As filed with the Securities and Exchange Commission on October 2, 2009

Registration No. 333-      

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

 

IntegraMed America, Inc.

(Exact name of registrant as specified in its charter)

 

 

Two Manhattanville Road

Purchase, New York 10577

(914) 253-8000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Jay Higham

Chief Executive Officer

Two Manhattanville Road

Purchase, New York 10577

(914) 253-8000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

With copies to:

 

 

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):

 

(Do not check if a smaller reporting company)                             

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

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.

 

 

Subject to completion, dated October 2, 2009

 

4,000,000 Shares

 

INTEGRAMED AMERICA, INC.

 

Common Stock

 

$      per share

 

 

 

 

 

 

 

 

This investment involves risk. See “Risk Factors” beginning on page 10.

 

 

 

The underwriters have a 30-day option to purchase up to 600,000 additional shares of common stock from us to cover over-allotments, if any.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved of anyone’s investment in these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

Piper Jaffray

 

Cowen and Company

 

The date of this prospectus is          , 2009.

 

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.

 

 

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 63 locations and 97 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 11 contracted fertility centers, referred to as our Partner Program, serving 13 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 six months ended June 30, 2009, our Fertility Centers Division generated approximately 68% of our revenues and 54% of our contribution.

 

Our Consumer Services Division offers services directly to fertility patients. The division offers a family of programs, including our Attain^tm 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 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 six months ended June 30, 2009, our Consumer Services Division generated approximately 9% of our revenues and 26% 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 six months ended June 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:

 

 

 

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.

 

 

Our Strengths

 

We believe that our strengths include:

 

 

 

 

 

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.

 

 

 

 

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.

 

 

The Offering

 

 

The information in this prospectus assumes that none of our outstanding stock options has been exercised or forfeited since June 30, 2009. All information in this prospectus assumes the issuance and sale of our common stock in this offering at an offering price of $9.37 per share, the last reported sale price for our common stock on October 1, 2009, as reported by the Nasdaq Global Market.

 

 

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 six months ended June 30, 2008 and 2009 have been derived from our unaudited consolidated financial statements, which are included elsewhere in this prospectus. In the opinion of management, our unaudited consolidated financial statements include all adjustments, consisting only of normal recurring items, except as noted in the notes to the consolidated financial statements, necessary for a fair statement of interim periods. The financial information presented for the interim periods has been prepared in a manner consistent with our accounting policies described elsewhere in this prospectus, and should be read in conjunction therewith. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full year period. You should read this data together with the consolidated financial statements and related notes appearing elsewhere in this prospectus, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other financial information included elsewhere in this prospectus. Historical results are not necessarily indicative of future performance.

 

We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”), including Financial Accounting Standards Board Interpretation No. 46 (revised December 2003) (“FIN No. 46R”), “Consolidation of Variable Interest Entities.” In accordance with FIN No. 46R, we do not consolidate the results of the fertility centers to which we provide services because we do not have a controlling financial interest in such centers and we are not the primary beneficiary or obligor of such centers’ financial results. We do, however, have a controlling financial interest in individual vein clinics where we are the primary beneficiary and obligor of their financial results. As such, we consolidate the financial condition, results of operations and cash flows of those clinics’ operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Off-Balance Sheet Arrangements.”

 

 

 

 

 

 

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 six months ended June 30, 2008 and 2009. This summary operating data is unaudited. Historical results are not necessarily indicative of future performance.

 

⁽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.

 

 

Investing in our common stock involves a high degree of risk. Before you invest in our common stock, you should carefully consider the various risks of the investment, including those described below, together with all of the other information included in this prospectus. Additional risks may also impair our business operations and adversely affect our prospects. If any of the following risks actually occur, our business, financial condition or operating results could be adversely affected. In that case, the trading price of our common stock could decline and you could lose all or part of your investment.

 

Risks Related to Our Business

 

The loss of one or more of our Partner fertility centers would lead to a decline in our revenues and profit.

 

The contracts that we enter into with our Partner fertility centers typically have terms that range from 10 to 25 years and contain automatic renewal provisions. Some of these agreements also contain provisions that allow the Partner fertility center to terminate the agreement, upon 12 months’ prior notice, at any time after five years from the agreement’s effective date. Our two largest Partner fertility centers provided approximately 34% of our Fertility Centers Division revenues for the year ended December 31, 2008. If either of these Partner fertility centers, or any of our other Partner fertility centers, were to terminate its agreement with us, we would lose all of the revenues associated with such Partner fertility center, but would not experience any meaningful reduction in our infrastructure costs.

 

We may not be able to find suitable Partner candidates or successfully integrate the operations of the fertility centers with which we enter into Partner contracts.

 

A key part of our business strategy is to enter into additional Partner contracts. We cannot assure you that we will be able to find suitable Partner candidates or that the fertility centers that we enter into Partner contracts with will be successful. Even if suitable Partner candidates are identified, negotiation over suitable terms and conditions may be protracted and unsuccessful, and we may not be able to achieve planned increases in the number of Partner centers. Further, achieving the anticipated benefits of current and possible future Partner contracts will depend in part upon whether we can integrate the operations of those fertility centers with our operations in a timely and cost-effective manner. The process of integrating the operations of Partner fertility centers with our operations is complex, expensive and time consuming and involves a number of risks, including, but not limited to:

 

 

We are dependent on the medical providers in our fertility centers and vein clinics to successfully execute our business strategy.

 

Although we manage our fertility centers and vein clinics, the medical providers at those centers and clinics provide medical services directly to patients and we do not have control over their medical activities. We cannot guarantee any medical provider’s ability to generate positive patient outcomes, build a positive reputation for their practice or to comply with our expectations. If the medical providers in our fertility centers and vein clinics act negligently or unethically, allow their medical

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.

 

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.

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, and each of our fertility centers and vein clinics, 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.

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.

 

Our management agreement with our Partner fertility center in Illinois provides that we will be paid a base fee equal to a fixed percentage of the revenues of the fertility center that declines to zero to the extent the costs relating to the management of the fertility center increase as a percentage of total revenues. There is a substantial risk that this compensation arrangement, being based on a percentage of revenues, would not be upheld if challenged under Illinois law. To address this, our management agreement provides that if such compensation arrangement is found to be illegal, unenforceable, against public policy or forbidden by law, the management fee will be an annual fixed fee to be mutually agreed upon, not less than $1,000,000 per year, retroactive to the effective date of the agreement, resulting in a reduction of our management fee. In such event, there is likely to be a significant decrease in the management fees derived from this fertility center as a result of the new fee structure, as well as repayment of amounts paid in excess of the prior management fee.

 

Although we view our Attain IVF programs as a guaranty or warranty of our fertility centers’ performance, the Attain IVF programs 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 our Attain IVF programs to substantial regulation in that state as an insurance contract, including burdensome reserve requirements. In addition, in states that prohibit physicians from splitting professional fees with non-physicians, we could be required to restructure our Attain IVF programs if a state concluded that our Attain IVF programs constituted fee splitting because we retain a portion of the payments patients pay directly to us for their medical treatment by our fertility centers. The imposition of any such liabilities and any such changes in our method of doing business would likely reduce revenues and contribution from our Consumer Services Division.

 

Additionally, our management agreements with our vein clinics provide that the vein clinics will pay us a fee equal to 150% of our expenses of operating and managing the vein clinics. These fees have historically exceeded the operating margin generated by any particular vein clinic prior to payment of the management fee. Accordingly, each vein clinic only pays the portion of the management fee that is equal to the amount of revenue generated by the clinic annually up to the 150% amount. As a result, our vein clinics do not generate any net profits at year end. A state regulator could find that such a compensation model is actually based on a percentage of the revenue of a particular vein clinic or that our management fee is not commensurate with the services we provide, in which case our management agreements would be violating fee-splitting laws of certain states where we operate vein clinics. We could be forced to restructure the fee structure under the management agreements to our material financial detriment or the providers affiliated with our vein clinics who have been found to violate the fee-splitting statutes or regulations may be subject to disciplinary action or criminal sanctions, which could lead to the closure of one or more of our vein clinics.

Our arrangements with our fertility centers and vein clinics may trigger the application of federal and various state franchise laws. We have never sought to comply with any such franchise laws, nor have we ever sought any exemptions from such laws. The U.S. Federal Trade Commission could bring an enforcement action against us for failure to comply with federal franchise laws and could impose significant fines against us, order us to pay restitution to the fertility centers and vein clinics that are found to be franchisees (and the physicians that own or operate them) and/or seek criminal sanctions against us. Under the laws of certain of the states in which we operate, the physicians that own or operate our fertility centers and vein clinics may bring private causes of actions against us for violating such laws. In many of these jurisdictions, in addition to a judgment for actual damages, a court could award the physicians rescission, attorney’s fees and costs and treble damages. Additionally, we could be subject to fines and criminal sanctions. Even if we were to comply with these federal and state franchise 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.

 

Our credit agreement contains covenants that impose restrictions on us that may limit our operating flexibility, prevent us from entering into extraordinary transactions that benefit our stockholders and limit our growth.

 

Our credit agreement contains covenants that restrict our flexibility to conduct business. These covenants prohibit or limit, among other things:

 

 

The 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.

 

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.

Risks Relating to an Investment in our Common Stock

 

The trading price of our common stock could be subject to volatility.

 

The average daily trading volume of our shares of common stock on the Nasdaq Global Market for the nine months ended September 30, 2009 was approximately 7,158 shares. Because the shares of our common stock are lightly traded, they are subject to volatile price fluctuations, which may make it difficult for you to sell our common stock when you want or at prices you find attractive. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of management’s attention and resources, and could have a material adverse effect on our financial condition.

 

Future sales or the potential for future sales of our common stock may cause the trading price of our common stock to decline.

 

Sales of a substantial number of shares of our common stock by our two largest stockholders, or by any of our other significant stockholders, or the perception that these sales may occur, could cause the market price of our common stock to decline. Approximately 40% of our outstanding common stock is 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, who held an aggregate of 741,025 shares of our common stock as of August 31, 2009, 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.

 

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. We will use the proceeds that we receive from the sale of common stock in 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 $      per share, representing the difference between the assumed public offering price of $9.37 per share and our tangible net book value per share as of June 30, 2009.

 

Our future capital needs could result in dilution of your investment.

 

Our board of directors may determine from time to time that there is a need to obtain additional capital through the issuance of additional shares of our common stock or other securities. These issuances would likely dilute the ownership interests of the investors in this offering and may dilute the net tangible book value per share of our common stock. Investors in subsequent offerings may also have

rights, preferences and privileges senior to our current stockholders which may adversely impact our current stockholders.

 

We do not intend to pay cash dividends on our common stock for the foreseeable future.

 

We have not paid cash dividends on our common stock during the last two fiscal years, and we do not expect to pay cash dividends on our common stock at any time in the foreseeable future. The future payment of dividends directly depends upon our future earnings, capital requirements, financial requirements and other factors that our board of directors will consider. In addition, our credit agreement prohibits us from paying cash dividends on our common stock. Because we do not anticipate paying cash dividends on our common stock in the foreseeable future, the return on your investment on our common stock will depend solely on a change, if any, in the market value of our common stock.

 

Our certificate of incorporation, by-laws and Delaware law could limit another party’s ability to acquire us, even if an acquisition would be beneficial to our stockholders.

 

A number of provisions in our certificate of incorporation and by-laws make it difficult for another company to acquire us, even if doing so would benefit our stockholders. For example, our certificate of incorporation authorizes our board of directors to issue “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval. The rights of holders of our common stock could be adversely affected by the terms of any preferred stock that may be issued in the future. In addition, our by-laws limit the ability of our stockholders to call special meetings or fill vacancies on the board.

 

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.

 

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:

 

 

 

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.

 

We estimate that the net proceeds to us from this offering will be approximately $      million, or approximately $      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 intend to use the net proceeds of this offering for general working capital and other corporate purposes, including funding potential contract acquisitions of Partner fertility centers.

 

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:

 

 

On October 1, 2009, the closing sale price per share of our common stock was $9.37, as reported on the Nasdaq Global Market. On September 30, 2009, there were 103 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.

 

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.

 

The following table describes our capitalization as of June 30, 2009 on an actual basis and as adjusted to reflect our sale of 4,000,000 shares of common stock in this offering at an assumed offering price of $9.37 per share, the last reported sale price for our common stock on October 1, 2009, as reported by the Nasdaq Global Market, after deducting estimated underwriting discounts and commissions and offering expenses payable by us related to this offering.

 

You should read this capitalization table together with the consolidated financial statements and related notes appearing elsewhere in this prospectus, as well as “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other financial information included elsewhere in this prospectus.

 

 

 

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 six months ended June 30, 2008 and 2009 have been derived from our unaudited consolidated financial statements, which are included elsewhere in this prospectus. In the opinion of management, our unaudited consolidated financial statements include all adjustments, consisting only of normal recurring items, except as noted in the notes to the consolidated financial statements, necessary for a fair statement of interim periods. The financial information presented for the interim periods has been prepared in a manner consistent with our accounting policies described elsewhere in this prospectus, and should be read in conjunction therewith. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full year period. You should read this data together with the consolidated financial statements and related notes appearing elsewhere in this prospectus, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other financial information included elsewhere in this prospectus. Historical results are not necessarily indicative of future performance.

 

We prepare our consolidated financial statements in accordance with GAAP, including FIN No. 46R. In accordance with FIN No. 46R, we do not consolidate the results of the fertility centers to which we provide services because we do not have a controlling financial interest in such centers and we are not the primary beneficiary or obligor of such centers’ financial results. We do, however, have a controlling financial interest in individual vein clinics where we are the primary beneficiary and obligor of their financial results. As such, we consolidate the financial condition, results of operations and cash flows of those clinics’ operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Off-Balance Sheet Arrangements.”

 

 

 

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 11 contracted fertility centers, referred to as our Partner Program, serving 13 metropolitan markets across the United States. We offer products and services to these providers designed to support the fertility center’s growth. All fertility Partners also have full access to our Consumer Services Division offerings. The division also sponsors a Council of Physicians and Scientists for fertility providers. Physicians affiliated with our Partner fertility centers obtain a portion of their malpractice insurance through ARTIC — Assisted Reproductive Technology Insurance Company, a captive insurance company which we helped organize in 2005.

 

Our Consumer Services Division offers our Attain IVF programs to fertility patients. The division’s Attain IVF programs are designed to make the treatment process easier and more affordable for patients. Currently, this division maintains a contracted network of 25 independent fertility centers (23 as of December 31, 2008) under its Affiliate Program, which is designed to distribute the division’s products and services to a wider group of patients than those serviced by our Partner locations.

 

Our Vein Clinics Division began operations on August 8, 2007, with the purchase of Vein Clinics of America, Inc. (“VCA”), a company that had been in business since 1981. The Vein Clinics Division currently manages a network of 34 clinics (32 as of December 31, 2008) located in 13 states, which specialize in the treatment of vein disease and other vein disorders.

 

The primary elements of our business strategy include:

 

 

Major Events Impacting Financial Condition and Results of Operations

 

2009

 

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.

 

2008

 

From June 2008 through March 2009, our 2007 annual and our 2008 periodic interim Securities and Exchange Commission reports were the subject of a standard comment and review process by the Staff of the Division of Corporation Finance of the Securities and Exchange Commission. The application of generally accepted accounting principles to our Attain IVF Refund Program’s (formerly our Shared Risk Refund Program’s) multiple element revenue arrangements is complex and management’s interpretation of the applicable authoritative literature related to the timing of the recognition of the fair value of revenues for the non-refundable portion of the Attain IVF Refund Program fees differed from that of the Securities and Exchange Commission, which caused us to re-evaluate our revenue recognition policies. As a result, we restated our prior financial statements 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. This restatement does not impact our cash flows from operations or the ultimate profits from our Attain IVF Refund Program, only the timing of the revenue recognition for the non-refundable portion of the Attain IVF Refund Program fees paid by patients. See Note 2 of our consolidated financial statements included elsewhere in this prospectus. The financial data included in this prospectus reflects this restatement.

 

On December 17, 2008, we announced the opening of a new vein clinic in Skokie, Illinois. This clinic represents our ninth vein care clinic in the greater Chicago metropolitan area and benefits from the operational and marketing leverage we have developed in that market.

 

On December 8, 2008, we announced the opening of a new vein clinic in Monroeville, Pennsylvania. This clinic is our first vein clinic in Pennsylvania and is designed to provide state-of-the-art vein care to patients in the greater Pittsburgh area.

 

On July 9, 2008, we entered into a business services agreement to provide discrete business services to Arizona Reproductive Medicine Specialists, based in Phoenix, Arizona. Under the terms of this 25-year agreement, our service fees were initially comprised of a fixed percentage of the fertility practice’s net revenues. We also had the exclusive option, which we exercised on April 1, 2009, at any point during

the life of the contract to expand our service offerings into a complete range of business, marketing and financial services. After we exercised the option on April 1, 2009, our fees also included a fixed percentage of the fertility practice’s earnings.

 

On June 23, 2008, we announced that we entered into a new Affiliate services contract with the University of North Carolina (“UNC”) School of Medicine’s Department of Obstetrics and Gynecology in Chapel Hill, North Carolina. As an Affiliate, UNC School of Medicine’s Department of Obstetrics and Gynecology receives distribution rights to our consumer products and services. In addition, UNC School of Medicine’s Department of Obstetrics and Gynecology has the right to receive other products and services uniquely designed to support the business needs of successful, high-growth fertility centers.

 

On June 5, 2008, we announced the opening of a new vein clinic in Marietta, Georgia. This clinic was our fourth vein clinic in Georgia.

 

On April 29, 2008, we announced the opening of a new vein clinic in Alexandria, Virginia. This addition to our Vein Clinics Division provides focused vein care treatment solutions to the Washington, D.C. metropolitan area.

 

On April 24, 2008, we entered into a business service agreement to supply a complete range of business, marketing and facility services to Southeastern Fertility Centers, P.A., located in Mount Pleasant, South Carolina. Under the terms of this 25-year agreement, our service fees are comprised of reimbursed costs of services, a tiered percentage of revenues and an additional fixed percentage of the practice’s earnings. We also committed up to $600,000 to fund any necessary capital needs of the practice.

 

On April 1, 2008, we entered into an Affiliate services contract with OU Physicians Reproductive Health in Oklahoma City, Oklahoma. As a result of this agreement, OU Physicians Reproductive Health provides another opportunity for our Consumer Services Division to distribute its product offerings.

 

2007

 

On August 30, 2007, we entered into a business service agreement to supply a complete range of business, marketing and facility services to the Center for Reproductive Medicine in Orlando, Florida. The Center for Reproductive Medicine is a fertility practice comprised of four physicians. Under the terms of this 25-year agreement, our service fees are comprised of reimbursed costs of services, a tiered percentage of revenues and an additional fixed percentage of the Center for Reproductive Medicine’s earnings. We also committed up to $1.0 million to fund any necessary capital needs of the practice.

 

On August 8, 2007, we acquired all of the outstanding stock of VCA for a total cost of approximately $29 million in cash and common stock. The results of VCA are included in our financial statements from the date of the acquisition.

 

Also on August 8, 2007, we entered into an amended credit agreement with Bank of America, N.A. (“Bank of America”). The new term loan under the amended credit agreement is in the amount of $25 million (the proceeds of which were applied to repay our original term loan and finance, in part, the VCA transaction). Interest on the new term loan is, at our option, at the prime rate less up to 0.50% or at LIBOR plus 2.00% to 2.75%, depending upon the level of the ratio of consolidated debt to earnings before interest, taxes depreciation and amortization (“EBITDA”). The amended credit agreement also contains provisions for a revolving line of credit in the amount of $10 million. Interest on the revolving line of credit is at the prime rate less up to 0.50% or at LIBOR plus 1.5% to 2.5%, depending on the level of the ratio of consolidated debt to EBITDA.

Effective July 1, 2007, we expanded our fertility center Partner service arrangement with Shady Grove Fertility Reproductive Science Center, P.C. (“Shady Grove”) with the addition of the Fertility Center of the Greater Baltimore Medical Center (the “Center”) in Baltimore, Maryland, where we now provide a full range of business, marketing and financial services. Under the terms of this agreement, we purchased the assets of the Center from Greater Baltimore Medical Center and have committed additional resources to support further growth and development of the Center. Under the terms of this agreement, we are paid service fees comprised of reimbursed costs of services and a fixed percentage of revenues, plus an additional fixed amount of the Center’s earnings.

 

On March 19, 2007, we declared a 25% common stock split effected in the form of a common stock dividend for all holders of record as of April 13, 2007. As a result of this dividend, 1,628,907 new shares of common stock were issued on the payment date of May 4, 2007. No fractional shares were issued as all fractional amounts were rounded up to the next whole share. All weighted average shares outstanding and earnings per share calculations in this prospectus have been restated to reflect this common stock dividend.

 

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.

 

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 six months ended June 30, 2009 and 2008 and the years ended December 31, 2008, 2007 and 2006:

 

 

 

Revenues

 

For the six months ended June 30, 2009, total revenues of $108.5 million increased approximately $13.1 million, or 14%, from the same period in 2008. Approximately $5.8 million of this increase was generated by our Vein Clinics Division, $5.8 million from our Fertility Centers Division and $1.5 million from our Consumer Services Division. The two new vein clinics opened during the first quarter of 2009 accounted for $1.1 million of our Vein Clinics Division’s increase, with the remaining $4.7 million generated by legacy clinics.

 

For the year ended December 31, 2008, total revenues of $197.4 million increased approximately $46.2 million, or 30.6%, from the year ended December 31, 2007. We experienced year-over-year 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 $151.2 million increased approximately $25.3 million, or 20.1%, 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.

 

The components of our revenues from each of the Partner fertility centers are:

 

 

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.

 

During the first six months of 2009, Fertility Centers Division revenues increased by $5.8 million, or 9%, relative to the same period in the prior year. This increase was the result of a 5.0% rise in same-center revenues as well as $2.5 million of revenues from the addition of two new Partner contracts in April and July 2008. These increases are net of the reduction in business at one of our top fertility centers in the Midwest as a result of termination of a contract with one of the center’s third-party payors, as well as a slight moderation in demand that we believe is attributable to the prolonged recession. Contribution from this facility in 2008 was approximately $2.3 million and this third-party payor represented approximately 20% of this contribution.

 

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:

 

 

In July 2008, we also entered into a 25-year contract with Arizona Reproductive Medicine Specialists, based in Phoenix, Arizona. Under the terms of this agreement, we phased in the implementation of our full suite of Partner services over time. Under this arrangement, our fees were originally calculated as a fixed percentage of the center’s revenues with an option to expand into our standard three-tiered fee structure, in line with expanded Partner services, based upon the center meeting certain performance targets. We exercised this option on April 1, 2009.

The table below illustrates the components of the Fertility Centers Division revenues in relation to the Partner fertility center practice financials for the six months ended June 30, 2009 and 2008 and the years ended December 31, 2008, 2007 and 2006 (in thousands):

 

 

 

The following summarized quarterly data for the six months ended June 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 labs in order to undergo normal maintenance (in thousands, except new patient visits and IVF cases completed).

 

Consumer Services Segment

 

Revenues from our Consumer Services Division increased by 18.5%, or $1.5 million, for the six months ended June 30, 2009 versus the same period in the prior year. Attain IVF Refund Program revenues accounted for approximately 94% of the division’s revenues during the first six months of 2009, up from approximately 93% for 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. The two main factors that impact Attain IVF Refund Program financial performance are:

 

 

During the second quarter of 2009, the loss 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.

 

Our Affiliate Program generated revenues of $625,000 during the first half of 2009, up slightly from $587,000 for the prior year period. This increase in revenues is attributable to pricing adjustments for the program’s services. Although our Affiliate Program produces revenues on a stand alone basis, the primary value of the Affiliate Program is to serve as a distribution channel for our Attain IVF programs and as an introduction to our services for medical practices that may become full fertility Partners. As of June 30, 2009, this network was comprised of 23 independent fertility centers, one more than the year earlier period.

 

Pharmaceutical revenues for the six months ended June 30, 2009 were $16,000 down from $68,000 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 during 2009. 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 half of 2009 and beyond.

 

For the year ended December 31, 2008, revenues of $17.6 million from our Attain IVF Refund Program represented approximately 92.6% of our Consumer Services Division revenues. This compares to revenues of $14.4 million, or slightly over 91.1%, of Consumer Services Division revenues in 2007. Revenue growth in our Attain IVF Refund Program of $3.2 million, or 22.2%, 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 $2.9 million, or 25.2%, 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 $200,000 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.

 

The following summarized Consumer Services Division quarterly data for the six months ended June 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 Refund Program (in thousands, except enrollments and pregnancies).