sv1za
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)
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Delaware
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8011
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06-1150326
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(State or other jurisdiction of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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Two
Manhattanville Road
Purchase, New
York 10577
(914) 253-8000
(Address,
including zip code, and telephone number, including area code,
of registrants 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:
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Steven Khadavi, Esq.
Dorsey & Whitney LLP
250 Park Avenue
New York, New York 10177
Telephone: (212) 415-9200
Facsimile: (212) 953-7201
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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
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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):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a
smaller reporting
company)
CALCULATION OF REGISTRATION
FEE
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Proposed Maximum
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Proposed Maximum
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Title of Each Class of
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Amount to be
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Offering Price Per
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Aggregate Offering
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Amount of
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Securities to be
Registered
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Registered(1)
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Share(2)
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Price(1)(2)
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Registration Fee(3)
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Common stock, $0.01 par value per share
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2,800,000
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$9.22
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$25,816,000
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$1,841
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(1)
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Includes common
stock issuable upon exercise of the underwriters
over-allotment option.
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(2)
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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.
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(3)
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Previously paid the
amount of $2,367 in connection with the initial filing of this
registration statement on October 2, 2009.
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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.
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.
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Subject to completion, dated
February 5, 2010
2,500,000 Shares
INTEGRAMED AMERICA,
INC.
Common Stock
$
per share
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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.
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The last reported sale price of our common stock on
February 4, 2010 was $8.26 per share.
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Trading symbol: Nasdaq Global Market INMD
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This investment involves risk. See Risk Factors
beginning on page 11.
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Per Share
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Total
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Price to IAT Reinsurance Company Ltd.
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$
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$
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Public offering price through the underwriters
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to IntegraMed America, Inc.
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$
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$
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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 anyones 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.
IntegraMed Centers and Clinics
'
IntegraMed Partner Fertility Centers
IntegraMed Affiliate Fertility Centers
IntegraMed Vein Clinics
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TABLE OF
CONTENTS
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.
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:
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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.
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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 Administrations
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.
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Our
Strengths
We believe that our strengths include:
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
6
The Offering
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Common stock offered by
us(1) |
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2,500,000 shares |
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2,800,000 shares if the underwriters exercise their
over-allotment option in full |
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Common stock outstanding immediately after this
offering(2) |
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11,355,866 shares |
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Use of proceeds |
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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. |
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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. |
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You should read the discussion in this prospectus under the
heading Use of Proceeds for more information. |
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Risk factors |
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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. |
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Nasdaq Global Market symbol: |
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INMD |
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(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.
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(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.
7
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 Managements
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
Managements 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
9
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.
10
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 agreements 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 managements 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
providers 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
11
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.
12
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.
13
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, attorneys
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
14
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.
15
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:
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the payment of dividends to our stockholders;
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the incurrence of additional indebtedness;
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the making of certain types of restricted payments and
investments;
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sales of assets; and
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consolidations, mergers and transfers of all or substantially
all of our assets.
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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.
16
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 companys 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
managements 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.
17
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 partys 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.
18
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.
19
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:
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termination of any of our Partner fertility center agreements
for any reason;
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an inability to identify attractive candidates for our Partner
Program, successfully negotiate contract acquisition terms with
Partner candidates or effectively integrate new Partners;
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an inability to recruit or retain suitable physicians to open
and operate our vein clinics;
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less than expected growth in the vein care market, especially
for minimally invasive procedures in which our vein clinics
specialize;
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termination or adverse changes to the terms of our reimbursement
arrangements with third-party payors;
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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;
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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;
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changing patterns of enforcement or new interpretations of
existing laws and regulations;
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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;
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development of new technologies that our Partner or Affiliate
fertility centers or vein clinics do not adopt;
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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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20
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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;
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an increase in the competition that we and our Partners
fertility centers or vein clinics face; and
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other factors discussed under the headings Risk
Factors, Managements Discussion and Analysis
of Financial Condition and Results of Operations and
Business.
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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.
21
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 $25 million, and (ii) to
accelerate the pace to target the opening of eight new vein
clinics in 2010. However, we have no obligation to apply the net
proceeds of this offering as set forth above and there can be no
assurance that we will successfully identify any acquisition
candidates or markets for new centers or clinics. If we do not
apply the net proceeds of this offering as set forth above, we
intend to use the net proceeds for general working capital and
other corporate purposes.
22
PRICE
RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq Global Market under the
symbol INMD. The following table sets forth, for the
periods indicated, the high and low closing sales prices per
share of our common stock, as reported on the Nasdaq Global
Market:
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High
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Low
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2010
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First Quarter (through February 4, 2010)
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$
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8.85
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$
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7.95
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2009
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Fourth Quarter
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$
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9.37
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$
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7.55
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Third Quarter
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$
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10.25
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$
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7.03
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Second Quarter
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$
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7.99
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$
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5.81
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First Quarter
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$
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7.45
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$
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5.60
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2008
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Fourth Quarter
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$
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6.97
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$
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4.80
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Third Quarter
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$
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8.17
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$
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6.01
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Second Quarter
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$
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10.23
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$
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7.07
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First Quarter
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$
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11.95
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$
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8.50
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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.
23
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 $8.26 per share,
the last reported sale price for our common stock on
February 4, 2010, as reported by the Nasdaq Global Market,
after deducting estimated underwriting discounts and commissions
and offering expenses payable by us related to this offering.
You should read this capitalization table together with the
consolidated financial statements and related notes appearing
elsewhere in this prospectus, as well as Use of
Proceeds, Managements Discussion and Analysis
of Financial Condition and Results of Operations and the
other financial information included elsewhere in this
prospectus.
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As of September 30,
2009
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Actual
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As
Adjusted(1)
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(unaudited)
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(in thousands, except share
data)
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Debt:
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Current portion of long-term notes payable and other obligations
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$
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11,335
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$
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11,335
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Long-term notes payable and other obligations
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15,845
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15,845
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Total notes payable and other
obligations(2)
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27,180
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|
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.
|
24
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
Managements 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
Managements 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
|
|
25
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
|
|
|
|
|
|
|
|
|
|
|
26
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
|
|
27
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.
28
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 Managements
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
Managements 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
30
MANAGEMENTS
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 centers 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 divisions 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 divisions 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.
|
31
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 centers 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.
32
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 Programs
multiple element revenue arrangements is complex and
managements 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 practices 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 practices 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 Medicines Department
of Obstetrics and Gynecology in Chapel Hill, North Carolina. As
an Affiliate, UNC School of Medicines Department of
Obstetrics and Gynecology receives distribution rights to our
consumer products and services. In addition, UNC School of
Medicines 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.
33
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 practices 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 Medicines
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 Centers
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.
34
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.
35
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
36
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 FCIs
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.
37
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
centers 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 centers
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.
38
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).
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 divisions
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
40
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 programs 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.
41
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,
42
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.
43
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.
44
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.
45
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 companys 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
46
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 Americas 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.
47
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Amount of Commitment Expiration
Per Period
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|
|
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Less Than
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|
|
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|
|
|
|
|
After
|
|
|
|
Total
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1 Year
|
|
|
1
3 Years
|
|
|
4
5 Years
|
|
|
5 Years
|
|
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|
(in thousands)
|
|
|
Unused lines of credit
|
|
$
|
2,500
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|
|
$
|
|
|
|
$
|
2,500
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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 practices
repayment hierarchy consists of the following:
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|
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|
We provide a cash credit to the practice for billings to
patients and insurance companies;
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|
We reduce the cash credit for center expenses that we have
incurred on behalf of the practice;
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|
|
|
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 physicians 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
48
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.
49
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
50
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 agreements 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 centers 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 FCIs 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.
51
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
divisions 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
52
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:
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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;
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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;
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Explaining the financial costs and patient responsibilities of
the various treatment options;
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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;
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Coordinating an initial medical assessment required for entry
into our Attain IVF programs;
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Arranging treatment with an Affiliate or a Partner center for
all treatment cycles used by the patient; and
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Providing on-going case management, treatment plan monitoring
and evaluation services.
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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 patients 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
53
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 patients 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 patients 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 Divisions 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 patients 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.
54
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
clinics 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 clinics 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 physicians 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
agreements term and for two years thereafter. Although it
is
55
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 divisions 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:
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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.
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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.
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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.
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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.
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Marketing and sales. We have established more
formal, direct-to-consumer and physician referral marketing
programs.
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Shared
Services Group
Through our Shared Services group, we provide the following
support to our Fertility Centers, Consumer Services and Vein
Clinics Divisions:
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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.
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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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56
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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.
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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.
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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:
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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;
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With improving pregnancy rates, the cost of treatment is
decreasing thereby making these services more affordable;
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Demand for reproductive medical services is increasing through
greater public awareness and acceptance of these
treatments; and
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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.
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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:
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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;
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The need for greater efficiencies to offset rising costs and
decreases in revenue growth;
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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;
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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;
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The increased need for marketing services like those we provide
to address increasing competition among medical providers
specializing in fertility treatment; and
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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.
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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:
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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;
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Spider Veins which are very small varicose veins.
They are thin, threadlike veins that lie close to the
skins 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;
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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
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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.
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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 Administrations
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:
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The level of specialized skills required for comprehensive
patient treatment;
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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;
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The current fragmented nature of the market, which is comprised
of numerous smaller, independent providers, allowing the
opportunity for market consolidation;
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New laser and medical technologies that make access to treatment
less painful and disfiguring, coupled with insurance company
reimbursement for these new technologies;
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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
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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.
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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
practices 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:
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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;
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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
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Identifying locations where we believe there are attractive
demographics, reasonable media costs and a favorable
reimbursement environment.
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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:
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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;
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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;
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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;
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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
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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 jurisdictions 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 practices ability to operate
independent of our management on the grounds that the managed
practices management arrangement with us violates the
states 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 jurisdictions 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 states 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 physicians
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
66
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 entitys 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 states 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
67
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.
68
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 centers
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 centers 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
centers earnings.
|
|
|
|
Shady Grove a fixed dollar amount of the
centers earnings subject to a fixed percentage of the
centers 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 FCIs
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.
69
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
|
|
70
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.
71
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.
72
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 Bachelors degree in Accounting and Finance from
Loyola University of Chicago.
73
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 Bachelors degree in
Computer Science from St. Johns 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
Marylands 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 Bachelors
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.
74
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. Marys
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.
75
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
committees 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
76
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 executives 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
individuals 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 executives 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
77
(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 individuals
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 executives 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 Cooks 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 executives
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 executives incentives are aligned with those of our
stockholders.
78
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
individuals maximum contribution of $15,500, up to 1.5% of
an individuals 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 individuals maximum
contribution of $16,500, up to 1.5% of an individuals
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. Highams employment without cause on
30 days prior notice, in which event Mr. Higham
will receive, as severance pay, 12 months base
salary, plus Mr. Highams 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. Highams 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
79
Mr. Highams 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. Highams 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. Highams 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
years 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
80
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, $2,564 for the year ended December 31,
2008 paid by us in connection with a vehicle leased for
Mr. Doman, plus amounts representing our matches made for
the Named Executive Officers under our 401(k) Plan.
|
footnotes continued on following page
81
|
|
(3) |
Such amount is not currently calculable. We expect such amount
to be determined in March 2010.
|
|
|
(4) |
Represents grant date market value.
|
|
|
(5) |
Mr. Doman joined us on August 8, 2007 with our
acquisition of VCA.
|
|
|
(6) |
Ms. Schumann worked on a part-time basis from
January 1, 2006 through November 14, 2007.
|
Grants of
Plan-Based Awards for the Fiscal Years Ended December 31,
2008 and 2009
The following table sets forth certain information concerning
the Named Executive Officers with respect to grants of
plan-based awards for the fiscal years ended December 31,
2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards:
|
|
|
Securities
|
|
|
Exercise or
|
|
|
Grant Date
|
|
|
|
|
|
|
Number of Shares
|
|
|
Underlying
|
|
|
Base Price of
|
|
|
Fair Value of
|
|
|
|
|
|
|
of Stock or Units
|
|
|
Options
|
|
|
Option Awards
|
|
|
Stock and
|
|
Name
|
|
Grant Date
|
|
|
(#)(1)
|
|
|
(#)
|
|
|
($/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
|
|
|
|
|
|
|
|
|
|
|
$
|
|