<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1999
COMMISSION FILE NUMBER: 0-26625
NOVAMED EYECARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-4116193
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
980 North Michigan Avenue, Suite 1620, Chicago, Illinois 60611
(Address of principal executive offices)
Registrant's telephone, including area code: (312) 664-4100
--------------
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities and Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports)
Yes [X] No [ ]
and
(2) has been subject to such filing requirements for the past 90 days.
Yes [ ] No [X]
As of November 9, 1999 there were outstanding 24,098,680 shares of the
registrant's common stock, par value $.01 per share.
<PAGE>
NOVAMED EYECARE, INC.
FORM 10-Q FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PART OR ITEM PAGE
<S> <C> <C>
Part I. FINANCIAL STATEMENTS 3
Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -- September 30, 1999 and December
31, 1998 3
Condensed Consolidated Statements of Operations -- Three and nine months
ended September 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows -- Three and nine months
ended September 30, 1999 and 1998 6
Notes to Interim Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations 11
Part II. OTHER INFORMATION 18
Item 2. Change in Securities and Use of Proceeds 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
2
<PAGE>
Part I
- ------
Item 1.
NOVAMED EYECARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
------ ------------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,124 $ 1,875
Accounts receivable, net 12,738 11,278
Due from affiliated providers, net 852 110
Notes receivable from affiliated providers 322 393
Inventory 2,798 1,490
Other current assets 2,102 1,240
------------ ----------
Total current assets 25,936 16,386
Property and equipment, net 14,578 9,893
Notes receivable from related party - 400
Intangible assets, net 41,845 35,660
Other assets, net 290 340
------------ ----------
Total assets $82,649 $62,679
============ ==========
</TABLE>
The Notes to Interim Condensed Consolidated Financial Statements
are an integral part of these statements.
3
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------------------------------ ------------- ------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 3,895 $ 3,142
Accrued expenses 4,692 3,297
Income taxes payable 596 427
Current maturities of long-term debt 525 300
---------- ----------
Total current liabilities 9,708 7,166
---------- ----------
Long-term debt, net of current maturities 178 20,427
---------- ----------
Deferred income tax liability 401 1,702
---------- ----------
Commitments and contingencies
Redeemable convertible preferred stock:
Series C convertible preferred stock - 6,350
---------- ----------
Series D convertible preferred stock - 10,080
---------- ----------
Stockholders' equity:
Series A convertible preferred stock - 117
Series B convertible preferred stock - 4
Common stock ($.01 par value, 26,000,000 shares authorized,
23,995,618 and 2,751,254 shares outstanding, respectively) 240 28
Additional paid in capital 73,930 17,955
Retained earnings (deficit) (1,808) 1,072
Treasury stock, at cost - (2,222)
---------- ----------
Total stockholders' equity 72,362 16,954
---------- ----------
Total liabilities and stockholders' equity $82,649 $62,679
========== ==========
</TABLE>
The Notes to Interim Condensed Consolidated Financial Statements
are an integral part of these statements.
4
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue:
Management services $14,413 $ 9,857 $38,839 $24,988
Surgery and laser centers 8,348 5,288 21,638 14,024
Product sales and other 4,408 2,163 11,554 5,581
------- ------- ------- -------
Total net revenue 27,169 17,308 72,031 44,593
------- ------- ------- -------
Operating expenses:
Salaries, wages and benefits 9,813 6,654 27,043 17,430
Cost of sales and medical supplies 7,061 4,464 19,321 11,255
Selling, general and administrative 6,276 3,768 16,224 10,280
Depreciation and amortization 1,274 842 3,499 2,322
Compensation expense related to stock options 2,472 - 2,690 -
------- ------- ------- -------
Total operating expenses 26,896 15,728 68,777 41,287
------- ------- ------- -------
Income from operations 273 1,580 3,254 3,306
Other expense, net 225 376 1,265 947
Discount to initial public offering price upon the
exchange of subordinated notes for common stock 2,425 - 2,425 -
------- ------- ------- -------
Income (loss) before income taxes (2,377) 1,204 (436) 2,359
Provision (benefit) for income taxes (460) 596 409 1,166
------- ------- ------- -------
Net income (loss) (1,917) 608 (845) 1,193
Accretion of Series C and Series D convertible
preferred stock 1,441 (232) (2,035) (401)
------- ------- ------- -------
Income (loss) available to Series A and Series B
convertible preferred and common stockholders $ (476) $ 376 $(2,880) $ 792
======= ======= ======= =======
Basic earnings per common share $ 0.05 $ 0.03 $ 0.04 $ 0.05
======= ======= ======= =======
Fully diluted earnings (loss) per common share $ (0.09) $ 0.02 $ (0.18) $ 0.05
======= ======= ======= =======
Basic weighted average common shares outstanding 12,654 2,751 5,880 2,751
======= ======= ======= =======
Fully diluted weighted average common shares outstanding 21,172 15,376 15,896 15,561
======= ======= ======= =======
</TABLE>
The Notes to Interim Condensed Consolidated Financial Statements
are an integral part of these statements.
5
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (845) $ 1,193
Adjustments to reconcile net income (loss) to net cash provided by
operating activities, net of effects of purchase transactions:
Depreciation and amortization 3,499 2,322
Amortization of deferred compensation 2,690 -
Discount from conversion of subordinated exchangeable notes to common
stock 2,425 -
Deferred taxes (1,491) -
Minority interest - (13)
Changes in non-cash working capital items (2,517) (3,155)
-------- -------
Net cash provided by operating activities 3,761 347
-------- -------
Cash flows from investing activities:
Purchases of property and equipment (6,428) (3,141)
Acquisitions of affiliated entities (6,982) (1,313)
Receipts of notes receivable from affiliated providers 472 935
-------- -------
Net cash used in investing activities (12,938) (3,519)
-------- -------
Cash flows from financing activities:
Borrowings under revolving line of credit 23,400 4,700
Payments under revolving line of credit (31,885) (1,450)
Payments of subordinated debt (2,200) -
Proceeds from the issuance of stock, net of transaction costs 25,404 3,024
Payments for the redemption of preferred stock, net of transaction costs - (5,228)
Other long-term debt and capital lease obligations (293) (283)
-------- -------
Net cash provided by financing activities 14,426 763
-------- -------
Net increase (decrease) in cash and cash equivalents 5,249 (2,409)
Cash and cash equivalents, beginning of period 1,875 4,009
-------- -------
Cash and cash equivalents, end of period $ 7,124 $ 1,600
======== =======
</TABLE>
The Notes to Interim Condensed Consolidated Financial Statements
are an integral part of these statements.
6
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Dollars in thousands, except per share data)
(Unaudited)
1. BASIS OF PRESENTATION
The information contained in the interim consolidated financial statements
and footnotes is condensed from that which would appear in the annual
consolidated financial statements. Accordingly, the interim condensed
consolidated financial statements included herein should be read in conjunction
with the consolidated financial statements as of and for the year ended December
31, 1998 filed by NovaMed Eyecare Inc. (the "Company") with the Securities and
Exchange Commission on Form S-1 on August 18, 1999. The unaudited interim
condensed consolidated financial statements as of September 30, 1999 and
September 30, 1998, include all normal recurring adjustments which management
considers necessary for a fair presentation. The results of operations for the
interim periods are not necessarily indicative of the results that may be
expected for the entire fiscal year. The net income (loss) per share was
computed using the weighted average number of common shares outstanding during
each period.
2. EARNINGS (LOSS) PER COMMON SHARE
Prior to the Company's initial public offering on August 18, 1999, the
Company had multiple classes of convertible preferred stock outstanding. Upon
the completion of the initial public offering, all outstanding classes of
preferred stock converted into common stock of the Company. In addition, $9.7
million of face amount subordinated exchangeable promissory notes were exchanged
into 1,516,000 shares of common stock. For the computation of earnings per
share, the Series A and Series B Preferred Stock was assumed to be outstanding
through the initial public offering date of August 18, 1999.
Since the Series A and Series B Convertible Preferred Stock participated
along with the common stock in the Company's earnings, the Company used the two
class method for the calculation of earnings per share (EPS). Under the two
class method, earnings or loss is allocated to the Series A and Series B
convertible preferred stock as one class, and to common stock as a second class.
For each class of stock, Basic EPS is calculated by dividing allocated earnings
(loss) allocable to the class by the weighted average number of shares
outstanding of that class during the period. Diluted EPS is calculated by
dividing net income (loss) by the weighted average number of common shares,
including the dilutive effect of potential common shares outstanding during the
period. Potential common shares consist of outstanding options, convertible debt
and preferred stock. The dilutive effect of options are calculated using the
treasury stock method. The dilutive effect of the Series A and Series B
convertible preferred shares are calculated using the if converted method.
7
<PAGE>
Earnings (loss) per common share is calculated as follows (amounts in
thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income (loss) available to Series A and B convertible preferred
and common stockholders $ (476) $ 376 $(2,880) $ 792
Income (loss) allocated to preferred stockholders (1,136) 304 (3,130) 643
------- ------- ------- -------
Income (loss) available to common stockholders--basic $ 660 $ 72 $ 250 $ 149
======= ======= ======= =======
Income (loss) available to common stockholders--diluted $(1,917) $ 376 $(2,880) $ 792
======= ======= ======= =======
Basic weighted average number of common shares outstanding 12,654 2,751 5,880 2,751
Weighted average number of common shares issuable upon the
conversion of dilutive preferred shares 8,518 11,578 10,016 11,892
Effect of dilutive securities--stock options - 1,047 - 918
------- ------- ------- -------
Diluted weighted average number of shares outstanding 21,172 15,376 15,896 15,561
======= ======= ======= =======
Earnings (loss) per common share:
Basic $ 0.05 $ 0.03 $ 0.04 $ 0.05
======= ======= ======= =======
Diluted $ (0.09) $ 0.02 $ (0.18) $ 0.05
======= ======= ======= =======
</TABLE>
The effect of the subordinated exchangeable notes is anti-dilutive in all
periods presented and, accordingly, is excluded from diluted EPS. Additionally,
the effect of the conversion of the Series C and Series D convertible preferred
stock is anti-dilutive for the nine months ended September 30, 1999. Also, the
effect of dilutive securities--stock options for the three and nine months ended
September 30, 1999 have been excluded, as their effect is anti-dilutive.
3. UNAUDITED PRO FORMA INFORMATION
In connection with the Company's initial public offering on August 18,
1999, certain noncash, nonrecurring charges were recorded in the accompanying
condensed consolidated financial statements. The following unaudited pro forma
summary presents the results of operations as if the events described more fully
in the notes below had occurred at the beginning of the periods presented
(amounts in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Income (loss) available to Series A and Series B convertible
preferred and common stockholders $ (476) $ 376 $(2,880) $ 792
Eliminate compensation expense related to stock options (a) 2,472 - 2,690 -
Eliminate discount to initial public offering price upon the
exchange of subordinated notes for common stock (b) 2,425 - 2,425 -
Eliminate preferred stock accretion upon conversion to common
stock (c) (1,441) 232 2,035 401
Eliminate interest expense upon debt conversion to common stock (d) - 200 400 600
Related income tax benefit (1,589) (99) (1,866) (296)
------- ------- ------- -------
Pro forma net income $ 1,391 $ 709 $ 2,804 $ 1,497
======= ======= ======= =======
Pro forma earnings per fully diluted common share $ 0.06 $ 0.03 $ 0.12 $ 0.07
======= ======= ======= =======
Pro forma weighted average diluted share outstanding 23,948 21,655 22,894 21,523
======= ======= ======= =======
</TABLE>
8
<PAGE>
Notes:
(a) Represents the pro forma elimination of the compensation expense
associated with the initial public offering-related vesting of certain
stock options granted in 1999.
(b) Represents the pro forma elimination of the additional interest
expense which resulted from the exchange of subordinated exchangeable
promissory notes into common stock at a discount to the initial public
offering price per share.
(c) Represents the pro forma elimination of the accretion of the Series C
and Series D convertible preferred stock through the initial public
offering to its estimated fair market value. Upon the completion of
the initial public offering, the Series C and Series D convertible
preferred stock converted into common stock.
(d) Represents the pro forma elimination of the interest expense from the
subordinated exchangeable promissory notes which were converted to
common stock at the time of the IPO.
4. STOCKHOLDERS' EQUITY
On August 18, 1999, the Company sold 3,000,000 new shares of common stock
at a public offering price of $8.00 per share. Net proceeds were approximately
$20.2 million after deducting underwriting discounts and commissions and
offering expenses. In addition, the underwriters exercised their over-allotment
option on September 1, 1999, to acquire an additional 600,000 shares of the
Company's common stock at $8.00 per share, contributing $4.5 million of
additional net proceeds.
In connection with the Company's initial public offering, holders of $9.7
million face amount subordinated exchangeable promissory notes exchanged their
notes for 1,516,000 shares of the Company common stock at an exchange ratio of
$1.00 worth of common stock, based upon the initial public offering price of
$8.00, for each $0.80 worth of outstanding principal on the notes. The Company
recorded approximately $2.0 million, net of tax benefit, of additional noncash,
nonrecurring interest expense during the three months ended September 30, 1999
based upon the difference between the $1.00 worth of common stock and the $0.80
worth of outstanding principal.
In connection with the Company's initial public offering, approximately
16.3 million shares of Series A, Series B, Series C and Series D preferred
stock, which represented all of the issued and outstanding shares of preferred
stock on the date of the offering, converted into common stock of the Company.
Prior to the initial public offering, however, the holders of the Series C and
Series D convertible preferred stock had the right to tender their stock for
redemption in 2004 and 2005 at the greater of the amount originally paid for the
preferred stock or its fair market value. Because the redemption right was
outside of the Company's control, generally accepted accounting principles
require that until the redemption date, the Company increase the value of the
preferred stock to its ultimate redemption value, a principle known as
accretion. This accretion is deducted from net income in the accompanying
consolidated financial statements to arrive at the income available for common
stockholders. Although the Company did not have an independent appraisal, it
estimated the potential future redemption value based upon various transactions
with third parties, through comparison to similar public companies and the
initial price range established during the filing of the Company's registration
statement on Form S-1. Based upon these estimates, the Company recorded
accretion of $739 and $3.5 million for the twelve months ended December 31, 1998
and the six months ended June 30, 1999, respectively. Since the redemption
feature of the Series C and Series D stock terminated on the effectiveness of
the initial public offering, the Company was required to record an accretion
adjustment up to the effective date of the offering. Based upon the actual
public offering price of $8.00 per share, the Company recorded its final
accretion adjustment of $1.4 million to reduce the carrying value of the
preferred stock during the three months ended September 30, 1999.
9
<PAGE>
During July 1999, the Company fully vested all stock options granted from
February 1, 1999 through July 23, 1999, contingent on the completion of the
initial public offering. The Company issued stock options to acquire 1,050,800
shares of common stock during this time period at exercise prices below the
estimated fair market value. Accordingly, the Company recorded $1.6 million, net
of tax, as compensation expense during the three months ended September 30, 1999
related to the accelerated vesting of these options.
5. OPERATING SEGMENTS
The table below presents information about operating data and segment
assets, adjusted to exclude the effects of the non-cash, non-recurring items
discussed in note 2 above, used by the chief operating decision maker of the
Company as of and for the three and nine months ended September 30, 1999 and
1998:
<TABLE>
<CAPTION>
Management Surgery and Product
Services Laser Centers Sales and Other Corporate Eliminations Total
----------- ------------- ---------------- ---------- ------------- ---------
Three months ended September 30, 1999
- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue $17,224 $ 8,348 $ 4,408 $ - $(2,811) $27,169
Earnings before tax 1,686 3,234 495 (2,895) - 2,520
Depreciation and amortization 298 238 50 688 - 1,274
Interest (income) (5) - (5) (63) - (73)
Interest expense 1 1 - 293 - 295
Identifiable assets 13,813 8,945 4,206 55,685 - 82,649
Three months ended September 30, 1998
- -----------------------------------------
Net revenue $13,196 $ 5,288 $ 2,163 $ - $(3,339) $17,308
Earnings before tax 1,805 1,842 180 (2,623) - 1,204
Depreciation and amortization 231 130 1 480 - 842
Interest (income) (4) - (3) (62) - (69)
Interest expense 3 - - 407 - 410
Identifiable assets 10,674 6,392 1,009 40,391 - 58,466
Nine months ended September 30, 1999
- -----------------------------------------
Net revenue $47,316 $21,638 $11,554 $ - $(8,477) $72,031
Earnings before tax 4,626 8,336 1,241 (9,124) - 5,079
Depreciation and amortization 827 633 101 1,938 - 3,499
Interest (income) (14) - (28) (104) - (146)
Interest expense 3 2 - 1,020 - 1,025
Identifiable assets 13,813 8,945 4,206 55,685 - 82,649
Nine months ended September 30, 1998
- -----------------------------------------
Net revenue $32,163 $14,024 $ 5,581 $ - $(7,175) $44,593
Earnings before tax 4,013 4,908 408 (6,970) - 2,359
Depreciation and amortization 619 371 3 1,329 - 2,322
Interest (income) (9) - (7) (226) - (242)
Interest expense 12 - 1 1,098 - 1,111
Identifiable assets 10,674 6,392 1,009 40,391 - 58,466
</TABLE>
10
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for historical information, statements relating to NovaMed's plans,
objectives and future performance are forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are based on management's current expectations. Because of various
risks and uncertainties, actual strategies and results in future periods may
differ materially from those currently expected.
The discussion set forth below analyzes certain factors and trends related to
the financial results for each of the three and nine months ended September 30,
1999 and 1998. This discussion should be read in conjunction with the condensed
consolidated financial statements and notes to the condensed consolidated
financial statements.
Results of Operations
Three Months Ended September 30, 1999 Compared to the Three Months Ended
September 30, 1998
Net Revenue. Net revenue increased 57.0% from $17.3 million to $27.2
million. Management services revenue increased 46.2% from $9.9 million to $14.4
million. The increase in management services revenue was primarily a result of
overall increases in laser vision correction, cataract and other ophthalmic
surgery procedures performed by our affiliated eye care professionals as well as
new affiliations with eye care professionals. Surgery and laser center revenue
increased 57.9% from $5.3 million to $8.3 million, primarily as a result of a
165.8% increase in laser vision correction procedures, compared to the same
three months of 1998. The increase in laser vision correction procedures was a
result of both an increase in the overall demand for the procedure as well as an
increase in the number of our affiliated eye care professionals performing the
procedures. We also experienced a 16.7% increase in the number of cataract and
other eye related surgical procedures, compared to the three months ended
September 30, 1998. Product sales revenue increased 103.8% from $2.2 million to
$4.4 million, primarily as a result of the acquisition of Midwest Uncuts, Inc.
in January 1999.
Salaries, Wages and Benefits. Salaries, wages and benefits expense
increased 47.5% from $6.7 million to $9.8 million. As a percentage of revenue,
salaries, wages and benefits expense decreased from 38.4% to 36.1%. The absolute
increase in salaries, wages and benefits expense primarily reflects the
additional payroll incurred as a result of new acquisitions and affiliations as
well as increased head count necessary to accommodate increased laser vision
correction volume. The decrease in salaries, wages and benefits expense as a
percentage of revenue was a result of better utilization of staff due primarily
to the increased volume of laser vision correction, cataract and other eye
related surgical procedures.
Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased 58.2% from $4.5 million to $7.1 million. As a percentage of
revenue, cost of sales and medical supplies expense increased from 25.8% to
26.0%. The absolute increase in cost of sales and medical supplies expense is
primarily a result of the January 1, 1999 acquisition of Midwest Uncuts, Inc.
and of higher volumes at our optical products purchasing organization, the
NovaMed Alliance. The increase in laser vision correction procedures and the
related supply costs also contributed to the absolute increase during the
period. In general, our optical laboratories and the NovaMed Alliance have
higher cost of sales as a percentage of revenue than the optical retail outlets
of our affiliated eye care professionals.
11
<PAGE>
Selling, General and Administrative. Selling, general and administrative
expense increased 66.6% from $3.8 million to $6.3 million. As a percentage of
revenue, selling, general and administrative expense increased from 21.8% to
23.1%. The absolute increase in selling, general and administrative expenditures
related primarily to the expansion of sales and marketing efforts in connection
with our laser vision correction business and acquisitions. In addition, we
increased our information technology expenditures related to our enterprise-wide
information systems and other programs supporting our laser vision correction
business.
Depreciation and Amortization. Depreciation and amortization expense
increased 51.3% from $842,000 to $1.3 million. Acquisitions and affiliations and
increased capital expenditures have increased overall amortization expense.
Compensation Expense Related to Stock Options. During July 1999, we fully
vested all stock options granted from February 1, 1999 through July 23, 1999. We
issued stock options to acquire 1,050,800 shares of our common stock during this
time period, which were granted with exercise prices below the fair market
value. Accordingly, we recorded $1.6 million, net of tax, as compensation
expense related to those options which became fully vested on the completion of
our initial public offering.
Other Expense. Other expense decreased 40.2% from $376,000 to $225,000. The
decrease in other expense was primarily related to the reduction of interest
expense as a result of the reduction of outstanding indebtedness from the
application of the proceeds of our initial public offering, which occurred on
August 18, 1999. In addition, $9.7 million of our subordinated exchangeable
promissory notes were exchanged for our common stock in connection with our
initial public offering at an exchange ratio of $1.00 worth of our common stock,
based upon the initial public offering price, for each $0.80 worth of
outstanding principal on the notes. We recorded the net difference between the
$1.00 worth of common stock and the $0.80 worth of outstanding principal on the
note as a nonrecurring, noncash interest expense of $2.0 million, net of tax
benefits.
Provision for Income Taxes. Our effective tax rate reflects the impact of
nondeductible amortization expense and excludes the effects of the noncash,
nonrecurring initial public offering-related expenses described above. Our
effective tax rate decreased to 44.8% from 49.4%, due to a higher level of
earnings in the three months ended September 30, 1999 compared to the relatively
fixed amount of nondeductible goodwill.
Accretion of Series C and Series D Convertible Preferred Stock. In connection
with the Company's initial public offering, approximately 16.3 million shares of
Series A, Series B, Series C and Series D preferred stock, which represented all
of the issued and outstanding shares of preferred stock, converted into common
stock of the Company. Prior to the initial public offering, however, the
holders of the Series C and Series D convertible preferred stock had the right
to tender their stock for redemption in 2004 and 2005 at the greater of the
amount originally paid for the preferred stock or its fair market value. Because
the redemption right is outside of the Company's control, generally accepted
accounting principles require that until the redemption date, the Company
increase the value of the preferred stock to its ultimate redemption value, a
principle known as accretion. This accretion is deducted from net income in the
accompanying consolidated financial statements to arrive at the income available
for common stockholders. Although the Company did not have an independent
appraisal, it estimated the potential future redemption value based upon various
transactions with third parties, through comparison to similar public companies
and the initial price range established during the filing of the Company's
registration statement on Form S-1. Based upon these estimates, the Company
recorded accretion of $739,000 and $3.5 million for the twelve months ended
December 31, 1998 and the six months ended June 30, 1999, respectively. Since
the redemption feature of the Series C and Series D stock terminated on the
effectiveness of the initial public offering, the Company was required to record
an accretion adjustment up to the effective date of the offering. Based upon
the actual public offering price of $8.00 per share, the
12
<PAGE>
Company recorded its final accretion adjustment of $1.4 million to reduce the
carrying value of the preferred stock during the three months ended September
30, 1999.
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended September
30, 1998
Net Revenue. Net revenue increased 61.5% from $44.6 million to $72.0
million. Management services revenue increased 55.4% from $25.0 million to $38.8
million. The increase in management services revenue was primarily related to
overall increases in laser vision correction, cataract and other eye related
surgical procedures performed by our affiliated eye care professionals as well
as new affiliations with eye care professionals. These new affiliations included
a number of optical retail outlets that also contributed to the increase in
management services revenue. Surgery and laser center revenue increased 54.3%
from $14.0 million to $21.6 million, primarily related to better utilization of
our surgery and laser centers and a 199.7% increase in laser vision correction
procedures, compared to the same period in 1998. In addition, we experienced a
26.3% increase in the number of cataract and other eye related surgical
procedures, compared to the same period in 1998. Product sales revenue increased
107.0% from $5.6 million to $11.6 million, primarily as a result of the
acquisition of Midwest Uncuts, Inc. in January 1999 and higher volumes at the
NovaMed Alliance.
Salaries, Wages and Benefits. Salaries, wages and benefits expense
increased 55.2% from $17.4 million to $27.0 million. As a percentage of revenue,
salaries, wages and benefits expense decreased from 39.1% to 37.5%.
Approximately half of the absolute increase in salaries, wages and benefits
expense was a result of acquisitions and affiliations. We also invested in
additional personnel, including sales, marketing and information technology
personnel, in the nine months ended September 30, 1999 as part of our growth
strategy relating to laser vision correction. We expect to continue our
investment in personnel to further support the growth of laser vision
correction.
Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased approximately 71.7% from $11.3 million to $19.3 million. As a
percentage of revenue, cost of sales and medical supplies expense increased from
25.2% to 26.8%. The absolute increase in these expenses during the nine months
ended September 30, 1999 was primarily related to the acquisition of Midwest
Uncuts, Inc., increased volume of laser vision correction, cataract and other
eye related surgical procedures performed in our eye surgery and laser centers
as well as the increased costs associated with increased sales at the NovaMed
Alliance. The increase in the cost of sales and medical supplies expense as a
percentage of revenue was primarily due to increased sales at our optical
laboratories and the NovaMed Alliance, which generally sells products with a
higher cost of sales as a percentage of revenue than our other sources of
revenue.
Selling, General and Administrative. Selling, general and administrative
expense increased approximately 57.8% from $10.3 million to $16.2 million. As a
percentage of revenue, selling, general and administrative expense decreased
from 23.1% to 22.5%. The absolute increase in selling, general and
administrative expenditures related primarily to information technology and
marketing to support our growth related to laser vision correction and the
effects of acquisitions. Our selling, general and administrative expense as a
percentage of revenue declined as a result of spreading fixed operating costs
over an increased revenue base.
Depreciation and Amortization. Depreciation and amortization expense
increased 50.7% from $2.3 million to $3.5 million. Increased capital spending
and acquisitions were the primary cause of the increase.
Compensation Expense Related to Stock Options. During July 1999, we fully
vested all options granted from February 1, 1999 through July 23, 1999. We
issued options to acquire 1,050,800 shares of our common stock during this time
period, which were granted with exercise prices below the fair market
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value. Accordingly, we recorded $1.6 million, net of tax, as compensation
expense related to those options which became fully vested on the completion of
our initial public offering.
Other Expense. Other expense increased 33.6% from $947,000 to $1.3 million.
Other expense was primarily related to interest expense, resulting from
additional borrowings used primarily to fund acquisitions and capital
expenditures. In addition, $9.7 million of our subordinated exchangeable
promissory notes were exchanged for our common stock in connection with our
initial public offering at an exchange ratio of $1.00 worth of our common stock,
based upon the initial public offering price, for each $0.80 worth of
outstanding principal on the notes. We recorded the net difference between the
$1.00 worth of common stock and the $0.80 worth of outstanding principal on the
note as a nonrecurring, noncash interest expense of $2.0 million, net of tax
benefits.
Provision for Income Taxes. Our effective tax rate reflects the impact of
nondeductible amortization expense and excludes the effects of noncash,
nonrecurring initial public offering-related expenses described above. Our
effective tax rate declined from 49.4% to 44.8%, due to a higher level of
earnings for the nine months ended September 30, 1999 compared to the relatively
fixed amount of nondeductible goodwill.
Accretion of Series C and Series D Convertible Preferred Stock. In connection
with the Company's initial public offering, approximately 16.3 million shares of
Series A, Series B, Series C and Series D preferred stock, which represented all
of the issued and outstanding shares of preferred stock, converted into common
stock of the Company. Prior to the initial public offering, however, the
holders of the Series C and Series D convertible preferred stock had the right
to tender their stock for redemption in 2004 and 2005 at the greater of the
amount originally paid for the preferred stock or its fair market value. Because
the redemption right is outside of the Company's control, generally accepted
accounting principles require that until the redemption date, the Company
increase the value of the preferred stock to its ultimate redemption value, a
principle known as accretion. This accretion is deducted from net income in the
accompanying consolidated financial statements to arrive at the income available
for common stockholders. Although the Company did not have an independent
appraisal, it estimated the potential future redemption value based upon various
transactions with third parties, through comparison to similar public companies
and the initial price range established during the filing of the Company's
registration statement on Form S-1. Based upon these estimates, the Company
recorded accretion of $2.0 million for the nine months ended September 30, 1999.
Liquidity and Capital Resources
We generated cash from operating activities for the nine months ended
September 30, 1999 of $3.8 million. We used $12.9 million in our investing
activities during the nine months ended September 30, 1999, which included six
acquisitions and the purchase of property and equipment. We used net bank
borrowings of $8.4 million, the net proceeds from the issuance of stock of $25.4
million, and net cash from operating activities to fund our investing activities
and to retire subordinated debt and other debt obligations. As of September 30,
1999, we had cash and cash equivalents of approximately $7.1 million and working
capital of approximately $16.2 million.
In May 1999, we increased our revolving credit facility to $35 million.
Advances under the credit facility are secured by substantially all of our
assets. The credit agreement expires in July 2000. Interest is payable at an
annual rate equal to our lender's published base rate minus .50% or LIBOR plus a
range from 1.5% to 2.0%, varying upon our ability to meet financial covenants.
As of September 30, 1999, the annual rate was approximately 6.9%. Our credit
agreement includes a commitment fee of .375% for the unused portion during the
commitment period. Our credit agreement contains covenants that include
limitations on indebtedness, liens, capital expenditures, ratios that define
borrowing availability and restrictions on the payment of dividends. As of
September 30, 1999, we were in compliance with all of our credit agreement
covenants. We had no amount outstanding as of September 30, 1999.
14
<PAGE>
We expect that the proceeds from our initial public offering, our funds
from operations and our existing revolving credit facility will be sufficient to
fund our operations for at least 12 months. We are currently in the process of
renegotiating our revolving credit facility to extend beyond July 2000. Our
future capital requirements and the adequacy of our available funds will depend
on many factors, including the timing of our acquisition activities, new
affiliations with eye care professionals, capital requirements associated with
our laser vision correction services and facilities, expansions and the future
cost of surgical equipment.
All of our current FDA-approved lasers are subject to a supply agreement
with Summit Technology, Inc. Under this agreement, we utilize Summit-
manufactured lasers for periods ranging from 36 to 42 months. During these
periods, we pay Summit monthly based on the number of procedures performed with
each laser. We are required to pay for a minimum number of procedures on each
laser during the commitment period, whether or not these procedures are actually
performed. As of October 31, 1999, we have entered into commitments to pay
Summit approximately $7.0 million during the term of these commitments, with
$4.8 million remaining to be paid.
In connection with the exchange of $9.7 million of our subordinated
exchangeable promissory notes, we have agreed to lend each of these noteholders
on April 1, 2000 an amount equal to the Federal and state income taxes payable
by the holder as a result of the exchange of the notes, but only for those
shares of our common stock received in the exchange which they still own on
April 1, 2000. We estimate the aggregate amount of these tax loans will not
exceed $4 million. Each of the tax loans will be non-interest bearing, non-
recourse to the debtor and secured by a number of shares of our common stock
held by the debtor having a value, based on the offering price, equal to two
times the loan amount. Upon the sale by a debtor after April 1, 2000 of any
shares of our common stock issued in exchange for a note, the debtor will be
required to repay a fraction of the debtor's initial tax loan amount equal to
the number of shares sold divided by the total number of shares of our common
stock previously issued in exchange for a note and owned by the debtor on April
1, 2000. The tax loans also will be payable by the debtors upon our demand for
payment. Currently, we intend to allow the debtors to repay these loans as they
dispose of their shares of our common stock. We also have agreed to reimburse
these debtors, on a grossed-up basis, for any Federal or state taxes that they
recognize as a result of imputed interest on the tax loans.
15
<PAGE>
Year 2000 Readiness and Related Risks
The year 2000 issue relates to computer programs that have time-sensitive
hardware and software being unable to recognize or to interpret dates beyond the
year 1999. This could result in a system failure or miscalculations causing
disruptions of operations, including a temporary inability to process
transactions, bill and collect fees or engage in other business activities.
We have established a task force that includes operations, information
technology, accounting and legal personnel. Our task force has undertaken, but
has not yet completed, an assessment of our state of readiness and the potential
impact of any year 2000 risks. To date, the task force has focused on the
following areas to assess as to year 2000 readiness:
. Core business systems
. Third party payors, product and equipment manufacturers and other
suppliers
. Physical facility systems
For each of these areas, the task force has been assessing systems
potentially susceptible to year 2000 compliance issues, and where appropriate,
we have been developing and implementing corrective actions and testing to
ensure compliance. We believe that we are devoting the necessary resources to
identify and resolve any significant year 2000 issues in a timely manner.
Core Business Systems. Our core business systems primarily consist of
management and financial accounting systems. We use our management systems to
schedule patients, to bill payors for services rendered and to obtain
operational productivity data. We use our financial accounting systems to pay
vendors, to record transactions and for financial reporting. In evaluating these
systems, we received written confirmation from vendors that the enterprise
system software, hardware and network operating systems included in our
management and financial systems are year 2000 compliant.
All of our locations as well as the eye care clinics of our affiliated eye
care professionals are currently using our financial accounting systems. Most of
our locations as well as the eye care clinics of our affiliated eye care
professionals are currently using our management systems, with the remaining
locations expected to be incorporated into our management systems by the end of
the first quarter of 2000. One of the eye care clinics of our affiliated eye
care professionals in the St. Louis region currently uses a management system
that is not year 2000 compliant. We will perform the necessary upgrades to this
system to ensure year 2000 readiness. If we are not able to complete the
upgrades of this facility as scheduled, this may adversely affect our ability to
seek reimbursement from Medicare and other third party payors on a timely basis
for this affiliated eye care clinic, although we believe this effect would not
be material to us because this facility does not account for a significant
portion of our accounts receivable.
Third Party Payors, Product and Equipment Manufacturers and Other
Suppliers. Some surgery procedures, primarily cataract removal, performed at our
surgery and laser centers or the eye care clinics of our affiliated eye care
professionals are covered by governmental reimbursement programs, including
Medicare, or third party payors, including private insurance companies. Medicare
has publicly announced that it believes its systems are year 2000 compliant.
Medicare has also publicly announced that it has established redundant systems
certified by independent consultants as year 2000 compliant, which are intended
to serve as "back up" systems in the event their assessment of their primary
systems proves inaccurate. Our task force is in the process of reviewing the
Internet web sites of third party payors that provide a material portion of
payments we or our affiliated eye care professionals receive for surgical and
16
<PAGE>
clinical procedures to assess their year 2000 readiness. If we are unable to
determine the year 2000 readiness of these payors, or need to address year 2000
issues we identify, we intend to contact these payors to request additional
information about their year 2000 readiness, in an attempt to mitigate the
related collection risks to us.
We rely on third party manufacturers and suppliers for lasers and laser
surgery-related products and equipment, utilities and other key supplies and
services, and we are in the process of reviewing the Internet web sites of a
number of our equipment manufacturers and suppliers to assess their year 2000
readiness. Most of our excimer lasers are manufactured by Summit Technology,
Inc. Representatives from Summit have informed us that its lasers utilize a
system clock that recognizes years in a four digit format, and therefore, its
lasers will function without any effect upon safety or efficiency upon a change
of date to the year 2000. We have not incurred, and do not believe we will
incur, material costs related to any inquiry as to the year 2000 readiness of
our third party payors, product and equipment manufacturers and other suppliers.
Physical Facility Systems. We are continuing to evaluate the year 2000
readiness of our physical facility systems, including phone, power, security,
heating, ventilation and air conditioning systems. We have requested information
from the providers of our physical facility systems, and we intend to make
second requests relating to non-responses. Unsatisfactory responses or non-
responses from critical suppliers will be evaluated on a case by case basis in
an attempt to mitigate any risk to us.
In addition to any remedial actions taken during the remainder of 1999, we
have implemented a year 2000 contingency plan that primarily involves purchasing
amounts of inventory so that we will be able to continue to operate to help
support our eye surgery and laser centers, and our affiliated eye care
professionals will be able to operate their eye care clinics, in the event of
any supply shortages resulting from any year 2000 problems experienced by our
suppliers. These purchases will be made incrementally over the remainder of
1999. Each of the eye care clinics of our affiliated eye care professionals is
also capable of manually performing billing, collection and other practice
management functions.
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PART II. OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds
On August 23, 1999, the Company completed the sale of 3,000,000 shares, and
certain selling stockholders completed the sale of 1,000,000 shares, of the
Company's common stock, par value $.01 per share, at a price to the public of
$8.00 per share in a firm commitment public offering. The offering was effected
pursuant to a Registration Statement on Form S-1 (Registration No. 333-79271),
which the Securities and Exchange Commission declared effective on August 13,
1999. Donaldson Lufkin & Jenrette Securities Corporation, Hambrecht & Quist LLC,
William Blair & Company, L.L.C. and DLJdirect Inc. were the lead underwriters
for the offering. In connection with the offering, the Company registered and
offered the underwriters an option to purchase up to an additional 600,000
shares of common stock at a price of $8.00 per share. The underwriters exercised
this option in full on September 1, 1999.
In addition, upon completion of the initial public offering, all
outstanding shares of preferred stock were automatically converted into
16,326,535 shares of NovaMed Eyecare, Inc. common stock.
Of the $28,800,000 in aggregate proceeds raised by the Company in
connection with the offering, $2,016,000 was paid to the underwriters in
connection with underwriting discounts and approximately $2,155,000 was incurred
by the Company in connection with offering expenses, printing fees, filing fees
and legal fees. A significant portion of the legal fees incurred in connection
with the offering were paid to the law firm Katten Muchin & Zavis of which
Steven V. Napolitano, a member of the Company's board of directors, is a
partner. The net offering proceeds to the Company after deducting the foregoing
expenses were approximately $24,629,000. The aggregate proceeds to the selling
stockholders were $8,000,000 and the net proceeds to the selling stockholders
after deducting underwriting discounts were $7,440,000.
The primary purposes of the initial public offering were to repay all of
the Company's bank and subordinated exchangeable debt outstanding following the
offering, for working capital and to pursue its laser vision correction strategy
through new affiliations, acquisitions and expansions in existing and future
markets. The Company used approximately $22,800,000 of the proceeds to repay its
bank and subordinated exchangeable debt, and approximately $1,829,000 for
working capital.
Sales of Unregistered Securities
From July 1, 1999 through September 30, 1999, the Company issued
unregistered securities to a limited number of persons as described below:
1. On July 16, 1999, the Company issued 75,000 shares of common stock to
an affiliated professional entity in connection with the acquisition
of the Company's clinical research business.
2. From August 12, 1999 through September 22, 1999, an aggregate of
45,250 shares of common stock were issued to employees and directors
upon exercise of options under the Company's Stock Incentive Plan.
No underwriters were engaged in connection with the foregoing sales of
securities. The sale of securities listed in item 1 above was made in reliance
upon the exemptions from registration in Section
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4(2) of the Securities Act of 1933 for transactions not involving a public
offering. Issuances of shares upon exercise of options listed in item 2 were
made under Rule 701 promulgated under the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K
The Company did not file any reports on Form 8-K during the third
quarter of 1999
19
<PAGE>
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on it behalf by the
undersigned thereunto duly authorized.
NOVAMED EYECARE, INC.
/s/ Ronald G. Eidell November 15, 1999
- -------------------- -----------------
Ronald G. Eidell Date
Executive Vice President, Chief
Financial Officer and Secretary
/s/ Martin A. Koehler November 15, 1999
- --------------------- -----------------
Martin A. Koehler Date
Vice President Finance and
Principal Accounting Officer
20
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Name
- ------ ------------
27 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,124
<SECURITIES> 0
<RECEIVABLES> 26,355
<ALLOWANCES> 12,443
<INVENTORY> 2,798
<CURRENT-ASSETS> 25,936
<PP&E> 20,275
<DEPRECIATION> 5,697
<TOTAL-ASSETS> 82,649
<CURRENT-LIABILITIES> 9,708
<BONDS> 0
0
0
<COMMON> 240
<OTHER-SE> 72,122
<TOTAL-LIABILITY-AND-EQUITY> 82,649
<SALES> 19,190
<TOTAL-REVENUES> 72,031
<CGS> 12,782
<TOTAL-COSTS> 68,777
<OTHER-EXPENSES> 3,690
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,425
<INCOME-PRETAX> (436)
<INCOME-TAX> 409
<INCOME-CONTINUING> (845)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (845)
<EPS-BASIC> .04
<EPS-DILUTED> (.18)
</TABLE>
