able to compete effectively with existing providers in our markets or that new competitors will not enter into our markets. These existing and new competitors may have greater financial and other resources than we or our fertility centers or vein clinics do. See “Risk Factors — We face increased competition from existing providers, as well as new providers entering our markets.”
 
Health Care Regulation
 
The health care industry is highly regulated. Our ability to operate profitably will depend in part upon our ability, and the ability of our affiliated physicians and physician practice groups, to obtain and maintain all licenses and other approvals necessary to, and to otherwise, comply with applicable health care regulations. We believe that health care regulations will continue to change. Therefore, we monitor developments in health care law, and we are likely to be required to modify our operations from time to time as our business and the regulatory environment changes. Many aspects of our current and anticipated business operations have not been the subject of specific judicial or regulatory interpretation. A review of our business by courts or regulatory authorities may result in a determination that could adversely affect our operations. In addition, the health care regulatory environment may change in a way that restricts our operations. Future changes in health care regulation are difficult to predict and may constrain or require us to restructure our operations, which could negatively impact our business and operating results.
 
Physician Licensure Laws
 
The practice of medicine is subject to state licensure laws, regulations and approvals. We have established a system designed to ensure that the physicians at our fertility centers and vein clinics are appropriately licensed under applicable state law. If physicians at the centers or clinics fail to renew their licenses on an annual basis or fail to maintain an unrestricted license, our business, financial condition and results of operations may be negatively impacted.
 
Corporate Practice of Medicine
 
Some states have laws that prevent business entities like us from practicing medicine, employing physicians and other individuals licensed in the healing arts or other learned profession and exercising control over their decisions, also known, collectively, as the corporate practice of medicine. In some states these prohibitions are expressly stated in a statute or regulation, whereas in other states the prohibition is a matter of judicial or regulatory interpretation. Additionally, in those states which apply such prohibitions to individuals licensed in the healing arts or other learned profession, it is not clear whether physician assistants or nurse practitioners would be subject to such prohibitions.
 
In states that prohibit the corporate practice of medicine, we operate by maintaining long-term management contracts with affiliated medical practices, which are each owned and operated by physicians and which employ or contract with additional physicians. Under such an arrangement, the laws of most states focus on the extent to which the corporation exercises control over the physicians and on the ability of the physicians to use their own professional judgment as to diagnosis and treatment. We do not represent to the public that we offer medical services, and we do not exercise influence or control over the practice of medicine by physicians or by their affiliated medical practices. In each of these states, the affiliated fertility center or vein clinic is the sole employer of the physicians, and the affiliated fertility center or vein clinic retains the full authority to direct the medical, professional and ethical aspects of its medical practice. Our fertility centers and vein clinics are duly


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licensed or qualified as a medical practice or foreign corporation in the states where such license or qualification is required.
 
Corporate practice of medicine laws and their interpretations are continually evolving and may change in the future. Moreover, these laws and their interpretations are generally enforced by state courts and regulatory agencies that have broad discretion in their enforcement. Although we neither employ physicians nor provide medical services in those states that prohibit the corporate practice of medicine, a state court or enforcement agency may conclude that we are engaged in the corporate practice of medicine in those states where we employ nurse practitioners and physician assistants who work under the supervision of the physicians at our fertility centers and vein clinics or because we provide services to physicians in connection with their performance of professional medical services through our management contracts.
 
Although we have not received notification from any state regulatory or similar authority asserting that we are engaged in the corporate practice of medicine, to the extent any act or service to be performed by us is construed by a court or enforcement agency as constituting the practice of medicine in a particular jurisdiction, we cannot be sure that such court or enforcement agency would not construe our arrangements as violating that jurisdiction’s corporate practice of medicine doctrine. If such a claim were successful, we could be subject to civil and criminal penalties, could be required to restructure or terminate our applicable contractual arrangements and managed physicians could have restrictions imposed upon their licenses to practice medicine. Additionally, a physician shareholder of a managed practice might successfully avoid restrictions on the practice’s ability to operate independent of our management on the grounds that the managed practice’s management arrangement with us violates the state’s prohibition on the corporate practice of medicine. Such results or the inability of us or the managed practices to restructure our relationships to comply with such prohibitions could have an adverse effect on our business, financial condition and results of operations.
 
Fee Splitting
 
The laws of some states prohibit physicians from splitting with anyone, other than providers who are part of the same group practice, any professional fee, commission, rebate or other form of compensation for any services not actually and personally rendered. The precise language and judicial interpretation of fee-splitting prohibitions varies from state to state.
 
Fee-splitting laws and their interpretations vary from state to state and are enforced by state courts and regulatory authorities that have broad discretion in their enforcement. For example, our Attain IVF programs could be interpreted by one or more state regulators as prohibited fee splits to the extent that we retain a portion of the payments patients pay directly to us for their medical treatment by our fertility centers. There can be no assurance that these laws will be interpreted in a manner consistent with our practices or that other laws or regulations will not be enacted in the future that could have a material adverse effect on our business, financial condition and operating results. Penalties for violating fee-splitting statutes or regulations may include the medical license revocation, suspension, probation or other disciplinary action of the providers affiliated with our fertility centers or vein clinics who have been found to violate the fee-splitting statutes or regulations.
 
Courts in some states have interpreted fee-splitting statutes as prohibiting all percentage of gross revenue and percentage of net profit management fee arrangements, despite the performance of legitimate management services. In addition, courts have refused to enforce contracts found to violate state fee-splitting prohibitions. To the extent any of our contractual arrangements are construed by a court or enforcement agency as violating a jurisdiction’s fee-splitting laws, there is a possibility that some provisions of our agreements may not be enforceable. For example, a physician shareholder of a managed practice might successfully avoid payment of a management fee on the grounds that the


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management arrangement violates the state’s fee-splitting prohibition. We also may be required to redesign or terminate our arrangements, including our Attain IVF programs, and our relationships with our fertility centers or vein clinics in order to bring their activities into compliance with such laws. The termination of, or our failure to successfully restructure, any such relationship could have a material adverse affect on our business, financial condition and operating results. In particular, a forced restructuring of our management fee could have a material impact on us. In addition, expansion of our operations to new jurisdictions could require structural and organizational modifications of our relationships with our fertility centers in order to comply with additional statutes.
 
Further, although our management agreements with our vein clinics provide that each vein clinic pay us a fee equal to 150% of our expenses of operating and managing the vein clinic, these fees have historically exceeded the operating margin generated by any particular vein clinic prior to payment of the management fee. Accordingly, each vein clinic only pays the portion of the management fee that is equal to the amount of revenue generated by the clinic annually up to the 150% amount. As a result, our vein clinics do not generate any net profits at year end. In those states that have interpreted fee-splitting statutes as prohibiting a percentage of net revenue management fee arrangements where we have vein clinics, there is material risk that a regulator could recharacterize our management fee as 100% of net revenue in violation of such states’ fee-splitting statutes which would subject physicians affiliated with our vein clinics to disciplinary actions or civil penalties.
 
Courts in other states, including Maryland, where we currently have two vein clinics and plan to open two additional clinics in 2010, have interpreted their fee-splitting statutes to prohibit non-physicians from receiving fees in connection with the management of a physician practice that do not bear a reasonable relationship to the services being rendered based on the fair market value of such services. A state regulator could conclude that 150% of our expenses does not bear a reasonable relationship to the services being rendered because none of our vein clinics generate sufficient revenues to pay the full management fee. If our management fee were to be challenged in a state such as Maryland, there is substantial risk that this compensation method would not be upheld, which could subject the providers who are affiliated with the vein clinics in Maryland to disciplinary action as well as civil penalties. We also have vein clinics in Wisconsin, Tennessee and Kansas which have a similar requirement that the management fee reflect the fair market value of the services being rendered and impose disciplinary actions, civil penalties and criminal penalties on the physicians who are affiliated with our vein clinics in those locations if such fee does not reflect the fair market value of the services being rendered.
 
Federal and State Anti-Kickback Prohibitions
 
Various federal and state laws govern financial arrangements among health care providers. The federal anti-kickback law prohibits the knowing and willful offer, payment, solicitation or receipt of any form of remuneration in return for, or with the purpose to induce, the referral of Medicare, Medicaid or other federal health care program patients, or in return for, or with the purpose to induce, the purchase, lease or order of items or services that are covered by Medicare, Medicaid or other federal health care programs. Similarly, many state laws prohibit the solicitation, payment or receipt of remuneration in return for, or to induce, the referral of patients to private as well as government programs in violation of these statutes.
 
Federal and state anti-kickback statutes are very broad and it is possible that a court could conclude that the marketing services we offer in exchange for a management fee based on a percentage of net profits constitutes a payment in violation of these statutes. Our fertility centers and vein clinics are also subject to these statutes, but we do not oversee and are not responsible for their compliance with these laws.


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Violations of these anti-kickback laws may result in substantial civil or criminal penalties for individuals or entities. These laws may be enforced by the government or by private individual whistleblowers. If we or our fertility centers or vein clinics are found to have violated federal or state anti-kickback laws, our business, operations or financial condition could be adversely affected.
 
Physician Self-Referral Prohibitions
 
The federal physician self-referral statute, known as the “Stark” statute, prohibits a physician from making a referral for certain designated health services to any entity with which the physician has a financial relationship, unless there is an exception in the statute that allows the referral. The entity that receives a prohibited referral from a physician may not submit a bill to Medicare for that service. Federal courts have ruled that a violation of the Stark statute, as well as a violation of the federal anti-kickback law described above, can serve as the basis for a Federal False Claims Act suit. Many state laws prohibit physician referrals to entities with which the physician has a financial interest, or require that the physician provide the patient notice of the physician’s financial relationship before making the referral. Violation of the Stark statute and state laws prohibiting physician referrals can result in substantial civil penalties for both the referring physician and any entity that submits a claim for a health care service made pursuant to a prohibited referral. Although we have structured our arrangements with our fertility centers and vein clinics to comply with the Stark statute and state laws prohibiting certain physician referrals, because of the complexity of these laws, these laws could be interpreted in a manner inconsistent with our operations. In addition, our fertility centers and vein clinics are themselves subject to these laws, but we do not oversee and are not responsible for their compliance with these laws. Federal or state self-referral regulation could adversely impact our arrangements with certain customers, and our ability to market our services directly to physicians in a position to refer patients to our fertility centers and vein clinics.
 
False Claims
 
Under separate federal statutes, submission of false or fraudulent claims to government payors may lead to civil monetary penalties, criminal fines and imprisonment and/or exclusion from participation in the Medicare, Medicaid and other federally-funded health care programs. These false claims statutes include the Federal False Claims Act, which allows any person to bring suit alleging false or fraudulent Medicare or Medicaid claims or other violations of the statute and to share in any amounts paid by the entity to the government in fines or settlement. In some jurisdictions, even claims that were accurately submitted for medically necessary health care services have been held by courts to be “false” where the provider was not in compliance with federal anti-kickback or Stark laws, or applicable Medicare regulations. These private actions have increased significantly in recent years and have increased the risk that we or our vein clinics will have to defend a false claims action, pay fines or be excluded from participation in the Medicare and/or Medicaid programs as a result of an investigation involving our fertility centers or vein clinics arising out of such an action.
 
Business of Insurance
 
Laws and regulatory approaches to insurance are state specific and vary widely from state to state. Although most states supply statutory definitions of “insurance,” these definitions are subject to disparate interpretation by state courts, attorney generals and regulators. Our Attain IVF Refund program and our Attain IVF Multi-Cycle program each have several characteristics that are present in an insurance contract. Although we view our Attain IVF Refund program as a guaranty or a warranty of our fertility centers’ performance and our Attain IVF Multi-Cycle program as a lower-cost alternative, it is possible that an insurance regulator in a state where we conduct business could take the position that either or both of our Attain IVF programs are insurance and should be regulated as such by the state. If we are found to have engaged in the business of insurance without a license, we could be


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subject to criminal and civil penalties or be forced to comply with burdensome reserve requirements or restructure the programs.
 
Health Insurance Portability and Accountability Act of 1996
 
Health care providers, health care clearinghouses and operators of health plans (collectively, “covered entities”) are significantly affected by certain health information requirements contained in HIPAA. HIPAA and its implementing regulations established national standards for, among other things, certain electronic health care transactions, the use and disclosure of certain individually identifiable patient health information and the security of the electronic systems maintaining this information. These are commonly known as the HIPAA transaction and code set standards, privacy standards and security standards, respectively.
 
HIPAA allows covered entities to disclose protected health information to “business associates” if the covered entities obtain satisfactory assurances that the business associate will use the information only for the purposes for which it was engaged by the covered entity, will safeguard the information from misuse and will help the covered entity comply with some of the covered entity’s duties under HIPAA. We are a “business associate” under HIPAA because we perform services for or on behalf of covered entities, such as our fertility centers or vein clinics, that involve the use or disclosure of protected health information. We enter into business associate agreements with covered entities and are contractually obligated to comply with the requirements of those agreements.
 
The American Recovery and Reinvestment Act of 2009, specifically the portion known as the Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”), expanded the scope and application of HIPAA, including, among other things, applying the security and certain privacy provisions of HIPAA directly to business associates. Application of these rules to business associates is a significant change. Previously, liability under HIPAA rested exclusively with the covered entity. Under the HITECH Act, the business associate now has responsibility and liability directly for a breach.
 
Beginning on February 17, 2010, certain administrative, physical and technical safeguards and policy, procedure, and documentation requirements of the security standards under HIPAA will apply to a business associate in the same manner that they apply to a covered entity. For example, breaches of the security of electronic health records may require disclosure to affected individuals, news media and the Secretary of the U.S. Department of Health and Human Services. Such requirements must be incorporated into the business associate agreement between the business associate and the covered entity.
 
Under the HITECH Act, business associates will face criminal and civil liabilities for failure to comply with HIPAA. Criminal penalties may be imposed against persons who obtain or disclose protected health information without authorization. In addition, a state’s attorney general can bring civil actions against a person on behalf of residents of the state that are adversely affected by violations of either HIPAA or the HITECH Act. The attorney general can either seek to enjoin further violations or obtain money damages on behalf of the residents harmed. The U.S. Department of Health and Human Services is also beginning to perform periodic audits of health care providers to ensure that required policies under the HITECH Act are in place. In addition, individuals harmed by violations will be able to recover a percentage of monetary penalties or a monetary settlement based upon methods established by the U.S. Department of Health and Human Services for this private recovery. HIPAA also authorizes the imposition of civil monetary penalties against entities that employ or enter into contracts with individuals or entities that have been excluded from participation in the Medicare or Medicaid programs, which means that we could be subject to penalties if our fertility centers, vein clinics or employees are excluded from participation in the Medicare or Medicaid programs. Any failure to


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comply with these laws could have an adverse impact on our business, operations or financial condition.
 
Antitrust Laws
 
In connection with the corporate practice of medicine laws referred to above, our fertility centers and vein clinics are organized as separate legal entities. As such, our fertility centers and vein clinics may be deemed to be persons separate from both us and each other under antitrust laws and, accordingly, subject to a wide range of laws that prohibit anti-competitive conduct among separate legal entities. There can be no assurance that a review of our business by courts or regulatory authorities would not have a material adverse effect on our operation or the operation of our fertility centers or vein clinics.
 
Future Legislation and Regulation
 
Health care providers are subject to federal, state and local laws and regulations, and sanctions imposed under or changes to such laws or regulations could adversely affect our operations or financial results. The federal fiscal year 2010 budget establishes a reserve fund of more than $630 billion over the next 10 years to finance fundamental reform of the United States’ health care system, in an effort to reduce costs and expand health care coverage. The fund will be paid for by a combination of tax revenue and reductions in Medicare and Medicaid spending.
 
In addition, the White House announced in July 2009 that it had reached agreement with leading hospital groups, including the American Hospital Association, to cut federal payments under Medicare and Medicaid by $155 billion over 10 years as part of a plan to offset a portion of the cost of a national health insurance and health reform proposal. Much of these savings are reported to be derived from across-the-board cuts in Medicare hospital payments, with at least $50 billion in the cuts linked directly to increases in the number of uninsured who would be provided coverage under the proposed national health insurance proposal.
 
There are currently numerous proposals on the federal and state levels for comprehensive reforms relating to health care that could affect payment and reimbursement for health care services in the United States. The U.S. Congress is considering legislation that could dramatically overhaul the health care system, including the possibility of a government health care plan. If national reform legislation is enacted, we may benefit from certain provisions thereof, and, conversely, may be adversely affected by other provisions. For example, because our Attain IVF programs are self-pay programs for patients that do not have insurance coverage for fertility treatments, health care reform that increases insurance coverage for fertility treatments could lead to a decrease in demand for our Attain IVF programs. We cannot predict whether any such reforms will ultimately be adopted or the impact that such reforms may have on the demand or payment for our services.
 
Employees
 
As of September 30, 2009, we had 1,306 employees. Of these, 1,057 were employed by our Fertility Centers Division, 15 by our Consumer Services Division, 202 by our Vein Clinics Division and 32 were employed at our corporate headquarters, including 8 who were executive management. Of the 1,306 employees, 136 were employed on a part-time basis and 95 were employed on a per diem basis. We are not a party to any collective bargaining agreement and we believe that our employee relationships are good.


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Our Fertility Centers and Vein Clinics
 
For the years ended December 31, 2008, 2007 and 2006 and the nine months ended September 30, 2009, the following contracted fertility centers each individually provided greater than 10% of our Fertility Centers Division revenues, net and/or contribution as follows:
 
                                                                 
    Percent of Revenues, Net   Percent of Contribution
    Nine Months Ended
  Year Ended
  Nine Months Ended
  Year Ended
    September 30,
  December 31,   September 30,
  December 31,
    2009   2008   2007   2006   2009   2008   2007   2006
 
RSC of New England
    7.2       7.2       8.9       10.7       9.2       8.7       10.5       11.7  
FCI
    13.6       16.3       19.2       22.3       12.8       15.2       17.6       19.2  
Shady Grove Fertility Reproductive Science Center, P.C. (“Shady Grove”)
    17.8       18.0       21.3       22.9       16.9       17.2       21.4       20.5  
 
Generally, under our current fertility Partner agreements, we receive as compensation for our services a three-part fee comprised of: a tiered percentage of the fertility center’s net revenues; reimbursed costs of services (costs incurred in servicing a fertility center and any costs paid on behalf of the fertility center); and either a fixed percentage, or a fixed dollar amount, of the fertility center’s earnings after services fees, which may be subject to further limits. The third tier of our fee structure under our RSC of New England and Shady Grove Partner agreements are as follows:
 
  •  RSC of New England — a fixed annual percentage of the center’s earnings.
 
  •  Shady Grove — a fixed dollar amount of the center’s earnings subject to a fixed percentage of the center’s earnings limitation. The upper boundary of the calculation is $1,071,000 and the lower boundary of the calculation is $540,000.
 
Under our current Partner agreement with FCI, however, we do not receive a three-part fee. Rather, effective as of November 1, 2009, we receive a fee that is generally equal to the operating expenses associated with managing FCI’s medical practice plus 9.5% of such expenses. Our revenues from FCI prior to November 1, 2009 were, pursuant to our current Partner agreement with FCI, set at a fixed annual amount paid monthly.
 
A complete listing of our fertility Partner agreements and vein clinic locations is presented below.


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Fertility Partner Agreements
 
                                 
            Remaining
       
        Year Contract
  Contract
  No. of
  No. of
Name
  State   Acquired   Years   M.D.s   PhDs
 
Foulk & Whitten Nevada Center for Reproductive Medicine, P.C. 
  NV   December 2009     24       2       0  
Idaho Center for Reproductive Medicine, P.C. 
  ID   December 2009     24       2       0  
Utah Fertility Center, P.C. 
  UT   December 2009     24       3       0  
Arizona Reproductive Medicine Specialists, Ltd. 
  AZ   July 2008     23       4       1  
Southeastern Fertility Centers, P.A. 
  SC   April 2008     23       3       1  
Center for Reproductive Medicine, P.A. 
  FL   August 2007     22       4       1  
Reproductive Partners Medical Group, Inc. 
  CA   January 2005     19       9       0  
Seattle Reproductive Medicine, Inc., P.S. 
  WA   January 2004     7       7       1  
Reproductive Endocrine Associates of Charlotte, P.C. 
  NC   September 2003     8       6       1  
Northwest Center for Infertility & Reproductive Endocrinology
  FL   April 2002     7       7       1  
Shady Grove Fertility Reproductive Science Center, P.C. 
  MD, VA & DC   March 1998     13       21       2  
Fertility Centers of Illinois, S.C. 
  IL   February 1997     12       11       2  
Bay Area Fertility & Gynecology Medical Group, Inc. 
  CA   January 1997     11       6       1  
MPD Medical Associates (MA), P.C. (doing business as RSC of New England)
  MA, NH & RI   July 1988     2       7       1  


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Vein Clinic Locations
 
     
Location
  Date Clinic Opened
 
Cleveland, OH
  April 2009
Cincinnati, OH
  January 2009
Pittsburgh, PA
  December 2008
Skokie, IL
  December 2008
Marietta, GA
  June 2008
Alexandria, VA
  April 2008
Boca Raton, FL
  February 2008
Sterling, VA
  December 2007
Ft. Lauderdale, FL
  July 2007
St. Louis, MO
  January 2007
Merrillville, IN
  August 2006
Kansas City, MO
  June 2006
West Palm Beach, FL
  December 2005
Alpharetta, GA
  October 2005
Gurnee, IL
  September 2005
Naperville, IL
  September 2004
Lawrenceville, GA
  September 2001
Indianapolis, IN
  April 2001
Knoxville, TN
  March 2001
Raleigh, NC
  March 2000
Greensboro, NC
  January 2000
Madison, WI
  March 1999
Rockville, MD
  November 1998
Milwaukee, WI
  March 1998
Charlotte, NC
  February 1998
Orland Park, IL
  November 1996
Fairfax, VA
  March 1992
Overland Park, KS
  April 1991
Owings Mills, MD
  July 1990
Buffalo Grove, IL
  August 1989
Atlanta, GA
  June 1988
Oak Brook, IL
  Pre-1985
Chicago, IL
  Pre-1985
Schaumburg, IL
  Pre-1985
 
Properties
 
Our headquarters and executive offices are located at Two Manhattanville Road in Purchase, New York, where we occupy approximately 18,500 square feet under a lease expiring in 2012. Future lease payments for our headquarters and executive offices will approximate $51,100 per month.
 
We also lease or sublease the locations set forth in the two preceding tables for our Partner fertility centers and vein clinics. Costs associated with our Partner fertility centers are reimbursed to us as part of our fee agreement with the applicable center, whereas costs associated with vein clinic locations are not reimbursed.
 
We believe that our executive offices and the space occupied by our fertility centers and vein clinics are adequate for our operations.


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Legal Proceedings and Insurance
 
From time to time, we and our Partner fertility centers and vein clinics and their physicians are parties to legal proceedings in the ordinary course of business. We are exposed to claims of professional negligence based on services performed by our employees, including physician assistants and nurse practitioners, as well as based on our relationships with physicians providing treatments at our Partner fertility centers and vein clinics. None of these proceedings is expected to have a material adverse effect on our financial position, results of operations or cash flow. We maintain medical malpractice insurance with limits of $1 million per claim, regardless of the number of the covered defendants, and $10 million per year in the aggregate, with respect to our Partner fertility centers, and with limits generally equal to $1 million per physician and $10 million per year in the aggregate, with respect to our vein clinics. Our Partner fertility centers, vein clinics and their physicians are additional named insureds under our policies. All of our insurance policies are subject to deductibles or a self-insured retention. A portion of the insurance we maintain for certain of our fertility centers is provided by ARTIC.


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MANAGEMENT
 
Directors and Executive Officers
 
The following table sets forth information regarding our principal executive officers and directors, including their ages:
 
             
Name
  Age   Position
 
Jay Higham
    51     President, Chief Executive Officer and Director
John W. Hlywak, Jr. 
    62     Executive Vice President and Chief Financial Officer
Daniel P. Doman
    48     President of Vein Clinics Division
Angela Gizinski
    60     Vice President, Human Resources
Vijay Reddy
    43     Vice President, Information Systems
Pamela Schumann
    43     President of Consumer Services Division
Timothy P. Sheehan
    33     Vice President, Finance
Scott Soifer
    46     Executive Vice President, Operations and Administration
Joseph J. Travia, Jr. 
    57     President of Fertility Centers Division
Claude E. White
    61     Vice President, General Counsel and Secretary
Gerardo Canet
    64     Chairman of the Board of Directors
Kush K. Agarwal
    61     Director
Wayne R. Moon(1)(2)(3)(4)(5)
    69     Director
Lawrence J. Stuesser(1)(2)(3)(5)(6)
    67     Director
Elizabeth E. Tallett(1)(2)(3)(5)(7)
    60     Director
Yvonne S. Thornton, M.D., M.P.H.(1)(2)(3)(5)
    62     Director
 
(1) Member of the audit committee.
(2) Member of the compensation committee.
(3) Member of the nominating and governance committee.
(4) Chairperson of the nominating and governance committee.
(5) Independent director.
(6) Chairperson of the audit committee.
(7) Chairperson of the compensation committee.
 
JAY HIGHAM became our President and Chief Executive Officer, effective January 1, 2006, and had been our President and Chief Operating Officer since June 2004. He was appointed as a director, effective January 24, 2006. In October 1994, Mr. Higham joined us as Vice President of Marketing and Development and, in January 1999, was promoted to Senior Vice President of Marketing and Development. He earned a B.S. in Psychology from the University of Rochester and an M.H.S.A. from George Washington University.
 
JOHN W. HLYWAK, JR. joined us in July 1999 as our Senior Vice President and Chief Financial Officer and was named Executive Vice President and Chief Financial Officer in March 2006. Mr. Hlywak is a certified public accountant and has a B.S. in Accounting from Widener University.
 
DANIEL P. DOMAN joined us in August of 2007 with the acquisition of VCA. Since May 2008, he has served as President of our Vein Clinics Division. Previously, Mr. Doman was the Chief Financial Officer of VCA. Prior to joining VCA in April 2006, he was a Managing Director at Health Dimensions Group, a national, integrated senior living and health care management consulting firm, from April 2003 to March 2006. Prior to that, Mr. Doman was a Partner with BDO Seidman, LLP, an accounting and consulting firm, from July 1998 to March 2003. He has a Bachelor’s degree in Accounting and Finance from Loyola University of Chicago.


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ANGELA GIZINSKI joined us in April 2006 as our Vice President, Human Resources. For more than three years prior to joining us, Ms. Gizinski was Director, Human Resources with Sara Lee Branded Apparel, now known as Hanesbrands, Inc. Ms. Gizinski has an Associates Degree from Bay Path Junior College and a B.A. in Human Resource Management from Fairfield University.
 
VIJAY REDDY serves as our Vice President, Information Systems. Before joining us in 2003 as Manager of Technical Operations, Mr. Reddy was Director of Infrastructure & Technology for Lifetime Television in New York. He also has held management positions in information systems with Martha Stewart Living Omnimedia, Conde Nast Publications, Viacom and Schlumberger. Mr. Reddy has a Bachelor’s degree in Computer Science from St. John’s University, and he is a certified Institute of Electrical and Electronics Engineers Computer Systems Engineer.
 
PAMELA SCHUMANN was appointed President of our Consumer Services Division in September 2007. Prior to that, she served as our Vice President, Consumer Services. She joined us in 2001 to help launch our consumer services initiative. Ms. Schumann received her B.A. in Marketing from the University of Maryland’s Robert H. Smith School of Business.
 
TIMOTHY P. SHEEHAN joined us in January 2010 as our Vice President, Finance. Prior to joining us, Mr. Sheehan was Chief Financial Officer and director with Scale Finance LLC, a financial services consulting organization in North Carolina, from August 2008 to December 2009. From September 2006 to August 2008, he held the position of Vice President, Corporate Development at Minrad International, and from May 2004 to September 2006 he was an Associate at KeyBanc Capital Markets, a Cleveland, Ohio based middle-market investment bank. Mr. Sheehan has a B.S. in Accounting and a B.S. in Finance from Virginia Polytechnic Institute and State University and an M.B.A. from Wake Forest University, in addition to being a certified public accountant.
 
SCOTT SOIFER joined us in January 2005 as our Vice President, Marketing and Development and was promoted to Executive Vice President, Operations and Administration in July 2008. For more than 12 years prior to joining us, Mr. Soifer was an Associate Partner at Accenture (formerly Andersen Consulting), specializing in health care strategy, focused primarily on the health insurance sector. Mr. Soifer has a Bachelor’s degree in Computer Science from the University of California at Santa Barbara and an M.B.A. from the Kellogg School of Management at Northwestern University.
 
JOSEPH J. TRAVIA, JR. was appointed President of our Fertility Centers Division in September 2007. Prior to that, he served as our Senior Vice President, Operations, Eastern Region. He joined us in 2000 as Vice President and Executive Director of our Reproductive Science Center in New England. Mr. Travia is a certified public accountant and earned a B.S. in Management from Boston College and an M.B.A. from Babson College.
 
CLAUDE E. WHITE joined us in March 1995 as General Counsel and Assistant Secretary. In January 1998, Mr. White became Corporate Secretary, in addition to General Counsel, and in May 2002 became a Vice President. Mr. White received his B.A. in Political Science from Rutgers College and his J.D. from Rutgers School of Law.
 
GERARDO CANET served as our Chief Executive Officer from February 14, 1994 to December 31, 2005 and has been a director since February 14, 1994. Mr. Canet resigned as our Chief Executive Officer effective December 31, 2005, but continues to serve as chairman of the board and a consultant to the Company. Mr. Canet has been a director of Dendreon Corporation since December 1996. He earned a B.A. in Economics from Tufts University and an M.B.A. from Suffolk University.
 
KUSH K. AGARWAL became a director effective August 8, 2007. He served as President of VCA, which we acquired on August 8, 2007, from August 1987 until he resigned on May 15, 2008.


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Mr. Agarwal has a Master of Science in Industrial Administration from Carnegie-Mellon University, a Master of Science in Applied Analysis and Operations Research from the State University of New York and a Bachelor of Technology in Mechanical Engineering from Indian Institute of Technology.
 
WAYNE R. MOON became a director in May 2001. Mr. Moon joined Kaiser Foundation Health Plan, Inc. in 1970 and was subsequently elected President, Chief Operating Officer and director. In September 1993, Mr. Moon was appointed President and Chief Executive Officer of Blue Shield of California and a member of its board of directors and, later, chairman. Mr. Moon retired from Blue Shield of California in January 2000. Until recently, he served as chairman of the board of RelayHealth, Inc. He serves on various corporate and civic boards, including Varian, Inc. and the California State Automobile Association. Mr. Moon earned a B.B.A. and a Masters in Hospital Administration from the University of Michigan.
 
LAWRENCE J. STUESSER became a director in April 1994. Since June 1999, Mr. Stuesser has been a private investor. From June 1996 to May 1999, Mr. Stuesser was the President and Chief Executive Officer and a director of Computer People Inc., the U.S. subsidiary of London-based Delphi Group plc, of which he was also a director. Mr. Stuesser was a director of American Retirement Corporation from May 1997 to July 2006. Early in his career, Mr. Stuesser qualified as a certified public accountant and served as an audit manager with Alexander Grant & Company, an accounting firm. Mr. Stuesser holds a B.B.A. in Accounting from St. Mary’s University.
 
ELIZABETH E. TALLETT became a director in June 1998. Since July 2002, Ms. Tallett has been a Principal of Hunter Partners, LLC, which provides management services to developing life sciences companies. Ms. Tallett is a director of The Principal Financial Group, Inc., Varian, Inc., Coventry Health Care, Inc. and Meredith Corp. Inc. Ms. Tallett graduated from Nottingham University with degrees in Mathematics and Economics.
 
YVONNE S. THORNTON, M.D., M.P.H. became a director in January 2006. Dr. Thornton is a double board-certified specialist in obstetrics, gynecology and maternal-fetal medicine. Currently, Dr. Thornton is a perinatal consultant at Westchester Medical Center in New York. Dr. Thornton is a former Professor of Clinical Obstetrics and Gynecology at Cornell (Weill) Medical College and Vice-Chair of the Department of OB/GYN and Director of Maternal-Fetal Medicine at Jamaica Hospital Medical Center in New York City, where she served from 2002 to 2005. Dr. Thornton is a Diplomate of the American Board of Obstetrics and Gynecology, a Fellow of the American College of Surgeons and an Oral Examiner for the American Board of Obstetrics and Gynecology. After graduating with honors from Monmouth College in New Jersey, she received her M.D. with honors from Columbia University College of Physicians and Surgeons. Dr. Thornton also received her Executive Masters (M.P.H.) degree in Health Policy and Management from Columbia University.
 
Director Independence
 
Our board of directors has determined that Messrs. Moon and Stuesser, Ms. Tallett and Dr. Thornton are independent directors, in accordance with Nasdaq Marketplace Rule 5605(a)(2), because none of them is believed to have any relationships that, in the opinion of our board of directors, would interfere with the exercise of independent judgment in carrying out their responsibilities as a director. In addition, our board of directors has also determined that Mr. Sarason Liebler, who ceased being a member of our board of directors on May 12, 2009 because he had reached the mandatory retirement age of 72 under our corporate governance guidelines, was an independent director in accordance with Nasdaq Marketplace Rule 5605(a)(2). Our board of directors considered the $57,533 of consulting fees that were paid by us to Mr. Liebler in 2008 when determining his independence.


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Committees of the Board of Directors
 
Our board of directors maintains an audit committee, a compensation committee and a nominating and governance committee.
 
Audit Committee
 
The audit committee is charged by our board of directors to (a) study, review and evaluate our accounting, auditing and financial reporting practices, including the internal controls and audit functions, (b) assess our compliance with legal and regulatory requirements and (c) select the independent auditors and review their qualifications, independence and performance, while being the focal point for communications between our board of directors, our management and the independent auditors. More specifically, the audit committee pre-approves all audit and non-audit services to be performed by the independent auditors, reviews the scope and results of the audit of our financial statements, reviews financial statements and periodic filings with the Securities and Exchange Commission and discusses the same with our management.
 
Each audit committee member is an independent director, as defined in Nasdaq Marketplace Rule 5605(a)(2). Our board of directors has determined that in addition to being independent, Mr. Stuesser is an “audit committee financial expert” as such term is defined in Item 407 of Regulation S-K promulgated by the Securities and Exchange Commission.
 
Compensation Committee
 
The compensation committee, under a delegation of authority from our board of directors, reviews and makes decisions with respect to salaries, wages, bonuses, equity awards and other benefits and incentives for our executive officers.
 
Nominating and Governance Committee
 
Our board of directors maintains a nominating and governance committee consisting of independent directors, as defined in Nasdaq Marketplace Rule 5605(a)(2). The primary purpose of the nominating and governance committee is to provide oversight on the broad range of issues surrounding the composition and operation of our board of directors, including identifying individuals qualified to become members of our board of directors, recommending to our board of directors director nominees for the next annual meeting of stockholders and recommending to our board of directors a set of corporate governance principles applicable to us. The nominating and governance committee also provides assistance to our board of directors in the areas of committee selection, evaluation of the overall effectiveness of our board of directors and management and review and consideration of developments in corporate governance practices. The nominating and governance committee’s goal is to assure that the composition, practices, and operation of our board of directors contribute to value creation and effective representation of our stockholders.
 
Compensation Committee Interlocks and Insider Participation
 
During 2008 and from January 1, 2009 through May 12, 2009, the members of the compensation committee were Ms. Tallett (chairperson), Messrs. Liebler, Moon and Stuesser and Dr. Thornton. Mr. Liebler ceased being a member of our board of directors and the compensation committee on May 12, 2009 because he had reached the mandatory retirement age of 72 under our corporate governance guidelines. After May 12, 2009, the remaining members continued as the members of the compensation committee. All of the individuals listed above are, or, in the case of Mr. Liebler, were, independent directors, as defined in Nasdaq Marketplace Rule 5605(a)(2). None of the individuals listed above has ever been an officer or employee of us or any of our subsidiaries. During 2008 and 2009, none of our executive officers served on the compensation committee or board of directors of any other


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entity that had any executive officer who also served on the compensation committee of our board of directors or our board of directors.
 
Compensation Discussion and Analysis
 
Overview and Objectives
 
The objective of our compensation program, consisting of base salary, executive incentive compensation (performance-based compensation), stock options, restricted stock and restricted stock unit (“RSU”) grants, is to ensure that in our effort to create stockholder value, we attract, motivate and retain executives capable of assisting in the creation of such stockholder value.
 
Our compensation program is designed to be competitive by providing base salaries that are market driven; rewarding for our performance and individual performance through annual incentive compensation awards; and retaining executives through grants of stock option, restricted stock and RSU awards that provide for vesting over time, and upon the obtainment of certain performance targets in the case of RSUs. Commencing in 2008, we awarded senior executives with stock option awards that vest over a four-year period and, commencing in 2009, we granted performance-based RSUs to Messrs. Higham and Hlywak. In order to be market competitive with salaries for senior executives, the compensation committee annually assesses market salaries and attempts to ensure that salaries for our senior executives fall within the mid to upper range of salaries for comparable positions, taking into consideration experience, background and annual individual performance reviews for individual executives, but qualified to comparable size companies within comparable industries. With respect to executive incentive compensation, our executives are expected to accomplish individual goals annually that contribute to our overall growth. To the extent the goals are accomplished, such executives are rewarded. Additionally, our executives are rewarded if we achieve certain revenue and bottom-line goals each year, with greater reward being provided based on higher level of achievement.
 
We believe that linking executive compensation to corporate performance results in a better alignment of compensation with our goals and the interests of our stockholders. As performance goals are met or exceeded, most probably resulting in increased value to stockholders, executives are rewarded commensurately. We believe the compensation levels during 2008 and 2009 for our executives and our Chief Executive Officer adequately reflect our compensation goals and philosophy.
 
Elements of Our Compensation Program
 
We have chosen these four elements of compensation because of the belief that, taken together, (a) base salary, (b) executive incentive compensation, (c) stock option awards and (d) restricted stock and RSU grants represent the fairest way to compensate for services, provide a financial incentive to achieve long-term goals and objectives and help align an executive’s interest with that of our stockholders. Short-term compensation is typically in the form of base salary and annual incentive bonuses and long-term compensation is typically in the form of equity. Each individual’s base salary is determined based on years of experience and market rates for similar positions with other companies of comparable size. While the compensation committee does not believe that it is appropriate to establish compensation levels based solely on market comparisons or industry practices, it believes that information regarding pay practices at other companies is useful in assessing the reasonableness of compensation and recognizes that we need to be competitive for executive talent in our industry. A significant part of an executive’s compensation is the incentive bonus compensation program. This program provides a cash bonus which targets 75% of base salary for our President and Chief Executive Officer, 50% of base salary for the division Presidents and Executive Vice Presidents, 40% of base salary for Senior Vice Presidents and 30% of salary for Vice Presidents. The program has been designed to (a) reward executives who have achieved specific business and financial success during our most recent fiscal year, (b) give executives the incentive to strive for higher productivity, efficiency and quality of services and


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(c) encourage the “best” people to join us and stay with us. The program is based on achieving specific goals and results set by our President and Chief Executive Officer, and approved by the compensation committee. Our executive incentive compensation program consists of two parts: part one is based on our performance versus budget and part two is based on the achievement of individual performance goals. The maximum amount earned under part one is 60% of an individual’s total maximum incentive compensation which, as stated above, ranges from 30% to 75% of base salary. Part two of our incentive compensation program is based on the achievement of certain common milestones related to our achievements and specific milestones established for each executive. The common milestones are applicable to all eligible employees and the specific milestones apply to each eligible employee and are determined by each executive’s individual supervisor with the approval of our President and Chief Executive Officer. For Mr. Higham, our President and Chief Executive Officer, whose milestones are approved by the compensation committee, the common milestones represented 10% of his bonus eligibility and the specific milestones represented 30% of his bonus eligibility for 2008 and 2009. For Mr. Hlywak, our Executive Vice President and Chief Financial Officer, 10% of his eligible bonus was based on the common milestones and the specific milestones represented 30% of his bonus eligibility for 2008 and 2009.
 
Our President and Chief Executive Officer recommends to, and consults with, the compensation committee with respect to the base salaries of our executive officers. In order to assure that executive compensation is both competitive and appropriate, the compensation committee reviews executive compensation in its entirety before determining compensation level adjustments. The overall compensation of our senior executives is intended to fall within an appropriate range for comparable positions in our industry.
 
The compensation committee may retain the services of a compensation consultant to advise and assist it in the performance of its functions. During 2008, the compensation committee engaged Frederic W. Cook & Co. (“Cook”), which received instructions from, and reported directly to, the compensation committee. The compensation committee requested Cook’s advice on a variety of issues, including compensation strategy, market comparisons, pay and performance alignment versus industry peers, executive pay trends and potential compensation plan design and modifications. During 2009, the compensation committee did not engage the services of a compensation consultant.
 
Historically, our executive compensation structure emphasized cash components over long-term incentive components, due primarily to the low trading volume of our common stock. As we have grown, it has become more feasible to increase the emphasis on long-term incentives, making our executive compensation more competitive with comparable companies by increasing the equity portion of our overall compensation.
 
Allocation of Compensation Among the Four Elements
 
In determining what portion or percentage of an executive’s compensation is to be allocated among the four elements discussed above, we have determined that the largest portion should be allocated to base salary, the next largest portion to executive incentive compensation and the smallest portion to stock option awards and restricted stock and RSU grants. We recognize that in order to attract, motivate and retain executives, there must be a connection among each element of compensation that accomplishes the objectives stated above. Base salary serves to attract competent executives in what is an increasingly competitive marketplace. Executive incentive compensation serves as a good motivator for executives to strive for the highest level of productivity, which results in stockholder value. Stock option awards and restricted stock and RSU grants serve to retain executives because the vesting of the stock options, shares of restricted stock and RSUs granted is over a period of time and with the growth of our common stock, each executive’s incentives are aligned with those of our stockholders.


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Perquisites
 
We provide our President and Chief Executive Officer, Jay Higham, with a leased vehicle that is maintained at our expense. The total 2008 and 2009 expenses related to the leased vehicle were $12,463 and $13,420, respectively. Mr. Doman, the President of our Vein Clinics Division, received an automobile allowance for a portion of the year ended December 31, 2008 in an aggregate amount of $2,564. Mr. Doman did not receive an automobile allowance for the year ended December 31, 2009.
 
401(k) Defined Contribution Plan
 
We maintain a 401(k) Plan that allows executives, as well as our other employees, to make elective salary deferrals in accordance with Internal Revenue Service (“IRS”) regulations. In 2008, we provided a discretionary match of 25% of an individual’s maximum contribution of $15,500, up to 1.5% of an individual’s compensation of $230,000 or less for the year, for a maximum match of $3,450 per individual. For our President and Chief Executive Officer, our Executive Vice President and Chief Financial Officer and our other Named Executive Officers (as defined below), we contributed the maximum match of $3,450 in 2008. In 2009, we provided for a discretionary match of 25% of an individual’s maximum contribution of $16,500, up to 1.5% of an individual’s compensation of $245,000 or less for the year, for a maximum match of $3,675 per individual. For our President and Chief Executive Officer, our Executive Vice President and Chief Financial Officer and our other Named Executive Officers, we will contribute the maximum match of $3,675 in 2009.
 
Retirement Benefits
 
No retirement benefits are provided to our executives.
 
Severance and Change of Control Arrangements
 
Jay Higham Employment Agreement
 
On October 10, 2005, we entered into an employment agreement with Jay Higham to serve as our President and Chief Executive Officer, effective January 1, 2006. Pursuant to the employment agreement, Mr. Higham was appointed as one of our directors on January 24, 2006. The employment agreement provides that Mr. Higham receive an annual base salary of $275,000, subject to increases. Under the employment agreement, Mr. Higham was granted shares of our common stock with a value of $400,000 based on the closing price of our common stock as reported on the Nasdaq Global Market on the first trading day of January 2006. The number of shares of our common stock granted to Mr. Higham was 32,000 and such shares of common stock vest over a 10-year period. Pursuant to the employment agreement, we may terminate Mr. Higham’s employment without cause on 30 days’ prior notice, in which event Mr. Higham will receive, as severance pay, 12 months’ base salary, plus Mr. Higham’s annual bonus, without regard to the condition precedents established for the bonus payment, in one lump sum payment. Under the employment agreement, if we had terminated Mr. Higham effective December 31, 2008, based on his 2008 compensation, he would have been paid an aggregate of $545,000, $330,000 of which represents his 2008 base salary and $215,000 of which represents his accrued 2008 bonus. Under the employment agreement, if we had terminated Mr. Higham effective December 31, 2009, based on his 2009 compensation, he would have been paid an aggregate of $681,490, $389,423 of which represents his 2009 base salary and $292,067 of which represents twice the full amount of his accrued 2009 bonus.
 
The employment agreement further provides that if, within one year after our “Change of Control” (as defined in the employment agreement), Mr. Higham’s employment is terminated by Mr. Higham for “Good Reason” (as defined in the employment agreement) or by us without cause, Mr. Higham will be paid a lump sum amount equal to his base salary for a 24-month period, plus twice the full amount of


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Mr. Higham’s annual bonus based on his then current base salary, without regard to the condition precedents established for the bonus payment. Based on this change of control provision, if we had experienced a “Change of Control” in 2008 and Mr. Higham’s employment had been terminated effective December 31, 2008, for either “Good Reason” by Mr. Higham or without cause by us, Mr. Higham would have been entitled to termination pay equal to an aggregate of $1,089,000, $660,000 of which represents his then annualized base salary for 24-months and $429,000 of which represents twice the full amount of his annual bonus. In addition, based on this change of control provision, if we had experienced a “Change of Control” in 2009 and Mr. Higham’s employment had been terminated effective December 31, 2009, for either “Good Reason” by Mr. Higham or without cause by us, Mr. Higham would have been entitled to termination pay equal to an aggregate of $1,362,980, $778,846 of which represents his then annualized base salary for 24-months and $584,134 of which represents twice the full amount of his annual bonus.
 
Under the employment agreement, Mr. Higham has agreed not to compete with us while employed by us and for a period of two years thereafter.
 
Executive Retention Agreements
 
We are also a party to executive retention agreements with our executive officers, including Mr. Hlywak, our Executive Vice President and Chief Financial Officer, and the other Named Executive Officers (as defined below).
 
The executive retention agreements provide for certain severance payments and benefits to the Named Executive Officers in the event of a termination of their employment, either by us without cause or by the executive for “Good Reason” (as defined in the executive retention agreement), at any time within 18 months after we experience a “Change in Control” (as defined in the executive retention agreement) (any such termination, a “Qualifying Termination”). More specifically, the executive retention agreements provide the Named Executive Officers with one additional year of base salary, bonus (if applicable) and benefits (or equivalent) more than they would previously have been entitled to receive upon a termination without cause. Accordingly, pursuant to the executive retention agreements, in the event of a Qualifying Termination, the Named Executive Officers will be paid one year’s severance. Pursuant to the terms of the executive retention agreements, all incentive stock options granted to a Named Executive Officer will become fully vested upon a Qualifying Termination, subject to certain terms and conditions. Also, pursuant to the executive retention agreements, we would be required to pay each Named Executive Officer for all reasonable fees and expenses incurred by them in litigating their rights under the executive retention agreements, to the extent a Named Executive Officer is successful in any such litigation.
 
Under the executive retention agreements, in the event a Named Executive Officer, other than Mr. Higham, who would be paid in accordance with the terms of his employment agreement, is terminated without cause under circumstances outside a “Change in Control,” each Named Executive Officer would be paid 90 days base salary continuation. In the event Mr. Hlywak had been terminated without cause effective December 31, 2008 as a result of a “Change in Control” that occurred in 2008, Mr. Hlywak would have been paid an aggregate of $484,000, $256,000 of which represents his 2008 annual base salary and $128,000 of which represents the bonus amount Mr. Hlywak would have been eligible to receive. In the event Mr. Hlywak had been terminated without cause effective December 31, 2009 as a result of a “Change in Control” that occurred in 2009, Mr. Hlywak would have been paid an aggregate of $412,788, $275,192 of which represents his 2009 annual base salary and $137,596 of which represents the bonus amount Mr. Hlywak would have been eligible to receive. For each of the other Named Executive Officers, had they been terminated without cause effective December 31, 2008 as a result of a “Change in Control” that occurred in 2008, he or she would have been paid his or her 2008 annual base salary and bonus amount which he or she would have been eligible to receive. For


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Mr. Doman, the payment would have been an aggregate of $310,520, $221,880 of which represents annual base salary and $88,720 of which represents bonus. For Mr. Travia, the payment would have been an aggregate of $343,000, $245,000 of which represents annual base salary and $98,000 of which represents bonus. For Ms. Schumann, the payment would have been an aggregate of $294,000, $210,000 of which represents annual base salary and $84,000 of which represents bonus. Similarly, for each of the other Named Executive Officers, had they been terminated without cause effective December 31, 2009 as a result of a “Change in Control” that occurred in 2009, he or she would have been paid his or her 2009 annual base salary and bonus amount which he or she would have been eligible to receive. For Mr. Doman, the payment would have been an aggregate of $348,432, $232,288 of which represents annual base salary and $116,144 of which represents bonus. For Mr. Travia, the payment would have been an aggregate of $385,529, $257,019 of which represents annual base salary and $128,510 of which represents bonus. For Ms. Schumann, the payment would have been an aggregate of $358,269, $238,846 of which represents annual base salary and $119,423 of which represents bonus.
 
Finally, in certain circumstances, Section 162(m) of the Internal Revenue Code of 1986, as amended (“Section 162(m)”), limits to $1 million the deductibility of compensation, including stock-based compensation, paid to executives by public companies. None of the compensation paid to our executive officers in 2008 exceeded the threshold for deductibility under Section 162(m).
 
Summary Compensation Table
 
The following table sets forth a summary of the compensation paid or accrued by us during the years ended December 31, 2009, 2008, 2007 and 2006 for our President and Chief Executive Officer, our Executive Vice President and Chief Financial Officer and our next three most highly compensated executive officers (the “Named Executive Officers”):
 
                                                         
                      Stock
    Option
    All Other
       
          Salary
    Bonus
    Awards
    Awards
    Compensation
    Total
 
Name and Principal Position
  Year     ($)     ($)     ($)(1)(4)     ($)(1)(4)     ($)(2)     ($)  
 
Jay Higham
    2009     $ 389,423       (3)   $ 93,750           $ 17,095       (3)
President and Chief
    2008     $ 330,000     $ 128,700     $ 70,949     $ 112,516     $ 15,913     $ 658,078  
Executive Officer
    2007     $ 300,000     $ 195,000     $ 154,000           $ 13,555     $ 662,555  
      2006     $ 275,000     $ 148,500     $ 441,250           $ 15,828     $ 880,578  
John W. Hlywak, Jr. 
    2009     $ 275,192       (3)   $ 35,000           $ 3,675       (3)
Executive Vice President
    2008     $ 256,000     $ 76,500     $ 38,252     $ 56,259     $ 3,450     $ 430,461  
and Chief Financial Officer
    2007     $ 245,000     $ 122,500     $ 84,807           $ 3,300     $ 455,607  
      2006     $ 234,000     $ 105,750     $ 28,200           $ 3,300     $ 371,250  
Daniel P. Doman(5)
    2009     $ 232,288       (3)   $ 35,000           $ 3,675       (3)
President of Vein Clinics
    2008     $ 221,880     $ 42,750     $ 100,004     $ 49,550     $ 6,014     $ 420,198  
Division
    2007     $ 79,167     $ 56,670                       $ 135,837  
                                                         
Pamela Schumann(6)
    2009     $ 238,846       (3)   $ 35,000           $ 3,675       (3)
President of Consumer
    2008     $ 210,000     $ 84,000     $ 27,500     $ 56,259     $ 3,450     $ 381,209  
Services Division
    2007     $ 122,635     $ 31,863     $ 111,075           $ 2,895     $ 268,468  
      2006     $ 97,231     $ 28,800     $ 9,770           $ 2,775     $ 138,576  
Joseph J. Travia, Jr. 
    2009     $ 257,019       (3)   $ 35,000           $ 3,675       (3)
President of Fertility Centers
    2008     $ 245,000     $ 110,250     $ 37,500     $ 56,259     $ 3,450     $ 452,459  
Division
    2007     $ 222,654     $ 87,200     $ 124,600           $ 3,300     $ 437,754  
      2006     $ 201,076     $ 63,570     $ 19,800           $ 3,015     $ 287,461  
 
(1) See Note 19 of our consolidated financial statements included elsewhere in this prospectus for a discussion of the assumptions made in the valuation of the stock awards and the option awards.
(2) This column includes the amounts of $12,463, $10,255 and $12,528 for the years ended December 31, 2008, 2007 and 2006, respectively, paid by us in connection with a vehicle leased for Mr. Higham, $2,564 for the year ended December 31, 2008 paid by us in connection with a vehicle leased for Mr. Doman, plus amounts representing our matches made for the Named Executive Officers under our 401(k) Plan.
 
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(3) Such amount is not currently calculable. We expect such amount to be determined in March 2010.
(4) Represents grant date market value.
(5) Mr. Doman joined us on August 8, 2007 with our acquisition of VCA.
(6) Ms. Schumann worked on a part-time basis from January 1, 2006 through November 14, 2007.
 
Grants of Plan-Based Awards for the Fiscal Years Ended December 31, 2008 and 2009
 
The following table sets forth certain information concerning the Named Executive Officers with respect to grants of plan-based awards for the fiscal years ended December 31, 2008 and 2009:
 
                                         
                All Other
             
                Option Awards:
             
          All Other
    Number of
             
          Stock Awards:
    Securities
    Exercise or
    Grant Date
 
          Number of Shares
    Underlying
    Base Price of
    Fair Value of
 
          of Stock or Units
    Options
    Option Awards
    Stock and
 
Name
  Grant Date     (#)(1)     (#)     ($/Sh)(2)     Option Awards  
 
Jay Higham
    1/2/08 (3)             5,573     $ 11.20     $ 13,416  
      5/13/08 (3)     6,265                     $ 56,761  
      5/13/08 (4)     1,566                     $ 14,188  
      7/22/08 (4)             33,600     $ 8.06     $ 99,100  
      1/2/09 (4)     13,607                     $ 93,750  
John W. Hlywak, Jr. 
    1/2/08 (3)             2,787     $ 11.20     $ 6,709  
      5/13/08 (3)     3,378                     $ 30,605  
      5/13/08 (4)     844                     $ 7,647  
      7/22/08 (4)             16,800     $ 8.06     $ 49,550  
      1/2/09 (4)     5,080                     $ 35,000  
Daniel P. Doman
    5/13/08 (4)     11,038                     $ 100,004  
      7/22/08 (4)             16,800     $ 8.06     $ 49,550  
      1/2/09 (4)     5,080                     $ 35,000  
Pamela Schumann
    1/2/08 (3)             2,787     $ 11.20     $ 6,709  
      5/13/08 (4)     828                     $