<PAGE>
As filed with the Securities and Exchange Commission on August 17, 1999
Registration No. 333-79271
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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NOVAMED EYECARE, INC.
(Exact name of registrant as specified in its charter)
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Delaware 8741 36-4116193
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code No.)
organization)
980 North Michigan Avenue, Suite 1620, Chicago, Illinois 60611, (312) 664-4100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
STEPHEN J. WINJUM
Chairman of the Board, President and Chief Executive Officer
980 North Michigan Avenue, Suite 1620, Chicago, Illinois 60611, (312) 664-4100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
STEVEN V. NAPOLITANO, ESQ. THOMAS J. MURPHY, ESQ.
JEFFREY R. PATT, ESQ. TIMOTHY R.M. BRYANT, ESQ.
Katten Muchin & Zavis McDermott, Will & Emery
525 West Monroe Street, Suite 1600 227 West Monroe Street, Suite 4400
Chicago, Illinois 60661 Chicago, Illinois 60606
(312) 902-5200 (312) 372-2000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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 [_] .
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 earlier effective
registration statement for the same offering: [_] .
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: [_] .
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: [_] .
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_] .
--------------
The Registrant hereby amends this Registration Statement on the 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 the date as the Commission, acting pursuant to
Section 8(a), determines.
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<PAGE>
This Post-Effective Amendment No. 1 to Form S-1 Registration Statement is
being filed to revise our previous disclosure based on (a) a revised amount of
shares being offered by us (3,500,000) and our selling stockholders (1,000,000)
and (b) a revised price range of $9.00 to $10.00 per share (including a revised
midpoint of the range of $9.50).
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and we are not soliciting an offer to buy +
+these securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
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Preliminary Prospectus
, 1999
4,500,000 Shares of Common Stock
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NovaMed Eyecare, Inc.: The Offering:
We are an eye care
services company . We are offering
focused on laser vision 3,500,000 shares.
correction. We own and Existing stockholders
operate 10 eye surgery are offering
and laser centers and 1,000,000 shares.
operate two laser
vision correction
centers in five U.S.
regional markets, where
we are affiliated with
83 eye care
professionals.
. This is a firm
commitment
underwriting.
. The underwriters have
an option to purchase
up to an additional
675,000 shares from
us to cover over-
allotments.
Proposed Nasdaq National Market Symbol:
NOVA
. This is our initial
public offering and
no market currently
exists for our common
stock. We anticipate
the price range to be
between $9.00 and
$10.00 per share.
. Closing: August ,
1999.
-------------------------------------------
<TABLE>
<CAPTION>
Per Share Total
------------------------------------------------------------
<S> <C> <C>
Public offering price $ $
Underwriting fees
Proceeds to us
Proceeds to our selling stockholders
------------------------------------------------------------
</TABLE>
Investing in our common stock involves risks described in "Risk Factors,"
beginning on page 6.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
- --------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette
Hambrecht & Quist
William Blair & Company
DLJdirect Inc.
<PAGE>
[Photo of Daniel S. Durrie, M.D. [Daniel S. Durrie, M.D., our
performing surgery on Stephen J. National Director of Refractive
Winjum] Surgery, performing a laser vision
correction procedure on Stephen J.
Winjum, our Chairman of the Board,
President and Chief Executive
Officer]
[NovaMed Eyecare, Inc. Logo]
[One of our 10 eye surgery and laser [Photo of Brodersen-Williams eye care
centers, located adjacent to one of clinic]
our affiliated eye care clinics in
the Chicago, Illinois metropolitan
area]
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 6
Company History and Acquisitions.... 14
Use of Proceeds..................... 16
Dividend Policy..................... 16
Capitalization...................... 17
Dilution............................ 18
Selected Consolidated Financial
Data............................... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 20
Business............................ 30
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Government Regulation............... 45
Management.......................... 50
Certain Transactions................ 57
Selling Stockholders................ 59
Principal Stockholders.............. 60
Description of Securities........... 62
Shares Eligible for Future Sale..... 66
Underwriting........................ 68
Legal Matters....................... 70
Experts............................. 70
Where You Can Find More Information. 70
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
----------------
NovaMed EyecareSM is our service mark. This prospectus also includes service
marks, registered service marks and trademarks of other companies.
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information from this document and does not
contain all of the information that you should consider before investing in our
common stock. To understand the risks involved in your investment decision, you
should carefully read the entire prospectus and the documents to which we refer
you.
Unless otherwise indicated, all share amounts and financial information
presented in this prospectus:
. give effect to the conversion of our convertible preferred stock into our
common stock, which will occur automatically upon completion of this
offering
. give effect to the issuance of 1,276,314 shares of common stock upon the
exchange of $9.7 million of our subordinated exchangeable promissory
notes, based upon an assumed initial public offering price of $9.50 per
share
. assume the underwriters' over-allotment option is not exercised
We are an eye care services company focused on laser vision correction. We
operate in the following metropolitan regions: Chicago, Illinois; Kansas City,
Missouri; Louisville, Kentucky; St. Louis, Missouri; and Richmond, Virginia.
Our revenue has grown at a compound annual rate of 100.5% from $15.9 million
in 1996, our first full year of operation, to $63.7 million in 1998. We became
profitable in 1997 and from 1997 to 1998 our net income increased from $105,000
to $1.7 million.
In 1998, the number of laser vision correction procedures performed by our
affiliated eye care professionals more than tripled to 5,083 as compared to the
prior year. Through the six months ended June 30, 1999, the number of
procedures more than doubled from the prior year period to 5,150, which exceeds
the number performed during all of 1998.
We own and operate:
. 10 eye surgery and laser centers where our affiliated eye care
professionals perform laser vision correction and other eye-related
surgical procedures
. an eye-only research organization with an emphasis on laser vision
correction that provides clinical and other research services to eye care
device, product and pharmaceutical manufacturers
. an optical services division that sells eye care products and accessories
to eye care professionals, including corrective lenses and eyeglasses
produced by our three wholesale optical laboratories, and eyeglass frames
and contact lenses purchased from manufacturers by our optical products
purchasing organization
We also operate under service agreements two laser vision correction centers
where our affiliated eye care professionals perform laser vision correction
surgery.
Generally, we enter into long-term business relationships, or affiliations,
with eye care professionals by:
. acquiring their non-medical assets including equipment, leasehold
interests and working capital
. hiring their non-medical personnel
. assuming their office leases
. entering into long-term service agreements with their professional
entities
Under these service agreements, we provide business, administrative and
financial services to our affiliated eye care professionals and their optical
retail outlets in exchange for a management fee.
To date, we have affiliated with 83 eye care professionals. Our affiliated
eye care professionals provide a wide range of eye care services to patients
including laser vision correction surgery, basic eye examinations and the
diagnosis and treatment of complex eye conditions. Our affiliated eye care
professionals currently practice in 45 eye care clinics which are leased and
staffed by us. In addition, our affiliated eye care professionals operate 28
optical retail outlets, each of which is located within one of our affiliated
eye care clinics, where they sell eyeglasses, contact lenses and other optical
products and accessories to patient-consumers.
1
<PAGE>
Based on data collected by the Vision Council of America, total U.S. eye
care spending in 1998 approximated $55 billion. Of this amount, $38.4 billion
was spent on health care costs associated with eye and vision conditions and
$16.3 billion was spent on eyewear.
The Vision Council of America estimates that in 1997, 161 million people,
representing approximately 60% of the U.S. population, required eyeglasses or
contact lenses to correct refractive vision conditions which result from the
improper curvature of the cornea. The three most common refractive conditions
are:
. myopia, commonly referred to as nearsightedness
. hyperopia, commonly referred to as farsightedness
. astigmatism
A number of surgical procedures have been developed as alternative means of
correcting nearsightedness, farsightedness and astigmatism. The popularity of
vision correction surgery has recently increased, primarily as a result of the
1996 introduction of the Laser In-Situ Keratomileusis, or LASIK, procedure. In
the LASIK procedure, an ophthalmologist uses an automated microsurgical
instrument to peel back a thin layer of corneal tissue which remains hinged to
the eye. A number of laser pulses are then applied to the exposed cornea to
improve the patient's vision by flattening the cornea, in the case of
nearsighted patients, and steepening the cornea, in the case of farsighted
patients.
Spectrum Consulting estimates that in 1998, eye care professionals performed
approximately 450,000 laser vision correction surgery procedures in the U.S.,
representing an increase of 97.4% over the number of procedures performed in
1997. Spectrum Consulting also forecasts that eye care professionals will
perform approximately 950,000 and 1.4 million laser vision correction
procedures in the U.S. in 1999 and 2000, respectively. Despite this rapid
growth, the number of vision correction surgery patients in 1998 represented
less than 0.2% of the 161 million people with refractive vision conditions in
the U.S.
In order to pursue this market opportunity, we have focused on building
regional clusters of eye surgery and laser centers and affiliated eye care
professionals. We build our regional clusters by entering into service
agreements with leading ophthalmologists and optometrists in a manner which
achieves a hub and spoke configuration of affiliated eye care professionals
around our eye surgery and laser centers.
Our goal is to become the leading laser vision correction services and
facilities company in each of our existing and future regional markets. We
intend to achieve this goal by continuing to establish contractual affiliations
with leading eye care professionals and by implementing a growth strategy which
includes the following specific components:
. continuing to expand our presence in existing regional markets
. selectively targeting and entering new regional markets
. providing patient-consumer directed marketing support to our regional
clusters of affiliated eye care professionals
. capitalizing on and expanding our eye-only research organization
. developing and implementing additional business, administrative and
financial services to assist our affiliated eye care professionals in
enhancing their laser vision correction procedure growth
Our principal offices are located at 980 North Michigan Avenue, Suite 1620,
Chicago, Illinois 60611. Our telephone number is (312) 664-4100. Our website
address is www.novamed.com.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by us... 3,500,000 shares
Common stock offered by the
selling stockholders........ 1,000,000 shares
Common stock to be
outstanding after the
offering, excluding up to
6,292,038 additional shares
reserved for issuance
pursuant to our 1996 stock
incentive plan and our 1999
stock purchase plan......... 23,593,807 shares
Use of proceeds.............. We intend to use the proceeds of this offering
to repay all of our bank and subordinated
exchangeable debt outstanding following this
offering, for working capital and to pursue our
laser vision correction strategy through new
affiliations, acquisitions and expansion in our
existing and future markets. We will not receive
any proceeds from the shares sold by the selling
stockholders.
Proposed Nasdaq National NOVA
Market symbol...............
Risk Factors................. See "Risk Factors," beginning on page 6 for a
discussion of factors you should carefully
consider before deciding to buy our common
stock.
</TABLE>
3
<PAGE>
Summary Consolidated Financial Data
You should read the following summary consolidated financial data together
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our consolidated financial statements and related notes
included in this prospectus.
The pro forma earnings per common share data exclude the effect of the
accretion of our Series C and Series D convertible preferred stock. The holders
of these preferred shares have the right to tender their stock for redemption
in 2004 and 2005. Generally accepted accounting principles require us to
increase the value of these preferred shares to their fair market value as
their fair market value increases, a principle known as accretion. These
preferred shares will automatically convert into common stock upon completion
of this offering. This conversion will eliminate the redemption rights and the
necessity for further accretion. We will record the final charge for accretion
upon the completion of this offering.
The pro forma earnings per common share and the pro forma balance sheet data
give effect to:
. the conversion of our convertible preferred stock into shares of our common
stock, which will occur automatically upon the completion of this offering
. the issuance of 1,276,314 shares of our common stock, assuming an initial
public offering price of $9.50 per share, upon the exchange of our
subordinated exchangeable promissory notes and the elimination of the
interest expense related to these notes
. with respect to the pro forma balance sheet data only, we will record the
discount to the initial public offering price in connection with the exchange
of the subordinated exchangeable promissory notes as additional interest
expense, net of tax benefit, of approximately $2.0 million. This net amount
is reflected here as a decrease in retained earnings.
The pro forma as adjusted balance sheet data also give effect to the sale of
3,500,000 shares of common stock by us at an assumed initial public offering
price of $9.50 per share and the application of the net proceeds from this
offering as discussed in "Use of Proceeds."
See Note 8 to our consolidated financial statements included in this
prospectus for details concerning the timing of the retirement of our
outstanding subordinated exchangeable promissory notes.
<TABLE>
<CAPTION>
Six months
Years ended December ended
31, June 30,
------------------------ ----------------
1996 1997 1998 1998 1999
(In thousands, except per share data
and selected operating data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue....................... $15,850 $42,408 $63,729 $27,285 $44,862
Operating expenses................ 16,679 40,387 58,986 25,559 41,881
------- ------- ------- ------- -------
Income (loss) from operations..... (829) 2,021 4,743 1,726 2,981
Other expense..................... 83 1,710 1,373 571 1,040
------- ------- ------- ------- -------
Income (loss) before income taxes. (912) 311 3,370 1,155 1,941
Provision for income taxes........ -- 206 1,664 570 869
------- ------- ------- ------- -------
Net income (loss)................. $ (912) $ 105 $ 1,706 $ 585 $ 1,072
Less--Accretion of Series C and
Series D convertible preferred
stock............................ -- -- (739) (169) (3,476)
------- ------- ------- ------- -------
Income (loss) available to Series
A and Series B convertible
preferred stock and common stock. $ (912) $ 105 $ 967 $ 416 $(2,404)
======= ======= ======= ======= =======
Earnings (loss) per common share:
Basic............................ $ -- $ 0.01 $ 0.07 $ 0.03 $ (0.17)
======= ======= ======= ======= =======
Diluted.......................... $ (0.08) $ 0.01 $ 0.06 $ 0.03 $ (0.17)
======= ======= ======= ======= =======
Weighted average common shares
outstanding:
Basic............................ -- 2,178 2,751 2,751 2,471
======= ======= ======= ======= =======
Diluted.......................... 11,358 17,237 16,003 16,223 14,374
======= ======= ======= ======= =======
Pro Forma Data:
Earnings per common share--
diluted......................... $ 0.10 $ 0.06
======= =======
Weighted average common shares
outstanding--diluted............ 21,409 22,563
======= =======
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Six months
ended
Years ended December 31, June 30,
----------------------------- -----------
1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Eye surgery and laser centers....... 6 10 10 10 10
Affiliated eye care clinics......... 13 25 45 27 44
Optical retail outlets.............. 7 10 27 9 27
Procedures:
Laser vision correction............ -- 1,676 5,083 1,851 5,150
Cataract........................... 5,308 12,308 15,904 6,766 8,262
Other eye surgery and laser center
procedures........................ 1,337 7,445 9,837 4,285 6,064
Employees........................... 184 524 744 547 889
<CAPTION>
As of June 30, 1999
-----------------------------
Actual Pro Forma As Adjusted
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........... $ 864 $ 864 $ 11,737
Total assets........................ 71,613 72,043 82,916
Long term debt, excluding current
portion............................ 27,964 18,264 14
Series C and Series D convertible
preferred stock.................... 19,906 -- --
Total stockholders' equity.......... 14,223 44,259 73,382
</TABLE>
5
<PAGE>
RISK FACTORS
You should carefully consider the following factors and other information
contained in this prospectus before purchasing any of our common stock.
Risks Relating to Our Business
Our failure to grow, or to manage our growth, could reduce our ability to
continue to achieve or sustain profitability
Our growth strategy is focused on our existing and future regional markets
and involves:
. affiliating with additional eye care professionals through long-term
service agreements
. establishing or acquiring additional eye surgery and laser centers
. assisting our affiliated eye care professionals in opening new eye care
clinics and in offering a broader range of services and products
Pursuing new eye surgery and laser centers and affiliations with eye care
professionals presents us with a variety of challenges. We may not experience
an increase in surgical procedures at our existing eye surgery and laser
centers or management fees from our affiliated eye care professionals. We may
not be able to achieve the economies of scale and patient base, or provide the
business, administrative and financial services, required to sustain
profitability in our existing and future eye surgery and laser centers or in
the clinics of our affiliated eye care professionals.
If we are unable to successfully implement our growth strategy or manage our
growth effectively, our business, financial condition and results of
operations, including our ability to achieve and sustain profitability, could
be adversely affected.
Our limited operating history and our dependence on laser vision correction
and other refractive surgical procedures make it difficult to predict our
future results of operations
There is limited financial data upon which you can evaluate our future
results of operations and our growth prospects. This evaluation should take
into account the risks and difficulties frequently encountered by companies
early in their development, particularly companies in new and rapidly evolving
markets, including the laser vision correction market. We may not be able to
successfully address these risks and uncertainties, in which case, our recent
results and growth rate may not be indicative of our future results of
operations and growth rate.
If eye care professionals and the general population do not broadly accept
laser vision correction and other refractive surgical procedures as
alternatives to eyeglasses and contact lenses, a significant source of our
historical and future revenue and earnings growth will be limited
Our profitability and growth will depend upon broad acceptance by eye care
professionals and the general population of laser vision correction and other
refractive surgical procedures in the United States. Eye care professionals and
the general population might not broadly accept laser vision correction surgery
because of:
. the cost of the procedure that, to date, has been paid directly by
patients
. concerns about the safety and effectiveness of laser vision correction,
which are partially attributable to some reports of:
--an increase in the light scattering properties of the cornea during
healing
--undesirable visual sensations produced by bright lights
--decreases in contrast sensitivity
--unintended over- or under-corrections
--decline in corrective effect
--disorders of corneal healing, corneal scars and corneal ulcers
--induced astigmatism
. lack of sufficient long-term follow-up data
. adverse patient reactions or negative publicity involving patient
outcomes
. availability of alternative methods for correcting vision conditions
6
<PAGE>
If eye care professionals and the general population do not widely accept
laser vision correction and other refractive surgical procedures, a significant
source of our historical and future revenue and earnings growth will be
limited.
We may not compete effectively with other eye care services companies that
have more resources and experience than us
Competitors with substantially greater financial, technical, managerial,
marketing and other resources and experience may compete more effectively than
us. We and our affiliated eye care professionals compete with other businesses,
including other eye surgery and laser center companies, hospitals, individual
ophthalmologists and optometrists, other surgery and laser centers, eye care
clinics and providers of retail optical products. Our wholesale optical
laboratories and optical products purchasing organization also face competition
on national, regional and local levels. Companies in other health care industry
segments, including managers of hospital-based medical specialties or large
group medical practices, may become competitors in providing surgery and laser
centers as well as competitive eye care related services. Competition for
retaining the services of highly qualified ophthalmologists and optometrists
and medical, technical and managerial personnel is significant, and we may not
be able to help our affiliated eye care professionals identify, hire, train,
retain and affiliate with these types of individuals in the future.
If we find it necessary to reduce prices in response to competition, we could
experience reductions in profitability and revenue growth
The market for providing laser vision correction and other refractive
surgery procedures is becoming increasingly competitive. Several eye care
companies feature these services as a component of their activities. As laser
vision correction and other refractive surgery becomes more prevalent, we
expect a greater number of independent ophthalmologists to develop laser vision
correction and other refractive surgery practices.
In the event our competitors offer laser vision correction or other
refractive surgery services at lower prices than we and our affiliated eye care
professionals do, we may have to lower the prices we charge. If we lower
prices, we could experience reductions in our profitability and revenue growth.
Rapid technological advances may reduce our sources of revenue and our
profitability
Adoption of new technologies that may be comparable or superior to the
excimer laser could reduce the amount of the management fees we receive from
affiliated professional entities and facility fees we receive from eye care
professionals who use our eye surgery and laser centers. Reduction of these
sources of revenue could decrease our profitability. In this case, we might
have to expend significant capital resources to deploy new technology and
related equipment to remain competitive. Our inability to provide access to new
and improving technology could deter eye care professionals from affiliating
with us or from using our eye surgery and laser centers.
Our failure to maintain or establish profitable affiliations with a sufficient
number of eye care professionals could limit our profitability and revenue
growth
Our success depends upon our ability to establish affiliations with eye care
professionals in our existing and future markets. We may not be able to enter
into contractual arrangements with ophthalmologists or optometrists on
satisfactory terms, and these affiliations may not be profitable for us. In
addition, if vision correction technology becomes available to ophthalmologists
that is less expensive than the medical equipment currently required for laser
vision correction, eye care professionals might have less interest in our
services and our eye surgery and laser centers. If we fail to establish or
maintain profitable affiliations with a sufficient number of qualified
ophthalmologists and optometrists, we could experience reductions in our
profitability and revenue growth.
7
<PAGE>
Loss of the services of ophthalmologists or optometrists could impair our
sources of revenue and our ability to grow our business
Our success depends, in part, on the services of the ophthalmologists and
optometrists with whom we affiliate. Our inability to attract and retain eye
care professionals could limit our sources of revenue, our ability to grow our
business and our ability to expand our research operations. Generally, our
affiliated ophthalmologists enter into five year employment agreements with our
affiliated professional entities. These agreements generally contain non-
compete and non-solicitation covenants and often require the ophthalmologist to
pay liquidated damages that are generally in excess of $500,000 in the event
that he or she quits prior to the end of the initial term. Our affiliated
optometrists enter into employment contracts with our affiliated professional
entities which also contain non-compete and non-solicitation covenants. The
non-compete and non-solicitation covenants generally preclude the
ophthalmologist or optometrist from competing with his or her employer within a
specified geographic range, or soliciting the employer's patients or employees,
during the employment term and for a one-year period following termination. The
damages provisions and restrictive covenants may not effectively deter
affiliated eye care professionals from quitting if they elect to pay the
liquidated damages or establish a practice outside the geographic scope of the
noncompete covenant.
To date, neither we nor our affiliated professional entities have sought
judicial enforcement of any of these restrictive covenants. The enforceability
of restrictive covenants of these types will depend upon a variety of equitable
factors, including public policy concerns regarding broad restrictions that
might limit the availability of medical care. If a court deems the scope or
duration of the restrictive covenants or liquidated damages provisions
excessive, they may not be enforceable.
Loss of the services of key management personnel could adversely affect our
business
Our success depends, in part, on the services of key management personnel,
including Stephen J. Winjum, our Chairman of the Board, President and Chief
Executive Officer; Ronald G. Eidell, our Executive Vice President and Chief
Financial Officer; and E. Michele Vickery, our Executive Vice President of
Operations. Each of these officers has entered into an employment agreement
with us. The terms of these employment agreements, including their non-
competition, non-solicitation and confidentiality covenants, are described
under the caption "Management--Employment Agreements". We do not know of any
reason why we might be likely to lose the services of any of these officers.
However, in light of the role that each of these officers has played in our
growth to date, if we lost the services of any of these officers, we believe
that our business could be adversely affected.
The nature of our business could subject us to potential malpractice, product
liability and other claims
The provision of eye care services entails the potentially significant risk
of physical injury to patients and an inherent risk of potential malpractice,
product liability and other similar claims. Our insurance may not be adequate
to satisfy claims or protect us or our affiliated eye care professionals and
this coverage may not continue to be available at acceptable costs. A partially
or completely uninsured claim against us could reduce our earnings and working
capital.
Lack of adequate financing could limit our growth
Successful implementation of our growth strategy will require continued
access to capital. If we do not have sufficient cash resources, our growth
could be limited unless we are able to obtain capital through additional equity
or debt financings. We intend to finance future acquisitions, affiliations and
our other strategic initiatives by using a combination of cash, debt and
capital stock. However, if our stock does not maintain sufficient value, or is
not deemed to be an acceptable form of consideration, we may be required to use
more of our cash resources or obtain other financing. Capital may not be
available to us for acquisitions, affiliations or other needs. Further, if
financing is available, it may not be on terms that are favorable to us or
sufficient for our needs.
8
<PAGE>
Year 2000 compliance issues may expose us to liability, interrupt our ability
to conduct business or impair our cash flow if they cause delayed payments on
our accounts receivable
The year 2000 issue relates to computer programs that have time-sensitive
hardware and software 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 undertaken, but have not yet completed, an assessment of our state
of readiness and the potential impact of any year 2000 risks. We have designed
our efforts to assess the year 2000 readiness of our significant third party
payors, physical facility systems, product and equipment manufacturers and
suppliers to determine whether we are vulnerable to the failure of these
parties to remediate their own year 2000 issues. We expect to complete the
assessment phase of our physical facility systems during the third quarter of
1999, with any necessary remedial action planned during the fourth quarter of
1999. To date, we have spent immaterial amounts to address year 2000 concerns.
However:
. our assessment that we will not incur material year 2000 compliance costs
may prove inaccurate
. substantial year 2000 compliance expenditures may result from future
affiliations or acquisitions
. precautions that we have taken to protect our business from, or minimize
the impact of, the year 2000 issue may not adequately address this issue
. the systems of other companies, on which our operations rely, including
third party payors, may not adequately address the year 2000 issue
Although not applicable to laser vision correction and other refractive
procedures, the patients of our eye surgery and laser centers and affiliated
eye care professionals pay a portion of the charges for eye care services with
Medicare or third party payor reimbursements. Some private insurance companies
also provide partial or full coverage for elective procedures. In the event
Medicare or private insurance companies have difficulty processing and paying
claims because of year 2000 issues, this could cause our accounts receivable
to increase, which could impair our cash flow from operations, causing us to
increase our bank borrowings to compensate for the reduction in cash flow and
resulting in higher interest expense.
If a change in events or circumstances causes us to write-off a large portion
of intangible assets, our total assets would be reduced significantly and we
could incur a substantial charge to earnings
Our assets include substantial intangible assets in the form of service
agreements with our affiliated eye care professionals and goodwill. At June
30, 1999, intangible assets represented approximately 48.7% of pro forma as
adjusted total assets and 55.0% of pro forma as adjusted stockholders' equity.
The intangible asset value represents the excess of cost over the fair value
of the separately identifiable net assets acquired in connection with rights
we receive under our service agreements. The value of these assets may not be
realized. We regularly evaluate whether events and circumstances have occurred
that indicate all or a portion of the carrying amount of the asset may no
longer be recoverable, in which case an additional charge to earnings may
become necessary. If, during our evaluation, we determine that the
undiscounted cash flow from a surgery and laser center or an affiliated
practice is not sufficient to recover the unamortized intangible asset, we
will reduce the unamortized balance to its realizable amount and incur a
corresponding charge to earnings. To date, we have not written off a
significant portion of unamortized intangible assets attributable to service
agreements or goodwill. If, in the future, we determine that our unamortized
intangible assets have suffered an impairment which requires us to write off a
large portion of unamortized intangible assets due to a change in events or
circumstances, this write off would significantly reduce our total assets and
we could incur a substantial charge to earnings.
9
<PAGE>
Risks Relating to Our Industry
Changes in government regulation and supervision or proposed health care
reforms could impair our sources of revenue and limit our ability to grow our
business
We are subject to extensive government regulation and supervision,
including:
. Federal and State:
--anti-kickback statutes
--self-referral laws
--civil false claims acts
. State:
--corporate practice of medicine restrictions
--fee-splitting laws
--facility license requirements and certificates of need
. Food and Drug Administration regulation of medical devices, including
laser vision correction and other refractive surgery equipment, and
pharmaceuticals and related clinical trials
. Federal Trade Commission guidelines for marketing and promoting laser
vision correction and other refractive surgery procedures
Many of these laws and regulations are subject to varying interpretations,
and courts and regulatory authorities generally have provided little
clarification. Moreover, state and local laws and interpretations vary from
jurisdiction to jurisdiction. As a result, we may not always be able to
accurately predict interpretations of applicable law, and Federal and state
authorities could challenge some of our activities. If any of our activities
are challenged, we may have to divert substantial time, attention and resources
from running our business to defend our activities against these challenges,
regardless of their merit. If we do not successfully defend these challenges,
we may face a variety of adverse consequences, including:
. our affiliated eye care professionals terminating their service
agreements or having these agreements rendered unenforceable
. third party payors terminating their agreements with our affiliated eye
care professionals
. our affiliated eye care professionals losing their eligibility to
participate in Medicare or losing other contracting privileges
.in some instances, civil or criminal fines
Any of these consequences could reduce our revenue growth.
The regulatory environment in which we and our affiliated eye care
professionals operate may change significantly in the future. Numerous
legislative proposals have been introduced in Congress and in various state
legislatures over the past several years that could cause major reforms of the
U.S. health care system. In response to new or revised laws, regulations or
interpretations, we could be required to:
. revise the structure of our relationships with our affiliated eye care
professionals or the structure of our management fees
. incur substantial legal fees, fines or other costs
. curtail our business activities
Any of these results could impair our sources of revenue and our profitability
and limit our ability to grow our business.
Shortages in supplies of lasers and other surgery-related products and
equipment may impair our ability to provide our affiliated eye care
professionals with necessary equipment
There are a limited number of manufacturers of laser vision correction and
refractive surgery-related products and equipment. These products and equipment
may not be available in the quantities or time frames we require. Any shortages
in our supplies of these products may limit our affiliated eye care
professionals' ability to sustain or increase their volume of laser vision
correction and other refractive surgeries and our ability to open or operate
eye surgery and laser centers. This could adversely affect our relationships
with our affiliated eye care professionals and result in a reduction of our
revenue from management fees and in the utilization levels at our eye surgery
and laser centers.
10
<PAGE>
Litigation in the medical device industry may impair our ability to provide
our affiliated eye care professionals with necessary equipment
The medical device industry, including the eye-related laser equipment
sector, has experienced substantial litigation in the U.S. regarding patents
and proprietary rights. Any future litigation that relates to equipment we use
at our eye surgery and laser centers may impair our ability to provide access
to this equipment. Our inability to provide our affiliated eye care
professionals with access to this equipment would impair their ability to
sustain or increase their volume of laser vision correction or other refractive
surgery procedures. This could adversely affect our relationships with our
affiliated eye care professionals and result in a reduction of our revenue from
management fees and in the utilization levels at our eye surgery and laser
centers.
Medicare and private third-party payor cost containment efforts and reductions
in reimbursement rates could reduce our revenue and our cash flow
We estimate that for the year ended December 31, 1998, government sponsored
health care programs, directly or indirectly, accounted for approximately 49%
of our total revenue. This includes management fee revenue from affiliated eye
care professionals who receive payments from these programs, as well as
facility fees we receive directly for eye care professionals' use of our eye
surgery and laser centers. This revenue does not include amounts derived from
laser vision correction, which is an elective procedure that patient-consumers
pay for out-of-pocket.
The health care industry is experiencing a trend toward cost containment as
government and private third-party payors seek to impose lower reimbursement
and utilization rates and to negotiate reduced payment schedules with health
care providers. These trends may result in a reduction from historical levels
in per patient revenue received by our eye surgery and laser centers and
affiliated eye care professionals. Changes in Medicare payment rates have
reduced payments to ophthalmologists and optometrists. Private insurance
payments also could be affected to the extent that these insurance companies
use payment methodologies based on Medicare rates.
Reductions in payments to our eye surgery and laser centers and affiliated
eye care professionals or other changes in reimbursement for eye care services
could reduce our revenue and our cash flow.
Risks Relating to this Offering
After this offering, approximately 81% of our total outstanding shares will be
restricted from immediate resale but may be sold into the market in the
future, which could cause our stock price to drop significantly
After this offering, we will have 23,593,807 shares of common stock
outstanding. This includes the 4,500,000 shares being sold in this offering,
which may be resold in the public market immediately unless acquired by our
affiliates, as that term is defined under the Securities Act of 1933. We refer
in this prospectus to these affiliates as "Rule 144 Affiliates" so as to avoid
confusion with our use of the term "affiliated eye care professionals." The
remaining 19,093,807 shares, which will continue to be held by our existing
stockholders, will represent approximately 81% of our shares outstanding after
this offering. The holders of these shares will be subject to contractual
restrictions on resales of these shares into the public market. We have
described these restrictions, which range from 180 days to two years, in more
detail under the caption "Shares Eligible for Future Sale".
The holders of these shares have the right to demand registration of
4,257,238 of these shares and have piggyback registration rights for 18,603,807
shares covering future offerings by us. The holders of 6,650,815 of these
shares have agreed to not exercise these registration rights for six months
after the date of this prospectus, and the holders of 12,442,992 of these
shares have agreed to not exercise these registration rights for one year after
the date of this prospectus. These restrictions have been agreed to with the
underwriters. However, Donaldson, Lufkin & Jenrette Securities Corporation, on
behalf of the underwriters, may waive these restrictions at any time. Rule 144
Affiliates also will be subject to the volume limitations of Rule 144 under the
Securities Act.
As restrictions on resale end, our stock price could drop significantly if
the holders of these
11
<PAGE>
restricted shares sell them or if the market perceives that these holders
intend to sell shares. This could occur without regard to the performance of
our business.
Any return on your investment in our stock will depend on your ability to
sell our stock at a profit
Some investors favor companies that pay dividends. We have never declared
or paid any dividends and our credit agreement prohibits payment of dividends
on our common stock. We anticipate that we will not declare dividends at any
time in the foreseeable future. Instead we will retain earnings for use in our
business. As a result, your return on an investment in our stock likely will
depend on your ability to sell our stock at a profit.
The absence of a prior public market for our stock and possible volatility in
our stock price could impair your ability to sell our stock at a profit
There has been no public market for our common stock. We are applying to
list our common stock on the Nasdaq National Market. We do not know whether
investor interest will lead to the development of a trading market. If a
trading market develops, that market may not be sustained or liquid.
We will determine the initial offering price for our shares through
negotiations with the underwriters. You may not be able to sell your shares at
or above this initial offering price. The price at which our shares will trade
will depend upon a number of factors, including:
. our historical and anticipated operating results
. announcements by us or our competitors
. changes in financial estimates by securities analysts regarding us, our
industry, our suppliers or our competitors
. conditions and trends in the industries in which we or our competitors
compete
. general market and economic conditions
In addition, the stock market has, from time to time, experienced extreme
price and volume fluctuations. These broad market fluctuations may adversely
affect the market price of our common stock.
Fluctuations in our quarterly operating results may make it difficult to
predict our future results of operations and may cause volatility in our
stock price
Our results of operations have varied and may continue to fluctuate from
quarter to quarter. We have a high level of fixed operating costs, including
compensation costs and minimum usage commitments on our excimer lasers. As a
result, our profitability depends to a large degree on the volume of surgical
procedures performed in, and on our ability to utilize the capacity of, our
eye surgery and laser centers and on the volume of patients treated in the
clinics of our affiliated eye care professionals.
We experience some seasonality in our operating results during the first
calendar quarter. The timing and degree of fluctuations in our operating
results will depend on several factors, including:
. decreases in demand for non-emergency procedures due to severe weather
. availability or sudden loss of the services of our affiliated eye care
professionals
. availability or shortages of laser and other vision correction surgery-
related products and equipment
. the timing and relative size of acquisitions and affiliations with eye
care professionals
These kinds of fluctuations in quarterly operating results may make it
difficult for you to assess our future results of operations and may cause
volatility in our stock price.
Our use of offering proceeds is not subject to a specific plan and may not
prove beneficial to us or our stockholders
We describe our intended uses of the proceeds of this offering under "Use
of Proceeds." However, we have not determined exactly how these proceeds will
be allocated among the uses we describe, other than with respect to the
repayment of all of our outstanding bank and subordinated exchangeable debt
outstanding following this offering. Therefore, you must rely on the judgment
of our management with respect to the use of the proceeds from this offering
not used to repay our bank and subordinated debt. We cannot assure you that
management will use these proceeds in a manner that will prove beneficial to
us or our stockholders.
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<PAGE>
You will incur immediate and substantial dilution
If you purchase shares of our stock in the offering, you will experience
immediate dilution in the net tangible book value of your shares of
approximately $8.10 per share assuming an offering price of $9.50 per share. If
we issue additional shares of common stock in the future, you will suffer
further dilution.
Provisions of our charter and bylaws, Delaware law and our Rights Agreement
could deter takeover attempts
Provisions of our Restated Certificate of Incorporation, our Bylaws,
Delaware law and our Rights Agreement may have the effect of delaying,
deterring or preventing a change in control, even if a change in control would
be beneficial to you. Members of our board of directors may have interests in a
change of control that differ from you. These interests could cause them to
resist a change in control that would help you better realize the value of your
investment.
Our existing stockholders will have the ability to control our affairs and to
deter a change in control and their interests in a change in control may
differ from your interests
After this offering, our Rule 144 Affiliates and affiliated eye care
professionals will own approximately 68% of the outstanding shares of our
stock. As a result, if these persons act together, they will have the ability
to exercise substantial control over our affairs and to elect a sufficient
number of directors to control our board of directors. Because of their
relationships with us, many of these persons may have interests in a change in
control that differ from your interests.
For example, our affiliated eye care professionals may have an interest in
the quality and nature of management services to be rendered following a change
in control. This interest could cause them to resist a change in control that
they perceive will result in new, different or less desirable management
services being offered to them.
In addition, our affiliated eye care professionals have agreed not to sell
their shares of our stock, subject to some exceptions, for a period of one year
from the date of this prospectus, without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation. They also have agreed to
specified volume limitations on sales of our stock during the year following
the first anniversary of the date of this prospectus. Consequently, the
ownership position of our Rule 144 Affiliates and affiliated eye care
professionals, as well as the contractual restrictions agreed to by our
affiliated eye care professionals, may also have the effect of delaying,
deterring or preventing a change in control, even if a change in control would
be beneficial to you.
Our actual results could differ materially from those mentioned in the
forward-looking statements contained in this prospectus
This prospectus contains forward-looking statements which relate to possible
future events, industry, demographic and consumer trends and our performance
and results of operations. In some cases, you can identify forward-looking
statements by our use of words including "may," "will," "should,"
"anticipates," "believes," "expects," "plans," "intends," "estimates,"
"projects" and other similar words. All forward-looking statements involve risk
and uncertainty. Our actual results could differ materially from those
mentioned in the forward-looking statements contained in this prospectus for
many reasons, including the risks described above and the occurrence of events
described elsewhere in this prospectus.
13
<PAGE>
COMPANY HISTORY AND ACQUISITIONS
Corporate Structure
We were originally organized as a Delaware limited liability company in
March 1995 under the name NovaMed Eyecare Management, LLC.
In connection with a capital infusion from venture capital investors, in
November 1996, we formed NovaMed Holdings Inc., an Illinois corporation, to
serve as a holding company, responsible for overall strategic planning, with
NovaMed Eyecare Management, LLC as an operating subsidiary. In May 1999,
NovaMed Holdings Inc. reincorporated as a Delaware corporation and changed its
name to NovaMed Eyecare, Inc. In June 1999, we changed the name of our
operating subsidiary to NovaMed Eyecare Services, LLC.
Initial Operations
In September 1995, we began providing various billing and financial
services, including clinical operations and practice development services, to
six Chicago metropolitan and Northwest Indiana ophthalmology groups:
. Brodersen-Williams Eye Institute, P.C., in Hammond, Indiana
. Deschamps Eye Care, P.C., in Merrillville, Indiana
. Walter I. Fried, Ph.D., M.D., S.C., in Gurnee, Illinois
. Kirk Eye Center, S.C., in River Forest, Illinois
. Northshore Eye Associates, Ltd., in Chicago, Illinois
. Northwest Ophthalmology Associates, S.C., in Arlington Heights, Illinois
On January 1, 1996, we purchased the nonmedical assets of each of these
founding ophthalmology groups. We entered into long-term service agreements
with each of these groups in which we agreed to provide a broader range of
business, administrative and financial services in exchange for a management
fee. We describe these services under "Business--Business Operations--Services
and Products". We also acquired four eye surgery and laser centers in these
transactions.
Acquisitions and Affiliations
We acquire eye surgery and laser centers through transactions in which we
acquire either all of the stock or substantially all of the assets of the
entity owning the center. We generally affiliate with eye care professionals by
acquiring substantially all of the nonmedical assets of the professional entity
owning the clinic. In some cases, we acquire the capital stock of a corporation
previously formed by the eye care professionals to own their nonmedical assets.
Nonmedical assets generally include:
. medical and office equipment
. computer hardware and software
. leasehold interests
. working capital
. medical and office supplies
. financial books and records
. the name of the professional entity owning the center or clinic
In connection with these acquisitions, we enter into a 40-year service
agreement with a professional entity owned by the affiliated eye care
professionals. These agreements require us to provide substantially all of the
business, administrative and financial services necessary to operate the
business functions and affairs of the professional entity. The professional
entity is required to retain a sufficient number of ophthalmologists and
optometrists to provide professional eye care services to its patients. The eye
care professionals retain control of patient treatment decisions. In these
affiliations, we require that the professional entity enter into employment
agreements with its ophthalmologists and optometrists that generally have five-
year initial terms. Typically, these agreements contain restrictions on the eye
care professional's ability to compete with the professional entity, and on his
or her ability to recruit our and their employees or interfere with patient
relationships. These covenants usually survive termination of employment for up
to one year. During the initial terms, ophthalmologists who have an equity
interest in an affiliated professional entity are required to pay liquidated
damages to the affiliated professional entity if they terminate their
employment. Under the terms of our service agreements, we are generally
entitled to
14
<PAGE>
receive liquidated damages payments made to our affiliated professional
entities.
In 1996, including the affiliations with our founding ophthalmology groups
on January 1, 1996, we acquired six eye surgery and laser centers and
affiliated with 13 eye care clinics, including seven optical retail outlets. We
commenced the operations of our optical products purchasing organization, the
NovaMed Alliance, in June 1996.
In 1997, we acquired four eye surgery and laser centers, and affiliated with
14 eye care clinics, including four optical retail outlets. During 1997, our
affiliated eye care professionals closed two eye care clinic locations,
including one optical retail outlet.
In 1998, we affiliated with 21 eye care clinics, including 18 optical retail
outlets. During 1998, our affiliated eye care professionals closed one eye care
clinic location and one optical retail outlet.
In 1999, we have affiliated with two eye care clinics, including two optical
retail outlets. During 1999, our affiliated eye care professionals closed two
eye care clinic locations and one optical retail outlet. We also commenced our
wholesale optical laboratory operations with the acquisition of two wholesale
optical laboratories in January 1999, and acquired our clinical research
business through a purchase of clinical research assets from an affiliated
professional entity effective July 1, 1999. For more information about our
clinical research business, see "Certain Transactions--Purchase of Clinical
Research Contracts" and "Business--Business Operations--Research".
In addition to our affiliations with our founding ophthalmology groups,
these transactions have included the following ophthalmology groups:
St. Louis, Missouri--The Eye Center. Effective November 1, 1996, we acquired
substantially all of the nonmedical assets of an ophthalmology group located in
Florissant, Missouri. In connection with this transaction, we also acquired
substantially all of the assets of an eye surgery and laser center located in
Florissant.
St. Louis, Missouri--Illinois Eye Specialists. Effective November 27, 1996,
we acquired substantially all of the nonmedical assets of an ophthalmology
group with offices in Granite City and Maryville, Illinois. In connection with
this transaction, we also acquired substantially all of the assets of an eye
surgery and laser center located in Maryville.
Richmond, Virginia--Dominion Eye Associates. Effective January 1, 1997, we
acquired all of the issued and outstanding shares of the owner of substantially
all of the nonmedical assets relating to the operation of an ophthalmology
group and of the owner and operator of an eye surgery and laser center located
in Richmond.
Kansas City, Missouri--Hunkeler Eye Centers. Effective March 3, 1997, we
acquired all of the issued and outstanding shares of an entity engaged in the
management of Hunkeler Eye Centers, an ophthalmology group with offices
throughout the Kansas City, Missouri metropolitan area. We also acquired two
eye surgery and laser centers located in Overland Park, Kansas and Kansas City,
Missouri.
Louisville, Kentucky--American Eye Institute. Effective May 1, 1997, we
acquired substantially all of the nonmedical assets of an ophthalmology group
located in New Albany, Indiana. In connection with this transaction, we also
acquired substantially all of the assets of an eye surgery and laser center
located in New Albany.
Kansas City, Missouri--EyeCare Midwest. Effective July 25, 1998, we acquired
substantially all of the nonmedical assets of two ophthalmology groups located
in the Kansas City, Missouri metropolitan area. In connection with the
transaction, the two ophthalmology groups combined their operations into a
single entity.
15
<PAGE>
USE OF PROCEEDS
DIVIDEND POLICY
We estimate that our proceeds from this offering, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us, will approximate $29.1 million, or $35.1 million if the underwriters
exercise their over-allotment option in full. We will use approximately $16.9
million of the net proceeds to repay all of the outstanding principal and
interest on all of our existing bank debt. In addition, the holders of $1.35
million of our subordinated exchangeable promissory notes have elected not to
exchange their notes for shares of our common stock in connection with this
offering. We have the right to redeem these notes for an amount equal to their
outstanding principal plus accrued and unpaid interest as of the date of
redemption. We will use approximately $1.35 million of the net proceeds from
the offering to redeem all of these remaining notes prior to the end of 1999.
After giving effect to this offering, the repayment of our existing bank
debt and the redemption of approximately $1.35 million of our subordinated
notes, we will have no material debt outstanding.
Under the terms of our credit agreement, interest is payable at an annual
rate equal to our lender's published base rate minus 0.50% or LIBOR plus a
range from 1.5% to 2.0%, varying upon our ability to meet financial covenants.
As of June 30, 1999, we had $16.9 million outstanding under our credit
facility. Our credit agreement expires in July 2000.
As of June 30, 1999, the annual interest rate was approximately 6.7%. Our
credit agreement includes a commitment fee of 0.375% for the unused portion
during the commitment period. During the twelve months ended June 30, 1999, we
borrowed approximately $16.9 million under our credit agreement for the
following purposes:
. $9.8 million for the acquisition of two wholesale optical laboratories
and the affiliation with 19 eye care clinics, including 19 optical retail
outlets
. $1.9 million for general working capital
. $5.2 million to repurchase 1,188,414 shares of our Series A convertible
preferred stock at a price of $4.38 per share
We intend to use the remainder of the net proceeds of this offering as
follows:
. For working capital
. To pursue our laser vision correction strategy through:
--New affiliations in our existing and future markets
--Acquisitions in our existing and future markets
--Expanding our patient-consumer directed marketing
--Expanding our eye-only research organization
Though we continuously evaluate potential acquisitions, we have no current
agreement, commitment or understanding with respect to any material
acquisition.
Pending their use, we plan to invest the net proceeds in short-term,
investment-grade, interest-bearing securities.
We have never paid a cash dividend on our common stock. We plan to retain
all future earnings to finance the development and growth of our business.
Therefore, we do not currently anticipate paying any cash dividends on our
common stock. Any future determination as to the payment of dividends will be
at our board of directors' discretion and will depend on our results of
operations, financial condition, capital requirements and other factors our
board of directors considers relevant. Our credit agreement prohibits the
payment of dividends on our common stock.
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<PAGE>
CAPITALIZATION
The table below shows our capitalization as of June 30, 1999. The Pro Forma
column gives effect to:
. the conversion of our convertible preferred stock into our common stock,
which will occur automatically upon completion of this offering
. the issuance of 1,276,314 shares of common stock upon exchange of our
subordinated exchangeable promissory notes
. the additional interest expense, net of tax benefit, of $2.0 million,
which we will record as a reduction in retained earnings for the
discount on the exchange of the subordinated exchangeable promissory
notes.
The As Adjusted column gives further effect to our issuance and sale of
3,500,000 shares of common stock at an assumed initial public offering price of
$9.50 per share, after deducting underwriting discounts and commissions and
estimated offering expenses payable by us, and the application of our net
proceeds from this offering. In addition, the table does not reflect either:
. the 4,986,883 shares of common stock issuable upon exercise of
outstanding options at July 23, 1999 at an average exercise price of
$3.44 per share
. the issuance of 75,000 shares of common stock in connection with the
purchase of our clinical research business, effective July 1, 1999
<TABLE>
<CAPTION>
June 30, 1999
------------------------------
Actual Pro Forma As Adjusted
(In thousands except share
data)
<S> <C> <C> <C>
Cash and cash equivalents....................... $ 864 $ 864 $11,737
======= ======= =======
Current maturities of long-term debt............ $ 150 $ 150 $ 150
------- ------- -------
Long-term debt, less current maturities:
Subordinated exchangeable promissory notes.... $11,050 $ 1,350 $ --
------- ------- -------
Bank debt and other........................... 16,914 16,914 14
------- ------- -------
Redeemable convertible preferred stock:
Series C convertible preferred stock, $.01 par
value, 2,400,000 shares authorized, 2,000,000
issued and outstanding actual, none pro forma
or as adjusted............................... 8,088 -- --
Series D convertible preferred stock, $.01 par
value, 3,000,000 shares authorized, 2,323,837
issued and outstanding actual, none pro forma
or as adjusted............................... 11,818 -- --
Stockholders' equity:
Series A convertible preferred stock, $.01 par
value, 13,112,000 shares authorized,
11,740,055 shares issued and 11,602,698
shares outstanding actual, none pro forma or
as adjusted.................................. 117 -- --
Series B convertible preferred stock, $.01 par
value, 455,000 shares authorized, 400,000
issued and outstanding actual, none pro forma
or as adjusted............................... 4 -- --
Common stock, $.01 par value, 26,000,000
shares authorized; 2,751,254 shares issued,
2,409,708 shares outstanding actual,
20,012,557 pro forma and 23,512,557 as
adjusted..................................... 28 205 235
Additional paid-in-capital.................... 20,224 52,199 78,946
Retained deficit, including $4,215 of
preferred stock accretion.................... (1,332) (3,327) (3,327)
Treasury Stock, at cost, 137,357 shares of
Series A convertible preferred stock actual,
none pro forma or as adjusted; 341,546 shares
of common stock actual and 478,903 pro forma;
no shares of common stock, as adjusted....... (2,346) (2,346) --
Total stockholders' equity.................. 14,223 44,259 73,382
------- ------- -------
Total capitalization........................ $62,243 $62,673 $73,546
======= ======= =======
</TABLE>
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DILUTION
Our pro forma net tangible book value as of June 30, 1999 was approximately
$3.9 million, or $0.20 per share. Pro forma net tangible book value per share
represents the amount of pro forma stockholders' equity, less intangible
assets, divided by the pro forma number of shares of common stock outstanding
as of June 30, 1999. Our as adjusted pro forma net tangible book value as of
June 30, 1999 would have been $33.0 million, or $1.40 per share after giving
effect to the sale of 3,500,000 shares of common stock offered by us at an
initial public offering price of $9.50 per share and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us.
This represents an immediate increase in pro forma net tangible book value
of $1.20 per share to existing stockholders and an immediate dilution in pro
forma net tangible book value of $8.10 per share to investors purchasing our
common stock in this offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per share.............................. $9.50
-----
Pro forma net tangible book value per share before this offering... 0.20
Increase per share attributable to new investors................... 1.20
----
As adjusted pro forma net tangible book value per share after this
offering............................................................ 1.40
-----
Dilution per share to new investors.................................. $8.10
=====
</TABLE>
The table below summarizes, on a pro forma basis, the differences between
our existing stockholders and the new investors purchasing our common stock in
this offering with respect to the total number of shares purchased from us, the
total consideration paid and the average price per share paid, based upon an
initial public offering price of $9.50 per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Paid Per Share
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 20,012,557 85% $52,404,000 61% $2.62
New investors............ 3,500,000 15% 33,250,000 39% $9.50
---------- --- ----------- ---
Total................ 23,512,557 100% $85,654,000 100%
========== === =========== ===
</TABLE>
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
To aid you in your analysis, we are providing the following financial
information. We derived the selected consolidated financial data for the years
ended December 31, 1996, 1997 and 1998 from our audited consolidated financial
statements. The financial data for the year ended December 31, 1995 and for the
six month periods ended June 30, 1998 and 1999 are derived from our unaudited
consolidated financial statements and include, in our opinion, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the data for the periods presented. The following information is only a
summary, and you should read it in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and related notes included in this
prospectus. Specifically, please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for the effects of acquisitions
and affiliations.
<TABLE>
<CAPTION>
Six months
Years ended December 31, ended June 30,
-------------------------------- ----------------
1995 1996 1997 1998 1998 1999
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenue:
Management services....... $ 568 $10,326 $24,401 $36,053 $15,131 $24,426
Surgery and laser
centers.................. -- 5,303 14,484 20,131 8,736 13,290
Product sales and other... -- 221 3,523 7,545 3,418 7,146
------ ------- ------- ------- ------- -------
Total net revenue....... 568 15,850 42,408 63,729 27,285 44,862
------ ------- ------- ------- ------- -------
Operating expenses:
Salaries, wages and
benefits................. 446 8,259 18,123 25,266 10,776 17,448
Cost of sales and medical
supplies................. -- 2,570 8,723 15,762 6,791 12,260
Selling, general and
administrative........... 950 5,044 11,315 14,625 6,512 9,948
Depreciation and
amortization............. -- 806 2,226 3,333 1,480 2,225
------ ------- ------- ------- ------- -------
Total operating
expenses............... 1,396 16,679 40,387 58,986 25,559 41,881
------ ------- ------- ------- ------- -------
Income (loss) from
operations................ (828) (829) 2,021 4,743 1,726 2,981
Other (income) expense..... (21) 83 1,710 1,373 571 1,040
------ ------- ------- ------- ------- -------
Income (loss) before income
taxes..................... (807) (912) 311 3,370 1,155 1,941
Provision for income taxes. -- -- 206 1,664 570 869
------ ------- ------- ------- ------- -------
Net income (loss).......... $ (807) $ (912) $ 105 $ 1,706 $ 585 $ 1,072
Less--Accretion of Series C
and Series D convertible
preferred stock........... -- -- -- (739) (169) (3,476)
------ ------- ------- ------- ------- -------
Income (loss) available to
Series A and Series B
convertible preferred and
common stock.............. $ (807) $ (912) $ 105 $ 967 $ 416 $(2,404)
====== ======= ======= ======= ======= =======
Earnings (loss) per common
share:
Basic..................... $ -- $ -- $ 0.01 $ 0.07 $ 0.03 $ (0.17)
====== ======= ======= ======= ======= =======
Diluted................... $(0.46) $ (0.08) $ 0.01 $ 0.06 $ 0.03 $ (0.17)
====== ======= ======= ======= ======= =======
Weighted average common
shares outstanding:
Basic..................... -- -- 2,178 2,751 2,751 2,471
====== ======= ======= ======= ======= =======
Diluted................... 1,747 11,358 17,237 16,003 16,223 14,374
====== ======= ======= ======= ======= =======
Pro forma earnings per
common share:
Basic..................... $ 0.11 $ 0.07
======= =======
Diluted................... $ 0.10 $ 0.06
======= =======
Pro forma weighted average
number of common shares
outstanding:
Basic..................... 19,937 19,975
======= =======
Diluted................... 21,409 22,563
======= =======
<CAPTION>
As of December 31, As of June 30,
-------------------------------- ----------------
1995 1996 1997 1998 1998 1999
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.. $ 642 $ 5,951 $ 4,009 $ 1,875 $ 4,179 $ 864
Total assets............... 2,034 27,694 52,734 62,679 56,008 71,613
Total debt, excluding
current portion........... -- 6,378 15,838 20,427 15,699 27,964
Redeemable convertible
preferred stock........... -- 5,794 12,680 16,430 15,863 19,906
Total stockholders' equity. 1,786 12,755 18,149 16,954 18,567 14,223
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion along with our consolidated
financial statements and related notes included in this prospectus. Our actual
results, performance and achievements in 1999 and beyond may differ materially
from those expressed in or implied by forward-looking statements contained in
this discussion. These statements are subject to risks, uncertainties and
assumptions described above under the heading "Risk Factors."
Overview
We are an eye care services company focused on laser vision correction. We
operate in the following metropolitan regions: Chicago, Illinois; Kansas City,
Missouri; Louisville, Kentucky; St. Louis, Missouri; and Richmond, Virginia.
Our revenue is earned from three sources:
. management services revenue derived from management fees paid by
affiliated eye care professional entities and reimbursement of expenses
paid or incurred by us on behalf of these entities
. eye surgery and laser center facility fees
. the sale of eye care products and accessories to eye care professionals,
including
--corrective lenses and eyeglasses produced by our three wholesale
optical laboratories, and
--eyeglass frames and contact lenses purchased from manufacturers by our
optical products purchasing organization
We provide services, facilities and equipment to our affiliated eye care
professionals under long-term service agreements. These service agreements
generally have 40-year initial terms and require us to provide substantially
all of the business, administrative and financial services necessary to operate
the eye care clinics and retail optical outlets.
The service agreements provide that our affiliated eye care professionals
retain sole control over:
. the dispensing of all medical and other professional services to their
patients
. decisions relating to selecting, hiring, compensating and terminating eye
care professionals
. corporate governance decisions and other internal matters affecting the
operation of their legal entities
. the employment of a sufficient number of ophthalmologists and
optometrists to provide professional eye care services to their patients
Under the service agreements, we are generally required to pay all expenses
incurred in connection with the business and medical operations of our
affiliated eye care clinics and retail optical outlets, except for the salaries
and benefits of those eye care professionals who have an ownership interest in
the professional entity employing them. Our affiliated eye care professionals
then reimburse us monthly for those expenses that we pay on their behalf.
In addition to reimbursing us for eye care clinic and retail optical outlet
expenses, our affiliated professional entities pay us a monthly fee for our
services. This is generally a targeted monthly fee established in an annual
budget that we negotiate each year with our affiliated eye care professionals.
This targeted monthly fee is adjusted upward or downward in direct proportion
to any positive or negative variance in the actual monthly operating results of
the eye care clinics and optical retail outlets from their respective budgeted
monthly operating results. There are no limitations on the amount of these fee
adjustments. On average, excluding reimbursement of expenses that we pay on
behalf of our affiliated professional entities, the fees paid to us in 1998
represented 35.7% of the earnings before interest and taxes of our affiliated
professional entities. The earnings of an affiliated professional entity are
determined by subtracting the expenses of its eye care clinics and optical
retail outlets from the professional services and other revenues earned by the
professional entity. These expenses generally include all expenses incurred in
connection with the business and medical operations of the professional entity,
except for any salaries and benefits of those eye care professionals who have
an ownership interest in the professional entity. Each professional entity is
then responsible for paying the salaries and benefits of its eye care
professional-owners from the amount retained by the professional entity after
paying our fee. To the extent the targeted monthly fee is adjusted upward or
downward as described above, the amounts retained by the affiliated
professional entities to pay the eye care professional-owners' salaries and
benefits are correspondingly adjusted upward or downward. If in any given month
an affiliated professional entity's
20
<PAGE>
expenses relating to the operation of its eye care clinics and optical retail
outlets exceed the revenue derived from these operations, we would not receive
a management fee from that entity for that month.
We generally do not enter into nominee shareholder arrangements with our
affiliated eye care professionals, nor do we have a "controlling financial
interest" in any of our affiliated eye care professionals' practices as defined
by EITF 97-2, "Applications of FASB Statement No. 94 and APB No. 16 to
Physician Practice Management Entities and Certain Other Entities under
Contractual Management Arrangements." Accordingly, we do not consolidate the
financial statements of the affiliated eye care professionals' practices.
Please see "Business--Business Operations--Services and Products" elsewhere in
this prospectus for a further description of our service agreements.
We generate eye surgery and laser center facility fee revenue on a per
patient basis, and we recognize this revenue at the time of the encounter.
We receive a portion of our eye surgery and laser center revenue, and our
affiliated eye care professionals receive a portion of their revenue, from
Medicare and other third party payors. These amounts often differ from our
established rates and the established rates of our affiliated eye care
professionals. As a result, we are required to estimate the amount that we will
ultimately receive during the period these services are rendered. We recognize
any difference between our estimates and the amount ultimately received in the
period that final settlements are determined. To date, these differences
generally have been immaterial.
In 1998, government sponsored health care programs, directly or indirectly,
accounted for approximately 49% of our revenue, down from approximately 61% in
1997. We expect this share of our revenue to continue to decline, primarily as
a result of continued growth in our facility and service revenue attributable
to laser vision correction surgery.
We sell eye care products and accessories to eye care professionals through
our Optical Services division, which includes our wholesale optical
laboratories and our optical products purchasing organization, the NovaMed
Alliance. We generate wholesale optical laboratories revenue on a per unit
basis and we recognize this revenue upon the shipment of the completed product.
The NovaMed Alliance negotiates volume buying discounts with optical products
manufacturers. We sell products to both affiliated and non-affiliated
ophthalmologists and optometrists; however, sales to our affiliated eye care
professionals are eliminated in the preparation of our financial statements.
The manufacturers ship most of these products directly to the eye care
professionals. We recognize revenue based on the amount billed to the eye care
professionals and recognize expense based on the cost of the products purchased
from the manufacturers.
Our operating expenses consist of salaries, wages and benefits; cost of
sales and medical supplies; selling, general and administrative expense; and
depreciation and amortization. Cost of sales expense relates to the sale of
optical products to patients in our affiliated optical retail outlets, our
wholesale optical laboratories and through the NovaMed Alliance. Medical
supplies expense primarily relates to consumable items that our affiliated eye
care professionals use during surgery. Selling, general and administrative
expense consists primarily of sales and marketing expenses and corporate, eye
care clinic and eye surgery and laser center overhead.
Our operating expenses have fixed, variable and semi-variable components.
Some of the costs associated with operating our eye surgery and laser centers
and affiliated eye care clinics, including rent, utilities and general office
overhead, are fixed and will not change as volumes increase. Other of these
costs, including surgical supplies, cost of sales and pharmaceuticals, will
change in direct proportion to procedure volumes.
Our salaries, wages and benefits contain both fixed and variable cost
components. Employees including corporate and regional personnel, practice
administrators and some practice staff are not directly affected by changes in
procedure volume. On the other hand, the number of eye surgery and laser center
and eye care clinic nurses and technicians we employ generally increases or
decreases in proportion to changes in procedure volume. At the optical
laboratories, the labor component of cost of sales remains relatively fixed
over ranges of production volume.
Product costs in our Optical Services division are mostly variable,
representing the per unit cost of the related materials.
21
<PAGE>
Our revenue has increased significantly since inception, and from 1997 to
1998, we experienced 50.3% revenue growth. The majority of our revenue growth
was a result of higher procedure volumes in both our eye surgery and laser
centers and our affiliated eye care clinics and an increase in the number of
members utilizing the NovaMed Alliance. During 1998, we increased our emphasis
on laser vision correction by initiating full-scale marketing programs aimed at
vision correction patients, developing our affiliations with eye care
professionals and increasing the capacity of our eye surgery and laser centers
to provide laser vision correction and other refractive surgery procedures. We
plan to continue our focus on laser vision correction and, as a result,
anticipate that we will continue to increase expenditures in sales and
marketing, salaries and surgical supplies.
We also plan to continue our investment in the development of our
enterprise-wide information systems, or e-community. This will include
expenditures in people, hardware and software. Our e-community projects under
development, including data warehousing and a provider relationship management
system, are more fully described under "Business--Services and Products--
Information Technology".
The following chart shows the growth in the number of laser vision
correction procedures performed by our affiliated eye care professionals:
NovaMed Eyecare, Inc.
Quarterly Laser Vision Correction Procedures
When we affiliate with eye care professionals, we generally:
. acquire their non-medical assets and, in some cases, their eye surgery
and laser centers
. hire their non-medical personnel
. assume their office leases
. enter into service agreements with affiliated professional entities that
have an initial term of 40 years
In addition, we have acquired other businesses, including Midwest Uncuts,
Inc., our wholly-owned subsidiary that owns and operates two of our wholesale
optical laboratories. We allocate the purchase price paid in these affiliations
and acquisitions to all of the identifiable tangible and intangible assets
acquired based upon their relative fair value, with the remainder being
ascribed to service agreements. We determine the appropriate useful life of the
intangible assets resulting from affiliations by considering factors including:
. the number of physicians in each eye care clinic
. the number of eye care clinics
. the clinics' ability to recruit additional physicians
. the clinics' relative market position
. the length of time each eye care clinic has been in existence
. the relative profitability of the practice
. the term of the service agreement
Effective January 1, 1998, we changed our estimate of the useful lives of
intangible assets related to our service agreements entered into on or before
January 1, 1998, from 32 years to 25 years. We made this change to conform our
policy with policies adopted by other healthcare services companies during 1998
and to better represent the useful lives of the service agreements. We now
expect to amortize all future intangible assets related to affiliations with
eye care professionals over a 5 to 25 year period. We amortize goodwill
resulting from acquisitions of nonmedical assets over a 25 to 40 year period.
22
<PAGE>
The timing and degree of fluctuations in our quarterly operating results
will depend on several factors, including:
. decreases in demand for non-emergency procedures due to severe weather
. availability or sudden loss of the services of our affiliated eye care
professionals
. availability or shortages of laser and other vision correction surgery-
related products and equipment
. the timing and relative size of acquisitions and affiliations with eye
care professionals
Effective Income Tax Rate
Our effective income tax rate reflects the impact of nondeductible
amortization expense. To the extent our pre-tax profitability continues to
rise as a result of growth in our operating earnings, we expect our effective
tax rate to continue to decline over time to a level of approximately 40%.
Effect of Transactions Relating to this Offering
The holders of our Series C and Series D convertible preferred stock have
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 our control, generally
accepted accounting principles require that until the redemption date, we
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
our accompanying consolidated financial statements to arrive at the income
available for common stockholders. Although we have not had an independent
appraisal, we have estimated the potential future redemption value based upon
various transactions with third parties and through comparison to similar
public companies within our market. Based upon our estimates, we have recorded
accretion of $739,000 and $3,476,000 for the twelve months ended December 31,
1998 and the six months ended June 30, 1999, respectively. Completion of this
offering, however, will result in the automatic conversion of each share of
our Series C and Series D convertible preferred stock into one share of our
common stock and the termination of the related redemption rights. We will
continue to record the accretion through the completion of this offering. We
will record the final charge for accretion upon the completion of this
offering.
$9.7 million of our subordinated exchangeable promissory notes will be
exchanged for our common stock in connection with this 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.
Generally accepted accounting principles require that we record the net
difference between the $1.00 worth of common stock and the $0.80 worth of
outstanding principal on the note as a non-recurring, non-cash expense.
Accordingly, we will record in our results of operations for the three months
ended September 30, 1999, additional interest expense of $2.0 million, net of
tax benefits, related to the discount on the exchange of the notes.
During July 1999, we fully vested all options granted from February 1, 1999
through July 23, 1999, contingent on the completion of this offering. We
issued options to acquire 1,075,800 shares of our common stock during this
time period. Accordingly, we expect to record $1.6 million, net of tax, as
compensation expense during the quarter in which this offering is completed
related to those options which become fully vested on the date of the
completion of this offering.
Results of Operations
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
Net Revenue. Net revenue increased 64.4% from $27.3 million to $44.9
million. Management services revenue increased 61.4% from $15.1 million to
$24.4 million. The increase in management services revenue was primarily a
result of new affiliations with eye care professionals as well as overall
increases in laser vision correction, cataract and other ophthalmic surgery
procedures performed by our affiliated eye care professionals. Surgery and
laser center revenue increased 52.1% from $8.7 million to $13.3 million,
primarily as a result of a 165.4% increase in laser vision correction
procedures, compared to the first six 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. For the six
months ended June 30, 1999, we had 18 affiliated eye care professionals
performing laser vision correction procedures compared to eight for the same
period in 1998. We also experienced a 33.4% increase in the number of cataract
and other eye related surgical procedures, compared to the six
23
<PAGE>
months ended June 30, 1998. Product sales revenue increased 109.1% from $3.4
million to $7.1 million, primarily as a result of the acquisition of Midwest
Uncuts, Inc.
Salaries, Wages and Benefits. Salaries, wages and benefits expense increased
61.9% from $10.8 million to $17.4 million. As a percentage of revenue,
salaries, wages and benefits expense decreased from 39.5% to 38.9%. The
absolute increase in salaries, wages and benefits expense primarily reflects
the additional payroll incurred as a result of new acquisitions and
affiliations. 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 80.5% from $6.8 million to $12.3 million. As a percentage of
revenue, cost of sales and medical supplies expense increased from 24.9% to
27.3%. 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 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.
Selling, General and Administrative. Selling, general and administrative
expense increased 52.8% from $6.5 million to $9.9 million. As a percentage of
revenue, selling, general and administrative expense decreased from 23.9% to
22.2%. 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. In addition, we
increased our information technology expenditures related to our enterprise-
wide information systems and other programs supporting our laser vision
correction business. Increases in laser vision correction procedure volumes led
to improvement in selling, general and administrative expense as a percentage
of revenue.
Depreciation and Amortization. Depreciation and amortization expense
increased 50.3% from $1.5 million to $2.2 million. Acquisitions and
affiliations have increased overall amortization expense.
Other Expense. Other expense increased 82.0% from $571,000 to $1.0 million.
The increase in other expense was primarily related to higher interest expenses
resulting from additional borrowings, which were used primarily to fund
acquisitions and affiliations entered into after the first six months ended
June 30, 1998.
Provision for Income Taxes. Our effective tax rate decreased to 44.8% from
49.4%.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Net Revenue. Net revenue increased 50.3% from $42.4 million to $63.7
million. Management services revenue increased 47.8% from $24.4 million to
$36.0 million. The increase in management services revenue was primarily
related to new affiliations with eye care professionals as well as overall
increases in laser vision correction, cataract and other eye related surgical
procedures performed by our affiliated 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 39.0% from $14.5 million to $20.1 million, primarily related
to better utilization of our surgery and laser centers and a 503.5% increase in
laser vision correction procedures, compared to the year ended December 31,
1997. In addition, we experienced a 24.1% increase in the number of cataract
and other eye related surgical procedures, compared to the year ended December
31, 1997. Product sales revenue increased 114.2% from $3.5 million to $7.5
million, primarily as a result of higher volumes at the NovaMed Alliance.
Salaries, Wages and Benefits. Salaries, wages and benefits expense increased
39.4% from $18.1 million to $25.3 million. As a percentage of revenue,
salaries, wages and benefits expense decreased from 42.7% to 39.6%.
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 second half of 1998 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 our laser vision correction services and
facilities business.
24
<PAGE>
Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased approximately 80.7% from $8.7 million to $15.8 million. As a
percentage of revenue, cost of sales and medical supplies expense increased
from 20.6% to 24.7%. The absolute increase in these expenses during 1998 was
primarily related to the 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 the
NovaMed Alliance, which generally sells products with a higher cost of sales as
a percentage of revenue than our other sources of revenue. We expect cost of
sales and medical supplies expense, as a percentage of revenue, to decline as a
result of faster revenue growth from laser vision correction compared to our
other sources of revenue.
Selling, General and Administrative. Selling, general and administrative
expense increased approximately 29.3% from $11.3 million to $14.6 million. As a
percentage of revenue, selling, general and administrative expense decreased
from 26.7% to 22.9%. The absolute increase in selling, general and
administrative expenditures related primarily to investments in information
technology and marketing to support our growth related to laser vision
correction. 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. We expect to continue our information technology and
marketing expenditures to further support the growth of our laser vision
correction services and facilities business.
Depreciation and Amortization. Depreciation and amortization expense
increased 49.7% from $2.2 million to $3.3 million. Increased capital spending,
acquisitions and a change in the estimated useful life of intangible assets
caused this increase. Effective January 1, 1998, we decreased our useful life
of intangible assets related to service agreements entered into, on or before
January 1, 1998, from 32 to 25 years, which added $250,000 to amortization
expense in 1998.
Other Expense. Other expense decreased 19.7% from $1.7 million to $1.4
million. Other expense was primarily related to interest expense, resulting
from additional borrowings used primarily to fund acquisitions and capital
expenditures. In addition, in 1997 we recorded a one-time expense of $589,000
for the disposition of fixed assets.
Provision for Income Taxes. Our effective tax rate declined from 66.2% to
49.4%.
Years Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Net Revenue. Net revenue increased 167.6% from $15.9 million to $42.4
million. Management services revenue increased 136.3% from $10.3 million to
$24.4 million. Surgery and laser center revenue increased 173.1% from $5.3
million to $14.5 million. The increase in management services and surgery and
laser center revenue was primarily a result of new affiliations with eye care
professionals. In addition, sales through the NovaMed Alliance, which began
operations during the fourth quarter of 1996, were $3.5 million.
Salaries, Wages and Benefits. Salaries, wages and benefits expense increased
approximately 119.4% from $8.3 million to $18.1 million. As a percentage of
revenue, salaries, wages and benefits expense decreased from 52.1% to 42.7%.
The absolute increase in salaries, wages and benefits expense reflected the
additional payroll incurred as a result of new acquisitions and affiliations.
The decrease in salaries, wages and benefits expense as a percentage of revenue
was primarily a result of having an increased revenue base in 1997.
Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased approximately 239.4% from $2.6 million to $8.7 million. As a
percentage of revenue, cost of sales and medical supplies expense increased
from 16.2% to 20.6%. The optical retail outlets of our affiliated eye care
professionals accounted for the majority of the cost in 1996. The absolute
increase in the cost of sales was primarily a result of a higher volume of
sales at the NovaMed Alliance. The increase in cost of sales and medical
supplies expense as a percentage of revenue was caused by the NovaMed Alliance,
which sells products at a higher cost of
25
<PAGE>
sales as a percentage of revenue than the optical retail outlets of our
affiliated eye care professionals. The significant increase in medical supplies
expense was primarily related to new affiliations with eye care professionals.
Selling, General and Administrative. Selling, general and administrative
expense increased approximately 124.3% from $5.0 million to $11.3 million. As a
percentage of revenue, selling, general and administrative expense decreased
from 31.8% to 26.7%. The absolute increase in selling, general and
administrative expense was primarily a result of new affiliations with eye care
professionals. The remainder of the increase was a result of expenditures
related to building our corporate infrastructure.
Depreciation and Amortization. Depreciation and amortization expense
increased 176.2% from $806,000 to $2.2 million. Acquisitions, affiliations and
increased capital spending caused this increase.
Other Expense. Other expense increased from $83,000 to $1.7 million. The
increase was primarily related to increased interest expense, which resulted
from the issuance of subordinated exchangeable promissory notes issued in
connection with affiliations with eye care professionals. In addition, we
recorded a one-time expense of $589,000 in 1997 for a loss on the disposition
of fixed assets.
Provision for Income Taxes. During a majority of 1996, we operated as a
limited liability company and, accordingly, we passed along any tax benefit or
expense to our members. We converted to a tax paying entity at the end of 1996
and incurred a taxable loss from the date of the conversion to the end of the
year. We did not, however, record any tax benefit, which would have resulted
from our net operating loss carry-forward. Instead, we recorded a valuation
allowance against the associated tax benefit. Moreover, on a pro forma basis,
had we been a tax paying entity for all of 1996, we would not have recorded any
tax benefit that would have resulted from the net operating loss carry forward
due to future uncertainties. In 1997, our effective tax rate was 66.2%.
Liquidity and Capital Resources
We generated cash from operating activities for the six months ended June
30, 1999 of $1.0 million. We used $9.8 million in our investing activities
during the six months ended June 30, 1999, which included two acquisitions and
the purchase of property and equipment. We used net bank borrowings of $8.4
million, the proceeds from the issuance of stock, and net cash from operating
activities to fund our investing activities and to reduce subordinated debt and
other debt obligations. As of June 30, 1999, we had cash and cash equivalents
of approximately $864,000 and working capital of approximately $10.5 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 June 30, 1999, the annual rate was approximately 6.7%. 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.
Except for our failure to comply from time to time with covenants relating to
immaterial administrative matters for which we have received waivers, we have
never been in default under our credit agreement. As of June 30, 1999, we were
in compliance with all of our credit agreement covenants. We had $16.9 million
outstanding as of June 30, 1999.
During 1998, we repurchased 1,188,414 shares of our Series A convertible
preferred stock at a price of $4.38 per share, providing liquidity to some of
the Series A stockholders.
Also during 1998, some holders of our Series C convertible preferred stock
exercised a warrant to acquire 684,932 shares of our Series D convertible
preferred stock at $4.38 per share.
We expect that the proceeds from this offering, our funds from operations
and our existing revolving credit facility will be sufficient to fund our
operations for at least 12 months. Our future capital requirements and the
adequacy of our available funds will depend on many factors, including the
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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 July 31, 1999, we have entered into commitments to
pay Summit approximately $7.0 million during the term of these commitments,
with $5.6 million remaining to be paid.
We currently have outstanding loans to six affiliated eye care professionals
for an aggregate amount of $785,194. We anticipate that one of the selling
stockholders will repay approximately $490,000 of these loans out of his
proceeds of this offering. Although we are not required to do so under our
service agreements, we have from time to time made loans to our affiliated eye
care professionals to cover cash flow needs. These loan agreements are full
recourse and are negotiated on an individual basis with interest rates ranging
from 8.5% to 9.5% per annum. The loans are generally secured by collateral
ranging from any of our stock owned by the eye care professional to any
compensation due and owing the professional for services provided. These types
of loan arrangements may arise from time to time in the future.
We currently have outstanding $11.05 million of subordinated exchangeable
promissory notes. In connection with this offering, $9.7 million of our
subordinated exchangeable promissory notes will be exchanged for shares of our
common stock. The remaining $1.35 million of these notes will remain
outstanding after this offering but according to their terms, these notes will
no longer be convertible or exchangeable. We have the right to redeem these
notes for an amount equal to their outstanding principal plus accrued and
unpaid interest as of the date of redemption. We will use approximately $1.35
million of the net proceeds from the offering to redeem all of these remaining
notes prior to the end of 1999.
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.
Recent Accounting Pronouncements
In March 1998, the Accounting Standards Committee issued AICPA Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". This statement provides guidance on accounting for
the costs of computer software developed or obtained for internal use and
identifies characteristics of internal use software as well as assists in
determining when computer software is for internal use. SOP 98-1 is effective
for fiscal years beginning after December 15, 1998, with earlier application
permitted. We adopted SOP 98-1 during 1998, and it did not have a material
effect on our financial statements.
In March 1998, the Accounting Standards Committee issued AICPA Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities". This statement
provides guidance on the financial reporting of start-up costs and organization
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costs. It requires that the cost of start-up activities and organization costs
be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, with earlier application permitted. We do not expect the
adoption of this SOP to have a material impact on our financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
changes the previous accounting definition of derivative which focused on
freestanding contracts, including, for example, options and forwards, and
futures and swaps, expanding it to include embedded derivatives and many
commodity contracts. Under the statement, every derivative is recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
133 is effective for fiscal years beginning after June 15, 1999. We do not
anticipate that the adoption of SFAS 133 will have a material impact on our
financial position or results of operations.
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
1999. Two of the eye care clinics of our affiliated eye care professionals in
the St. Louis region currently use management systems that are not year 2000
compliant. We expect to equip these facilities with our year 2000 compliant
management systems by the end of September. If we are not able to complete the
integration of these facilities into our management systems as scheduled, this
may adversely affect our ability to seek reimbursement from Medicare and other
third party payors on a timely basis for these affiliated eye care clinics,
although we believe this effect would not be material to us because these two
facilities do 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 eye
surgery and laser centers or the eye care clinics of our affiliated eye care
professionals are
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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 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 dates 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. We expect to complete the assessment
phase of our physical facility systems during the third quarter of 1999, with
remedial action planned during the fourth quarter of 1999.
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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BUSINESS
Our Business
We are an eye care services company focused on laser vision correction. We
operate in the following metropolitan regions: Chicago, Illinois; Kansas City,
Missouri; Louisville, Kentucky; St. Louis, Missouri; and Richmond, Virginia.
Our Industry
The eye care market consists of a large, diverse group of services and
products. The eye care services market includes routine eye examinations as
well as diagnostic and surgical procedures that address complex eye and vision
conditions. The most common conditions addressed by eye care professionals are
nearsightedness, farsightedness and astigmatism. Other frequently treated
conditions include cataracts, glaucoma, macular degeneration and diabetic
retinopathy. Eye and vision conditions are typically treated with surgery,
pharmaceuticals, prescription glasses, contact lenses or some combination of
these treatments. Additional services offered by eye care professionals include
research services for eye care devices or pharmaceuticals being developed or
tested in clinical trials. The optical products market consists of the
manufacture, distribution and sale of optical goods including corrective
lenses, eyeglasses, frames, contact lenses and other optical products and
accessories.
In the U.S., eye care services and products have traditionally been
delivered through a well developed, but fragmented, system of local
professionals, including individual or small groups of optometrists and
ophthalmologists. Optometrists complete four years of optometry school and are
generally licensed to perform routine eye examinations, determine visual
acuity, prescribe corrective eyewear and, in most states, prescribe specified
ophthalmic pharmaceuticals. Optometrists are not licensed to perform surgery,
but often provide pre- and post-operative care. Ophthalmologists must complete
four years of medical school and obtain an M.D. degree, and are licensed to
perform surgery as well as to prescribe pharmaceuticals and perform other
diagnostic eye care services. There are approximately 32,000 practicing
optometrists and 22,000 practicing ophthalmologists in the U.S.
Eye care professionals typically perform eye examinations in an office or
clinic setting. For surgical procedures, ophthalmologists frequently will
schedule operating room time in a hospital or ambulatory surgery center
including, for example, one of our eye surgery and laser centers.
Ophthalmologists frequently perform laser vision correction, cataract and other
eye related surgical procedures on an outpatient basis. As a result, there are
a number of ambulatory surgery centers focused on ophthalmology.
Eye care represents one of the largest health care service and product
markets in the U.S. According to industry sources, over 161 million people in
the U.S. require vision correction. Annual spending for health care costs
associated with eye and vision conditions is approximately $38.4 billion, while
annual spending on retail optical products is an additional $16.3 billion,
representing a total market of approximately $55 billion.
We expect the eye care market to continue to grow for the following reasons:
. Rapid Acceptance of New Technologies and Procedures and Increasing Demand
for Vision Correction Surgery. With the emergence of improved laser
vision correction technologies, the market for vision correction surgery
has been expanding rapidly. From 1996 to 1998, the number of laser vision
correction procedures performed annually increased from approximately
100,000 to 450,000.
. Continued Development of Improved Medical Technologies and
Pharmaceuticals. New medical technologies and pharmaceuticals have led to
earlier detection and improved treatment of many of the most common eye
and vision conditions, with fewer complications or side effects. New
technologies are in development that are expected to expand the access
to, and the effectiveness of, treatments, particularly the treatment of
refractive and cataract conditions.
. Aging of the Population. The incidence of eye disease, including
refractive and cataract disorders, increases substantially with age.
Increases in average life expectancy, combined with the aging of the baby
boom population, are expected to lead to an increase in the number of
adults over the age of 55. According to Frost & Sullivan, 19.5% of the
U.S. population in the year 2005 is
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forecasted to be between the ages of 55 and 74, with 94% of this age group
forecasted to be suffering from some type of refractive condition.
. Improved Patient Awareness. With the expansive amount of medical
information that has become available, patients have and continue to
become increasingly educated and aware of the different types of eye and
vision conditions and how they can be treated.
Vision Correction Surgery
Radial Keratotomy, or RK, introduced in the U.S in the 1970s, was the first
surgical technique approved for vision correction. RK procedures require a
delicate surgical technique and significant physician training, and the
procedure can result in the instability of the eye over a period of months to
years.
Recently, new surgical technologies and techniques have been introduced for
surgical correction of common vision conditions which result from the improper
curvature of the cornea. If the cornea's curvature is not correct, the cornea
cannot properly focus the light passing through it onto the retina, and the
person will see a blurred image. The three most common refractive conditions
are:
. myopia, commonly referred to as nearsightedness, which is caused by a
steepening of the cornea, resulting in the blurring of distant objects
. hyperopia, commonly referred to as farsightedness, which is caused by a
flattening of the cornea, resulting in the blurring of close objects
. astigmatism, in which images are not focused on any point due to the
varying curvature of the eye along different axes, which results in a
distorted view of images
Use of an excimer laser to alter the curvature of the cornea has become the
most common method of surgical vision correction. Although not approved in the
U.S. for general use until 1996, Photorefractive Keratectomy, or PRK, was
introduced abroad in 1988, as the first vision correction surgery that used
laser technology. PRK offers several advantages over RK, including a shorter,
simpler procedure, a less substantial training requirement for ophthalmologists
and fewer complications. However, the procedure proved to be more painful and
typically required three to six weeks of recovery time before full visual
acuity was restored, with the potential that full benefit of the procedure
would not be realized for up to six months.
Laser In-Situ Keratomileusis, or LASIK, was introduced in 1996, leading to a
dramatic increase in the popularity of laser vision correction surgery. LASIK
offers the ease-of-use benefits to ophthalmologists afforded by PRK, while
providing:
. significant reductions in patient pain or discomfort
. patient recovery times ranging from a few hours after the procedure to
two weeks
. reduced complication rates
In the LASIK procedure, an ophthalmologist uses an automated microsurgical
instrument to peel back a thin layer of corneal tissue which remains hinged to
the eye. A number of laser pulses are then applied to the cornea to remove
tissue and thereby correct the patient's vision by flattening the shape of the
cornea in nearsighted patients and steepening the shape of the cornea in
farsighted patients. After the surgeon replaces the layer of corneal tissue, no
bandages are required and most patients experience virtually no discomfort. A
LASIK procedure typically takes 10 to 15 minutes from set-up to completion,
with the length of time of the actual laser treatment lasting 15 to 90 seconds,
depending on the degree of correction required. LASIK is performed in an
outpatient setting, with only topical anesthesia. Only ophthalmologists are
licensed to perform LASIK, although optometrists are actively involved in
identifying appropriate candidates for the procedure and in providing pre- and
post-operative care.
The number of vision correction procedures performed in the U.S. has
expanded rapidly since 1996, primarily as a result of the advantages of the
LASIK procedure. Spectrum Consulting estimates that, in 1998, eye care
professionals performed approximately 450,000 laser vision correction surgery
procedures in the U.S., representing an increase of 97.4% over the number of
procedures performed in 1997. Spectrum Consulting also forecasts that eye care
professionals will perform approximately 950,000 and 1.4 million laser vision
correction procedures in the U.S. in 1999 and 2000, respectively. Despite this
rapid growth, the number
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of vision correction surgery patients in 1998 represented less than 0.2% of the
161 million people with refractive vision conditions in the U.S.
The following chart shows the growth in the number of laser vision
correction procedures performed in the U.S. from 1996 through 1998 and the
number of procedures forecasted for 1999 and 2000 by Spectrum Consulting:
[Bar Chart Appears Here]
Despite this rapid growth, the estimated number of vision correction surgery
patients in 1998 represented less than 0.2% of the 161 million people with
refractive vision conditions in the U.S. Based on an average price per eye of
$2,200 for a LASIK procedure, if 1% of the estimated 161 million people that
have refractive vision conditions in the U.S. elected to have a laser vision
correction procedure on both eyes, the potential value of the laser vision
correction market would exceed $7 billion. Further, unlike other eye-related
surgical procedures, vision correction surgery is an elective procedure that
patient-consumers pay for out-of-pocket.
We expect several factors to continue to expand the vision correction
surgery market for the next several years. Market penetration remains low, but
is expected to increase. We believe that high patient satisfaction with the
LASIK procedure has generated many word-of-mouth patient referrals for our
affiliated eye care professionals. In addition, improved laser technologies are
in development or are about to be approved that address other eye and vision
conditions including farsightedness and astigmatism. New technologies also have
recently been introduced that provide patients and physicians with even more
treatment options and are expected to expand the potential market. For example,
the intrastromal corneal ring, or Intacs(TM), which was commercially introduced
in the U.S. in April 1999, is a non-laser surgical technique approved to treat
nearsightedness.
Other Eye Care Services
Cataract Surgery. Cataract surgery is currently the most widely performed
surgical procedure in the U.S. A cataract occurs when the normally transparent
lens of the eye becomes cloudy as part of the aging process. In cataract
surgery, the ophthalmologist removes the clouded natural lens and replaces it
with a synthetic intraocular lens. Cataract surgery is typically performed on
an outpatient basis using local anesthesia, and the procedure time is typically
less than 30 minutes. According to the American Society of Cataract and
Refractive Surgery, more than 60% of people over the age of 60 have some degree
of cataract formation. In 1997, over 2.3 million cataract procedures were
performed in the U.S. Cataract procedures are expected to continue to increase
for the next several years, driven primarily by the aging of the population and
the introduction of improved technologies and surgical techniques. With the
preponderance of cataract surgery patients being over the age of 65, the
Medicare program has been the primary source of reimbursement for cataract
surgery providers.
Other Eye Disorders. Other common eye disorders include glaucoma, macular
degeneration and diabetic retinopathy. Glaucoma is one of the leading causes of
preventable blindness in the U.S., and the single most common cause of
blindness among African-Americans. Approximately 3 million people in the U.S.
are believed to have glaucoma, while only 1 million have currently been
diagnosed with the disease. By 2030, industry sources project that the number
of glaucoma cases diagnosed will double, primarily as a result of the aging of
the general population and an increase in the average life span. Age-related
macular degeneration is the leading cause of visual impairment for persons age
75 and older, and it is the most common cause of new cases of visual impairment
among those over age 65. Diabetic retinopathy is a leading cause of vision loss
and blindness. More than 40% of patients with diabetes for 15 years or more
have some degree of blood vessel damage which may result in diabetic
retinopathy. Incidence of this disease is expected to increase dramatically as
a result of a growing number of patients diagnosed with diabetes. Treatment of
these eye and vision conditions is generally reimbursed by Medicare and other
third party payors.
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Optical Services and Products
While the number of patient options for vision correction has increased with
improved surgical vision correction technologies and techniques, the market for
basic optical goods including corrective lenses, eyeglass frames, contact
lenses and other optical products and accessories, remains a significant
market. According to the Vision Council of America, consumers spent
approximately $16.3 billion on eyewear in 1998, up 5.8% from approximately
$15.4 billion in 1997. Eyeglass frames are typically sold through retail
optical outlets located in optometrist and ophthalmologist clinics, as well as
through retail stores.
Challenges Faced By Eye Care Providers
Recent advances in medical technology and surgical procedures for vision
correction have significantly increased consumer demand for laser vision
correction surgery. Ophthalmologists face a number of significant challenges in
meeting and capitalizing on this demand, including:
. maintaining their existing patient and procedure base while developing a
laser vision correction surgery practice
. developing marketing expertise in order to promote their services to
patient-consumers
. purchasing, or otherwise gaining access to, expensive laser vision
correction surgery equipment, including excimer laser systems that Frost
& Sullivan reports are priced in the range of $500,000
. adapting to the latest advances in laser vision correction technology and
procedures, as well as establishing and maintaining a level of expertise
with new technologies and procedures
. maintaining an efficient division of labor by partnering with, or
recruiting, additional ophthalmologists to perform surgery and
optometrists to provide pre- and post-operative care to laser surgery
patients
Our Strategy
Our goal is to become the leading laser vision correction services and
facilities company in each of our existing and future regional markets. We have
tailored our business model to focus on establishing and maintaining
contractual affiliations with leading eye care professionals in each of our
regional markets.
Our Business Model
We have focused on building regional clusters of eye surgery and laser
centers and affiliated eye care professionals. We structure these regional
clusters to achieve a hub and spoke configuration of affiliated eye care
professionals around our eye surgery and laser centers. We believe our business
model provides us with several advantages in assisting our affiliated eye care
professionals in developing a laser vision correction practice. These
advantages include our ability to:
. establish and maintain long-term relationships with leading
ophthalmologists and optometrists through access to our eye surgery and
laser centers, clinical research capability and range of business,
administrative and financial services
. assist our affiliated eye care professionals in establishing regional
market leadership in laser vision correction through our clinical
research, information technology and marketing know-how
. provide our affiliated eye care professionals with the benefits of
regional brand recognition
. create multiple sources of revenue through the range of business,
administrative and financial services and eye care products that we offer
We work with our affiliated eye care professionals to develop a patient-
consumer approach that we believe benefits not only the growth of their laser
vision correction practices, but all aspects of their continuum of eye care
services, ranging from basic eye examinations to the treatment of complex eye
and vision conditions.
We have implemented our business model in each of our existing regional
markets, building around the following key components:
Long-term affiliations with leading eye care professionals. We believe the
combination of access to our eye surgery and laser centers, clinical research
programs and the full range of business,
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administrative and financial services that we offer enhances our ability to
affiliate with leading eye care professionals in each of our markets. In
addition, we are working with our affiliated eye care professionals within
particular markets to reorganize their existing medical practices into a single
legal and business entity in that market. We believe that having a single
entity in each of our markets permits an efficient consolidation of fixed
overhead and staff, implementation of a common information technology system,
effective division of labor among ophthalmologists and optometrists, and
establishment of a unified entity for marketing and branding purposes.
Eye surgery and laser centers. We currently operate 10 eye surgery and laser
centers, each of which is a wholly-owned, licensed ambulatory surgical center.
Each of our eye surgery and laser centers is located adjacent to a clinic of
one of our affiliated eye care professionals. These eye surgery and laser
centers are designed to meet the demands of high volume eye surgeons, including
surgeons focusing on laser vision correction. We believe that access to fully
licensed ambulatory surgical centers in each of our markets provides our
affiliated eye care professionals with a long-term competitive advantage since
the centers are designed to efficiently accommodate a wide range of current and
emerging surgical vision correction procedures and avoid relying on any
particular technology or procedure.
We believe we are well positioned to capture increased laser vision
correction procedure volume and revenue in each of our eye surgery and laser
centers. Currently, we have three eye surgery and laser centers that are
approaching full utilization based upon a five day, eight hour per day work
week. We can create further capacity in these three centers by extending
surgery hours, adding surgery days, or adding additional lasers and related
surgical equipment. Our other seven centers currently operate at an average
utilization rate of 30%. In the future, when needed, we can increase the
capacity of these seven centers in a manner similar to the other three. We also
have additional capacity through our operation under service agreements of two
laser vision correction centers where affiliated eye care providers perform
laser vision correction surgery.
Clinical research. Our eye-only research organization provides clinical and
other research services to eye care device, product and pharmaceutical
manufacturers, with an emphasis on laser vision correction and other refractive
technologies. We believe our clinical research capability permits us and our
affiliated eye care professional entities to:
. attract and retain leading ophthalmologists and optometrists who seek the
professional challenge associated with participating in clinical research
activities
. preview emerging vision correction and other ophthalmic technologies and
adjust our business model and strategy accordingly
. become early adapters to the latest technologies and procedures, thus
enhancing our affiliated eye care professionals' patient care
. establish a quality brand name and regional market leadership for our
affiliated eye care professionals in vision correction surgery
Business, administrative and financial services. We have established
business, administrative and financial services which, we believe, have helped
us to attract and retain leading ophthalmologists and optometrists. We believe
that these services have helped generate significant growth in laser vision
correction surgery revenue for our affiliated eye care professionals. These
services include information technology, provider and patient-consumer directed
marketing, office staffing services, professional and staff recruiting
services, surgeon and staff training and optical products and services.
Our Growth Strategy
We are focused on the rapidly growing U.S. market for laser vision
correction surgery and our goal is to become the leading laser vision
correction services and facilities company in each of our existing and future
regional markets. We intend to achieve this goal by continuing to establish
contractual affiliations with leading eye care professionals and by
implementing a growth strategy which includes the following specific
components:
Expanding our presence in existing regional markets. We believe that there
are significant growth opportunities in our existing regional
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markets. We believe that the following factors will drive this growth:
. increasing demand for, and patient-consumer acceptance of, laser vision
correction surgery
. significant expansion of our marketing services, including patient-
consumer directed marketing designed to enhance awareness of the laser
vision correction expertise of our affiliated eye care professionals and
the full range of eye care services that they offer
. acquiring existing or establishing new eye surgery and laser centers
. acquiring existing or establishing new laser vision correction centers
. contractual affiliations with additional ophthalmologists and
optometrists
. continued development and implementation of our business, administrative
and financial services
Selectively targeting and entering new regional markets. We believe our
management team's experience in building and developing successful eye care
businesses will enable us to effectively identify additional markets in which
to build regional clusters of eye surgery and laser centers and affiliated eye
care professionals. We intend to enter new markets through multiple avenues,
including:
. acquiring existing or establishing new eye surgery and laser centers
. acquiring existing or establishing new laser vision correction centers
. entering into contractual affiliations with leading ophthalmologists and
optometrists
. developing and implementing our business, administrative and financial
services in each new region
Providing patient-consumer directed marketing support to our affiliated eye
care professionals. We believe our affiliated eye care professionals have
experienced improved market share as a result of our patient-consumer directed
marketing support, and we intend to continue to invest in these programs. Our
regional marketing activities include:
.direct to patient-consumer advertising
. patient seminars on laser vision correction
. centralized toll free call centers
. corporate and group sales
all of which are designed to create consumer brand awareness for us and our
affiliated eye care professionals. This marketing support allows our affiliated
eye surgeons to reach a broader range of new patients with the latest
information concerning laser vision correction, as well as traditional eye care
services. We also assist affiliated eye surgeons in establishing procedures for
co-managing patients with optometrists. This provides eye surgeons with an
opportunity to focus on surgery and better leverage their time, while also
allowing patients to elect to have their optometrist participate in their
continuing care.
Capitalizing on and expanding our eye-only research organization. Our
research activities provide our affiliated eye care professionals with early
access to, and experience with, the latest vision correction technologies in
advance of many competing eye surgeons. We believe that there are significant
growth opportunities for the research business because of the prevalence of new
eye care devices, products and pharmaceuticals in development, and the demand
among eye care device, product and pharmaceutical companies for these types of
services. We believe that we will be able to use our marketing, information
systems and management experience to further pursue these growth opportunities.
We further believe that these research opportunities will expand as we continue
to affiliate with leading ophthalmologists and optometrists in both our
existing and future markets. As we grow, we plan to expand our clinical
research activities to other regions and more actively market our research-
related services to eye care device, product and pharmaceutical companies.
Continuing to develop and implement business, administrative and financial
services to enhance laser vision correction growth. We believe that our full
complement of business, administrative and financial services will continue to
provide us with an advantage in attracting, affiliating and maintaining
affiliations with leading ophthalmologists and optometrists. These services
include:
. information technology
. provider and patient-consumer directed marketing
. clinic and office staffing services
. professional and staff recruiting services
. surgeon and staff training
. optical products and services
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We also expect to build upon this portfolio of services. In 1999, we plan to
implement new information technology offerings including an intranet-based
patient marketing and scheduling system, patient outcomes tracking and an
optical point-of-sale system. All of these will be integrated into our new,
enterprise wide e-community and data warehouse.
Business Operations
Eye Surgery and Laser Centers
We operate 10 eye surgery and laser centers, each of which is a wholly-
owned, licensed ambulatory surgical center. Eye care professionals perform
laser vision correction, cataract and other eye related surgical procedures at
our eye surgery and laser centers. We currently have nine excimer lasers in
service and an additional three lasers dedicated to conducting clinical trials.
We plan to deploy additional excimer lasers in 1999.
All of our current FDA-approved lasers are subject to a supply agreement
with Summit Technology, Inc. This supply agreement is nonexclusive and we are
free to obtain lasers from other laser manufacturers. Under this agreement, we
have the right to 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. Summit may terminate
the agreement with respect to any particular laser if we fail, after reasonable
cure periods, to comply with the terms of the agreement relating to the
particular laser or to pay Summit the required monthly payments. We may
terminate the agreement with respect to any particular laser if: (a) we satisfy
the minimum payment obligations required to be paid to Summit during the term,
or (b) if the FDA withdraws or materially restricts its approval of the use of
Summit's excimer laser.
We generally try to acquire or establish eye surgery and laser centers with
two suites. This allows for efficient use of the surgeon's time since operative
preparation can be performed in one suite while the surgeon operates in the
adjacent suite. To date, each of our eye surgery and laser centers has been
located adjacent to one of the clinics of our affiliated professional entities.
This further contributes to the time and cost efficiency of surgical operations
and facilitates our ability to coordinate pre- and post-operative patient
visits between our affiliated ophthalmologists and optometrists.
Today, most forms of laser vision correction surgery may be performed in a
clean room in a physician's office and we have structured the operation of two
laser vision correction centers in this manner. As new vision correction
technologies are developed, however, we believe that medical standards will
dictate that some types of surgical vision correction procedures will need to
be performed in a licensed ambulatory surgery center or hospital. Examples of
new technologies currently in clinical trials include phakic intraocular lenses
and implantable contact lenses.
Accordingly, we believe that the flexibility of our eye surgery and laser
centers to accommodate the full spectrum of existing and future vision
correction surgeries will provide us with an advantage over our competitors
whose facilities may not be able to accommodate these procedures. This
advantage is further enhanced in those states with rigorous certificate of need
requirements that make it difficult to construct a licensed facility.
Eight of our surgery and laser centers have been accredited by the American
Association of Ambulatory Healthcare (AAAHC), and we expect our two remaining
centers to be accredited by the end of 1999. We believe as managed care panels
shift to requiring accreditation by the AAAHC or the Joint Commission on
Accreditation of Healthcare Organizations as a condition to reimbursement, our
accreditation will provide us a competitive advantage with respect to
reimbursable procedures including, for example, cataract surgery.
Services and Products
Long-Term Service Agreements. We have long-term service agreements in place
with professional entities covering 44 ophthalmologists and 39 optometrists,
who provide eye care services in one or more of our 45 eye care clinics.
Generally, we seek to cluster eye care clinics within regional
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markets that can support one or more eye surgery and laser centers. Our
strategy involves affiliating with leading eye care professionals within a
regional market until we have achieved a cluster of eye care clinics,
affiliated eye care professionals and eye surgery and laser centers in a hub
and spoke configuration throughout the regional market.
We believe that acquiring or building concentrated clusters of eye care
clinics around eye surgery and laser centers allows us to more effectively
utilize our eye surgery and laser center capacity. Each cluster has a regional
management team and uniform information technology. As a result, we can more
effectively assist affiliated eye care professionals in creating brand name
recognition within their regional market and integrating subspecialists in a
manner that effects a more efficient division of labor.
We provide services, facilities and equipment to our affiliated eye care
professionals under long-term service agreements. These service agreements are
generally for a 40-year term and require us to provide all of the business,
administrative and financial services necessary to operate the eye care clinics
and optical retail outlets. These services typically include:
. billing, collection and cash management services
. procuring and maintaining all office space, office and medical supplies,
medical and nonmedical equipment, information systems, and furniture and
furnishings
. subject to federal and state law, recruiting, employing, supervising and
training all non-professional personnel
. assisting our affiliated eye care professionals in recruiting additional
ophthalmologists and optometrists
. information technology services
. marketing services
. assisting our affiliated eye care professionals with the establishment
and implementation of quality assurance, risk management and utilization
review programs
. assisting our affiliated eye care professionals in obtaining and
maintaining federal, state and local licenses and permits
. negotiating managed care contracts on behalf of our affiliated eye care
professionals
The professional entities or our affiliated eye care professionals, and not
us, generally enter into managed care agreements relating to the provision of
professional and dispensing services. Occasionally, we may execute a managed
care agreement as agent on behalf of our affiliated eye care professionals;
however, our affiliated eye care professionals or entities are the providers
under these contracts. Collectively, our affiliated eye care professionals are
parties to only four capitated agreements, which generate less than $100,000 in
total annual revenues. We also have entered into managed care agreements in our
capacity as the owner and operator of eye surgery and laser centers. None of
these agreements is on a capitated basis.
The service agreements provide that our affiliated eye care professionals
retain sole control over:
. the dispensing of all medical and other professional services to their
patients
. all decisions relating to the selecting, hiring, compensating and
terminating of eye care professionals
. all corporate governance decisions and other internal matters affecting
the operation of their legal entities
. the employment of a sufficient number of ophthalmologists and
optometrists to provide professional eye care services to their patients
Under the service agreements, we are generally required to pay substantially
all expenses incurred in connection with the business and medical operations of
our eye are clinics and optical retail outlets, except for the salaries and
benefits of those eye care professionals who have an ownership interest in the
professional entity employing them. Our affiliated eye care professionals then
reimburse us on a monthly basis for those expenses that we pay on their behalf.
Other than our responsibility for payment of the eye care clinic and optical
retail outlet expenses, we are not required to make any loans to any individual
eye care professionals or their professional entities.
In addition to reimbursing us for eye care clinic and optical retail outlet
expenses, our affiliated
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professional entities pay us a monthly fee for our services. This is generally
a targeted monthly fee established in an annual budget that we negotiate each
year with our affiliated eye care professionals. This targeted monthly fee is
adjusted upward or downward in direct proportion to any positive or negative
variance in the actual monthly operating results of the eye care clinics and
optical retail outlets from their respective budgeted monthly operating
results. There are no limitations on the amount of these fee adjustments. On
average, excluding reimbursement of expenses that we pay on behalf of our
affiliated professional entities, the fees paid to us in 1998 represented 35.7%
of the earnings before interest and taxes of the professional entities. The
earnings of an affiliated professional entity are determined by subtracting the
expenses of the eye care clinics and optical retail outlets from the
professional services and other revenues earned by the professional entity.
These expenses generally include all expenses incurred in connection with the
business and medical operations of the professional entity, except for any
salaries and benefits of those eye care professionals who have an ownership
interest in the professional entity. Each professional entity is then
responsible for paying the salaries and benefits of its eye care professional-
owners from the amount retained by the professional entity after paying our
fee. To the extent the targeted monthly fee is adjusted upward or downward as
described above, the amounts retained by the affiliated professional entities
to pay the eye care professional- owners' salaries and benefits are
correspondingly adjusted upward or downward. If in any given month an
affiliated professional entity's expenses relating to the operation of its eye
care clinics and optical retail outlets exceed the revenue derived from these
operations, we would not receive a management fee from that entity for that
month.
The service agreements are not terminable by our affiliated eye care
professionals or professional entities unless the termination is for cause,
which generally requires a court to make a final determination that we have
materially breached a fiduciary duty owed to the eye care professionals, or
that we have misappropriated or misapplied funds of the eye care professionals.
We cannot terminate the service agreement unless the termination is for cause,
which generally requires that:
. one or a group of affiliated eye care professionals lose their medical
licensing
. the professional entity loses its Medicare provider number or ability to
treat Medicare patients
. the professional entity dissolves or goes bankrupt
. the affiliated professional entity defaults in the performance of any of
its material duties
If an affiliated professional entity terminates its service agreement for
cause, it has the right, but not the obligation, to purchase all of the
following assets as of the termination date: (a) the unamortized intangible
assets, deferred charges and other amounts relating to the service agreement;
(b) all improvements, additions or leasehold improvements relating to the
clinic offices; and (c) all of the equipment originally acquired by us from the
affiliated professional entity and all other equipment, tangible assets,
inventory and supplies relating to the operation of the clinic offices. The
purchase price for these assets typically ranges from the book values we
maintain for purposes of our financial statements to fair market value. If the
affiliated professional entity elects to exercise this purchase right, it must
also assume all of our debts, contracts and other obligations principally
relating to our management of its clinics.
If we terminate a service agreement for cause, we have the right, but not
the obligation, to require the affiliated professional entity to purchase all
of these assets as of the termination date. The purchase price for these assets
is determined in the same manner described in the prior paragraph. If we
exercise our right to require the affiliated professional entity to purchase
these assets, it must also assume all of our debts, contracts and other
obligations principally relating to our management of its clinics.
In satisfying its purchase obligations, the affiliated professional entity
is generally required to pay cash for the repurchased assets. If the affiliated
professional entity terminates the service agreement for cause, however, then
it may elect to transfer to us shares of our common stock as a credit against
the purchase price. The value of any transferred shares will be based on their
fair market value as of the termination date.
A policy board is responsible for overseeing management and administrative
policies relating to
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the operation of all affiliated professional entities within a region. Each
policy board consists of an even number of members, one-half of whom are
appointed by us and one-half of whom are appointed by our affiliated eye care
professionals. Duties of these policy boards include: (a) review and approval
of any renovation and expansion plans and capital expenditures with respect to
the eye care clinic facilities; and (b) long-term strategic planning
objectives.
Generally, affiliations with our eye care professionals have been the result
of acquisitions of their non-medical assets, including equipment and office
leases, for consideration consisting of a combination of stock, notes or cash.
In connection with these transactions, a professional entity owned by the
affiliated eye care professionals enters into employment agreements with the
ophthalmologists and optometrists that generally have five year initial terms.
Typically, these agreements contain restrictions on the eye care professional's
ability to compete with us, and on his or her ability to recruit our or their
employees or interfere with patient relationships. These covenants usually
survive termination of employment for up to one year. During the initial terms,
ophthalmologists who have an equity interest in an affiliated professional
entity are required to pay liquidated damages to the affiliated professional
entity if they terminate their employment. Our service agreements generally
require the affiliated professional entities to remit these damages to us.
Provider and Patient-Consumer Marketing Support. Our marketing professionals
perform detailed analyses for each of our regional markets. An awareness
program is developed for each market that includes advertising, public
relations and direct marketing programs. An important component of our
marketing support strategy involves creating brand recognition. This applies
equally to branding NovaMed Eyecare to ophthalmologists andoptometrists, as
well as branding our regional clusters of affiliated eye care professionals to
patient-consumers. We are working with our affiliated eye care professionals
within particular markets to reorganize their existing medical practices into a
single legal and business entity. This allows us to use a single brand name for
advertising and other marketing purposes. To date, we have implemented this
strategy in Kansas City, Louisville and Richmond, and we plan to implement this
strategy in Chicago and St. Louis by the end of 1999.
We believe this single regional brand strategy provides stronger name
recognition than would otherwise be possible, reinforces the regional brand's
reputation for laser vision correction and the broad eye care expertise of our
affiliated eye care professionals, and provides cost efficiencies through
marketing economies of scale. As a result we believe that a single regional
brand provides an important advantage in the highly-fragmented laser vision
correction market. This branding strategy supports our goal of becoming the
leading laser vision correction services and facilities company in each
regional market we choose to enter.
We provide our affiliated eye care professionals with uniform brochures and
marketing support and utilize targeted media penetration including local radio,
television and newspaper advertisements. In addition, we develop specialized
programs targeting ophthalmologists and optometrists in order to help them
educate patient-consumers. We also have a dedicated sales and marketing team
focused on corporate and group sales.
Our marketing programs encourage patient-consumers to contact one of our
toll free call centers, where we provide them with further information and
attempt to enroll them in a laser vision correction informational seminar or
schedule them directly for an in-office consultation with one of our affiliated
eye care professionals. Our affiliated eye care professionals plan to deliver
more than 600 informational seminars across our five regional markets in 1999.
We provide personnel and assistance to our affiliated eye care professionals
to facilitate a service-driven, pleasant experience for their patients. This
includes management of schedules to foster on-time appointments and laser
vision correction counselors to help current and potential patients understand
the laser vision correction procedures and processes.
Our ten person marketing staff is decentralized, with a marketing director
in each region providing expertise on local market issues, supported by a staff
that coordinates key initiatives across markets.
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We encourage our affiliated eye care professionals to develop relationships
with optometrists and other primary care physicians in their region. In
addition, attendance and visibility at local professional society meetings,
presentations at education meetings and published research all help to promote
the professional standing of our affiliated eye care professionals within the
ophthalmology and optometry community.
Information Technology. We have designed our information technology strategy
to provide our locations with standardized information systems and business
processes which allow us to generate timely, accurate and consistent
information for our management team and affiliated eye care professionals. We
have an in-house information technology group consisting of 25 people who are
responsible for the installation, training, support and operation of these
systems.
We provide our affiliated eye care professionals with installation and
operational services to support our standard management and financial reporting
information systems. After we establish a new affiliation, our information
technology specialists complete an advanced deployment of our information
technology systems at the new affiliated eye care professional's offices. This
initial installation allows newly affiliated eye care professionals to access
our company-wide e-mail system, providing quick and easy access to our
corporate resources and to eye care professionals at our other regional eye
surgery and laser centers and eye care clinics of our affiliated eye care
professionals. Generally, within 60 days of our advanced deployment, all
accounting functions are integrated with our corporate finance system. To date,
we have fully integrated all of our eye surgery and laser centers and the eye
care clinics of our affiliated eye care professionals into the standard
financial accounting systems and most of our locations have been fully
integrated into our management systems, with the remaining locations expected
to be incorporated into our management systems by the end of 1999.
To further capitalize on our investment in information systems, we are
currently developing enhancements to our laser vision correction marketing
system and our consolidated reporting capability to enable us to track and
coordinate the activities of our eye surgery and laser centers, affiliated eye
care clinics and eye surgeons and co-managing optometrists. We also are
developing software enhancements for patient outcomes tracking, optical point-
of-sale and our Internet website. These enhancements will become part of our e-
community, which will also include projects under development, including data
warehousing and a new provider relationship management system.
Our data warehouse is designed to consolidate information, including
revenue, expense, patient demographics, procedures and clinical information,
across our eye surgery and laser centers and affiliated eye care clinics. This
data warehouse will enable us to improve decision support and reporting
capabilities at the corporate and affiliated eye care professional levels.
Our new provider relationship management system enables us to track and
coordinate the activities of our eye surgery and laser centers, the eye care
clinics of our affiliated eye care professionals, affiliated eye surgeons and
co-managing optometrists. We believe that this new system will allow us to
significantly improve our ability to create contacts with our affiliated eye
care professionals' patients, improve relationships with our affiliated eye
care professionals and provide new opportunities to enhance and expand our
business, administrative and financial services. In addition, this system will
enable us to track our affiliated eye care professionals' patients through our
call centers, eye surgery and laser centers, affiliated eye care clinics and
Internet website. As a result, we will have the ability to maintain contact
with, and promote the eye care services offered by our affiliated eye care
professionals to, these patients.
Administrative Services. As part of the administrative services provided to
our eye surgery and laser centers and affiliated eye care professionals, we:
. recruit, train, and oversee a regional management team in each of our
markets to implement various operational and strategic initiatives and to
integrate our operations
. evaluate and improve the clinical operations of our eye surgery and laser
centers and affiliated eye care clinics and optical retail outlets in
order to improve eye care professional and staff productivity and provide
quality patient care
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. provide billing and collection, cash management and financial accounting
and reporting services
Recruiting. We have three full-time recruiting professionals on staff to
assist our affiliated eye care professionals in recruiting ophthalmologists,
optometrists and support staff. These recruiting services include identifying
candidates, negotiating employment agreements and structuring compensation and
benefits packages for eye care professionals and support staff. Our internal
recruiting efforts allow our existing eye care professionals to avoid diverting
time and attention from providing eye care services to patients. Our dedicated
recruiting staff also allows us to minimize the costs associated with retaining
recruiting firms.
Surgeon and Staff Training. Several of our affiliated ophthalmologists serve
as lead investigators in clinical trials of eye care devices, products and
pharmaceuticals. As a result, some of our eye surgeons have established
clinical best practices in the field of vision correction. In our surgical
training program, these surgeons share these practices with our other
affiliated eye care professionals. Our leading affiliated eye surgeons
frequently meet with our other affiliated eye care professionals, both
individually and in all-doctor meetings, to educate them on new technologies.
We do not pay these eye surgeons for participating in the training of other
affiliated eye care professionals. We believe that they participate because
their participation:
. contributes to their reputation in the professional community
. provides a useful forum for discussing new ideas and techniques with
other eye care professionals who have a common interest through their
affiliation with us
Our involvement in clinical research also affords our affiliated eye care
professionals early access to certification and training programs for new
technologies. All of our eye surgeons are certified to use the excimer laser by
third party certification programs. In addition, most of our eye surgeons have
been trained in Intacs(TM), a non-laser refractive surgery procedure recently
approved by the FDA.
We also have a comprehensive clinic staff training program that covers all
aspects of eye care, with a focus on laser vision correction. Under the
program, we regularly provide clinic staff with training in the latest clinical
technologies, information technology systems, business processes and patient-
consumer marketing strategies. Our programs are designed to develop best
practices at the clinic staff level and stress the importance of the patient-
consumer experience to our overall business strategy.
Co-Management. A vision correction procedure typically involves, in addition
to the surgical procedure itself, a pre-operative examination and up to six
post-operative examinations within a year of surgery. These post-operative
visits allow an eye care professional to monitor a patient's healing and vision
improvement. A patient often may elect to have the post-operative examinations
performed by an optometrist. This allows ophthalmologists to focus on
performing laser vision correction surgery procedures, while optometrists focus
on pre- and post-operative care. The coordination of this care and the
communication between ophthalmologists and optometrists are critical to
achieving quality patient care, maximizing patient satisfaction and achieving
the optimal division of labor. Our information technology system fosters this
coordination and communication between eye care professionals to ensure the co-
management relationship is as seamless as possible for the patient.
Optical Retail Business. Under the terms of our long-term service
agreements, we assist our affiliated eye care professionals in operating 28
optical retail outlets across our five regional markets. Each of these
affiliated optical retail outlets is located in a clinic of one of our
affiliated eye care professionals. These retail outlets sell eyeglasses,
contact lenses and related optical products and accessories to patient-
consumers. As part of the business, administrative and financial services for
which we receive a management fee under these agreements, we:
. employ the non-medical staff in these retail outlets
. manage optical product inventory, including scheduling of shipping and
delivery
. assist in optical product pricing and marketing efforts
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Optical Services and Products
Optical Laboratory. We own and operate three full-service wholesale optical
laboratories that specialize in surfacing, finishing and distributing
corrective lenses and eyeglasses. These optical laboratories employ 65
individuals. Our laboratories have in excess of 325 active customers, including
affiliated and non-affiliated ophthalmologists, optometrists, opticians and
optical retail chains.
Optical Products Purchasing Organization. Our optical products purchasing
organization, allows affiliated and non-affiliated eye care professionals to
purchase optical products through us at volume discounts. This purchasing
center operates out of a leased 5,000 square foot facility located in
Roseville, Illinois, and has 18 full-time employees. We have in excess of 500
customers that utilize our optical products purchasing organization. We also
provide monthly reports to our customers that allow them to identify purchasing
trends and manage their optical product inventories more efficiently. We intend
to expand the scope of services offered to our customers by including eye care
equipment used in our affiliated and non-affiliated eye care professionals'
offices and optical laboratories.
Research
Our eye-only research center in Kansas City, Missouri, conducts Phase II-IV
clinical trials on eye care devices and pharmaceuticals, with an emphasis on
laser vision correction-related items. We believe our research center is the
largest non-university affiliated eye care research facility of its kind in the
U.S. The center has three excimer lasers that are dedicated for use in clinical
trials. The center also currently has research sponsor agreements relating to
30 clinical studies involving over 500 subjects participating in clinical
trials. The staff at our research center has a combined 60 years of research
experience. To date, more than 100 studies have been completed at the Kansas
City research center. Currently, our affiliated eye care professionals are
involved in research studies in all five of our regional markets.
We believe the quality of the Kansas City research center's results is
demonstrated by the high rate of same-sponsor studies conducted at the center.
The center competes for research projects based on its ability to provide
appropriate patient candidates as well as accurate, prompt and reliable
clinical data to research sponsors. Research relates to both vision correction
surgery and pathology studies, with vision correction technology research
studies accounting for approximately two-thirds of the trials we conduct. Other
studies also involve device or pharmaceutical treatments for glaucoma,
cataracts, retinal and other eye and vision conditions.
We own the assets of the Kansas City research center, and we employ all of its
non-medical personnel. Five of our affiliated eye care professionals supervise,
manage and conduct the medical aspects of the clinical trials at the center,
supported by our eight full-time research coordinators. Prior to July 1999, a
professional entity owned by our affiliated eye care professionals in Kansas
City entered into each of the sponsor agreements, and this professional entity
received the clinical trial fees paid by the sponsors. We derived additional
management fees under our service agreement with this Kansas City professional
entity as a result of these revenues. In July 1999, we acquired clinical
research assets including substantially all of these sponsor agreements from
the Kansas City professional entity. See "Certain Transactions--Purchase of
Clinical Research Contracts". Under these agreements, we will derive revenues
from various services including:
. identifying and providing investigators to conduct the clinical studies
. providing the non-medical personnel, supplies and equipment necessary for
the performance of the clinical trials
. maintaining possession of all research records
From these revenues, we will then pay our affiliated eye care professionals a
fee for various services they provide as investigators in these trials
including:
. recruitment and enrollment of patients
. performance of all patient medical treatments
. timely and accurate reporting of complications and adverse events
. preparation of any reporting documentation required by the FDA or any
sponsors
Our research capability is an essential component of our integrated eye care
services model. We believe the center's reputation for conducting quality
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research enhances our ability to recruit, establish and maintain affiliations
with leading eye care providers due to the prestige of associating with a
highly-regarded research program. We also believe our access to new technology
allows us to be an early adapter to shifts in science and technology relative
to our competitors.
Competition
The market for laser vision correction and other refractive surgery is subject
to intense competition. We and our affiliated eye care professionals compete
with other entities, including:
. refractive laser center companies
. hospitals
. individual ophthalmologists
. other surgery and laser centers
. manufacturers of excimer laser equipment
in offering these services and access to related equipment. In addition, the
laser vision correction and other refractive surgery procedures performed by
affiliated eye care professionals at our eye surgery and laser centers compete
with more traditional non-surgical treatments for refractive conditions,
including eyeglasses and contact lenses.
Eye care professionals interested in deploying excimer laser technology have
formed commercial enterprises in order to support the capital requirements for
acquiring the lasers and other necessary equipment. The industry today remains
highly fragmented, with most procedures performed by independent physician
groups. Several laser vision correction companies are developing national
operations. In addition, several eye care companies are featuring access to
laser vision correction and other refractive surgery services as a component of
their eye care practice development activities.
Our eye surgery and laser centers and affiliated eye care professionals
generally compete on the bases of:
. quality of patient care
. reputation
. price
We compete in fragmented geographic markets and do not face any single dominant
U.S. national competitor. Our principal corporate competitors in the market for
services and facilities related to laser vision correction and other refractive
surgery include TLC The Laser Center, Inc., Laser Vision Centers, Inc.,
ClearVision Laser Centers, Ltd., LCA-Vision Inc. and ARIS Vision, Inc.
In the market for providing business, administrative and financial services
to eye care professionals, we primarily compete with Omega Health Systems, Inc.
and Vision Twenty-One, Inc. The bases for competition in this market include:
. service
. pricing
. strength of delivery network
. strength of operational systems
. the degree of cost efficiencies
. access to surgery facilities
. marketing strength
. information technology systems
. managed care expertise
. patient access
. quality assessment programs
Although there are competitors in some of our markets who charge less than
us for the products and services we provide, we believe that our integrated eye
care model and alliances with recognized industry leaders afford us a
competitive advantage. Similarly, there are competitors of our affiliated eye
care professionals who charge less than them for laser vision correction.
However, we believe that industry experience to date suggests that price
generally has not been the driving factor in the patient decision regarding
laser vision correction.
Suppliers of eyeglasses and contact lenses, including, for example,
optometric chains, may also compete with us and our affiliated eye care
professionals, either by marketing alternatives to laser vision correction or
other refractive surgery procedures or by purchasing excimer lasers and
offering refractive surgery to their customers.
We compete in the optical laboratory market on the bases of:
. quality of service
. breadth of services
. reputation
. price
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Our three wholesale optical laboratories face a variety of national, regional
and local competitors.
In the market for providing optical group purchasing services, we primarily
compete with C&E Vision Group, Block Vision, Vision West and Buyer's Edge.
Competition in this market is based upon:
. service
. price
. strength of the purchasing organization, including the ability to
negotiate discounts
Although there are competitors in some of our markets that charge less than us
for optical laboratory and optical products purchasing services, we believe
that our expertise in providing custom surfacing and finishing in our
laboratory and the purchasing services from our optical products purchasing
organization afford us a competitive advantage in each of these markets.
Employees
As of June 30, 1999, we had approximately 889 employees. Approximately 135
are engaged in corporate management, 478 in eye care clinics, 142 in our eye
surgery and laser centers, 40 in optical retail outlets, 71 in our wholesale
optical laboratories, 15 in optical group purchasing services and eight in
clinical research. We are affiliated with 44 ophthalmologists and 39
optometrists. We believe that our relations with our employees are good. We are
not a party to any collective bargaining agreements.
Properties
We do not own any real property. We lease space for our corporate
headquarters in Chicago, our regional offices, our surgery and laser centers,
the clinics of our affiliated eye care professionals and our optical services
manufacturing and warehouse operations. In some cases, these facilities are
leased from affiliated providers. See "Certain Transactions" and notes 9 and 14
to our consolidated financial statements included in this prospectus. The terms
and conditions of our real property leases vary. The forms of lease range from
"modified triple net" to "gross" leases, with terms generally ranging from
month-to-month to five years, with multiple five-year renewal terms at our
option. Generally, our eye surgery and laser centers, eye care clinics and
optical retail outlets are located in medical complexes, office buildings or
free standing buildings. Any capacity constraints with our affiliated eye care
clinics and optical retail outlets can generally be resolved either through a
build-out of adjacent space or the leasing of additional office space in other
proximate locations. Depending on state licensing and Certificate of Need
issues, addressing capacity constraints in any of our eye surgery and laser
centers in a similar manner may require state regulatory approval.
Legal Proceedings
There are no material lawsuits or administrative actions pending, or to our
knowledge, threatened, which may have a material adverse effect upon our
business, financial condition or results of operations.
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GOVERNMENT REGULATION
As a participant in the health care industry, our operations and the
operations of our affiliated opthalmologists and optometrists are subject to
extensive and increasing regulation by governmental entities at the Federal,
state and local levels. Many of these laws and regulations are subject to
varying interpretations, and we believe courts and regulatory authorities
generally have provided little clarification. Moreover, state and local laws
and interpretations vary from jurisdiction to jurisdiction. As a result, we may
not always be able to accurately predict interpretations of applicable law, and
some of our activities, or the activities of our affiliated eye care
professionals, could be challenged.
We believe that our business operations and arrangements with our affiliated
eye care professionals comply in all material respects with Federal, state and
local laws. Additionally, it is our understanding that our affiliated
ophthalmologists and optometrists comply in all material respects with Federal,
state and local law, although we cannot assure you of this compliance. However,
we cannot assure you that Federal or state regulatory authorities would not
challenge any of these relationships or arrangements. If any of our activities
are challenged, we may have to divert substantial time, attention and resources
from running our business to defend against these challenges regardless of
their merit. If we do not successfully defend these challenges, we and our
affiliated providers may face a variety of adverse consequences including
service agreements being terminated or rendered unenforceable, third party
payor agreements being terminated, affiliated providers losing their
eligibility to participate in Medicare, Medicaid or other federal health care
programs, or losing other contracting privileges and, in some instances, civil
or criminal fines. Under some circumstances, we may be able to redesign or
reformulate our relationships or arrangements to address these challenges. Any
of these consequences could have a material adverse effect on our business,
financial condition and results of operations.
The regulatory environment in which we and our affiliated eye care
professionals operate may change significantly in the future. Numerous
legislative proposals have been introduced in the U.S. Congress and in various
state legislatures over the past several years that could cause major reforms
of the U.S. health care system. In response to new or revised laws, regulations
or interpretations, we could be required to revise the structure of our legal
arrangements or the structure of our fees, incur substantial legal fees, fines
or other costs, or curtail our business activities, reducing the potential
profit to us of some of our legal arrangements, any of which may have a
material adverse effect on our business, financial condition and results of
operations.
The following is a summary of some of the health care regulatory issues
affecting us, our affiliated eye care providers and our respective operations.
Federal Law
Anti-Kickback Statute. The Federal anti-kickback statute prohibits the
knowing and willful solicitation, receipt, offer or payment of any direct or
indirect remuneration in return for the referral of patients or the ordering or
purchasing of items or services payable under Medicare, Medicaid or other
federal health care programs. Violations of this statute may result in criminal
penalties, including imprisonment or criminal fines of up to $25,000 per
violation, civil penalties of up to $50,000 per violation, and exclusion from
federal programs including Medicare or Medicaid.
The Federal anti-kickback statute contains a number of exceptions. In order
to address the problems created by the broad language of the statute, Congress
directed the Department of Health and Human Services to develop regulations,
known as safe harbors, to the Federal anti-kickback statute. However,
relationships for which there is no safe harbor protection and relationships
that do not meet the prescribed safe harbor standards do not necessarily
violate the statute.
We believe our operations comply in all material respects with the Federal
anti-kickback statute. However, some aspects of our business, the business of
our affiliated providers, and our relationships with our affiliated providers
either do not meet the prescribed safe harbor standards, or relate to practices
for which no safe harbor standards have been proposed. These include:
. interests in us held by affiliated eye care professionals through stock
ownership and promissory notes made by us
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. marketing and managed care services provided to our affiliated professional
entities, where our services revenue is based, in part, on the revenue or
profit that is generated from these entities
. if we are deemed a provider of health care services, through our surgery and
laser centers or otherwise, referrals of patients to us from our affiliated
eye care professionals that own shares in us
. our role as an optical products purchasing organization
. compensation relationships between our affiliated ophthalmologists and
optometrists and their affiliated professional entities
. referrals between one of our affiliated professional entities and an entity
with which that professional entity has a financial relationship, including,
for example, for the rental of office equipment or space
. referrals among our affiliated professional entities
. co-management relationships of our affiliated providers, which could be
interpreted as an agreement between ophthalmologists and optometrists to
refer patients to one another
The federal agency responsible for interpreting and enforcing this statute
has stated that if ophthalmologists and optometrists engage in agreements to
refer, they may be violating the anti-kickback statute. Vision correction
surgery is not reimbursable by Medicare, Medicaid or other federal programs,
and thus the Federal anti-kickback laws do not generally apply to our
activities, and the activities of our affiliated eye care professionals, in the
areas of vision correction surgery. However, this agency also has taken the
position that this statute applies to non-Medicare or Medicaid covered
services, if the arrangement has an impact on referral patterns for services
covered by Medicare or Medicaid. Further, we and our affiliated eye care
professionals are subject to state anti-kickback laws that are similar in
nature.
No safe harbor currently exists to protect co-management relationships
between providers. We believe, however, that these arrangements comply in all
material respects with the Federal anti-kickback laws because our affiliated
eye care professionals are paid solely for the services they perform and these
payments reflect the fair market value of the services each eye care
professional offers each patient. In addition, approximately six years ago, a
safe harbor was proposed for "referral agreements for specialty services."
While we believe that the co-management relationships of our affiliated eye
care providers would satisfy the requirements of this proposed safe harbor, we
cannot predict when, if ever, the final regulations will be published, whether
they will differ from the proposal or whether they will apply to the co-
management relationships of our affiliated ophthalmologists and optometrists.
Self-Referral Law. Subject to limited exceptions, the Federal self-referral
law, known as the "Stark Law," prohibits physicians and optometrists from
referring their Medicare or Medicaid patients for the provision of "designated
health services" to any entity with which they or their immediate family
members have a financial relationship. "Financial relationships" include both
compensation and ownership relationships. "Designated health services" include
clinical laboratory services, radiology and ultrasound services, durable
medical equipment and supplies, and prosthetics, orthotics and prosthetic
devices, as well as seven other categories of services. We do not provide
"designated health services." Our affiliated providers, however, do provide
limited categories of designated health services, specifically, ultrasound
services, including A-scans and B-scans, and prosthetic devices, including
eyeglasses and contact lenses furnished to patients following cataract surgery.
Violating the Stark Law may result in denial of payment for the designated
health services performed, civil fines of up to $15,000 for each service
provided pursuant to a prohibited referral, a fine of up to $100,000 for
participation in a circumvention scheme, and exclusion from the Medicare,
Medicaid and other Federal health care programs. The Stark Law is a strict
liability statute. Any referral made where a financial relationship exists that
fails to meet an exception constitutes a violation of the law.
We do not believe that our operations are subject to the Stark Law.
Specifically, with respect to referrals from our affiliated eye care
professionals to us, including to our eye surgery and laser centers, we believe
the Stark Law is not implicated. The
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Stark Law's list of designated health services does not include services
rendered by ambulatory surgery centers, including our eye surgery and laser
centers.
To the extent that our affiliated eye care professionals provide designated
health services to Medicare and Medicaid beneficiaries, or make or receive
Medicare or Medicaid referrals for these services, the Stark Law could be
implicated. It is our understanding that our affiliated eye care professionals
have structured their operations and compensation arrangements to comply with
the Stark Law, although we cannot assure you of this compliance. Specifically,
we believe that the referral by our affiliated eye care professionals to the
retail outlets owned by their affiliated professional entities qualify for the
in-office ancillary services exception to the Stark Law which applies to
designated health services that are:
. furnished by or under the direct supervision of a member of a physician
group practice;
. provided in the same building in which group practice physicians furnish
physician services or in a building used by the group for the
centralized provision of designated health services; and
. billed under a group practice billing number.
Moreover, we also believe that our affiliated eye care professionals'
provision of designated health services, including A-scans and B-scans, also
qualifies for the in-office ancillary services exception.
In January 1998, the government promulgated proposed rules interpreting
provisions of the Stark Law. Because the proposed rules leave many ambiguities,
it is likely that the final regulations will differ somewhat from the proposal.
We believe that our affiliated professional entities have structured their
arrangements in accordance with the proposed regulations. We do not intend to
expand our business to include the provision of designated health services, and
we believe that our affiliated professional entities do not intend to provide
designated health services unless an exception to the Stark Law applies.
Nevertheless, we cannot predict whether our affiliated professional entities
will be affected once final regulations pursuant to the Stark Law are
published.
Civil False Claims Act. The Federal Civil False Claims Act prohibits
knowingly presenting or causing to be presented any false or fraudulent claim
for payment by the government, or using any false or fraudulent record in order
to have a false or fraudulent claim paid. Violations of the law may result in
repayment of three times the damages suffered by the government and penalties
from $5,000 to $10,000 per false claim. Collateral consequences of a violation
of the False Claims Act include administrative penalties and possible exclusion
from participation in Medicare, Medicaid and other federal health care
programs.
State Law
Anti-Kickback Laws. In addition to the Federal anti-kickback law, a number
of states have enacted laws which prohibit the payment for referrals and other
types of anti-kickback arrangements. These state laws typically apply to all
patients regardless of their source of payment. We believe that our operations
comply in all material respects with the anti-kickback laws of the states in
which we operate.
Self-Referral Laws. In addition to the Federal Stark Law, a number of states
have enacted laws which require disclosure of or prohibit referrals by health
care providers to entities in which the providers have an investment interest
or compensation relationship. In some states, these restrictions apply
regardless of the patient's source of payment. We believe that our operations
comply in all material respects with the self-referral laws of the states in
which we operate.
Corporate Practice of Medicine Laws. A number of states have enacted laws
which prohibit the corporate practice of medicine. These laws are designed to
prevent interference in the medical decision-making process from anyone who is
not a licensed physician. Many states have similar restrictions in connection
with the practice of optometry. Application of the corporate practice of
medicine prohibition varies from state-to-state. The following states where we
operate bar the corporate practice of medicine: Illinois, Indiana and Kansas.
In each of these states, a business corporation may not employ physicians or
provide medical services. Because we neither employ physicians nor provide
medical services, we believe that we comply in all material respects with the
corporate practice of medicine laws in these states. Our arrangements
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with affiliated professional entities expressly limit our duties to provide
management, administrative and business services to those that are necessary or
appropriate for the day-to-day administration of the non-medical aspects of the
affiliated professional entities. Our affiliated eye care professionals retain
complete authority, responsibility, supervision and control over the provision
of all medical and other professional healthcare services and are solely
responsible for providing or supervising the provision of these services.
However, because the corporate practice of medicine doctrine has been seldom
enforced or litigated in the states where we do business, the precise
parameters of the doctrine have not been defined, particularly in terms of the
management responsibilities that may be delegated to a company that provides
management services. Because of this, to the extent any act or service to be
performed by us is construed by a court or enforcement agency to constitute the
practice of medicine, our service agreements provide that our obligations to
perform the act or service is waived. While we believe that we have structured
our relationships with eye care professionals so that they comply, in all
material respects, with applicable corporate practice of medicine restrictions,
we cannot be sure that a particular state court or enforcement agency may not
take a contrary view. In this case, we may be required to redesign or
reformulate our relationships with our affiliated eye care professionals and
there is a possibility that some provisions of our service agreements may not
be enforceable.
Fee-Splitting Laws. The laws of some states prohibit providers from dividing
with anyone, other than providers who are part of the same group practice, any
fee, commission, rebate or other form of compensation for any services not
actually and personally rendered. Penalties for violating these fee-splitting
statutes or regulations may include revocation, suspension or probation of a
provider's license, or other disciplinary action. In addition, courts have
refused to enforce contracts found to violate state fee splitting prohibitions.
Four of the states where we currently do business prohibit some form of fee
splitting: Illinois, Kansas, Kentucky and Virginia. The precise language and
judicial interpretation of fee splitting prohibitions varies from state to
state. Courts in some states have interpreted fee splitting statutes to
prohibit all percentage of gross revenue and percentage of net profit
management fee arrangements. Other state statutes apply only to prohibit fee
splitting in return for referrals.
Our management fee arrangements differ from those invalidated as unlawful
fee splits because they establish a flat monthly fee that is subject to
adjustment based on the degree to which actual practice revenues or expenses
vary from budget. However, there is some risk that our arrangements could be
construed by a state court or enforcement agency to run afoul of state fee
splitting prohibitions. Accordingly, all of our service agreements contain
either a reformation provision or a mechanism establishing an alternative fee
structure, or both.
Fee splitting statutes are also the focus of ongoing litigation in states
where we do not currently conduct business. For example, litigation is pending
in Florida and North Carolina concerning the validity of a percentage fee paid
to a management company which conducts marketing services on behalf of a group
of doctors. In connection with this litigation, the state agencies are taking
the approach that these percentage arrangements violate the state's fee
splitting laws. Accordingly, as we expand into additional states, we may need
to amend or restrict various operations in order to ensure compliance with
applicable state laws, rules and regulations.
Facility Licensure and Certificate of Need. We may be required to obtain
licenses from the state departments of health in states where we open or
acquire eye surgery and laser centers. We believe that we have obtained the
necessary licenses in states where licenses are required. However, we believe
courts and state regulatory authorities generally have provided little
clarification as to some of the regulations governing licensure requirements.
It is possible that a state regulatory authority could challenge our position.
With respect to future expansion, we cannot assure you that we will be able to
obtain the required licenses. However, we have no reason to believe that, in
states requiring facility licenses, we will be not able to obtain this license
without unreasonable expense or delay.
Some states require a Certificate of Need, or CON, prior to the construction
or modification of an
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ambulatory surgery center, including, for example, our eye surgery and laser
centers, or the purchase of specified medical equipment in excess of an amount
set by the state. We believe that we have obtained the necessary CONs in states
where a CON is required. However, we believe courts and state regulatory
authorities generally have provided little clarification as to some of the
regulations governing the need for CONs. It is possible that a state regulatory
authority could challenge our determination. With respect to future expansion,
we cannot assure you that we will be able to acquire a CON in all states where
a CON is required.
Insurance Provisions. Many states also regulate the establishment of various
healthcare provider networks. These laws do not typically affect providers of
business and administrative services to professional entities. We are aware,
however, of some state insurance regulations requiring organizations involved
in specified types of contracting arrangements to register with the state
department of insurance and purchase surety bonds. It also is possible that a
state could require our licensure as a provider network or organization, health
maintenance organization or insurer. However, as long as another entity in the
chain of contracts is licensed by the state department of insurance, we believe
that we are unlikely to be viewed by any state where we do business as
requiring a license from the department. Because NovaMed does not enter into
any capitated or other risk-sharing contract without an HMO or other licensed
entity in the chain of contracts, we believe that we are not required to be
licensed under the insurance provisions of any states in which we currently
operate. However, we believe courts and state regulatory authorities generally
have provided little clarification as to some of the regulations governing the
need for licensure. It is possible that a state regulatory authority could
challenge our determination. We cannot assure you that we will be able to
acquire an insurance license in all states where licensure is required.
However, we have no reason to believe that in those states that require an
insurance or other license, we will not be able to obtain one.
Excimer Laser Regulation
Medical devices, including the excimer lasers used in our eye surgery and
laser centers, are subject to regulation by the U.S. Food and Drug
Administration, referred to as the FDA. Medical devices may not be marketed for
commercial sale in the U.S. until the FDA grants pre-market approval for the
device.
The FDA has not specifically approved the use of LASIK or the use of excimer
lasers to treat both eyes on the same day, commonly referred to as bilateral
treatment. The FDA considers these uses to be a practice of medicine decision.
Ophthalmologists, including our affiliated ophthalmologists, often perform
LASIK and bilateral treatment in an exercise of professional judgment in
connection with the practice of medicine.
Failure to comply with applicable FDA requirements could subject us, our
affiliated providers or laser manufacturers to enforcement action, product
seizures, recalls, withdrawal of approvals and civil and criminal penalties.
Further, failure to comply with regulatory requirements, or any adverse
regulatory action, including a reversal of the FDA's current position that the
"off-label," or non-FDA-approved, use of excimer lasers by physicians outside
the FDA approved guidelines is a practice of medicine decision, which the FDA
is not authorized to regulate, could result in a limitation on or prohibition
of our use of excimer lasers.
Regulation of Laser Vision Correction Marketing
The marketing and promotion of laser vision correction and other vision
correction surgery procedures in the U.S. are subject to regulation by the FDA
and the Federal Trade Commission, referred to as the FTC. The FDA and FTC have
released a joint communique on the requirements for marketing these procedures
in compliance with the laws administered by both agencies. The FTC staff also
issued more detailed staff guidance on the marketing and promotion of these
procedures and has been monitoring marketing activities in this area through a
non-public inquiry to identify areas that may require further FTC attention.
The FDA has traditionally taken the position that the promotion and advertising
of lasers by manufacturers and physicians should be limited to the uses
approved by the FDA. Although the FDA does not prevent surgeons from using
excimer lasers off-label, the FDA reserves the right to regulate advertising
and promotion of off-label uses.
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MANAGEMENT
Executive Officers and Directors
The following table contains information with respect to our directors,
executive officers and key employees:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Stephen J.
Winjum 36 President, Chief Executive Officer and Chairman of the Board of Directors
Ronald G.
Eidell 55 Executive Vice President and Chief Financial Officer
E. Michele
Vickery 44 Executive Vice President Operations
J. Gary
Jordan 52 Senior Vice President Sales
Robert A.
Wallach 41 Senior Vice President Marketing
John D.
Hunkeler,
M.D. 57 Medical Director and Director
R. Judd
Jessup 51 Director
Scott H.
Kirk,
M.D. 46 Director
Steven V.
Napolitano 40 Director
James B.
Tananbaum 36 Director
Peter C.
Wendell 49 Director
Douglas P.
Williams,
M.D. 41 Director
</TABLE>
Stephen J. Winjum, our founder, has been our President and Chief Executive
Officer and a member of our board of directors since NovaMed's formation in
March 1995. In May 1998, the board of directors established the position of
Chairman, and Mr. Winjum has served in that capacity ever since. From 1991
through 1994, Mr. Winjum was general counsel to Midwest Uncuts, Inc., a
national, full-service, wholesale optical laboratory. Prior to being general
counsel for Midwest Uncuts, Mr. Winjum co-founded Midwest Uncuts Chicago, an
optical company affiliated with Midwest Uncuts, and was its President and Chief
Executive Officer for approximately 18 months. Mr. Winjum earned his J.D., cum
laude, from the University of Notre Dame Law School in 1988, and his B.S.B.A.,
cum laude, in Accounting from Creighton University in 1985.
Ronald G. Eidell has been our Executive Vice President and Chief Financial
Officer since July 1998. From January 1996 to May 1998, Mr. Eidell was Senior
Vice President and Chief Financial Officer of Metromail Corporation, a provider
of information and technology products and services to direct marketing firms.
From June 1988 to December 1995, Mr. Eidell worked at R.R. Donnelley & Sons
Co., an international commercial printing company, where he was that company's
Senior Vice President, Finance and Treasurer from January 1991 to December
1995, and a Vice President from June 1988 through December 1990. Mr. Eidell
earned his M.B.A. from the University of Chicago in 1982 and his B.S. in
Business Administration from Drexel University in 1967.
E. Michele Vickery has been our Executive Vice President Operations since
March 1997. From 1990 to 1996, Ms. Vickery was employed by Surgical Care
Affiliates (SCA), a company specializing in the management of outpatient
surgery centers, as a Regional Vice President from 1990 until 1992, and as one
of two Senior Vice Presidents of Operations from 1992 to 1996. Upon the
acquisition of SCA by HealthSouth in 1996, Ms. Vickery continued as a Senior
Vice President of the Surgery Division of HealthSouth until joining us. Ms.
Vickery received her B.S.N. from Case Western Reserve University in 1978, and
her B.A. from Wittenberg University in 1976.
J. Gary Jordan joined us in April 1999 as our Senior Vice President Sales,
responsible for our sales organization and oversight of some of our development
activities. Prior to joining us, Mr. Jordan was President of the Cardiology
Division of the Cordis Corporation, a subsidiary of Johnson & Johnson, from
January 1997 to August 1998. In that capacity, he managed U.S. sales and
marketing,
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worldwide finance, information technology, quality assurance and human
resources. From July 1996 to December 1996, he was Cordis Corporation's Vice
President Sales and Marketing. From 1990 to 1996, Mr. Jordan was Vice President
of worldwide sales and marketing for St. Jude Medical where he directed
marketing and sales for St. Jude's heart valve division. Mr. Jordan earned his
B.A. from the University of Georgia in 1970.
Robert A. Wallach joined us in April 1999 as our Senior Vice President
Marketing, responsible for the overall strategy and field execution of our
marketing programs. Prior to joining us, Mr. Wallach was Vice President of
Global Marketing for Clean Shower, L.P., a consumer products company. From 1997
to 1998, Mr. Wallach was a Vice President of Marketing for Nabisco. From 1992
through 1997, Mr. Wallach was vice president of marketing for the Dannon
Company. Mr. Wallach has served on a number of industry association boards and
has recently been elected to the Board of Directors of the American Marketing
Association. Mr. Wallach earned his M.B.A. in marketing from Columbia
University in 1984, and his B.A., magna cum laude, from the State University of
New York at Albany in 1979.
John D. Hunkeler, M.D. is our Medical Director and has been a member of our
board of directors since January 1997. He is currently a director of Premier
Laser Systems, Inc., a company that designs, manufactures and sells lasers and
diagnostic equipment for dental, surgical and ophthalmic procedures. Dr.
Hunkeler is the founder and Medical Director of the Hunkeler Eye Centers and
has been practicing ophthalmology in the Kansas City area since 1973. In
October 1996, he was honored by the Ophthalmology Times as one of the top 100
ophthalmologists in the nation. Dr. Hunkeler is a Clinical Professor and Chair
of the Department of Ophthalmology at the University of Kansas School of
Medicine. He is certified by the American Board of Ophthalmology and is a past
president of the American Society for Cataract & Refractive Surgery. Dr.
Hunkeler earned his M.D. from the University of Kansas School of Medicine in
1967, served his internship at the Los Angeles County Hospital in Los Angeles,
California and completed his residency at the University of Kansas School of
Medicine in 1973.
R. Judd Jessup has been a member of our board of directors since November
1998. He is currently a director of CorVel Corporation, an independent
nationwide provider of medical cost containment and managed care services. Mr.
Jessup is currently a private investor. From 1994 to 1996 he served as
President of the HMO Division of FHP International Corporation, a diversified
health care services company. From 1987 to 1994, Mr. Jessup served as President
of Take Care, Inc., a multi-state HMO which was acquired by FHP International
Corporation in 1994. Mr. Jessup earned his M.B.A. from the University of Denver
in 1971, and his B.A. from Knox College in 1969.
Scott H. Kirk, M.D. has been a member of our board of directors since August
1995. Dr. Kirk has practiced ophthalmology in the Chicago area since 1982, and
has been the Medical Director at Kirk Eye Center in River Forest, Illinois
since 1987. Dr. Kirk is an assistant clinical professor at the University of
Illinois and is on the medical staff at West Suburban Hospital, Oak Park
Hospital and Gottleib Memorial Hospital. Dr. Kirk has served as a site surveyor
for the AAAHC since 1991 and is a current member of the AAAHC Board of
Directors. Dr. Kirk is certified by the American Board of Ophthalmology and is
a Fellow of the American Academy of Ophthalmology. Dr. Kirk is also a director
of the Outpatient Ophthalmology Surgical Society. Dr. Kirk earned his M.D. from
Washington University Medical School in 1978 and completed his residency there
in 1982.
Steven V. Napolitano has been a member of our board of directors since
January 1997. Mr. Napolitano is a senior partner in the law firm of Katten
Muchin & Zavis where he has practiced since 1995. He is a member of the firm's
Board of Directors and is also a co-chair of the firm's Private Equity and
Emerging Growth Company practice group. Mr. Napolitano practiced law in Chicago
with the firm of Dickinson, Wright, Moon, Van Dusen & Freeman from May 1991
through March 1995 and with Kirkland & Ellis from September 1985 through April
1991. He earned his J.D. from the Boston University School of Law, as a G.
Joseph Tauro Scholar, in 1985, and his B.A. in Economics from the University of
Notre Dame in 1981.
James B. Tananbaum has been a member of our board of directors since January
1997. Mr. Tananbaum has been President and Chief Executive Officer of Advanced
Medicine Inc., a private pharmaceutical research company since November 1996.
Mr. Tananbaum was a co-founder of GelTex Pharmaceuticals Inc., where he was a
director until January 1997. He has also served as a director of Intensiva
HealthCare Corporation and was a
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founding investor in Healtheon, Inc. From 1994 to 1996, he was a partner in
Sierra Ventures, a Menlo Park, California venture capital fund. Prior to
joining Sierra Ventures, Mr. Tananbaum was with Merck & Company, Inc., an
international pharmaceuticals company, where he served in a variety of line
operating management positions. Mr. Tananbaum earned his M.B.A. from Harvard
Business School in 1991, his M.D. from Harvard Medical School in 1989 and his
B.S.E.E. and B.S. degrees from Yale University in 1984.
Peter C. Wendell has been a member of our board of directors since March
1999. Mr. Wendell is the founder, and has been a General Partner, of Sierra
Ventures, a Menlo Park, California venture capital fund since 1982. He teaches
at Stanford University's Graduate School of Business, where he holds a faculty
appointment. In addition, Mr. Wendell is on the Board of Directors of the
Princeton University Investment Company which is responsible for the Princeton
endowment. He also serves as a director of Fatbrain.Com, Inc., an online
retailer of information resources, a position he has served in since September
1996. Previously, Mr. Wendell has worked in a variety of executive management
positions for IBM and has worked for McKinsey & Company management consultants.
Mr. Wendell earned his M.B.A., with distinction, from Harvard Business School
in 1976, and his B.A., magna cum laude, from Princeton University in 1972.
Douglas P. Williams, M.D. has been a member of our board of directors since
August 1995. Dr. Williams has been practicing ophthalmology at the Brodersen-
Williams Eye Institute, P.C. in Hammond, Indiana since July 1987. He is
certified by the American Board of Ophthalmology and is a member of the
American Society of Cataract and Refractive Surgery and the American College of
Eye Surgeons. Dr. Williams earned his M.D., A.O.A. from the University of
Chicago in 1983. He completed his residency at the University of Illinois Eye
and Ear Infirmary of Chicago in 1987.
Board of Directors
Our board of directors consists of eight directors. Following this offering,
the board of directors will be divided into three classes, with each class
serving for a term of three years. At each annual meeting of stockholders,
successors to those directors whose terms are expiring will be elected by our
stockholders. Directors whose terms will expire in 2000 are: Messrs. Winjum and
Wendell; directors whose terms will expire in 2001 are: Drs. Hunkeler and Kirk
and Mr. Tananbaum; directors whose terms will expire in 2002 are: Messrs.
Jessup and Napolitano and Dr. Williams.
Committees of the Board of Directors
Our audit committee recommends to our entire board of directors the
independent public accountants to be engaged by us, reviews the plan and scope
of our annual audit and reviews our internal controls and financial management
policies with our independent public accountants. The members of our audit
committee are Messrs. Jessup and Tananbaum.
Our compensation committee establishes guidelines and standards relating to
the determination of executive compensation, reviews executive compensation
policies and recommends to our entire board of directors compensation for our
executive officers. Our compensation committee also administers our stock
option and incentive award plans and determines the number of shares covered
by, and terms of, options to be granted to executive officers and key employees
pursuant to these plans. The members of our compensation committee are Messrs.
Jessup and Tananbaum.
Director Compensation
Except for grants of options to purchase our common stock granted upon the
initial election of some of our directors to our board of directors, our
directors do not receive compensation for serving as directors, attending or
participating in meetings or for serving on committees or participating in
committee meetings.
Compensation Committee Interlocks and Insider Participation
Our compensation committee currently consists of Messrs. Jessup and
Tananbaum. Neither member of the compensation committee has been an officer or
employee of us at any time. None of our executive officers serves as a member
of the board of directors or compensation committee of any other company that
has one or more executive officers
52
<PAGE>
Option Grants in 1998
serving as a member of our board of directors or compensation committee. Prior
to the formation of the compensation committee in May 1999, the board of
directors as a whole made decisions relating to compensation of our executive
officers. Mr. Winjum participated in all of these discussions and decisions,
except those regarding his own compensation.
Executive Compensation
The following table contains information with respect to all compensation
paid by us to our chief executive officer and our two other most highly
compensated executive officers in 1998. We employed no other executive officers
as of December 31, 1998. The $31,203 listed as Mr. Winjum's "Other Annual
Compensation" for 1998, is comprised of $22,203 paid to Mr. Winjum for accrued
but unused vacation in accordance with our established employee benefits policy
and a $9,000 annual allowance for automobile expense. The amounts relating to
Mr. Eidell reflect his compensation for the partial year commencing July 7,
1998, the date Mr. Eidell joined us.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation Awards
----------------------------- ------------------------------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Year Salary Bonus Compensation Award(s) Options/SARs Payout Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen J. Winjum....... 1998 $200,000 $75,000 $31,203 -- 50,000 -- --
Chairman of the Board,
President and Chief
Executive Officer
E. Michele Vickery...... 1998 $175,000 $40,000 -- -- 24,000 -- --
Executive Vice
President Operations
Ronald G. Eidell........ 1998 $ 80,096 $20,000 -- -- 250,000 -- --
Executive Vice
President and Chief
Financial Officer
</TABLE>
The following table contains information concerning our grant of stock
options to our chief executive officer and our two other most highly
compensated executive officers in 1998. Potential realizable value is presented
net of the option exercise price, but before any Federal or state income taxes
associated with exercise, and is calculated assuming that the fair market value
on the date of the grant appreciates at the indicated annual rates, compounded
annually, for the term of the option. The 5% and 10% assumed rates of
appreciation are mandated by the rules of the SEC and do not represent our
estimate or projection of future increases in the price of our common stock.
Actual gains will depend on the future performance of our common stock and the
option holder's continued employment throughout the vesting period. The amounts
reflected in the following table may not be achieved.
<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed Annual
Number of Percent of Rates of Stock
Shares Total Options Price Appreciation
Underlying Granted to Per Share for Option Term
Options Employees in Exercise or Expiration -------------------
Name Granted Fiscal Year Base Price Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Stephen J. Winjum....... 50,000 4.4% $3.50 2/01/2008 $110,100 $ 278,900
E. Michele Vickery...... 24,000 2.1% $3.50 2/01/2008 $ 52,800 $ 133,900
Ronald G. Eidell........ 250,000 22.1% $4.00 7/07/2008 $628,895 $1,593,742
</TABLE>
53
<PAGE>
1998 Option Values
The following table contains information regarding unexercised options held
by our chief executive officer and two other most highly compensated executive
officers at December 31, 1998. None of these individuals exercised any options
during 1998. The value of "in-the-money" options represents the difference
between the exercise price of an option and the fair market value of our common
stock as of December 31, 1998, which, solely for purposes of this calculation,
we estimate to have been $4.38 per share.
<TABLE>
<CAPTION>
Number of Shares
Underlying Unexercised Value of Unexercised
Options at December 31, In-The-Money Options at
1998 December 31, 1998
------------------------- -------------------------
Exercisable/Unexercisable Exercisable/Unexercisable
<S> <C> <C>
Stephen J. Winjum........... 585,834/404,166 $1,598,909/$946,291
E. Michele Vickery.......... 92,500/131,500 $195,150/$261,970
Ronald G. Eidell............ -- /250,000 $ -- /$ 95,000
</TABLE>
Employment Agreements
We have entered into employment agreements with Messrs. Winjum and Eidell
and Ms. Vickery that provide for current annual base salaries of $250,000,
$200,000, and $200,000, respectively. These executives are eligible to receive
an annual incentive compensation award based upon our executive compensation
plan which was effective January 1, 1999 and which was approved by our board of
directors. Incentive amounts payable under the plan for a year are based upon
relative achievement of earnings targets set by the board of directors at the
beginning of that year. Incentive compensation amounts are determined by
applying a percentage to the executive's salary. This percentage is determined
by reference to the level of actual earnings achievement compared to the
target. Achievement of targeted earnings levels will result in payments ranging
from 20% to 50% of the executive's salary. The agreements also provide for the
right to participate in our stock option plan and employee benefit programs.
These programs include hospitalization, disability, life and health insurance.
The employment agreements have initial terms of three years that automatically
renew on a year-to-year basis, unless either of us chooses to terminate the
agreement. The employment agreements impose on each employee non-competition
restrictions that survive termination of employment for one year and post-
termination confidentiality obligations. Each of these executives received
option grants as consideration for entering into these agreements.
We may terminate these agreements with or without cause or upon executive's
disability. If we terminate an executive for disability or cause, the executive
is not entitled to receive any salary or other severance after the date of
termination. We may terminate an executive for cause under the agreement if he
or she:
. materially breaches any term or condition of the agreement
. is grossly negligent in the performance of his or her duties
. fails to comply with any of our written guidelines that we have
furnished to the executive
. has committed an act that materially, negatively affects our business or
reputation, as reasonably determined by our board of directors
. has committed an act constituting a felony or other act involving
dishonesty, disloyalty or fraud against us, as reasonably determined by
our board of directors
If we terminate an executive without cause, the executive receives severance
compensation in a fixed amount equal to the executive's then-current base
salary and pro rata bonus for a period ranging from six to 18 months.
Limitation of Liability and Indemnification Matters
Our Restated Certificate of Incorporation contains provisions that eliminate
the personal liability of our directors to us or our stockholders for monetary
damages for breach of their fiduciary duty as a director to the fullest extent
permitted by the Delaware General Corporation Law, except for liability for:
54
<PAGE>
. any breach of their duty of loyalty to us or our stockholders
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law
. unlawful payments of dividends or unlawful stock repurchases or
redemptions
. any transaction from which the director derived an improper personal
benefit
Our Restated Certificate of Incorporation also contains provisions that
require us to indemnify our directors and that permit us to indemnify our
officers and employees to the fullest extent permitted by Delaware law,
including circumstances where indemnification would be discretionary. We are
not obligated to indemnify a person:
. with respect to proceedings, claims or actions initiated or brought
voluntarily by the person and not by way of defense
. for any amounts paid in settlement of an action indemnified against by us
without our prior written consent
We have obtained directors' and officers' liability insurance and have
entered into indemnity agreements with each of our directors and some of our
officers providing for this indemnification. We believe these measures are
essential to attracting and retaining qualified persons as directors and
officers.
1996 Stock Incentive Plan
In December 1996, we adopted the establishment of our 1996 Stock Incentive
Plan which is designed to promote our overall financial objectives by
motivating directors, officers, employees and other persons who are
instrumental to our long-term growth.
The 1996 plan is administered by the compensation committee of our board of
directors and is a flexible program that provides the Committee with broad
discretion to fashion the terms of grants of options as the compensation
committee deems appropriate. The plan currently permits the issuance of
nonstatutory stock options for the purchase of up to an additional 5,892,038
shares of common stock.
Directors, officers, employees, independent contractors and consultants who
are in a position to make contributions to our growth, management, protection
and success are eligible for selection by the compensation committee as
participants in the 1996 plan. Subject to the terms of the specific option
agreement, and with the exception of 1,075,800 options granted during the
period from February 1, 1999 through July 23, 1999, each option to purchase
common stock issued under our 1996 plan will become exercisable in stages
beginning six months after its grant date, when 1/8th of the participant's
options will become exercisable. An additional 1/48th of each of these options
will become exercisable as of the last day of each month thereafter. As a
result, each option will be exercisable in full 48 months after its grant date.
During July 1999, we fully vested all options granted to employees from
February 1, 1999 through July 23, 1999, contingent upon the completion of this
offering. We issued to employees options to acquire 1,075,800 shares of common
stock during this time period. In connection with the acceleration of these
options, each affected employee will be required to execute a lock-up agreement
with Donaldson, Lufkin & Jenrette that will restrict his or her ability to sell
shares received upon exercise of these options. The terms of these lock-up
agreements will restrict the affected employees from selling these shares for a
period of one year from the date of the final prospectus, and also place volume
limitations on the amount of shares that can be sold during the second and
third years following the date of the final prospectus.
We have also issued options to purchase common stock under the 1996 plan to
some of our affiliated eye care professionals. These options were purchased at
their fair market value based upon the Black-Scholes option-pricing model.
Retirement Plan
We have adopted a retirement savings plan covering most of our employees
provided they are 21 and have been working for us for the requisite length of
time. This retirement plan is intended to qualify under Sections 401(a) and
401(k) of the Internal Revenue Code.
Under terms of this plan, participants may elect to contribute up to 15% of
their annual compensation, subject to limitations under the Internal Revenue
Code, to the plan. In addition, we
55
<PAGE>
match 50% of a participant's contributions on the first 3% of salary
contributed by a participant to the plan.
These contributions are fully vested, except that our matching contributions
vest over time, fully vesting after five years of service. Benefits under this
plan are usually distributed through either a lump sum or installments
following retirement, death, disability or other termination of employment.
Benefits are sometimes distributed prior to termination of employment in
limited circumstances, including, for example, hardship and attainment of age
59 1/2.
1999 Stock Purchase Plan
In May 1999, our board of directors adopted an employee stock purchase plan
under which we reserved a total of 400,000 shares of our common stock for
purchase by our employees. We anticipate that this plan will be submitted to a
vote of our stockholders at our next annual meeting. Our compensation committee
administers the stock purchase plan. Employees are eligible to participate in
the stock purchase plan if they are employed by us and otherwise satisfy the
terms of the plan. The stock purchase plan will permit our eligible employees
to purchase our common stock through payroll deductions.
The stock purchase plan will operate on a calendar year basis. The stock
purchase plan will be implemented in a series of consecutive offering periods,
each approximately six months long, with the first offering period expected to
commence on the first trading day after September 30, 1999. The purchase price
per share at which shares are sold in an offering under the stock purchase plan
is expected to be 85% of the lesser of the fair market value of our stock on
the first day of the offering period, and the fair market value of our stock on
the last day of the offering period. Employees may end or modify their
participation in the stock purchase plan at any time during an offering period.
Participation ends automatically upon termination of employment. Payroll
deductions may not exceed $20,000 for any employee in any offering period.
No person will be able to purchase our common stock under the stock purchase
plan if that person or his or her family members, immediately after the
purchase, would own or control greater than 5% of our voting stock.
56
<PAGE>
CERTAIN TRANSACTIONS
Acquisition of Midwest Uncuts, Inc.
Effective January 1, 1999, we acquired all of the issued and outstanding
shares of Midwest Uncuts, Inc. in exchange for $5,400,000 in cash and 250,000
shares of our Series A convertible preferred stock valued at $4.38 per share.
The stockholders were Mr. and Mrs. John P. Winjum, the parents of our Chairman
of the Board, President and Chief Executive Officer. The terms and conditions
of this transaction were approved by a special committee appointed by our
Board, consisting of two independent, disinterested members of the Board. Prior
to this acquisition, we had retained Midwest Uncuts to finish and surface
lenses on a purchase order basis on market terms. We made payments of
approximately $520,000, $820,000 and $982,000 pursuant to these purchase orders
during 1996, 1997 and 1998, respectively.
Midwest Uncuts is now our wholly-owned subsidiary. We entered into a lease
agreement with John P. Winjum relating to the real estate underlying the
Indianola, Iowa location of Midwest Uncuts. The lease is effective as of
January 1, 1999 and is for 9,500 square feet of space. The lease has a five
year term and requires us to pay $48,000 per year in base rent over the term of
the lease.
Repurchase of Series A Convertible Preferred Stock
On June 25, 1998, we made an offer to the holders of our Series A
convertible preferred stock to purchase up to 1,200,000 shares of this stock at
a purchase price of $4.38 per share. This offer was designed to provide these
stockholders with liquidity. Pursuant to this offer, we purchased 1,188,414
shares of our Series A convertible preferred stock from some of the holders at
a purchase price of $4.38 per share. Douglas Williams Family Limited
Partnership, one of our 5% stockholders, was among the holders of Series A
convertible preferred stock who participated in this offer by selling 420,000
shares. Douglas Williams, a member of our board of directors, is the general
partner of Douglas Williams Family Limited Partnership.
Acquisition of TRI-OC Management, Inc.
Effective May 1, 1996, we acquired substantially all of the assets of TRI-OC
Management, Inc., a company specializing in the provision of optical dispensary
management services in exchange for 96,000 shares of our common stock. TRI-OC
is owned by three stockholders, each of whom was associated in some manner with
us prior to completion of this acquisition. TRI-OC's stockholders include John
P. Winjum, the father of our Chairman of the Board, President and Chief
Executive Officer, and Robert C. Goettling, an existing stockholder and our
Vice President Corporate Development. The disinterested members of the Board
unanimously approved this acquisition.
Physician Loans
We have also made the following loans which have been repaid:
We loaned $300,000 to Douglas P. Williams, M.D., a physician employed by,
and a stockholder of, Brodersen-Williams Eye Institute, P.C., an affiliated
professional entity located in Hammond, Indiana. Dr. Williams is also a member
of our Board. Dr. Williams signed a secured promissory note payable upon our
demand and bearing an interest rate of 9% per annum.
We loaned $150,000 to Ann K. Williams, M.D., a physician employed by, and a
stockholder of, Brodersen-Williams Eye Institute, P.C. Dr. Williams signed a
secured promissory note payable upon our demand and bearing an interest rate of
9% per annum.
Leases from Our Affiliated Physicians
Effective January 1, 1996, we entered into a lease agreement with Eldi E.
Deschamps, M.D. and his wife to lease approximately 10,000 square feet of
surgery and laser center and eye care clinic space located in Merrillville,
Indiana. The lease has a five year term and requires us to pay between $118,000
to $133,000 per year in base rent over the term of the lease. Dr. Deschamps is
the beneficial owner of more than 5% of our common stock.
57
<PAGE>
Effective January 1, 1996, we entered into a lease agreement with First
Colonial Trust Company, as trustee on behalf of Scott H. Kirk, M.D. to lease
10,098 square feet of surgery and laser center and eye care clinic space
located in River Forest, Illinois. The lease has a five year term and requires
us to pay between $165,000 to $186,000 per year in base rent over the term of
the lease. Dr. Kirk is one of our directors.
Effective January 1, 1996, we entered into a lease agreement with Mercantile
National Bank of Indiana, as trustee on behalf of Douglas P. Williams, M.D. to
lease 11,500 square feet of surgery and laser center and eye care clinic space
in Hammond, Indiana. The lease has a five year term and requires us to pay
between $173,000 to $194,000 per year in base rent over the term of the lease.
Dr. Williams is one of our directors.
Purchase of Clinical Research Contracts
Effective July 1, 1999, we purchased clinical research assets including
clinical research sponsor agreements from Hunkeler Eye Centers, P.C., in
exchange for 75,000 shares of our common stock. Hunkeler Eye Centers, P.C.'s
stockholders include John D. Hunkeler, M.D., our Medical Director and a member
of our board of directors.
Other Relationships with Affiliated Physicians
Scott H. Kirk, M.D., a member of our board of directors, is an
ophthalmologist employed by Hunkeler Eye Centers-Chicago, L.L.C., a
professional entity whose eye care professionals have been affiliated with us
since January, 1996. In 1996, 1997 and 1998, we recognized management services
revenue of approximately $3,151,000, $2,959,000, $3,034,000, respectively, from
the professional entity employing Dr. Kirk over this period. As described
above, we also lease office space from an entity affiliated with Dr. Kirk. Dr.
Kirk's brother, Kent H. Kirk, M.D., one of our shareholders, is also an
ophthalmologist employed by Hunkeler Eye Centers--Chicago, L.L.C.
John D. Hunkeler, M.D., a member of our board of directors, is an
ophthalmologist employed by Hunkeler Eye Centers, P.C., a physician group
affiliated with us since March 1997. In March, 1997, we acquired all of the
capital stock of NovaMed Management of Kansas City, Inc. from eleven
individuals, including Dr. Hunkeler. Dr. Hunkeler received 657,486 shares of
our common stock in exchange for his interest in NovaMed Management of Kansas
City, Inc. In addition, during 1997 and 1998, we recognized management services
revenue of approximately $6,747,000 and $9,841,000, respectively, from Hunkeler
Eye Centers, P.C.
Douglas P. Williams, M.D., a member of our board of directors, is an
ophthalmologist employed by Hunkeler Eye Centers-Chicago, L.L.C., a
professional entity whose eye care professionals have been affiliated with us
since January, 1996. In 1996, 1997 and 1998, we recognized management services
revenue of $1,799,000, $1,832,000 and $1,925,000, respectively, from the
professional entity employing Dr. Williams over this period. As described
above, we also lease office space from an entity affiliated with Dr. Williams.
Eldi E. Deschamps, M.D., a 5% stockholder is an ophthalmologist employed by
Hunkeler Eye Centers--Chicago, L.L.C., a professional entity whose eye care
professionals have been affiliated with us since January, 1996. In 1996, 1997
and 1998, we recognized management services revenue of $926,000, $954,000 and
$887,000, respectively, from the professional entity employing Dr. Deschamps
over this period. As described above, we also lease office space from an entity
affiliated with Dr. Deschamps.
58
<PAGE>
SELLING STOCKHOLDERS
Some of the shares being sold are presently owned by existing stockholders.
These shares were acquired through conversions of our preferred stock upon
completion of this offering or through private placements pursuant to Section
4(2) of the Securities Act.
The following table contains information regarding beneficial ownership of
our common stock as of July 31, 1999 and as adjusted to reflect the sale of
each selling stockholder's common stock in this offering. The selling
stockholders have furnished this information to us, and this information is, to
the best of our knowledge, accurate.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership Options to
of Common Stock Number of Common Stock Purchase Shares
Prior to this Offering of After this Offering Included in
---------------------- Shares ---------------------- Beneficial
Number of Percent of Being Number of Percent of Ownership
Name Shares Voting Power Offered Shares Voting Power Figures
<S> <C> <C> <C> <C> <C> <C>
Timothy B. Cavanaugh 184,358 * 16,597 167,761 * --
Cavanaugh Investments,
LLC 17,123 * 1,605 15,518 * --
Clifton D. Cokingtin (1) 121,241 * 10,977 110,264 * --
Eldi E. Deschamps
Revocable Trust (2) 1,001,313 5.32% 140,577 860,736 3.65% --
Daniel S. Durrie 394,885 2.09% 54,898 339,987 1.44% 76,041
Walter I. Fried and Gail
S. Fried Family Limited
Partnership 628,000 3.34% 4,686 623,314 2.64% --
Godfrey Family Limited
Partnership 90,404 * 2,343 88,061 * --
Blake Horio 54,247 * 3,209 51,038 * 20,000
John D. Hunkeler
Revocable Trust (3) 794,472 4.22% 32,801 761,671 3.23% --
Jemshed A. Khan (4) 155,097 * 14,304 140,793 * --
Illinois Eye
Specialists, Ltd. (5) -- -- 2,466 23,849 * --
Kirk Family Limited
Partnership (6) 2,620,000 13.93% 281,153 2,338,847 9.91% --
Andrew L. Moyes 96,908 * 4,686 92,222 * --
Northshore Eye
Surgicenter, Ltd. 460,300 2.45% 59,258 401,042 1.70% --
Robert A. Rymer Trust 45,662 * 9,190 36,472 * --
Kathleen M. Scarpulla 247,300 1.31% 37,234 210,066 * --
Steven M. Silverstein
Revocable Trust 117,329 * 10,996 106,333 * --
Michael C. Stiles (7) 177,843 * 16,021 161,822 * --
Stephen Vile Limited
Partnership 350,000 1.86% 28,584 321,416 1.36% --
Vile Family Limited
Partnership 90,000 * 12,652 77,348 * --
Stephen C. Volk (8) 102,740 * 46,859 766,407 3.25% --
Daniel Weinberg 4,000 * 375 3,625 * --
Stephen B. Wiles 200,237 1.06% 18,376 181,861 * --
Douglas P. Williams
Family Limited
Partnership (9) 1,820,000 9.68% 140,577 1,679,423 7.12% --
Lawrence D. Wolin
Limited Partnership 464,000 2.47% 49,577 414,423 1.76% --
</TABLE>
- --------
* Less than 1%
(1) Includes 34,247 shares jointly held with Diana L. Cokingtin before the
offering and 23,270 shares held after the offering.
(2) The trustee for Eldi E. Deschamps Revocable Trust is Eldi E. Deschamps,
M.D., a 5% stockholder. See "Principal Stockholders." Excludes 518,687
shares held in a separate trust for which Dr. Deschamps is also trustee.
(3) The trustee for the John D. Hunkeler Revocable Trust is John D. Hunkeler,
M.D., a member of our board of directors and our Medical Director.
(4) Includes 40,000 shares jointly held by Jemshed A. Khan and Michelle Hart-
Khan before the offering and 34,061 shares held after the offering.
(5) Upon the closing of this offering, Illinois Eye Specialists will exercise
its right to convert a subordinated exchangeable promissory note having a
face value of $200,000 into 26,315 shares.
(6) The general partners of the Kirk Family Limited Partnership are S. Kirk,
S.C. and Kirk Eye Center, S.C. Scott H. Kirk, M.D., a member of our board
of directors is the sole shareholder of S. Kirk, S.C., and his brother,
Kent A. Kirk, M.D., is the sole shareholder of Kirk Eye Center, S.C.
(7) Includes 5,708 shares jointly held with Michella M. Stiles before the
offering and 5,174 shares held after the offering.
(8) Upon the closing of this offering, Stephan C. Volk will exercise his right
to convert a subordinated exchangeable promissory note having a face value
of $5,400,000 into $710,526 shares.
(9) The general partner of the Douglas Williams Family Limited Partnership is
Brodersen-Williams Eye Institute, P.C. Douglas P. Williams, M.D., a member
of our board of directors, is the sole shareholder of Brodersen-Williams
Eye Institute, P.C. Excludes 68,000 shares held by Dr. Williams
individually.
59
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table contains information regarding the beneficial ownership
of our common stock as of July 31, 1999, and as adjusted to reflect the sale of
our common stock in this offering, by:
. each person or group of affiliated persons known by us to beneficially
own more than 5% of the outstanding shares of our common stock
. each of our directors
. each of our chief executive officer and the two other most highly
compensated executive officers in 1998
. all of our directors and executive officers as a group
Unless otherwise indicated below the persons in this table have sole voting
and investment power with respect to all shares shown as beneficially owned by
them. Beneficial ownership is determined in accordance with the rules of the
SEC. The number of shares beneficially owned by a person and the percentage
ownership of that person include shares of our common stock subject to options
and warrants held by that person that are currently exercisable or exercisable
within 60 days of July 31, 1999. Unless otherwise indicated, the address of the
beneficial owners is c/o NovaMed Eyecare, Inc., 980 North Michigan Avenue,
Suite 1620, Chicago, Illinois 60611.
<TABLE>
<CAPTION>
Options to Purchase
Beneficial Ownership of Beneficial Ownership of Shares Included
Common Stock Common Stock in Beneficial
Prior to this Offering After this Offering Ownership Figures
----------------------- ----------------------- -------------------
Number of Percent of Number of Percent of
Name and Address Shares Voting Power Shares Voting Power
<S> <C> <C> <C> <C> <C>
Five Percent Stockholders:
Kirk Family Limited
Partnership (1)........ 2,620,000 13.93% 2,338,847 9.91% --
c/o Kirk Eye Center,
S.C.
7427 Lake Street
River Forest, Illinois
60305
Sierra Ventures V, L.P.. 2,366,722 12.58% 2,366,722 10.03% --
c/o Peter C. Wendell
3000 Sand Hill Road
Building 4, Suite 210,
Menlo Park, California
94025
Douglas Williams Family
Limited Partnership
(2).................... 1,820,000 9.68% 1,679,423 7.12% --
c/o Brodersen-Williams
Eye Institute, P.C.,
6850 Hohman Avenue
Hammond, Indiana 46324
Eldi E. Deschamps, M.D.
(3).................... 1,520,000 8.08% 1,379,423 5.85% --
8510 Broadway Street
Merrillville, Indiana
46410
Directors and Officers:
Stephen J. Winjum....... 1,674,557 8.53% 1,674,557 6.86% 826,457
Ronald G. Eidell........ 159,994 * 159,994 * 102,916
E. Michele Vickery...... 200,287 1.06% 200,287 * 126,333
Scott H. Kirk, M.D. (4). 2,774,247 14.75% 2,493,094 10.57% --
John D. Hunkeler, M.D.
(5).................... 872,564 4.62% 839,763 3.55% 66,666
R. Judd Jessup (6)...... 112,157 * 112,157 * 20,833
Steven V. Napolitano
(7).................... 134,666 * 134,666 * 66,666
James B. Tananbaum...... 66,666 * 66,666 * 10,416
Douglas P. Williams,
M.D. (8)............... 1,888,000 10.04% 1,747,423 7.41% --
Peter C. Wendell (9).... 2,366,722 12.58% 2,366,722 10.03% --
All Executive Officers and
Directors as a Group
(12 people).............. 10,469,860 51.70% 10,015,329 40.02% 1,440,287
</TABLE>
60
<PAGE>
- --------
* Less than 1%
(1) The general partners of the Kirk Family Limited Partnership are S. Kirk,
S.C. and Kirk Eye Center, S.C. Scott H. Kirk, M.D., a member of our board
of directors, is the sole shareholder of S. Kirk, S.C., and his brother,
Kent A. Kirk, M.D., is the sole shareholder of Kirk Eye Center, S.C.
(2) The general partner of the Douglas Williams Family Limited Partnership is
Brodersen-Williams Eye Institute, P.C. Douglas P. Williams, M.D., a member
of our board of directors, is the sole shareholder of Brodersen-Williams
Eye Institute, P.C.
(3) Includes 518,687 shares held by Eldi E. Deschamps, M.D. as Trustee for the
Eldi Deschamps Grantor Annuity Trust u/a/d June 1, 1998 and 1,001,313
shares held by Eldi E. Deschamps, M.D. as Trustee for the Eldi Deschamps
Revocable Trust u/a/d June 1, 1998 before the offering and 860,736 shares
held after the offering.
(4) Includes 2,620,000 shares held by the Kirk Family Limited Partnership of
which Dr. Kirk is a partner.
(5) Includes 794,427 shares held by John D. Hunkeler, M.D. as Trustee for the
John D. Hunkeler Revocable Trust u/a/d October 13, 1988 before the
offering and 761,671 shares held after the offering.
(6) Includes 91,324 shares which are held by R. Judd Jessup and Charlene Lynne
Jessup, as Trustees for the R. Judd Jessup and Charlene Lynne Jessup
Living Trust u/a/d May 6, 1991.
(7) Excludes 23,962 shares of our common stock owned by Katten Muchin & Zavis,
the law firm of which Mr. Napolitano is a partner. See "Legal Matters".
(8) Includes 1,820,000 shares held by the Douglas Williams Family Limited
Partnership before the offering and 1,679,423 shares held after the
offering. Dr. Williams is a partner of the Douglas Williams Family Limited
Partnership.
(9) Includes 2,366,722 shares held by Sierra Ventures V, L.P. Mr. Wendell is a
general partner of SV Associates V, L.P., which is a general partner of
Sierra Ventures V, L.P. Mr. Wendell disclaims beneficial ownership of
these shares, except to the extent of his economic interest in the shares.
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<PAGE>
DESCRIPTION OF SECURITIES
General
The following summary is subject to, and qualified by, applicable law and
the provisions of our Restated Certificate of Incorporation and By-laws. We
have included these organizational documents as exhibits to the registration
statement of which this prospectus is a part.
Our Restated Certificate of Incorporation authorizes us to issue 100 million
shares of capital stock, of which 81,761,465 shares are designated common stock
and 18,238,535 shares are designated preferred stock. We currently have
outstanding 11,602,698 shares of Series A convertible preferred stock, 400,000
shares of Series B convertible preferred stock, 2,000,000 shares of Series C
convertible preferred stock and 2,323,837 shares of Series D convertible
preferred stock. Upon completion of this offering, all of this preferred stock
will automatically convert into an aggregate of 16,326,535 shares of our common
stock, and there will be no shares of preferred stock outstanding. Following
conversion of the outstanding preferred stock into common stock, the Series A,
B, C and D convertible preferred stock will be eliminated and these shares will
not be available for reissuance.
We currently have 2,490,968 shares of common stock outstanding. Of the
81,761,465 authorized shares of our common stock, 16,326,535 shares are
reserved for issuance upon conversion of the preferred stock, 5,892,038 shares
are reserved for issuance pursuant to our 1996 Stock Incentive Plan, and
400,000 shares are reserved for issuance pursuant to our 1999 Stock Purchase
Plan.
Common Stock
Our board of directors is classified into three classes as nearly equal in
number as possible, with the term of each class expiring on a staggered basis.
The classification of our board of directors may make it more difficult to
change the composition of the board of directors and thereby may discourage or
make more difficult an attempt by a person or group to obtain control of us.
Cumulative voting for the election of directors is not permitted, enabling
holders of a majority of our outstanding common stock to elect all members of
the class of directors whose terms are then expiring.
Voting Rights
Holders of our common stock are entitled to one vote per share. Subject to
any voting rights granted to holders of any preferred stock, a majority of the
votes entitled to be cast by all holders of our common stock will generally be
required to approve matters voted on by our stockholders. Amendments to our
Restated Certificate of Incorporation that would change and adversely affect
the powers, preferences or rights of a class or series of our stock also must
be approved by a majority of the votes entitled to be cast by the holders of
the adversely affected class or series, voting as a separate class or series.
Dividends
Subject to the rights of holders of any outstanding preferred stock, the
holders of outstanding shares of our common stock will share ratably on a per
share basis in any dividends declared from time to time by our board of
directors.
Other Rights
Subject to the rights of holders of any outstanding preferred stock, upon
our liquidation, dissolution or winding up, we will distribute any assets
legally available for distribution to our stockholders, ratably among the
holders of our common stock outstanding at that time. All shares of our common
stock currently outstanding are, and all shares of our common stock when duly
issued and paid for will be, fully paid and nonassessable, not subject to
redemption and without preemptive rights.
The $1.35 million of our subordinated exchangeable promissory notes not
exchanged for our common stock in connection with this offering will, by their
terms, become subordinated term notes following this offering. These notes will
be redeemed by us prior to the end of 1999, as described under "Use of
Proceeds". Prior to the redemption of these notes, laws concerning bankruptcy,
insolvency, reorganization, receivership, moratorium or other similar laws
affecting the rights and remedies of creditors generally will result in the
claims of the holders of these notes being satisfied prior to the claims of our
stockholders.
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Preferred Stock
Upon completion of this offering, all of our currently outstanding preferred
stock will automatically convert into shares of our common stock and there will
be no shares of preferred stock outstanding. Therefore, the following
information does not pertain to the currently outstanding preferred stock, but
rather the 1,820,000 shares of preferred stock that we may issue in the future
pursuant to our Restated Certificate of Incorporation.
We may issue preferred stock in series from time to time. Our board of
directors may designate the rights, preferences and limitations of these
shares. The rights, preferences and limitations of different series of
preferred stock may differ with respect to a variety of matters, including:
. dividend rates
. amounts payable on liquidation
. voting rights
. conversion rights
. redemption provisions
. sinking fund provisions
Our board of directors may authorize the issuance of preferred stock which
ranks senior to our common stock as to payment of dividends and the
distribution of assets on liquidation. In addition, our board of directors may
fix the limitations and restrictions, if any, upon the payment of dividends on
common stock to be effective while any shares of preferred stock are
outstanding. Our board of directors, without stockholder approval, may issue
preferred stock with voting and conversion rights which could adversely affect
the voting power of the holders of common stock.
Our undesignated preferred stock may allow our board of directors to render
more difficult or to discourage an attempt to obtain control of us by means of
a tender offer, proxy contest, merger or otherwise. The issuance of this
preferred stock pursuant to the board of director's authority may adversely
affect the rights of the holders of our common stock. For example, preferred
stock issued by us may rank prior to our common stock as to dividend rights,
liquidation preference or both, may have full or limited voting rights and may
be convertible into shares of our common stock. Accordingly, the issuance of
shares of preferred stock may discourage bids for our common stock or may
otherwise adversely affect the market price of our common stock. Except as
described in our Rights Agreement, we have no present intention to issue shares
of preferred stock.
Delaware Anti-Takeover Law and Charter and Bylaw Provisions
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, this section prohibits a publicly held Delaware
corporation from engaging in a business combination with an interested
stockholder for a period of three years after the date of the transaction in
which the person becomes an interested stockholder, unless each of the
following is satisfied:
. prior to the date at which the stockholder became an interested
stockholder, our board of directors approved either the business
combination or the transaction in which the person became an interested
stockholder
. in the transaction in which the stockholder becomes an interested
stockholder, the stockholder acquires more than 85% of the outstanding
voting stock of the corporation, excluding shares held by directors who
are officers or held in specified employee stock plans
. at a stockholder meeting held on or subsequent to the date of the
business combination, the business combination is approved by our board
of directors and by two-thirds of the outstanding voting stock of the
corporation, excluding shares held by the interested stockholder
An interested stockholder is a person who, together with affiliates and
associates, owns, or at any time within the prior three years did own, 15% or
more of the corporation's voting stock. Business combinations include, without
limitation, mergers, consolidations, stock sales and asset-based transactions
and other transactions resulting in a financial benefit to the interested
stockholder.
Our Restated Certificate of Incorporation and Bylaws contain a number of
provisions relating to corporate governance and to the rights of our
stockholders. These provisions may be deemed to have a potential anti-takeover
effect in that these
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provisions may delay, defer or prevent a change of control of us. These
provisions include:
. a requirement that, following this offering, stockholder action may be
taken only at stockholder meetings and not by written consent
. notice requirements relating to nominations to our board of directors and
to the raising of business matters at stockholder meetings that generally
require the stockholder to notify us within 45 to 75 days prior to the
first anniversary of the previous year's annual meeting of his or her
intention to raise a matter at the meeting provided that the stockholder
has sent a proxy to the holders of at least the percentage of voting
shares required to carry the proposal or, in the case of a nomination, to
the holders of at least the percentage of voting shares that the
stockholder reasonably believes to be sufficient to elect the nominee
. a requirement that special meetings of stockholders can only be called by
our Chairman of the Board, President, Chief Executive Officer or a
majority of our board of directors
. the classification of our board of directors, following this offering,
into three classes, each serving for staggered three-year terms
Rights Agreement
On July 7, 1999, our board of directors declared a dividend of one right for
each outstanding share of our common stock. The dividend was paid on July 12,
1999 to the stockholders of record on that date. Each right entitles the
registered holder to purchase from us one one-thousandth of a share of Series E
Junior Participating Preferred Stock, par value $.01 per share at a price of
$110.00 per one one-thousandth of a share of Series E Junior Participating
Preferred Stock, subject to adjustment. The description and terms of the rights
are set forth in a Rights Agreement between us and The American Stock Transfer
Company, as Rights Agent.
The rights are not exercisable until the distribution date which occurs on
the earlier of:
. the close of business on the tenth day after the first public
announcement that a person or group of affiliated or associated persons
has become an acquiring person by acquiring beneficial ownership of 15%
or more of our outstanding common stock, or
. the close of business on the tenth day, or a later date as may be
determined by our board of directors prior to the time that any person
becomes an acquiring person, following the commencement of, or
announcement of an intention to make, a tender or exchange offer the
consummation of which would result in the beneficial ownership of this
person or group of 15% or more of the outstanding shares of our common
stock.
Until the distribution date, the rights will be evidenced by our common
stock certificates and will be transferable only by the transfer of the shares
of common stock associated with the rights. Any transfer of the shares of our
common stock will constitute a transfer of the rights. As described below,
after a person or group becomes an acquiring person, the rights may not be
redeemed and may be amended under limited circumstances.
Until the distribution date or earlier redemption or expiration of the
rights, new certificates for shares of our common stock issued after July 12,
1999, upon transfer or new issuance of shares of our common stock, will contain
a legend incorporating the rights agreement by reference. Until the
distribution date or earlier redemption or expiration of the rights, the
surrender for transfer of any certificate for shares of our common stock
outstanding as of July 12, 1999 will also constitute the transfer of the rights
associated with shares of our common stock represented by this certificate. As
soon as practicable following the distribution date, separate certificates
evidencing the rights will be mailed to holders of record of the shares of our
common stock as of the close of business on the distribution date and these
separate rights certificates alone will evidence the rights. Each right is
exercisable for one one-thousandth of a share of our Series E Junior
Participating Preferred Stock at any time after the distribution date.
The rights are not exercisable for shares of our common stock until a
person, entity or group becomes an acquiring person. The rights will expire on
July 11, 2009, unless this date is extended or
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<PAGE>
unless the rights are redeemed earlier by us, in each case, as described below.
If a person or group becomes an acquiring person, each holder of a right
will have the right to receive, upon exercise, shares of our common stock, or
in specified circumstances, cash, property or other securities of us, having a
value equal to two times the purchase price of the right. However, all rights
that are, or were, beneficially owned by any acquiring person will be void.
At any time after the first date of public announcement by us or an
acquiring person that an acquiring person has become an acquiring person, if:
. we are the surviving corporation in a merger with any other company or
entity,
. we are acquired in a merger or other business combination transaction,
. 50% or more of our consolidated assets or earning power are sold, or
. an acquiring person engages in specified self-dealing transactions with
us,
each holder of a right, other than those whose rights have become void, will
have the right to receive, upon the exercise of the right at the then current
purchase price of the right, a number of shares of common stock of the
surviving or acquiring company which at the time of this type of transaction
will have a market value of two times the purchase price of this right.
At any time after a person or group becomes an acquiring person and prior to
the acquisition by this type of person or group of 50% or more of the
outstanding shares of our common stock, our board of directors may exchange the
rights, in whole or in part, without any additional payment, for shares of our
common stock at an exchange ratio of one share of our common stock per right.
Our board of directors shall exclude rights that have become void, and our
board of directors may issue a preferred share having equivalent rights,
preferences and privileges rather than a share of our common stock.
At any time prior to a person or group becoming an acquiring person, our
board of directors may redeem all, but not less than all, of the rights at a
redemption price of $.01 per right. The redemption of the rights may be made
effective at a time, on a basis and with any conditions as our board of
directors in its sole discretion may establish. Immediately upon any redemption
of the rights, the right to exercise the rights will terminate and the only
right of the holders of rights will be to receive the redemption price.
Any of the provisions of the rights may be amended by our board of directors
in order to cure any ambiguity or to make any other changes which our board of
directors deems necessary or desirable. However, after a person or group
becomes an acquiring person, any amendment must not adversely affect the
interests of holders of rights, other than the interests of any acquiring
person.
We have included the Rights Agreement as an exhibit to the registration
statement of which this prospectus is a part. A copy of the Rights Agreement
also is available free of charge from us. This summary description of the
rights does not purport to be complete and is qualified in its entirety by
reference to the Rights Agreement.
Registration Rights
Following is a description of the registration rights of our existing
stockholders:
Demand Rights. Our existing stockholders have the right to demand
registration of 4,257,238 of the shares they hold. At any time at least six
months after this offering, our stockholders that held our Class C or D
convertible preferred stock prior to this offering are entitled to one demand
registration upon initiation by at least 51% of these holders. Thereafter, a
second demand registration may be initiated by not less than 25% of these
holders. We are only required to effect a registration if at least 20% of the
common stock that was Class C or D convertible preferred stock prior to this
offering is to be sold in the demand offering and the anticipated aggregate
offering price of this demand registration exceeds $5,000,000. These holders
will be entitled to sell all of the shares requested to be registered, subject
to pro rata cutback in the underwriters' discretion.
Piggyback Rights. Our existing stockholders have piggyback registration
rights for 18,603,807 shares covering future offerings by us. Our stockholders
that held our Class C or D convertible preferred stock prior to this offering
have waived
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
their piggyback registration rights with respect to this offering. In a
secondary public offering effected at our initiation, these holders are
entitled to pro rata piggyback registration rights with respect to 50% of the
shares, other than shares to be sold for our benefit, permitted by the
underwriters to be sold in a secondary offering.
Our stockholders that held our common stock and Class A or B convertible
preferred stock prior to this offering have also waived their piggyback
registration rights with respect to this offering. In a secondary offering
initiated by us, these holders are entitled to pro rata piggyback registration
rights with respect to 50% of the shares, other than shares to be sold for our
benefit, permitted by the underwriter to be sold. These holders also have
piggyback registration rights with respect to any registration effected
pursuant to the demand registration rights of our stockholders that held our
Class C or D convertible preferred stock prior to this offering; provided,
however, that any of these registration rights are subordinate to the rights of
our former Class C or D convertible preferred holders and us to participate in
the offering and are subject to cutback in the underwriter's discretion.
The holders of shares who are entitled to either demand rights or piggyback
rights have agreed not to exercise these rights as follows:
. holders of 6,650,815 of these shares have agreed not to exercise these
rights for six months after the date of this prospectus
. the holders of 12,442,992 of these shares have agreed not to exercise
these rights for one year after the date of this prospectus
Expenses. Expenses of the registrations described above are paid by us other
than underwriting discounts and commissions and the fees of special counsel for
selling stockholders.
Transfer. Registration rights shall be transferable only with the transfer
of at least 500,000 shares of our common stock entitled to these rights or the
transfer of this common stock to a partner, stockholder or affiliate of the
transferor.
Termination. All registration rights shall terminate five years after this
offering.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is The American Stock
Transfer and Trust Company.
There will be 23,593,807 shares of our common stock outstanding immediately
after this offering. The 4,500,000 shares being sold in this offering are
freely tradeable without restriction unless held by a Rule 144 Affiliate.
After this offering, 141 holders of our common stock who did not purchase
shares in this offering will own 19,093,807 shares of our common stock. These
shares have not been registered under the Securities Act and, therefore, may
not be sold unless registered under the Securities Act or sold pursuant to an
exemption from registration, including, for example, the exemption provided by
Rule 144.
Lock-Up Agreements
We and our existing stockholders, including our executive officers and
directors, but excluding our affiliated eye care professionals who are
discussed below, have agreed that, for a period of 180 days from the date of
the final prospectus, we and they will not, subject to some exceptions, without
the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock, regardless of whether any of the transactions described in these
subparagraphs is to be settled by the delivery of common stock or other
securities, in cash or otherwise.
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<PAGE>
Our affiliated eye care professionals who are stockholders, including the
selling stockholders, have agreed to similar restrictions for a period of one
year from the date of the final prospectus and to additional volume limitations
during the year following the first anniversary of the date of the final
prospectus.
In connection with our acceleration of the vesting of options to acquire
1,075,800 shares of common stock granted to employees, each affected employee
will be required to execute a lock-up agreement with Donaldson Lufkin &
Jenrette. The lock-up agreements will prohibit the affected employees from
selling the shares issued upon exercise of these options for a period of one
year from the date of the final prospectus and also places volume limitations
on the amount of these shares the affected employees may sell during the second
and third years following the date of the final prospectus.
In addition, for a 180 day period we have agreed not to file any
registration statement with respect to, and each of our executive officers,
directors and some of our stockholders, including the selling stockholders, has
agreed not to make any demand for, or exercise any right with respect to, the
registration of any shares of common stock or any securities convertible into
or exercisable for common stock without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation.
As a result of these contractual restrictions, notwithstanding possible
earlier eligibility for sale under the provisions of Rules 144 and 701 of the
Securities Act discussed below, shares subject to these lock-up agreements will
not be salable until the agreements expire or unless prior written consent is
received from Donaldson, Lufkin & Jenrette Securities Corporation. Any early
waiver of the lock-up agreements by the underwriters, which, if granted, could
permit sales of a substantial number of shares and could adversely affect the
trading price of our shares, may not be accompanied by an advance public
announcement by us.
Taking into account these lock-up agreements, 6,650,815 shares will be
eligible for sale 180 days from the date of the final prospectus and 12,442,992
shares will become eligible for sale one year from the date of the final
prospectus, subject in some cases to volume and manner of sale limitations.
Rule 144
In general, under Rule 144, beginning 90 days after the date of the final
prospectus, a person, or persons whose shares are aggregated, who has
beneficially owned restricted shares for at least one year, including a person
who may be deemed our Rule 144 Affiliate, would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
. one percent of the number of shares of our common stock then outstanding;
or
. the average weekly trading volume of our common stock during the four
calendar weeks preceding the filing of a notice on Form 144 with respect
to the proposed sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us. We are unable to estimate accurately the number of restricted shares that
will be sold under Rule 144 because this will depend in part on the market
price of our common stock, the personal circumstances of the seller and other
factors.
Under Rule 144(k), a person who is not deemed to have been our Rule 144
Affiliate at any time during the 90 days preceding a sale, and who has
beneficially owned for at least two years the shares proposed to be sold, would
be entitled to sell those shares under Rule 144(k) without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144. Therefore, subject to the lock-up agreements, these shares may be
sold upon completion of this offering.
Rule 701
Beginning 90 days after the date of this prospectus, the shares of common
stock issuable upon exercise of the options granted by us prior to the
effective date of the registration statement will be eligible for sale in the
public market pursuant to Rule 701 under the Securities Act, subject to the
lock-up agreements. In general, Rule 701 permits resales of shares issued under
specified compensatory benefit plans and contracts commencing 90 days after the
issuer becomes subject to the reporting requirements of the Securities Exchange
Act in reliance upon Rule 144, but without compliance with restrictions,
including the holding period requirements, contained in Rule 144.
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Registration Statements on Form S-8
Following this offering, we intend to file under the Securities Act one or
more registration statements on Form S-8 to register all of the shares of our
common stock eligible for this form of registration statement:
. issuable upon exercise of outstanding options granted pursuant to our
1996 stock incentive plan
. reserved for future option grants pursuant to individual option
agreements or our 1996 stock incentive plan
. that we intend to offer for sale to our employees pursuant to our
employee stock purchase plan
These registration statements are expected to become effective upon filing and
shares covered by these registration statements will be subject to vesting
provisions and, in the case of Rule 144 Affiliates only, to the restrictions of
Rule 144, other than the holding period requirement, and subject to expiration
of the lock-up agreements.
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UNDERWRITING
Subject to the terms and conditions contained in the underwriting agreement
dated , 1999, the underwriters identified below, who are represented
by Donaldson, Lufkin & Jenrette Securities Corporation, Hambrecht & Quist LLC,
William Blair & Company, L.L.C. and DLJdirect Inc. have severally agreed to
purchase from us and the selling stockholders, the respective number of shares
of our common stock appearing opposite their names below:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation..............
Hambrecht & Quist LLC............................................
William Blair & Company, L.L.C. ................................
DLJdirect Inc....................................................
---------
Total.......................................................... 4,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered in this prospectus are subject to approval by their counsel of legal
matters and to other conditions. The underwriters are obligated to purchase and
accept delivery of all the shares of common stock offered in this prospectus,
other than those shares covered by the over-allotment option described below,
if any are purchased.
The underwriters propose to initially offer the shares of common stock in
part directly to the public at the public offering price set forth on the cover
page of this prospectus and in part to dealers, including the underwriters, at
this price less a concession not in excess of $ per share. The
underwriters may allow, and those dealers may re-allow, to other dealers a
concession not in excess of $ per share. After the initial offering of
the common stock, the public offering price and other selling terms may be
changed by the representatives of the underwriters at any time without notice.
The underwriters have informed us that they do not intend to confirm sales to
discretionary accounts.
The following table shows the underwriting fees to be paid to the
underwriters by us and the selling stockholders in connection with this
offering. The fees to be paid by us will be % of the initial public
offering price and are shown below assuming both no exercise and full exercise
of the underwriters' option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
Paid by Selling
Paid by Company Stockholders
----------------- ---------------
No
Exercise Full
-------- --------
<S> <C> <C> <C> <C>
Per share.................................. $ $ $ $
Total...................................... $
</TABLE>
We will pay the offering expenses, estimated to be $1.8 million, which
include, among other things:
. the SEC registration fee of $29,646
. the NASD filing fee of $10,500
. the Nasdaq National Market listing fee of $95,000
. accountants' fees and expenses of $175,000
. legal fees and expenses of $1.2 million
. transfer agent and registrar fees and expenses of $3,500
. printing and engraving expenses of $225,000
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We have granted the underwriters an option, exercisable for 30 days from the
date of the underwriting agreement, to purchase up to 675,000 additional shares
at the public offering price less the underwriting discount. This option may be
exercised solely to cover over-allotments, if any, made in connection with this
offering. To the extent the underwriters exercise this option, each underwriter
will become obligated, subject to conditions, to purchase a number of
additional shares approximately proportionate to the underwriter's initial
purchase commitment.
We and the selling stockholders have agreed to indemnify the underwriters
against civil liabilities, including liabilities under the Securities Act of
1933, or to contribute to payments that the underwriters may be required to
make in respect of any of those liabilities.
Prior to this offering, there was no established trading market for our
common stock. The initial public offering price of our common stock in this
offering will be determined by negotiations among us, the selling stockholders
and the representatives. Among the factors to be considered in determining the
initial public offering price are:
. the history and the prospects for the industry in which we compete
. our past and present operations
. our historical results of operations
. our prospects for future earnings
. the general condition of the securities markets at the time of this
offering
. the recent market prices of securities of generally comparable companies
We cannot assure you that an active trading market will develop for our common
stock or that it will trade at or above the initial public offering price in
the public market after this offering. We are applying to have our common stock
listed on the Nasdaq National Market under the symbol "NOVA."
In connection with this offering, the representatives, on behalf of the
underwriters, may engage in over-allotment, stabilizing transactions, syndicate
covering transactions and penalty bids in accordance with Regulation M under
the Securities Exchange Act of 1934, as amended. Over-allotment involves sales
in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions involve bids to purchase our common stock in the open
market for the purpose of pegging, fixing or maintaining the price of our
common stock. Syndicate covering transactions involve purchases of our common
stock in the open market after the distribution has been completed in order to
cover short positions. Penalty bids permit the representatives to reclaim a
selling concession from a syndicate member when shares of our common stock
originally sold by the syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. These stabilizing transactions,
syndicate covering transactions and penalty bids may cause the price of our
common stock to be higher than it would otherwise be in the absence of these
transactions. These activities, if commenced, may be discontinued at any time.
We and our existing stockholders, including our executive officers and
directors, have agreed to restrictions on our ability to offer or sell our
securities. We have described these restrictions under the caption "Shares
Eligible for Future Sale".
Other than in the United States, no action has been taken by us, the selling
stockholders or the underwriters that would permit a public offering of the
shares of common stock included in this offering in any jurisdiction where
action for that purpose is required. The shares included in this offering may
not be offered or sold, directly or indirectly, nor may this prospectus or any
other offering material or advertisement in connection with the offer and sale
of any of these shares be distributed or published in any jurisdiction, except
under circumstances that will result in compliance with the applicable rules
and regulations of that jurisdiction. Persons who receive this prospectus are
advised to inform themselves about and to observe any restrictions relating to
the offering of the common stock and the distribution of this prospectus. This
prospectus is not an offer to sell or a solicitation of an offer to buy any
shares of common stock included in this offering in any jurisdiction where that
would not be permitted or legal.
Affiliates of Donaldson, Lufkin & Jenrette Securities Corporation, purchased
237,739 shares of our common stock in September 1998, for $4.38 per share.
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LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND MORE INFORMATION
450 Fifth Street, N.W. Seven World Trade Center Citicorp Center
Judiciary Plaza Suite 1300 500 West Madison
Room 1024 New York, NY 10048 Street
Washington, D.C. 20549 Suite 1400
Chicago, IL 60661
Katten Muchin & Zavis, Chicago, Illinois will pass upon the validity of this
offering of our common stock and other matters for us. The firm owns 23,962
shares of our common stock, and some of the partners of the firm are beneficial
owners of an additional 197,737 shares of our common stock, including Steven V.
Napolitano, who serves as one of our directors and is the beneficial owner of
134,666 shares of our common stock. Legal matters will be passed upon for the
underwriters by McDermott, Will & Emery, Chicago, Illinois.
Our consolidated financial statements as of December 31, 1997 and 1998 and
for each of our three fiscal years in the period ended December 31, 1998,
included in this prospectus, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
Matters dealing with our compliance with Federal and state healthcare laws
and regulations set forth under "Government Regulation" have been included in
this document in reliance upon advice provided by either Katten Muchin & Zavis,
Chicago, Illinois or Arent Fox Kintner Plotkin & Kahn, PLLC, Washington, D.C.
and their status as experts in such matters.
This prospectus is part of a registration statement we filed with the SEC.
This prospectus does not contain all of the information contained in the
registration statement and all of its exhibits and schedules.
For further information about us, please see the complete registration
statement. Statements contained in this prospectus concerning the provisions of
documents filed with the registration statement as exhibits are necessarily
summaries of these documents. Please refer to the exhibits to the registration
statement for complete copies of these documents.
You may read and copy our registration statement and all of its exhibits and
schedules at the following SEC public reference rooms:
You may obtain information on the operation of the SEC public reference room
in Washington, D.C. by calling the SEC at 1-800-SEC-0330. You may also inspect
and copy the complete registration statement and other information at the
offices of The Nasdaq Stock Market located at 1735 K Street, N.W., Washington,
D.C. 20006-1500. The registration statement is also available from the SEC's
Web site at http://www.sec.gov, which contains reports, proxy and information
statements and other information regarding issuers that file electronically.
71
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements of NovaMed Eyecare, Inc.:
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and June
30, 1999 (unaudited)................................................... F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998 and the six months ended June 30, 1998 and 1999
(unaudited)............................................................ F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1997 and 1998 and the six months ended June 30, 1999
(unaudited)............................................................ F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998 and the six months ended June 30, 1998 and 1999
(unaudited)............................................................ F-7
Notes to Consolidated Financial Statements.............................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
NovaMed Eyecare, Inc.:
We have audited the accompanying consolidated balance sheets of NOVAMED
EYECARE, INC. AND SUBSIDIARIES as of December 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years ended December 31, 1996, 1997 and 1998. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NovaMed Eyecare, Inc. and
Subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years ended December 31,
1996, 1997 and 1998, in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Rule 12-09 Valuation Reserve
Schedule is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subject to the auditing procedure applied in the audit
of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 16, 1999
(except for Note 15,
as to which date is May 28, 1999)
F-2
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June Pro forma
December 31, 30, June 30,
ASSETS --------------- ------- ---------
------ 1997 1998 1999 1999
(unaudited)
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents.............. $ 4,009 $ 1,875 $ 864 $
Accounts receivable, net of allowances
of $6,994, $10,347 and $10,017,
respectively.......................... 6,980 11,278 12,995
Due from affiliated providers, net..... 755 110 84
Notes receivable from affiliated
providers............................. 2,035 393 322
Inventory.............................. 715 1,490 2,449
Other current assets................... 940 1,240 1,549 1,979
------- ------- ------- ------
Total current assets................. 15,434 16,386 18,263
Property and equipment, net.............. 6,492 9,893 12,692
Note receivable from related party....... 400 400 --
Intangible assets, net................... 30,127 35,660 40,351
Other assets, net........................ 281 340 307
------- ------- -------
Total assets......................... $52,734 $62,679 $71,613
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
June Pro forma
December 31, 30, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY ---------------- ------- ---------
------------------------------------ 1997 1998 1999 1999
(unaudited)
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable........................ $ 1,692 $ 3,142 $ 4,116
Accrued expenses........................ 2,811 3,297 3,210
Income taxes payable.................... 35 427 192
Current maturities of long-term debt.... 444 300 150
------- ------- -------
Total current liabilities............. 4,982 7,166 7,668
------- ------- -------
Long-term debt, net of current maturities. 15,838 20,427 27,964 $18,264
------- ------- ------- -------
Deferred income tax liabilities........... 629 1,702 1,852
------- ------- -------
Minority interests in equity of
consolidated entities.................... 456 -- --
------- ------- -------
Commitments and contingencies
Redeemable convertible preferred stock:
Series C convertible preferred stock,
$.01 par value, 2,400,000 shares
authorized, 2,000,000 issued and
outstanding at December 31, 1997 and
1998 and June 30, 1999 (none pro
forma), respectively................... 5,794 6,350 8,088 --
------- ------- ------- -------
Series D convertible preferred stock,
$.01 par value, 3,000,000 shares
authorized; 1,636,622, 2,323,837 and
2,323,837 issued and outstanding at
December 31, 1997 and 1998 and June 30,
1999 (none pro forma), respectively.... 6,886 10,080 11,818 --
------- ------- ------- -------
Stockholders' equity:
Series A convertible preferred stock,
$.01 par value, 13,112,000 shares
authorized, 11,733,166, 11,740,055 and
11,740,055 shares issued and
11,655,236, 11,072,698 and 11,602,698
shares outstanding at December 31, 1997
and 1998, and June 30, 1999 (none pro
forma), respectively; 160,000 shares
issuable at December 31, 1998.......... 117 117 117 --
Series B convertible preferred stock,
$.01 par value, 455,000 shares
authorized, 400,000 issued and
outstanding at December 31, 1997 and
1998, and June 30, 1999 (none pro
forma), respectively................... 4 4 4 --
Common stock, $.01 par value, 26,000,000
shares authorized; 2,748,503,
2,751,254, 2,751,254, and 20,081,205
shares issued and 2,748,503, 2,751,254,
2,409,708, and 19,746,655 shares
outstanding as of December 31, 1997 and
1998, June 30, 1999 and pro forma,
respectively........................... 27 28 28 205
Additional paid-in capital................ 18,083 17,955 20,224 52,199
Deferred compensation..................... -- -- (2,472) (2,472)
Retained earnings (deficit)............... 105 1,072 (1,332) (3,327)
Treasury stock, at cost, consists of
77,930, 507,347 and 137,357 shares of
Series A convertible preferred stock at
December 31, 1997 and 1998, and June 30,
1999 (none pro forma) and 341,546 shares
of common stock as of June 30, 1999,
478,903 pro forma........................ (187) (2,222) (2,346) (2,346)
------- ------- ------- -------
Total stockholders' equity............ 18,149 16,954 14,223 44,259
------- ------- ------- -------
Total liabilities and stockholders'
equity............................... $52,734 $62,679 $71,613
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December Six Months
31, Ended June 30,
------------------------- ----------------
1996 1997 1998 1998 1999
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenue:
Management services............. $10,326 $24,401 $36,053 $15,131 $24,426
Surgery and laser centers....... 5,303 14,484 20,131 8,736 13,290
Product sales and other......... 221 3,523 7,545 3,418 7,146
------- ------- ------- ------- -------
Total net revenue............. 15,850 42,408 63,729 27,285 44,862
------- ------- ------- ------- -------
Operating expenses:
Salaries, wages and benefits.... 8,259 18,123 25,266 10,776 17,448
Cost of sales and medical
supplies....................... 2,570 8,723 15,762 6,791 12,260
Selling, general and
administrative................. 5,044 11,315 14,625 6,512 9,948
Depreciation and amortization... 806 2,226 3,333 1,480 2,225
------- ------- ------- ------- -------
Total operating expenses...... 16,679 40,387 58,986 25,559 41,881
------- ------- ------- ------- -------
Income (loss) from operations. (829) 2,021 4,743 1,726 2,981
------- ------- ------- ------- -------
Other (income) expense:
Interest expense................ 87 1,363 1,546 701 1,130
Interest income................. (29) (322) (273) (173) (73)
Minority interests in earnings
of consolidated entities....... 17 108 132 69 --
Other........................... 8 561 (32) (26) (17)
------- ------- ------- ------- -------
Total other expense........... 83 1,710 1,373 571 1,040
------- ------- ------- ------- -------
Income (loss) before income taxes. (912) 311 3,370 1,155 1,941
Provision for income taxes........ -- 206 1,664 570 869
------- ------- ------- ------- -------
Net income (loss)................. $ (912) $ 105 $ 1,706 $ 585 $ 1,072
Less--Accretion of Series C and
Series D convertible preferred
stock............................ -- -- (739) (169) (3,476)
------- ------- ------- ------- -------
Income (loss) available to Series
A and Series B convertible
preferred and common
stockholders..................... $ (912) $ 105 $ 967 $ 416 $(2,404)
======= ======= =======
Earnings (loss) per common share
(audited):
Basic........................... $ -- $ .01 $ .07 $ .03 $ (.17)
======= ======= ======= ======= =======
Diluted......................... $ (.08) $ .01 $ .06 $ .03 $ (.17)
======= ======= ======= ======= =======
Weighted average common shares
outstanding (audited):
Basic........................... -- 2,178 2,751 2,751 2,471
======= ======= ======= ======= =======
Diluted......................... 11,358 17,237 16,003 16,223 14,374
======= ======= ======= ======= =======
Pro forma (Note 2)(unaudited):
Accretion to redemption value
eliminated as a result of the
completion of initial public
offering......................... 739 3,476
Interest expense eliminated due to
debt conversion, net of tax
benefit.......................... 483 242
------- -------
Pro forma net income.............. $ 2,189 $ 1,314
======= =======
Pro forma earnings per common
share (unaudited)
Basic........................... $ .11 $ .07
======= =======
Diluted......................... $ .10 $ .06
======= =======
Pro forma weighted average number
of common shares outstanding--
(unaudited)
Basic........................... 19,937 19,975
======= =======
Diluted......................... 21,409 22,563
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
Series A Series B
Preferred Preferred Common Stock Treasury Stock
------------- ------------ ------------ Additional Retained --------------- Total
Par Par Par Paid-in Deferred Earnings Stockholders'
Shares Value Shares Value Shares Value Capital Compensation (Deficit) Shares At Cost Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December
31, 1995......... 2,880 $ 29 -- $-- -- $-- $ 2,566 -- $ (809) -- $ -- $ 1,786
Stock issued in
conjunction with
practice
affiliations.... 8,400 84 -- -- -- -- 10,416 -- -- -- -- 10,500
Stock issued in
connection with
acquisitions.... 96 1 -- -- -- -- 119 -- -- -- -- 120
Redemption of
shares.......... (272) (3) -- -- -- -- (337) -- -- -- -- (340)
Issuance of--
Series A
preferred stock. 480 5 -- -- -- -- 596 -- -- -- -- 601
Series B
preferred stock. -- -- 400 4 -- -- 996 -- -- -- -- 1,000
Net loss........ -- -- -- -- -- -- -- -- (912) -- -- (912)
Accumulated
deficit at date
of
incorporation... -- -- -- -- -- -- (1,721) -- 1,721 -- -- --
------ ---- --- ---- ----- ---- ------- ------- ------- ------ ------- -------
BALANCE, December
31, 1996......... 11,584 116 400 4 -- -- 12,635 -- -- -- -- 12,755
Stock issued in
conjunction with
practice
affiliations.... -- -- -- -- 2,748 27 5,265 -- -- -- -- 5,292
Redemption of
shares.......... -- -- -- -- -- -- -- -- -- (78) (187) (187)
Stock options
exercised....... 149 1 -- -- -- -- 183 -- -- -- -- 184
Net income...... -- -- -- -- -- -- -- -- 105 -- -- 105
------ ---- --- ---- ----- ---- ------- ------- ------- ------ ------- -------
BALANCE, December
31, 1997......... 11,733 117 400 4 2,748 27 18,083 -- 105 (78) (187) 18,149
Stock options
exercised/sold.. 7 -- -- -- 3 1 32 -- -- -- -- 33
Redemption of
Series A
preferred stock,
net............. -- -- -- -- -- -- (71) -- -- (1,228) (5,380) (5,451)
Issuance of
Treasury stock
in conjunction
with practice
affiliations.... -- -- -- -- -- -- (89) -- -- 799 3,345 3,256
Accretion of
Series C and D
preferred stock. -- -- -- -- -- -- -- -- (739) -- (739)
Net income...... -- -- -- -- -- -- -- -- 1,706 -- -- 1,706
------ ---- --- ---- ----- ---- ------- ------- ------- ------ ------- -------
BALANCE, December
31, 1998 ........ 11,740 117 400 4 2,751 28 17,955 -- 1,072 (507) (2,222) 16,954
(Unaudited):
Issuance of
Treasury stock
in conjunction
with practice
affiliations.... -- -- -- -- -- -- -- -- -- 270 1,182 1,182
Common stock
reacquired from
affiliate....... -- -- -- -- -- -- -- -- -- (437) (2,179) (2,179)
Stock options
exercised....... -- -- -- -- -- -- (421) -- -- 195 873 452
Deferred
compensation
expense......... -- -- -- -- -- -- 2,690 (2,690) -- -- -- --
Amortization of
deferred
compensation
expense......... -- -- -- -- -- -- -- 218 -- -- -- 218
Accretion of
Series C and D
preferred stock. -- -- -- -- -- -- -- -- (3,476) -- -- (3,476)
Net income...... -- -- -- -- -- -- -- -- 1,072 -- -- 1,072
------ ---- --- ---- ----- ---- ------- ------- ------- ------ ------- -------
BALANCE, June 30,
1999 (unaudited). 11,740 $117 400 $ 4 2,751 $ 28 $20,224 $(2,472) $(1,332) (479) $(2,346) $14,223
====== ==== === ==== ===== ==== ======= ======= ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December Six Months Ended
31, June 30,
------------------------- ------------------
1996 1997 1998 1998 1999
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)............. $ (912) $ 105 $ 1,706 $ 585 $ 1,072
Adjustments to reconcile net
income (loss) to net cash
provided (used) in operating
activities, net of effects of
purchase transactions--
Depreciation and
amortization............... 806 2,226 3,333 1,480 2,225
Amortization of deferred
compensation............... -- -- -- -- 218
Deferred taxes.............. -- 171 1,237 -- --
Preferred stock issued for
services................... -- 125 -- -- --
Minority interests.......... 5 41 (46) 42 --
Loss on disposition of
property and equipment..... -- 589 -- -- --
Changes in non-cash working
capital items--
Accounts receivable and
due (to) from affiliated
providers, net........... (1,059) (3,015) (3,204) (1,622) (1,478)
Inventory................. (55) (5) (374) (71) (400)
Other current assets...... (538) (374) (260) 22 (322)
Other noncurrent assets... -- (180) (70) 24 111
Accounts payable, accrued
expenses and income taxes
payable.................. 1,055 (105) 65 (227) (420)
------- ------- ------- -------- --------
Net cash provided (used)
in operating
activities............. (698) (422) 2,387 233 1,006
------- ------- ------- -------- --------
Cash flows from investing
activities:
Purchases of property and
equipment.................... (1,302) (2,875) (4,466) (2,293) (3,906)
Acquisitions of and
affiliations with entities... (110) (2,222) (3,649) (217) (6,337)
Receipt (issuance) of notes
receivable from affiliated
providers.................... (75) (1,918) 1,491 (400) 472
------- ------- ------- -------- --------
Net cash used in
investing activities... (1,487) (7,015) (6,624) (2,910) (9,771)
------- ------- ------- -------- --------
Cash flows from financing
activities:
Borrowings under revolving
line of credit............... -- 3,000 14,735 -- 18,900
Payments under revolving line
of credit.................... -- (3,000) (6,250) -- (10,485)
Payments of subordinated debt. -- -- (3,700) -- (850)
Proceeds from the issuance of
preferred stock, net of
issuance costs............... 7,394 6,946 3,044 3,015 451
Payments for the redemption of
preferred stock, net of
transaction costs............ (340) (187) (5,262) -- --
Other long-term debt and
capital lease obligations.... 440 (1,264) (464) (168) (262)
------- ------- ------- -------- --------
Net cash provided by
financing activities... 7,494 5,495 2,103 2,847 7,754
------- ------- ------- -------- --------
Net increase (decrease) in cash
and cash equivalents........... 5,309 (1,942) (2,134) 170 (1,011)
Cash and cash equivalents,
beginning of year.............. 642 5,951 4,009 4,009 1,875
------- ------- ------- -------- --------
Cash and cash equivalents, end
of year........................ $ 5,951 $ 4,009 $ 1,875 $ 4,179 $ 864
======= ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information as of June 30, 1999 and for the six months ended June 30, 1998 and
1999 is unaudited
(Dollars in thousands, except per share data)
1. GENERAL INFORMATION
Description of the Business
NovaMed Eyecare, Inc. (NovaMed) along with its wholly-owned subsidiaries
(collectively, the Company), is an eye care services company engaged in the
business of: (i) owning, operating and/or managing eye surgery and laser
centers, optical retail outlets, wholesale optical laboratories, and an optical
products purchasing organization; (ii) providing financial, administrative,
information technology, marketing and other business services to ophthalmic and
optometric providers; and (iii) providing clinical and other research services
to eye care device, product and pharmaceutical manufacturers. The Company
operates within the United States in regional markets including Chicago,
Illinois; St. Louis, Missouri; Kansas City, Missouri; Louisville, Kentucky and
Richmond, Virginia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation
The consolidated financial statements have been prepared on the accrual
basis of accounting and include the accounts of the Company and its wholly
owned subsidiaries. The Company acquires certain net operating assets and
assumes certain liabilities of physician groups (the Affiliated Professional
Entities). The Company provides services, facilities and equipment to our
affiliated eye care professionals under long-term service agreements (SA). Each
of the SAs is generally for a 40-year term and requires the Company to provide
all of the business, administrative and financial services necessary to operate
the eye care clinics and optical dispensaries. These services typically
include:
. billing, collection and cash management services
. procuring and maintaining all office space, office and medical supplies,
medical and nonmedical equipment, information systems, and furniture and
fixtures
. recruiting, employing, supervising and training all non-professional
personnel
. recruiting services relating to our affiliated professionals, recruiting
of additional ophthalmologists and optometrists
. all administrative and support services
. information technology services
. marketing services
. assisting our affiliated professionals with the establishment and
implementation of quality assurance, risk management and utilization
review programs
. assisting our affiliated professionals in obtaining and maintaining
federal, state and local licenses and permits
. negotiating managed care contracts on behalf of our affiliated eye care
professionals
The SAs provide that the Affiliated Professional Entities retain sole and
exclusive control over the dispensing of all medical and other professional
services to their patients. The SAs also provide that the Affiliated
Professional Entities:
. retain control over all decisions relating to the selecting, hiring,
compensating and terminating of eye care professionals
F-8
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. retain control over all corporate governance decisions and other internal
matters affecting the operation of their legal entities
. employ or otherwise retain a sufficient number of ophthalmologists and
optometrists to provide professional eye care services to their patients.
Under the SAs, the Company is generally required to pay all expenses
incurred in connection with the business and medical operations of the eye care
clinics and optical dispensaries, except for the salaries and benefits of those
eye care professionals who have an ownership interest in the professional
entity employing them. The Affiliated Professional Entities then reimburse the
Company on a monthly basis for those expenses that are paid on the Affiliated
Professional Entities' behalf.
In addition to being reimbursed for eye care clinic and optical dispensary
overhead, the Company is paid a monthly fee for its services. This fee is
generally based on a fixed monthly amount established in an annual budget that
the Company negotiates each year with its Affiliated Professional Entities. If
the revenue or expenses of the eye care clinics and retail optical outlets in
any month vary from the budget for that month, then the fee is adjusted to
reflect the actual results of the eye care clinics and retail optical outlets.
There are no limitations on the amount of these fee adjustments. On average,
the fees paid to the Company in 1998 represented approximately 35.7% of the
earnings before interest and taxes of the Affiliated Professional Entities. The
earnings of the Affiliated Professional Entities are determined by subtracting
the expenses of the eye care clinics and retail optical outlets from the net
professional services and other revenues earned by the Affiliated Professional
Entity. These expenses generally include all expenses incurred in connection
with the business and medical operations of the Affiliated Professional Entity,
except for any salaries and benefits of those eye care professionals who have
an ownership interest in the Affiliated Professional Entity. Each Affiliated
Professional Entity is then responsible for paying the salaries and benefits of
its eye care professional-owners from the amount retained by the Affiliated
Professional Entity after paying the management fee.
The SAs are generally not terminable by the Affiliated Professional Entities
unless a court makes a final determination that the Company has breached a
material fiduciary duty owed to the eye care professionals, or that the Company
has misappropriated or misapplied funds of the eye care professionals. The
Company generally can not terminate the SAs unless:
. one or a group of Affiliated Professionals loses their medical license
. the professional entity loses its Medicare provider number or ability to
treat Medicare patients
. the professional entity is dissolved or goes bankrupt
. or the affiliated eye care professionals default in the performance of
any of their material duties
The Company does not generally enter into nominee shareholder arrangements with
Affiliated Professional Entities, nor does it have a "controlling financial
interest" in the Affiliated Professional Entities as defined by EITF 97-2,
"Applications of FASB Statement No. 94 and APB No. 16 to Physician Practice
Management Entities and Certain Other Entities under Contractual Management
Arrangements". Accordingly, the Company does not consolidate the financial
statements of the Affiliated Professional Entities. All significant
intercompany accounts and transactions have been eliminated.
Interim Financial Information
The financial information as of June 30, 1999, and for the six months ended
June 30, 1998 and 1999 is unaudited but includes all adjustments (consisting
only of normal recurring adjustments) which the Company considers necessary for
a fair presentation of the financial position at such date and the operating
results and cash flows for those periods. Results for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid instruments with an
original maturity of three months or less from the date of purchase.
F-9
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Due (To) From Affiliated Providers
Amounts due (to) from affiliated providers, which are unsecured, non-
interest-bearing and due on demand, include amounts owed to Affiliated
Professional Entities for services performed under SAs, receivables from
Affiliated Professional Entities and affiliated providers for expenses paid on
their behalf and certain other receivables.
Inventory
Inventory consists primarily of optical products such as spectacle frames
and lenses as well as surgical supplies used in connection with the operation
of the Company's Surgery and Laser Centers (SLCs). Inventory is valued at the
lower of cost or market, with cost determined using the first-in, first-out
(FIFO) method. The Company routinely reviews its inventory for obsolete, slow
moving or otherwise impaired inventory and records a related expense in the
period such impairment is known and quantifiable. The Company recorded an
immaterial expense for obsolete and slow moving inventory for the years ended
December 31, 1996, 1997 and 1998.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated
useful lives of the related assets, generally three to seven years for
equipment, computer software, furniture and fixtures, and the lesser of the
lease term or 10 years for leasehold improvements. Routine maintenance and
repairs are charged to expense as incurred.
Intangible Assets
The Company's affiliations involve the purchase of tangible and intangible
assets and the assumption of certain liabilities. As part of the purchase price
allocation, the Company allocates the purchase price to the tangible assets
acquired and liabilities assumed, based on estimated fair market values.
Because the Company does not practice medicine, maintain patient relationships,
hire physicians or enter into employment agreements with the physicians, the
intangible asset created in the affiliation is solely with the SA for the
Affiliated Professional Entity and that there are no other significant,
identifiable intangible assets. In connection with the determination of the
appropriate life of the SAs' identifiable intangible assets, the Company
analyzes the nature of each Affiliated Professional Entity with which an SA is
entered into, including the Affiliated Professional Entity's historical
profitability, the number of physicians in each Affiliated Professional Entity,
number of service sites, ability to recruit additional physicians, relative
market position, the length of time each Affiliated Professional Entity has
been in existence, and the term of the SA. Based on this practice-by-practice
evaluation, the Company's SAs are amortized over a composite period ranging
between 5 and 25 years. For practices with a 25-year amortization period, the
Company believes that the related physician groups are long-lived entities with
an indeterminate life and that the physicians, patient demographics and
customer relationships will be continuously replaced. In addition, for these
practices, none of the Affiliated Professional Entities nor physicians,
individually, are material to the results of operations of the Company. Also,
each Affiliated Practice Entity has been profitable since the date of
Affiliation. The Company also has the right to require the Affiliated
Professional Entity to purchase and assume the assets (including unamortized
intangible assets) and liabilities and obligations provided by the practice
upon the involuntary termination of the SA.
Effective January 1, 1998, on a prospective basis the Company changed its
estimate of the maximum useful lives of intangible assets associated with
affiliations under SAs from 32 years to 25 years. This change was made to
conform the Company's policy with that adopted by other healthcare services
companies during 1998 and to better represent the useful lives of the SAs. Of
the 23 practice affiliations completed through December 31, 1998, 9 SAs are
being amortized over a 5 to 15 year period with the remainder being amortized
over 25 years.
F-10
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impairment of Long-Lived Assets
The Company reviews the carrying value of the long-lived assets and goodwill
at least quarterly on an entity by entity basis to determine if facts and
circumstances exist which would suggest that assets might be impaired or that
the amortization period needs to be modified. Among the factors the Company
considers in making the evaluation are changes in the Affiliated Professional
Entity or SLC's market position, reputation, profitability and geographical
penetration. If facts and circumstances are present which may indicate
impairment is probable, the Company will prepare a projection of the
undiscounted cash flows of the specific Affiliated Professional Entity/SLC and
determine if the long-lived assets and/or goodwill are recoverable based on
these undiscounted cash flows. If impairment is indicated, then an adjustment
will be made to reduce the carrying amount of these assets to their fair value.
To date, no such impairments have been incurred.
Income Taxes
The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Statement Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes." Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes, using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
Fair Value of Financial Instruments
The carrying value of all financial instruments such as accounts receivable,
amounts due (to) from affiliated providers, accounts payable and accrued
expenses are reasonable estimates of their fair value because of the short
maturity of these items. The Company believes the carrying amounts of the
Company's note receivable from related parties, subordinated debt, line of
credit and obligations under capital leases approximate fair value because the
interest rates on these instruments are subject to change with, or approximate,
market interest rates.
Minority Interests
The Company owned 75% of two SLC's, and recorded the results of their
operations under the consolidation method of accounting. The interests of the
minority owners in the earnings of these SLCs are reflected as minority
interests in the consolidated balance sheets.
In November 1998, the Company purchased the remaining minority interests of
two SLCs held by certain persons associated with Affiliated Professional
Entities for 160,000 shares of the Company's Series A convertible preferred
stock. Accordingly, the Company now owns 100% of 10 SLCs. The acquisition of
the minority interests was accounted for under the purchase method of
accounting.
Revenue Recognition
Management Services
Management services revenue is equal to the net revenue of the Affiliated
Professional Entities, less amounts retained by the Affiliated Professional
Entities. The amounts retained by the Affiliated Professional Entities
represent the net billings of the Affiliated Professional Entities less
operating expenses and the Company's management fee. Management services
revenue is recognized when the Affiliated Professional Entities render services
and recognize operating expenses under the accrual method of accounting. Net
revenue is recorded by the Affiliated Professional Entities at established
rates reduced by a provision for contractual adjustments and doubtful accounts.
Contractual adjustments arise due to the terms of certain reimbursement
contracts. Such adjustments represent the difference between the charges at
established rates and estimated recoverable amounts and are recognized in the
period the services are rendered. Any differences between estimated contractual
adjustments and actual final settlements under reimbursement contracts, which
are immaterial, are recognized as contractual adjustments in the period of
final settlements.
F-11
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1998 and 1999, management services revenue was as follows:
<TABLE>
<CAPTION>
Six Months
Years Ended December 31, Ended June 30,
-------------------------- ----------------
1996 1997 1998 1998 1999
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenue of the Affiliated
Professional Entities........ $13,880 $32,263 $ 46,374 $18,967 $30,093
Less--amounts retained by
Affiliated Professional
Entities..................... (3,554) (7,862) (10,321) (3,836) (5,667)
------- ------- -------- ------- -------
$10,326 $24,401 $ 36,053 $15,131 $24,426
======= ======= ======== ======= =======
</TABLE>
For the years ended December 31, 1997 and 1998, the management services
revenue of one Affiliated Professional Entity accounted for 15.9% and 15.4% of
total net revenue, respectively.
Surgery and Laser Centers Revenue
Revenue derived from SLCs is based on fees charged to patients, third-party
payors or others for use of the SLCs and relate primarily to cataract, laser
vision correction and other refractive surgery procedures. SLC revenue is net
of contractual adjustments and a provision for doubtful accounts. Although the
Company does not separately track contractual adjustments and provisions for
doubtful accounts, management believes that the amounts related to bad debts
are immaterial for all periods presented. This revenue is recognized by the
Company and is not subject to SAs.
Optical Product Sales and Other
Through 1998, optical product sales consisted solely of an optical products
purchasing organization (the Alliance). The Alliance negotiates volume buying
discounts with optical products manufacturers. Products are sold to both
affiliated and non-affiliated ophthalmologists and optometrists. All sales to
affiliated ophthalmologists and optometrists are eliminated in consolidation.
Most of the products are shipped directly from the manufacturer to the
customer. Revenue is recognized, net of an allowance for returns, based on the
amount billed to the customer and is recorded upon receipt of the invoice from
the manufacturer or the shipping date if shipped from the Alliance. Beginning
in January 1999, the Company acquired a wholesale optical laboratory, Midwest
Uncuts, Inc. which manufactures and distributes corrective lenses and
eyeglasses (see note 3).
Cost of Sales and Medical Supplies
Cost of sales and medical supplies includes the cost of optical products
such as frames, optical lenses, contact lenses and medical supplies.
Earnings (Loss) Per Common Share
Since the Series A and Series B Convertible Preferred Stock participate
along with the common stock in the Company's earnings, the Company uses the two
class method for 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, warrants, convertible debt and
preferred stock. The dilutive effect of options and warrants 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.
F-12
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1996, there were no earnings for the period in which the common stock
was outstanding, and therefore, the entire loss was allocated to the class of
convertible preferred stock for Basic EPS. For 1997 and 1998, total earnings
were allocated to each class of stock based upon the weighted average shares
outstanding for each class as a percentage of total weighted average shares
outstanding.
Earnings (loss) per common share is calculated as follows (amounts in
thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended Six Months
December 31, Ended June 30,
------------------------ ---------------
1996 1997 1998 1998 1999
(unaudited)
<S> <C> <C> <C> <C> <C>
Income (loss) available to Series A
and B convertible preferred and
common stockholders................. $ (912) $ 105 $ 967 $ 416 $(2,404)
Income (loss) allocated to preferred
stockholders........................ (912) 89 784 339 (1,991)
------- ------- ------- ------- -------
Income (loss) available to common
stockholders-basic.................. $ -- $ 16 $ 183 $ 77 $ (413)
======= ======= ======= ======= =======
Income (loss) available to common
stockholders-diluted................ $ (912) $ 105 $ 967 $ 416 $(2,404)
======= ======= ======= ======= =======
Basic weighted average number of
common shares outstanding........... -- 2,178 2,751 2,751 2,471
Weighted average number of common
shares issuable upon the conversion
of dilutive preferred shares........ 11,358 14,624 11,780 12,055 11,903
Effect of dilutive securities--stock
options............................. -- 435 1,472 1,417 --
------- ------- ------- ------- -------
Diluted weighted average number of
shares outstanding.................. 11,358 17,237 16,003 16,223 14,374
======= ======= ======= ======= =======
Earnings (loss) per common share:
Basic.............................. $ -- $ 0.01 $ 0.07 $ 0.03 $ (0.17)
======= ======= ======= ======= =======
Diluted............................ $ (0.08) $ 0.01 $ 0.06 $ 0.03 $ (0.17)
======= ======= ======= ======= =======
</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 year ended December 31,
1998 and the six months ended June 30, 1999. Also, the effect of dilutive
securities--stock options for the six months ended June 30, 1999 have been
excluded as their effect is anti-dilutive.
Stock Compensation
In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, "Accounting for Stock-Based Compensation", which allows entities
to measure compensation costs related to awards of stock based compensation
using either the fair value method or the intrinsic value method. The Company
has elected to account for stock-based compensation programs using the
intrinsic value method. See Note 12 for the pro forma disclosures of the
effect on net income (loss) and earnings (loss) per share.
Concentration of Credit Risk
For the years ended December 31, 1996, 1997 and 1998, approximately 67%,
61% and 49%, respectively, of the Company's net revenue was received from
Medicare and other governmental programs, which reimburse providers based on
fee schedules determined by the related governmental agency. In the ordinary
course of business, providers receiving reimbursement from Medicare and other
governmental programs are potentially subject to a review by regulatory
agencies concerning the accuracy of billings and sufficiency of supporting
documentation.
F-13
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Unaudited Pro Forma Information
The unaudited pro forma consolidated balance sheet presents the Company's
balance sheet assuming (i) the conversion of 11,740,055 issued shares of Series
A convertible preferred stock into common stock on a share for share basis;
(ii) the conversion of 400,000 issued shares of Series B convertible preferred
stock into common stock on a share for share basis; (iii) the conversion of
2,000,000 issued shares of Series C convertible preferred stock into common
stock on a share for share basis; (iv) the conversion of 2,323,837 issued
shares of Series D convertible preferred stock into common stock on a share for
share basis; (v) the issuance of 1,010,412 shares of common stock upon the
exchange of the subordinated exchangeable promissory notes; and (vi) an
additional interest expense of $2.0 million, net of tax benefits, related to
the discount granted to the holders of the subordinated exchangeable notes,
which will occur automatically upon completion of the Company's proposed
initial public offering, as if the foregoing took place on June 30, 1999.
The unaudited pro forma earnings (loss) per share for the 12 months ended
December 31, 1998 and the six months ended June 30, 1999, is presented
assuming: (i) the accretion of the Series C and Series D convertible preferred
stock is excluded, (ii) the automatic conversion of preferred stock into shares
of the Company's common stock; and (iii) the issuance of 1,010,412 shares of
the Company's common stock upon exchange of the subordinated exchangeable
promissory notes, and the elimination of the additional interest expense to be
recorded by the Company related to the discount on the exchange of the notes.
3. AFFILIATIONS AND ACQUISITIONS
The Company acquires certain net assets of Affiliated Professional Entities
and the entire operations of the SLCs. In addition, the Company acquires the
right to provide services to Affiliated Professional Entities.
<TABLE>
<CAPTION>
Affiliated Professional Entity Effective Date Location
- ------------------------------ -------------- --------
<S> <C> <C>
1998:
Eyecare Midwest..................... July 1, 1998 Kansas City, MO
Louisville Optical Centers.......... September 24, 1998 Louisville, KY
1997:
Dominion Eye Associates (1)......... January 1997 Richmond, VA
Hunkeler Vision Centers (1)......... March 1997 Kansas City, MO & KS
American Eye Institute (1).......... May 1997 New Albany, IN
1996:
Brodersen-Williams Eye Institute
(1)................................ January 1996 Hammond, IN
Deschamps Eye Care (1).............. January 1996 Merrillville, IN
Walter I. Fried..................... January 1996 Gurnee, IL
Kirk Eye Center (1)................. January 1996 River Forest, IL
Northshore Eye Associates (1)....... January 1996 Chicago, IL
Northwest Ophthalmology Associates.. January 1996 Arlington Heights, IL
The Eye Center (1).................. November 1996 Florissant, MO
Illinois Eye Specialists (1)........ November 1996 Granite City, IL
</TABLE>
- --------
(1)Affiliation includes SLC(s)
F-14
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The acquisitions of nonmedical operating assets and liabilities have been
accounted for using the purchase method of accounting and, accordingly, the
purchase price has been allocated to the tangible assets acquired and
liabilities assumed based on the estimated fair values at the dates of
acquisition. Simultaneous with each acquisition, the Company entered into an SA
with each Affiliated Professional Entity. The following is an allocation of
purchase price for the acquisitions completed during the years 1996, 1997 and
1998:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Intangible assets acquired.......................... $ 13,519 $17,746 $ 6,920
Net assets acquired................................. 3,711 (570) (15)
-------- ------- -------
Total purchase price............................ 17,230 17,176 6,905
Less--
Fair value of stock issued........................ (10,620) (5,290) (3,256)
Notes issued...................................... (6,500) (9,664) --
-------- ------- -------
Cash purchase price............................. $ 110 $ 2,222 $ 3,649
======== ======= =======
</TABLE>
In January 1999, the Company acquired Midwest Uncuts, Inc., a wholesale
optical laboratory with two manufacturing locations, from a related party. The
transaction was accounted for by the purchase method of accounting and the
results of operations are included in the consolidated financial statements
since the date of acquisition. The consideration for the acquisition consisted
of $5.4 million of cash and 250,000 shares of Series A convertible preferred
stock issued at a value of $4.38 per share.
In addition, in January 1999 the Company acquired the stock of, and entered
into an SA with, an optometric practice located in St. Louis, Missouri.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31, 1997 and
1998:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Equipment.................................................. $ 4,953 $ 8,792
Equipment under capital lease obligations.................. 993 1,039
Computer software.......................................... 492 1,006
Furniture and fixtures..................................... 373 608
Leasehold improvements..................................... 1,300 1,996
------- -------
8,111 13,441
Less--Accumulated depreciation and amortization............ (1,619) (3,548)
------- -------
$ 6,492 $ 9,893
======= =======
</TABLE>
Depreciation and amortization expense for property and equipment in 1996,
1997 and 1998 was approximately $531, $1,363 and $1,946, respectively. In
addition, during 1997, the Company replaced its management software system and,
as a result, recorded an expense for the write-off of the net book value of
approximately $589, which is included in other expense on the accompanying
consolidated statements of operations.
5. INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
Amortization
Period 1997 1998
<S> <C> <C> <C>
SAs........................................ 5-25 Years $31,265 $38,185
Less--Accumulated amortization........... (1,138) (2,525)
------- -------
$30,127 $35,660
======= =======
</TABLE>
F-15
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Amortization expense for intangible assets in 1996, 1997 and 1998 was
approximately $275, $863 and $1,387, respectively. Effective January 1, 1998,
the Company reduced the maximum useful life of the costs associated with
affiliations under the SAs from 32 years to 25 years. This change was made to
conform the Company's policy with that adopted by other healthcare services
companies during 1998 and to better represent the useful lives of the SAs. The
change in the estimated useful life was treated on a prospective basis and
increased 1998 amortization expense by $250.
6. ACCRUED EXPENSES
Accrued expenses consist of the following as of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Accrued payroll and related................................ $1,640 $1,988
Accrued interest........................................... 768 674
Accrued other.............................................. 403 635
------ ------
$2,811 $3,297
====== ======
</TABLE>
7. INCOME TAXES
The provision for income tax expenses consists of the following for the
years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Current--
Federal................................................ $-- $ 31 $ 366
State.................................................. -- 4 61
---- ---- ------
-- 35 427
---- ---- ------
Deferred--
Federal................................................ -- 151 1,062
State.................................................. -- 20 175
---- ---- ------
-- 171 1,237
---- ---- ------
$-- $206 $1,664
==== ==== ======
</TABLE>
Prior to the Recapitalization discussed in Note 11, income for federal
income tax purposes was recognized by the members of NovaMed Eyecare
Management, LLC (NovaMed LLC) rather than the Company. Simultaneous with the
Recapitalization, the Company became a taxable entity. During the period from
the Recapitalization through December 31, 1996, the Company incurred a taxable
net loss and, accordingly, no provision for income taxes was recorded. As of
December 31, 1996, the Company recorded a valuation allowance equal to the
benefit related to the net operating loss carryforward.
The reasons for the differences between the income tax expense and the
amounts calculated using the U.S. statutory rate of 34% were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Tax expense at U.S. statutory rate.................... $-- $ 106 $1,146
Intangible asset amortization......................... -- 192 283
State taxes, net...................................... -- 49 235
Reversal of valuation allowance related to operating
loss carryforward.................................... -- (141) --
---- ----- ------
Provision for income taxes.......................... $-- $ 206 $1,664
==== ===== ======
</TABLE>
F-16
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred tax assets (liabilities) are comprised of the following at December
31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Current deferred tax assets (liabilities)
Compensation accruals.................................. $ 231 $ 98
Receivable allowances.................................. 110 220
Other.................................................. (173) (130)
----- -------
168 188
----- -------
Long-term deferred tax assets (liabilities)
Depreciation and amortization.......................... (476) (1,168)
Disposal of property................................... 198 --
Acquisitions........................................... (143) (335)
Other.................................................. (208) (199)
----- -------
(629) (1,702)
----- -------
$(461) $(1,514)
===== =======
</TABLE>
The Company paid no amounts for income taxes in 1996 and 1997, and $594
during 1998.
8. LONG-TERM DEBT
Long-term debt consists of the following as of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Subordinated exchangeable promissory notes.............. $15,600 $11,900
Revolving line of credit................................ -- 8,485
Other................................................... 682 342
------- -------
16,282 20,727
Less: Current maturities of long-term debt.............. (444) (300)
------- -------
$15,838 $20,427
======= =======
</TABLE>
Subordinated Exchangeable Promissory Notes
The Company issued subordinated exchangeable promissory notes (the Notes) in
connection with the acquisition of certain net assets of Affiliated
Professional Entities and certain SLCs, and the right to provide services to
Affiliated Professional Entities. Each Note has a term of 15 years, with the
entire principal balance payable at the end of such term and bears interest at
a rate of 8.25% payable quarterly. The Notes originally contained certain
redemption features which allowed holders to require the Company to redeem the
face amount of the Notes, plus all accrued and unpaid interest, within a
prescribed time frame at the second anniversary of the issuance of such Notes.
The Company has renegotiated with the Note holders whereby the holders have
extended their redemption rights. The holders can now redeem $3,100 in May
2000, $1,000 in June 2000, $1,550 in November 2000 and $5,400 in January 2001.
Each Note also contains the following features, which are triggered upon an
initial public offering (IPO) of the Company or any affiliate (Public Company):
(a) 25% of $6,200 face amount notes and 90% of $4,100 face amount notes are
automatically exchanged into common stock of Public Company at a 20% discount
to the IPO price; and (b) the holder may elect to (i) exchange the remaining
principal balance of the Note into common stock of Public Company at the 20%
discount to the IPO price, (ii) require the Company to redeem the remaining
principal balance of the Note, plus all accrued and unpaid interest, (iii)
maintain the Note or (iv) select a combination of any or all of (i) through
(iii). The Company, 90 days after an IPO, may elect to redeem any outstanding
balance plus accrued interest without penalty. Upon exchange of the Notes, the
company will incur a non-recurring non-cash expense equal to the 20% discount
to the IPO price. Such amount will be recorded as additional interest expense
on the date of the IPO. The Notes contain provisions subordinating the holders'
rights and priorities to the rights of any holders of senior debt.
F-17
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1996 and 1997, the Company issued Notes with aggregate principal
amounts of $6,100 and $9,500 respectively, in connection with the practice
affiliations and the acquisition of SLCs.
Revolving Credit Facility
The Company has entered into a $20 million credit agreement (the Credit
Facility) which provides for a revolving line of credit that expires in July
2000. Interest is payable at LIBOR, plus an applicable margin ranging from 1.5%
to 2.0%, depending on the Company's leverage ratios (as defined), or at the
prime rate minus .50%. As of December 31, 1998, the effective interest rate on
the Credit Facility was 7.16%. In addition, again depending on the Company's
leverage ratio, the Company must pay a commitment fee ranging from .25% to
.375% for the unused portion during the revolving commitment period. The Credit
Facility contains certain covenants, which include limitations on indebtedness,
liens, capital expenditures and certain ratios, which define borrowing
availability. In addition, the Company must maintain a minimum net worth (as
defined in the agreement) of $40 million. As of December 31, 1998, the Company
was in compliance (or has obtained waivers) with the covenants of the Credit
Facility.
In May 1999, the Company further amended its Credit Facility to increase the
total commitment to $35 million.
Interest Expense
The Company paid $20, $624 and $1,417 for interest and commitment fees
during 1996, 1997 and 1998, respectively.
9. OPERATING LEASES
The Company has commitments under long-term, non-terminable operating
leases, principally for facility and office space. Lease terms generally cover
one to ten years. Certain leases contain consecutive renewal options of five-
year periods. At December 31, 1998, minimum annual rental commitments under
operating leases with terms in excess of one year are as follows:
<TABLE>
<S> <C>
1999............................................................. $ 3,666
2000............................................................. 3,299
2001............................................................. 1,915
2002............................................................. 1,662
2003 and thereafter.............................................. 3,280
-------
Total minimum lease payments................................. $13,822
=======
</TABLE>
Rent expense related to operating leases amounted to approximately $1,060,
$2,911, and $3,627 during 1996, 1997 and 1998, respectively.
10. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is subject to various claims and legal actions that arise in the
ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
F-18
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Professional Liability Risk
The Company maintains third party professional liability insurance for its
SLC and business activities and procures insurance for its Affiliated
Professional Entities through a third-party insurer. Although the Company
believes that this insurance is adequate as to the amounts at risk, there can
be no assurance that any claim asserted against the Company will not exceed the
coverage limits of such insurance.
Insurance
The Company and the Affiliated Professional Entities are insured with
respect to medical malpractice risks on a claims-made basis. Management is not
aware of any claims against the Company or the Affiliated Professional Entities
that might have a material impact on the Company's financial position or
results of operations.
Purchase Commitment
During October 1998, the Company entered into an agreement with a vendor to
purchase approximately $3,400 in medical supplies over a term of 42 months. As
of December 31, 1998, the Company had $3,100 remaining on that commitment.
11. STOCKHOLDERS' EQUITY
NovaMed was incorporated in November 1996. In conjunction with a
recapitalization on December 20, 1996 (the Recapitalization), NovaMed issued
11,584,000 shares of Series A convertible preferred stock, par value $.01 per
share (Series A Stock), to replace previously granted 5,792 units of NovaMed
LLC. In addition, the Company issued options to purchase 1,528,000 shares of
Series A Stock in exchange for options to purchase 764 units of NovaMed LLC.
Contemporaneous with the Recapitalization, NovaMed issued 400,000 shares of
Series B convertible preferred stock, par value $.01 per share (Series B
Stock), for $2.50 per share; 2,000,000 shares of Series C convertible preferred
stock, par value $.01 per share (Series C Stock), for $3.00 per share; and
warrants to purchase an aggregate of 684,932 shares of Series D convertible
preferred stock, par value $.01 per share (Series D Stock), at $4.38 per share.
The Series B Stock, Series C Stock and the warrants to acquire Series D Stock
were issued under terms defined in a Securities Purchase Agreement (the
Securities Agreement), which provided for certain covenants and restrictions
including: (a) limitations on NovaMed's ability to issue additional shares
excluding shares issued in connection with a practice affiliation or SLC
acquisition and other prescribed exceptions; (b) subordination of Series A
Stock and Series B Stock to Series C Stock and Series D Stock (the Senior
Preferred Stock); (c) limitations on liens, guarantees and secured debt; and
(d) limitations on NovaMed's ability to enter into any practice affiliation or
acquisition involving the issuance of shares in excess of 20% of NovaMed's
value. In addition holders of the Senior Preferred Stock hold certain demand
and piggyback registration rights. The Securities Agreement provided that
certain investors were obligated to acquire, and NovaMed was obligated to
issue, an additional 456,621 shares of Series D Stock at a price of $4.38 per
share upon the attainment of a defined threshold of earnings before interest,
taxes, depreciation and amortization (the Trigger Event). NovaMed attained the
Trigger Event in 1997 and issued 456,621 shares of Series D Stock to the
prescribed investors at $4.38 per share and issued an additional 1,180,001
shares of Series D Stock to certain other investors at $4.38 per share. In
addition, holders of Senior Preferred Stock received certain registration
rights in connection with the transaction. The holders of preferred stock have
the right to vote on a share-for-share basis.
In connection with the execution of the Securities Agreement, NovaMed
amended its articles of incorporation (the Amendment) to provide that holders
of at least two-thirds of the then outstanding Senior Preferred Stock may elect
to redeem for cash up to 50% of their respective shares each year after April
2004, and April 2005, at the greater of a prescribed liquidation preference
amount per share (the Carrying Value), or
F-19
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the fair value of such preferred stock as established by independent
appraisers. The Amendment provides for a mandatory conversion of each share of
convertible preferred stock to one share of common stock in the event NovaMed
undertakes a qualifying IPO.
Although the Company has not obtained an independent appraisal, it has
estimated the potential future redemption value based upon various transactions
with third parties and through comparison to comparable publicly traded
companies. Accordingly, the Company has recorded an accretion of $739 to
increase the carrying value of its Senior Preferred Stock as of December 31,
1998.
Series D Warrant Exercise
In April 1998, certain investors exercised warrants for $3,011 to acquire an
aggregate of 687,216 shares of Series D Stock issued under the Securities
Agreement.
Treasury Stock
On May 26, 1998, the Board of Directors authorized a repurchase of up to
1,200,000 shares of the Company's Series A convertible preferred stock. The
Company purchased a total of 1,188,414 shares at an aggregate cost of $5,262.
Throughout 1998, the Company reissued 798,987 shares of treasury stock in
connection with practice affiliations.
12. EMPLOYEE BENEFIT PLANS
Employee Benefits and Compensation
The Company maintains a voluntary savings plan (the Plan) for eligible
employees under section 401(k) of the Internal Revenue Code whereby
participants may contribute a percentage of up to 15% of their compensation.
During 1997, the Plan was amended to provide for the Company to match 50% of
the employee's contributions on the first 3% of salary contributed by each
employee. The Company's matching contributions approximated $16, $70 and $136
for 1996, 1997 and 1998, respectively.
Stock Option Plans
In August 1995, NovaMed LLC approved an employee stock option plan (the 1995
Plan) and reserved 1,000 limited liability company units for certain officers
and key employees of NovaMed LLC. Under the terms of the 1995 Plan, options
generally become exercisable over a three-year period with vesting beginning
six months from the date of each grant and 1/36th of the total options granted
become exercisable each month thereafter.
In December 1996, the Company adopted the NovaMed Holdings Inc. Stock
Incentive Plan (the 1996 Plan). Under the 1996 Plan, NovaMed authorized
1,528,000 shares of $.01 par value Series A Stock to replace unit options
granted under the 1995 Plan. At such time, NovaMed also authorized 1,468,800
shares of its common stock, par value $.01 per share (Common Stock), to be
reserved for future grants. Authorized options for common stock under the 1996
Plan are exercisable over a four-year period with vesting beginning six months
from the date of each grant and 1/48th of the total options granted becoming
exercisable each month thereafter. The option period for Common Stock options
is 10 years from the date each option is granted. In March 1997, NovaMed
amended the 1996 Plan and authorized options for an additional 1,000,000 shares
of Common Stock and options for 55,000 shares of Series B Stock. In October
1998, NovaMed further amended the 1996 Plan and authorized options for an
additional 1,200,000 shares of Common Stock. All current outstanding options
are nonqualified stock options.
F-20
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company grants stock options to employees and nonemployee members of the
Company's Board of Directors. Pursuant to Accounting Principles Board No. 25,
the Company recognizes as compensation expense the difference between the
exercise price and the fair market value of its common stock on the date of
grant. Stock based compensation expense is deferred and recognized over the
vesting period of the stock option. During the years ended December 31, 1996,
1997 and 1998, the Company did not recognize any stock based compensation
expense. During the six months ended June 30, 1999, the Company recognized
approximately $218 in stock based compensation expense. During July, 1999, the
Company fully vested all options granted from February 1, 1999 through July 23,
1999, contingent on the completion of this offering. The Company has issued
1,075,800 options during this time period. Accordingly, the Company expects to
record $1.6 million, net of tax, as compensation expense during the quarter in
which this offering is completed related to those options which become fully
vested on the date of the completion of this offering.
In addition, the Company grants stock options to physicians employed by
Affiliated Professional Entities. The physicians reimburse the Company in full
for the compensation charge taken upon the granting of these options, which is
equal to their estimated fair market value on the date of the grant as
determined by the Black-Scholes option-pricing model.
The following table summarizes the activity in the stock option plan:
<TABLE>
<CAPTION>
Weighted
Average
Options Price Per Exercise
Outstanding Share Price
<S> <C> <C> <C>
December 31, 1995........................ 690,000 $ 1.25 $1.25
Granted................................ 981,000 $1.25-$2.50 $1.35
Exercised.............................. -- -- --
Canceled............................... (155,000) $ 1.25 $1.25
---------
December 31, 1996........................ 1,516,000 $1.25-$2.50 $1.31
Granted................................ 1,932,500 $1.88-$4.38 $2.05
Exercised.............................. (150,374) $1.25-$1.88 $1.26
Canceled............................... (234,626) $1.25-$2.50 $1.45
---------
December 31, 1997........................ 3,063,500 $1.80
Granted................................ 1,061,000 $3.50-$6.00 $4.46
Exercised.............................. (7,388) $1.25-$2.50 $1.93
Canceled............................... (114,112) $1.25-$3.85 $2.04
---------
December 31, 1998........................ 4,003,000 $2.49
========= =====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
-------------------------- ------------------
Exercise Average Average
Price Range Average Exercise Exercise
----------- Shares Life Price Shares Price
<S> <C> <C> <C> <C> <C>
$1.25 to $3.00................. 2,924,000 7.74 $1.77 1,871,065 $1.61
$3.01 to $6.00................. 1,079,000 9.48 4.46 81,519 3.73
--------- ---- ----- --------- -----
4,003,000 8.20 $2.49 1,952,584 $1.70
========= ==== ===== ========= =====
</TABLE>
The Company believes the exercise price of these stock options approximated
or exceeded the fair value of the applicable class of stock at the date of
grant based on the pricing of transactions involving the preferred stock as
discussed in Note 11, and the Company's financial condition at the date of
grant.
F-21
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarizes the pro forma effect on net income (loss) if the
fair values of stock based compensation had been recognized in the year
presented as compensation expense on a straight-line basis over the vesting
period of the grant:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Net income (loss) available to common stockholders.... $(1,099) $ 14 $578
======= ==== ====
Earnings (loss) per common share:
Basic............................................... $ -- $-- $.04
======= ==== ====
Diluted............................................. $ (.10) $-- $.04
======= ==== ====
</TABLE>
The fair value of these options was estimated using the minimum value method
with the following assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Expected option life in years........................... 10 10 10
Risk-free interest rate................................. 6.50% 6.06% 4.85%
Dividend yield.......................................... -- -- --
</TABLE>
13. OPERATING SEGMENTS
During 1998, the Company adopted SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. The Company manages its business
segments by types of service provided. The Company's reportable segments are as
follows:
Management services. Management services include medical services
provided to patients, the sale of optical products and research.
Surgery and Laser Centers. Surgery and laser centers include the results
of operations from owning, managing and operating surgery and laser
centers.
Product sales. Product sales include the Alliance optical products
purchasing organization, and beginning in 1999, Midwest Uncuts, a wholesale
optical laboratory and an optical products purchasing organization.
The accounting policies of the various segments are the same as those
described in the "Summary of Significant Accounting Policies" in Note 2, except
for the management services segment. Management services revenue is reported to
management using the net revenue of the Affiliated Professional Entities as the
total revenue. The revenue for the management services segment on the
accompanying Consolidated Statements of Operations is the net revenue of the
Affiliated Professional Entities reduced by amounts retained by the Affiliated
Professional Entities (See Note 2). Under either approach, the earnings before
income taxes (EBT) are identical.
The Company evaluates the performance of its segments based on EBT. Segment
EBT includes all revenue and expenses directly attributable to the segment
except amortization of intangible assets and excludes certain expenses that are
managed outside the reportable segment. Items excluded from the segment EBT
primarily consist of corporate expenses for salaries, wages and benefits,
general and administrative, interest on debt, and amortization of intangible
assets.
The Company excludes intercompany transfers for management reporting
purposes, as they have no effect on the EBT of the individual segments. Segment
identifiable assets include accounts receivable, inventory, other current
assets and long-lived assets of the segment. Corporate identifiable assets
represent all other assets of the Company including cash and cash equivalents,
corporate other current assets, and corporate long-lived assets, which include
property and equipment, notes receivable, intangible assets, and other long-
term assets. Capital expenditures for long-lived assets are not reported to
management by segment and are excluded, as presenting such information is not
practical.
F-22
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Surgery
and
Management Laser Product
Services Centers Sales Corporate Eliminations Total
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Six months ended June
30, 1999
Net revenue........... $30,092 $13,290 $7,146 $ -- $ (5,666) $44,862
EBT................... 2,940 5,102 746 (6,847) -- 1,941
Depreciation and
amortization......... 529 395 51 1,250 -- 2,225
Interest (income)..... (9) -- (23) (41) -- (73)
Interest expense...... 2 1 -- 1,127 -- 1,130
Identifiable assets... 13,555 7,927 4,172 45,959 -- 71,613
======= ======= ====== ======== ======== =======
Six months ended June
30, 1998
Net revenue........... $18,947 $ 8,736 $3,418 $ -- $ (3,816) $27,285
EBT................... 2,208 3,066 228 (4,347) -- 1,155
Depreciation and
amortization......... 388 241 2 849 -- 1,480
Interest (income)..... (5) -- (4) (164) -- (173)
Interest expense...... 9 -- 1 691 -- 701
Identifiable assets... 8,832 5,295 908 40,973 -- 56,008
======= ======= ====== ======== ======== =======
1998--
Net revenue........... $46,285 $20,131 $7,545 $ -- $(10,232) $63,729
EBT................... 5,707 7,181 546 (10,064) -- 3,370
Depreciation and
amortization......... 874 563 5 1,891 -- 3,333
Interest (income)..... (14) -- (11) (248) -- (273)
Interest expense...... 17 1 1 1,527 -- 1,546
Identifiable assets... 12,120 7,236 1,301 42,022 -- 62,679
======= ======= ====== ======== ======== =======
1997--
Net revenue........... $32,253 $14,484 $3,523 $ -- $ (7,852) $42,408
EBT................... 4,192 5,349 173 (9,403) -- 311
Depreciation and
amortization......... 587 386 9 1,244 -- 2,226
Interest (income)..... -- (12) (4) (306) -- (322)
Interest expense...... -- 35 1 1,327 -- 1,363
Identifiable assets... 8,717 4,373 517 39,127 -- 52,734
======= ======= ====== ======== ======== =======
1996--
Net revenue........... $13,860 $ 5,303 $ 221 $ -- $ (3,534) $15,850
EBT................... 2,516 2,179 14 (5,621) -- (912)
Depreciation and
amortization......... 262 77 3 464 -- 806
Interest (income)..... -- -- -- (29) -- (29)
Interest expense...... -- -- -- 87 -- 87
Identifiable assets... 4,191 2,081 125 21,297 -- 27,694
======= ======= ====== ======== ======== =======
</TABLE>
The Company has no revenues attributed to customers outside of the United
States and no assets located in foreign countries.
F-23
<PAGE>
NOVAMED EYECARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
14. RELATED-PARTY TRANSACTIONS
Facility Rent
The Company leases facility space from various partnerships, which include
affiliated providers as partners and trusts in which relatives of the
affiliated providers are named beneficiaries. Rent expense on related-party
operating leases amounted to approximately $816, $1,290 and $1,457 during 1996,
1997 and 1998, respectively.
Notes Receivable
The Company holds notes receivable of $393 from physicians affiliated with
the Company. The loans bear interest rates between 9.0-9.5%, are secured
against future services, and are either payable upon demand of the Company or
within two years of issuance.
The Company presently holds a note receivable for a total of $400 from a
physician affiliated with the Company related to the purchase of a minority
interest in an SLC. The note bears interest at 6% and is payable annually. The
principal is due in 2001. The note is included in note receivable from related
party at December 31, 1997 and 1998, and was paid in full subsequent to March
31, 1999.
Other
The Company purchased optical supplies such as spectacle frames and lenses
from Midwest Uncuts, which was owned by individuals who are related to an
officer of the Company. Total payments for purchases of optical supplies from
Midwest Uncuts during 1996, 1997 and 1998 were approximately $520, $820, and
$982, respectively. The Company purchased Midwest Uncuts in January 1999 (see
Note 3).
The Company receives professional services from a firm that employs a
director of the Company. Total payments for services received during 1996, 1997
and 1998 were approximately $543, $516 and $422, respectively.
15. MIGRATORY MERGER
Effective May 28, 1999, the Company reincorporated in Delaware and changed
its name to NovaMed Eyecare, Inc.
F-24
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
4,500,000 Shares of Common Stock
-------------------
PROSPECTUS
-------------------
Donaldson, Lufkin & Jenrette
Hambrecht & Quist
William Blair & Company
------------------
DLJdirect Inc.
- --------------------------------------------------------------------------------
Until , 1999, all dealers selling shares of our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This delivery requirement is in addition to the obligations of
dealers to deliver a prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
See forth below is an estimate of the approximate amount of fees and
expenses (other than underwriting commissions and discounts) payable by the
registrant in connection with the issuance and distribution of the common stock
pursuant to the prospectus contained in this registration statement. Registrant
will pay all of these expenses.
<TABLE>
<CAPTION>
Approximate
Amount
<S> <C>
Securities and Exchange Commission registration fee.......... $ 29,646*
NASD filing fee.............................................. 10,500
Nasdaq National Market listing fee........................... 95,000*
Accountants' fees and expenses............................... 175,000
Legal fees and expenses...................................... 1,200,000
Transfer agent and registrar fees and expenses............... 3,500
Printing and engraving expenses.............................. 225,000
Miscellaneous expenses....................................... 61,354
----------
Total.................................................... $1,800,000
==========
</TABLE>
- --------
* Actual amounts.
Item 14. Indemnification of Directors and Officers.
The registrant's Restated Certificate of Incorporation provides that the
registrant shall indemnify its directors to the full extent permitted by the
General Corporation Law of the State of Delaware and may indemnify its officers
and employees to such extent, except that the registrant shall not be obligated
to indemnify any such person (1) with respect to proceedings, claims or actions
initiated or brought voluntarily by any such person and not by way of defense,
or (2) for any amounts paid in settlement of an action indemnified against by
the registrant without the prior written consent of the registrant. Registrant
has entered into indemnity agreements with each of its directors. These
agreements may require the registrant, among other things, to indemnify such
directors against certain liabilities that may arise by reason of their status
or service as directors, to advance expenses to them as they are incurred,
provided that they undertake to repay the amount advanced if it is ultimately
determined by a court that they are not entitled to indemnification.
In addition, the registrant's Restated Certificate of Incorporation provides
that a director of the registrant shall not be personally liable to the
registrant or its stockholders for monetary damages for breach of his or her
fiduciary duty as a director, except for liability (1) for any breach of the
director's duty of loyalty to the registrant or its stockholders, (2) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) for willful or negligent conduct in paying
dividends or repurchasing stock out of other than lawfully available funds or
(4) for any transaction from which the director derives an improper personal
benefit.
Reference is made to Section 145 of the General Corporation Law of the State
of Delaware which provides for indemnification of directors and officers in
certain circumstances.
The registrant has purchased a directors' and officers' liability insurance
policy.
Under the terms of the underwriting agreement, the Underwriters have agreed
to indemnify, under certain conditions, the registrant, its directors, certain
of its officers and persons who control the registrant within the meaning of
the Securities Act of 1933, as amended.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
The following information reflects our recent sales of unregistered
securities:
On or about August 6, 1996, we issued 240 membership units in NovaMed
Eyecare Management, LLC to 20 investors consisting of individuals, joint
tenants and partnerships for an aggregate offering price of $600,000.
On or about November 1, 1996, we issued two subordinated exchangeable
promissory notes having an aggregate face value of $3,700,000 to two
affiliated eye care professionals in exchange for substantially all of the
nonmedical assets of an eye care practice, and a 75% interest in an eye
surgery and laser center.
On or about November 26, 1996, we issued 100 shares of common stock to
an individual investor for an aggregate offering price of $25.
On or about November 27, 1996, we issued two subordinated exchangeable
promissory notes having an aggregate face value of $2,000,000 to two
affiliated eye care professionals in exchange for substantially all of the
nonmedical assets of an eye care practice, and a 75% interest in an eye
surgery and laser center.
On or about December 20, 1996, in connection with our initial
restructuring in which we formed a holding company to hold all of the
ownership interests of our operating subsidiary, we issued 11,584,000
shares of Series A convertible preferred stock to all of the members of
NovaMed Eyecare Management, LLC in exchange for 5,792 units of membership
in NovaMed Eyecare Management, LLC in a tax-free reorganization.
On or about December 20, 1996, we issued 400,000 shares of Series B
convertible preferred stock to 19 investors consisting of individuals,
joint tenants and a partnership in exchange for an aggregate offering price
of $1,000,000.
On or about December 20, 1996, we issued 2,000,000 shares of Series C
convertible preferred stock and warrants to purchase 684,932 shares of
Series D convertible preferred stock to four investors consisting of
partnerships for an aggregate price of $6,010,000.
On or about January 1, 1997, we issued one subordinated exchangeable
promissory note having a face value of $5,400,000 to an affiliated eye care
professional in exchange for all of the issued and outstanding shares of
the owner of substantially all of the nonmedical assets relating to the
operation of an eye care practice and of the owner and operator of an eye
surgery and laser center.
On or about March 3, 1997, we issued 2,280,174 shares of common stock to
11 affiliated eye care professionals and options to purchase 55,000 shares
of Series B convertible preferred stock to two affiliated eye care
professionals in exchange for all of the issued and outstanding capital
stock of a corporation engaged in the management of an eye care practice
and which owned 100% interests in two eye surgery and laser centers.
On or about April 15, 1997, we issued 390,391 shares of common stock to
an affiliated eye care professional in exchange for all of the provider's
capital stock of a corporation engaged in the management of an eye care
practice.
On or about April 21, 1997, we issued 76,630 shares of common stock and
warrants to purchase 3,378 shares of common stock to five investors
consisting of partnerships, a trust and an individual in exchange for
negotiation and valuation services rendered in connection with an
affiliation with an eye care practice.
On or about May 1, 1997, we issued one subordinated exchangeable
promissory note to an affiliated eye care practice having a face value of
$3,100,000 in exchange for substantially all of the nonmedical assets of an
eye care practice.
On or about June 1, 1997, we issued one subordinated exchangeable
promissory note to an affiliated eye care provider having a face value of
$1,000,000 in exchange for substantially all of the assets of an eye
surgery and laser center.
II-2
<PAGE>
Over the period from July 31, 1997 through January 1, 1998, we issued
1,638,905 shares of Series D convertible preferred stock to 67 investors
consisting of individuals, joint tenants, trusts, corporations and
partnerships for an aggregate purchase price of $7,178,403.90.
On or about March 25, 1998, an individual investor, consisting of a
trust, exercised warrants to acquire 2,252 shares of common stock in
exchange for $9,863.76.
In April 1998, four investors, consisting of partnerships, exercised
warrants to acquire 684,932 shares of Series D convertible preferred stock
in exchange for $3,000,002.16.
On or about May 26, 1998, one investor, consisting of a trust, exercised
warrants to acquire 68,493 shares of Series D convertible preferred stock
in exchange for $299,999.34.
On or about July 25, 1998, we issued 550,987 shares of Series A
convertible preferred stock to three affiliated eye care professionals in
exchange for substantially all of the nonmedical assets of two eye care
practices.
On or about September 24, 1998, we issued 88,000 shares of Series A
convertible preferred stock to four affiliated eye care professionals in
exchange for all of the shares of the capital stock of an eye care
practice, all of the non-medical assets of an optometric partnership and a
50% partnership interest in another optometric partnership.
On or about November 30, 1999, we acquired from an affiliated eye care
professional the remaining 25% of the membership interests of an eye
surgery and laser center that we originally acquired on November 27, 1996,
in exchange for 80,000 shares of Series A convertible preferred stock.
On or about November 30, 1998, we acquired from two affiliated eye care
providers the remaining 25% of the membership interests of an eye surgery
and laser center that we originally acquired on November 1, 1996, in
exchange for 80,000 shares of Series A convertible preferred stock.
On or about January 1, 1999, we issued 250,000 shares of Series A
convertible preferred stock to two individual investors in exchange for all
of the shares of the capital stock of Midwest Uncuts, Inc.
On or about January 15, 1999, we issued 20,000 shares of Series A
convertible preferred stock to an affiliated eye care professional in
exchange for the eye care professional's shares of the capital stock of an
eye care practice.
On July 16, 1999, we issued 75,000 shares of common stock to an
affiliated professional entity in connection with the acquisition of our
clinical research business.
No underwriters were involved in any of the transactions described above. We
issued all of the securities in the foregoing transactions in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act,
including Regulation D promulgated thereunder, as transactions by an issuer not
involving any public offering and the transactions involved the issuance and
sale of our securities to financially sophisticated entities or individuals who
represented that they were aware of our activities and business and financial
condition, and who took these securities for investment purposes and understood
the ramifications of their actions. Each security holder represented that they
acquired such securities for investment for their own account and not for
distribution. All certificates representing the stock issued have a legend
imprinted on them stating that the shares have not been registered under the
Securities Act and cannot be transferred until properly registered under the
Securities Act or an exemption applies.
Between April 1996 and August 11, 1999 we issued options to purchase 591,000
shares of Series A convertible preferred stock, 55,000 shares of Series B
convertible preferred stock and 4,038,650 shares of common stock at exercise
prices ranging from $1.25 to $10.80 to employees, members of our board of
directors and affiliated eye care professionals. No options were issued to
affiliated eye care professionals after April 1999.
Between April 1996 and August 11, 1999, an aggregate of 256,055 shares of
Series A convertible preferred stock, and 103,707 shares of common stock were
issued upon exercise of options under our stock option plan.
II-3
<PAGE>
No underwriters were involved in any of the transactions relating to options
that are described above. We issued all of the securities in the foregoing
transactions in reliance upon the exemption from registration available under
Section 4(2) of the Securities Act, including Rule 701 promulgated thereunder,
as transactions by an issuer not involving any public offering and pursuant to
a written compensatory benefit plan.
II-4
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<C> <S>
1+ Underwriting Agreement
3.1+ Amended and Restated Certificate of Incorporation of the
Registrant
3.2+ Bylaws of the Registrant
4.1+ Specimen stock certificate representing Common Stock
4.2+ Registrant's Rights Agreement
5+ Opinion of Katten Muchin & Zavis as to the legality of the
securities being registered (including consent)
10.1+ Registrant's 1996 Stock Incentive Plan, as amended
10.2+ Registrant's Amended and Restated 1999 Stock Purchase Plan
10.3+ Indemnification Agreement
10.4+ Registration Rights Agreement
10.5+ Subordinated Registration Rights Agreement
10.6+ Employment Agreement
10.7+* Summit Technology, Inc. Agreement
10.8+ Second Amendment and Consent to the Amended and Restated Credit
Agreement
10.9+* Management Services Agreement (American Eye Institute, P.C.)
10.10+* Management Services Agreement (Dominion Eye Associates, P.C.)
10.11+* Management Services Agreement (The Eye Center, Inc.)
10.12+* Management Services Agreement (Hunkeler Eye Centers--Chicago,
L.L.C.)
10.13+* Management Services Agreement (Hunkeler Eye Centers--Kansas
City, L.L.C.)
10.14+* Management Services Agreement (Illinois Eye Specialists, Ltd.)
10.15+ Registrant's 401(k) Plan
21+ Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
23.2+ Consent of Katten Muchin & Zavis (contained in its opinion filed
as Exhibit 5 hereto)
23.3+ Consent of Arent Fox Kintner Plotkin & Kahn, PLLC
27+ Financial Data Schedule
</TABLE>
- --------
*Certain portions of this Exhibit have been omitted based upon a request for
confidential treatment of this document; omitted portions have been
separately filed with the Commission.
+Previously filed
(b) Financial Statement Schedules.
II-5
<PAGE>
NOVAMED EYECARE, INC.
RULE 12-09 VALUATION RESERVES
(in 000's)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
beginning of costs and end of
Description period expenses Deductions period
- ----------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
1996
Allowance for contractual
adjustments................... $ -- $14,486 $(12,056) $ 2,430
Allowance for bad debts........ -- 307 (216) 91
------ ------- -------- -------
$ -- $14,793 $(12,272) $ 2,521
====== ======= ======== =======
1997
Allowance for contractual
adjustments................... $2,430 $29,243 $(25,614) $ 6,059
Allowance for bad debts........ 91 1,170 (326) 935
------ ------- -------- -------
$2,521 $30,413 $(25,940) $ 6,994
====== ======= ======== =======
1998
Allowance for contractual
adjustments................... $6,059 $39,746 $(36,559) $ 9,246
Allowance for bad debts........ 935 901 (735) 1,101
------ ------- -------- -------
$6,994 $40,647 $(37,294) $10,347
====== ======= ======== =======
</TABLE>
II-6
<PAGE>
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To provide to the underwriters at the closing specified in the
underwriting agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
(2) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(3) For purposes of determining any liability under the Securities Act, (i)
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective and (ii) each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Post-Effective Amendment No. 1 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago, and State of Illinois on the 17th day of
August, 1999.
NovaMed Eyecare, Inc.
/s/ Stephen J. Winjum
By: _________________________________
Stephen J. Winjum
Chairman, Chief Executive Officer
and
President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 1 to the Registration Statement has been signed below
by the following persons in the capacities indicated on August 17, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Stephen J. Winjum Chairman of the Board, Chief Executive
___________________________________________ Officer and President (Principal
Stephen J. Winjum Executive Officer)
/s/ Ronald G. Eidell* Executive Vice President and Chief
___________________________________________ Financial Officer (Principal Financial
Ronald G. Eidell Officer)
/s/ Martin A. Koehler* Vice President Finance (Principal
___________________________________________ Accounting Officer)
Martin A. Koehler
/s/ John D. Hunkeler, M.D.* Director
___________________________________________
John D. Hunkeler, M.D.
/s/ R. Judd Jessup* Director
___________________________________________
R. Judd Jessup
/s/ Scott H. Kirk, M.D.* Director
___________________________________________
Scott H. Kirk, M.D.
/s/ Steven V. Napolitano* Director
___________________________________________
Steven V. Napolitano
/s/ James B. Tananbaum* Director
___________________________________________
James B. Tananbaum
/s/ Peter C. Wendell* Director
___________________________________________
Peter C. Wendell
/s/ Douglas P. Williams. M.D.* Director
___________________________________________
Douglas P. Williams, M.D.
</TABLE>
/s/ Stephen J. Winjum
*By: ________________________________
Stephen J. Winjum
Attorney-in-Fact
II-8
