<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2000
COMMISSION FILE NUMBER: 0-26625
NOVAMED EYECARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-4116193
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
980 North Michigan Avenue, Suite 1620, Chicago, Illinois 60611
(Address of principal executive offices)
Registrant's telephone, including area code: (312) 664-4100
___________________
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities and Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports)
Yes [X] No[_] and
(2) has been subject to such filing requirements for the past 90 days. Yes [X]
No [_]
As of August 9, 2000, there were outstanding 24,599,226 shares of the
registrant's common stock, par value $.01 per share.
<PAGE>
NOVAMED EYECARE, INC.
FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PART OR ITEM PAGE
<S> <C> <C>
Part I. FINANCIAL STATEMENTS 3
Item 1. Interim Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets - June 30, 2000 and December
31, 1999 3
Condensed Consolidated Statements of Operations - Three and six
months ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows - Six months ended
June 30, 2000 and 1999 5
Notes to the Interim Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Part II. OTHER INFORMATION 14
Item 2. Change in Securities and Use of Proceeds 14
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE>
Part I
------
Item 1. FINANCIAL STATEMENTS
NOVAMED EYECARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ - $ 1,828
Accounts receivable, net 18,956 14,501
Due from affiliated providers, net 1,691 1,931
Notes receivable from affiliated providers 3,065 342
Inventory 3,415 3,427
Other current assets 4,024 2,113
--------- ---------
Total current assets 31,151 24,142
Property and equipment, net 20,896 16,065
Intangible assets, net 57,813 47,852
Other assets, net 2,663 193
--------- ---------
Total assets $ 112,523 $ 88,252
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,363 $ 3,608
Accrued expenses and income taxes payable 5,563 4,937
Current maturities of long-term debt 416 3,617
--------- ---------
Total current liabilities 10,342 12,162
--------- ---------
Long-term debt, net of current maturities 20,691 196
--------- ---------
Deferred income tax liability 1,492 1,113
--------- ---------
Commitments and contingencies
Stockholders' equity:
Series E junior participating preferred stock ($.01 par value, 1,912,000 shares
authorized, none outstanding at June 30, 2000 and December 31,1999,
respectively) - -
Common stock ($.01 par value, 81,761,465 shares authorized, 24,514,790
and 24,159,199 shares outstanding, respectively) 245 242
Additional paid-in capital 76,906 74,628
Retained earnings (deficit) 2,847 (89)
--------- ---------
Total stockholders' equity 79,998 74,781
--------- ---------
Total liabilities and stockholders' equity $ 112,523 $ 88,252
========= =========
</TABLE>
The notes to the interim condensed consolidated financial statements
are an integral part of these statements.
3
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ ----------------------
2000 1999 2000 1999
-------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenue:
Management services $ 17,281 $ 12,574 $ 34,027 $ 24,426
Surgery and laser centers 10,702 7,404 20,597 13,290
Product sales and other 6,111 3,858 11,086 7,146
-------- ------------ ---------- ----------
Total net revenue 34,094 23,836 65,710 44,862
======== ============ ========== ==========
Operating expenses:
Salaries, wages and benefits 12,324 8,999 24,102 17,230
Cost of sales and medical supplies 9,206 6,522 17,406 12,260
Selling, general and administrative 7,912 5,019 15,115 9,948
Depreciation and amortization 1,814 1,129 3,513 2,225
Compensation expense related to stock options - 161 - 218
======== ============ ========== ==========
Total operating expenses 31,256 21,830 60,136 41,881
-------- ------------ ---------- ----------
Income from operations 2,838 2,006 5,574 2,981
Other expense, net 301 532 476 1,040
-------- ------------ ---------- ----------
Income before income taxes 2,537 1,474 5,098 1,941
Provision for income taxes 1,079 660 2,162 869
======== ============ ========== ==========
Net income 1,458 814 2,936 1,072
Accretion of Series C and Series D convertible
preferred stock - (2,907) - (3,476)
-------- ------------ ---------- ----------
Income (loss) available to Series A and Series B
convertible preferred and common stockholders $ 1,458 $ (2,093) $ 2,936 $ (2,404)
======== ============ ========== ==========
Basic earnings (loss) per common share $ 0.06 $ (0.15) $ 0.12 $ (0.17)
======== ============ ========== ==========
Diluted earnings (loss) per common share $ 0.06 $ (0.15) $ 0.11 $ (0.17)
======== ============ ========== ==========
Basic weighted average common shares outstanding 24,474 2,421 24,354 2,471
======== ============ ========== ==========
Diluted weighted average common shares outstanding 26,141 14,354 26,270 14,374
======== ============ ========== ==========
</TABLE>
The notes to the interim condensed consolidated financial statements
are an integral part of these statements.
4
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------------
2000 1999
----------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,936 $ 1,072
Adjustments to reconcile net income to net cash provided by operating activities, net
of effects of purchase transactions--
Depreciation and amortization 3,513 2,225
Noncash employee stock option expense - 218
Deferred taxes 610 -
Changes in noncash working capital items--
Accounts receivable and due from affiliated providers, net (3,517) (1,478)
Inventory 44 (400)
Other current assets (1,186) (322)
Other noncurrent assets 51 111
Accounts payable, accrued expenses and income taxes payable 22 (420)
----------- -----------
Net cash provided by operating activities 2,473 1,006
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (6,203) (3,906)
Acquisitions of and affiliations with entities, net (13,063) (6,337)
Receipt (issuance) of notes receivable from/(to) affiliated providers (2,723) 472
----------- -----------
Net cash used in investing activities (21,989) (9,771)
=========== ===========
Cash flows from financing activities:
Borrowings under revolving line of credit 56,850 18,900
Payments under revolving line of credit (39,550) (10,485)
Payments of subordinated debt - (850)
Proceeds from the issuance of common stock 654 451
Payments of other debt, debt issuance fees and capital lease obligations (266) (262)
=========== ===========
Net cash provided by financing activities 17,688 7,754
----------- -----------
Net decrease in cash and cash equivalents (1,828) (1,011)
Cash and cash equivalents, beginning of period 1,828 1,875
----------- -----------
Cash and cash equivalents, end of period $ - $ 864
=========== ===========
</TABLE>
The notes to the interim condensed consolidated financial statements
are an integral part of these statements.
5
<PAGE>
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Dollars in thousands, except per share data)
(Unaudited)
1. BASIS OF PRESENTATION
The information contained in the interim consolidated financial statements
and notes is condensed from that which would appear in the annual consolidated
financial statements. Accordingly, the interim condensed consolidated financial
statements included herein should be read in conjunction with the consolidated
financial statements as of and for the year ended December 31, 1999, filed by
NovaMed Eyecare, Inc. (the "Company") with the Securities and Exchange
Commission on Form 10-K. The unaudited interim condensed consolidated financial
statements as of June 30, 2000 and for the three and six months ended June 30,
2000 and 1999, include all normal recurring adjustments which management
considers necessary for a fair presentation. The results of operations for the
interim periods are not necessarily indicative of the results that may be
expected for the entire fiscal year. The net income (loss) per share was
computed using the weighted average number of common shares outstanding during
each period.
2. UNAUDITED PRO FORMA INFORMATION
In connection with the Company's initial public offering on August 18, 1999
("IPO"), certain noncash, nonrecurring charges were recorded in the 1999
consolidated financial statements. The following unaudited pro forma summary
presents the results of operations as if the events described more fully in the
notes below had occurred on January 1, 1999 (in thousands, except per share):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------- --------------------------
2000 1999 2000 1999
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Income (loss) available to Series A and Series B
convertible preferred and common stockholders $ 1,458 $ (2,093) $ 2,936 $ (2,404)
Eliminate compensation expense related to stock options (a) - 161 - 218
Eliminate preferred stock accretion upon conversion to
common stock (b) - 2,907 - 3,476
Eliminate interest expense upon debt conversion to common
stock (c) - 200 - 400
Related income tax effect - (126) - (241)
---------- ----------- ----------- ------------
Pro forma net income 1,458 $ 1,049 $ 2,936 1,449
========== =========== =========== ============
Pro forma earnings per diluted common share 0.06 $ 0.04 $ 0.11 0.06
========== =========== =========== ============
Pro Forma weighted average diluted shares outstanding 26,141 24,298 26,270 22,802
========== =========== =========== ============
</TABLE>
Notes:
(a) Represents the pro forma elimination of the compensation expense associated
with the IPO-related vesting of certain stock options granted in 1999.
(b) Represents the pro forma elimination of the accretion of the Series C and
Series D convertible preferred stock through the date of the IPO to its
estimated fair market value. Upon the completion of the IPO, the Series C
and Series D convertible preferred stock converted into common stock.
(c) Represents the pro forma elimination of the interest expense from the
subordinated exchangeable promissory notes, which were exchanged into common
stock at the time of the IPO.
6
<PAGE>
3. EARNINGS (LOSS) PER COMMON SHARE
Prior to the Company's IPO, the Company had multiple classes of convertible
preferred stock outstanding. Upon the completion of the IPO, all outstanding
classes of preferred stock converted into common stock of the Company. In
addition, $9.7 million of subordinated exchangeable promissory notes were
exchanged into 1,516,000 shares of common stock. For the computation of earnings
per share, the Series A and Series B convertible preferred stock were assumed to
be outstanding through the IPO.
Because the Series A and Series B convertible preferred stock participated
along with the common stock in the Company's earnings, the Company used the two
class method for the calculation of earnings per share ("EPS") for 1999. Under
the two class method, earnings or loss is allocated to the Series A and Series B
convertible preferred stock as one class, and to common stock as a second class.
For each class of stock, basic EPS is calculated by dividing allocated earnings
(loss) allocable to the class by the weighted average number of shares
outstanding of that class during the period. Diluted EPS is calculated by
dividing net income (loss) by the weighted average number of common shares,
including the dilutive effect of potential common shares outstanding during the
period. Potential common shares consist of outstanding options, convertible debt
and preferred stock. The dilutive effect of options are calculated using the
treasury stock method. The dilutive effect of the Series A and Series B
convertible preferred shares are calculated using the if-converted method.
Earnings (loss) per common share is calculated as follows (in thousands,
except per share):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ -------------------------
2000 1999 2000 1999
--------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Income (loss) available to Series A and B convertible
preferred and common stockholders $ 1,458 $ (2,093) $ 2,936 $ (2,404)
Income (loss) allocated to preferred stockholders - (1,734) - (1,991)
--------- ------------ ---------- ------------
Income (loss) available to common stockholders-basic $ 1,458 $ (359) $ 2,936 $ (413)
========= ============ ========== ============
Income (loss) available to common stockholders-diluted $ 1,458 $ (2,093) $ 2,936 $ (2,404)
========= ============ ========== ============
Basic weighted average number of common shares
outstanding 24,474 2,421 24,354 2,471
Weighted average number of common shares issuable upon
the conversion of dilutive preferred shares - 11,933 - 11,903
Effect of dilutive securities--stock options 1,667 - 1,916 -
--------- ------------ ---------- ------------
Diluted weighted average number of shares outstanding 26,141 14,354 26,270 14,374
========= ============ ========== ============
Earnings (loss) per common share:
Basic $ 0.06 $ (0.15) $ 0.12 $ (0.17)
========= ============ ========== ============
Diluted $ 0.06 $ (0.15) $ 0.11 $ (0.17)
========= ============ ========== ============
</TABLE>
The effect of the subordinated exchangeable notes and of the conversion of
the Series C and Series D convertible preferred stock was anti-dilutive in 1999
and accordingly, is excluded from diluted EPS.
7
<PAGE>
OPERATING SEGMENTS
The table below presents information about operating data and segment
assets, adjusted to exclude the effects of the 1999 noncash, nonrecurring items
discussed in Note 2, used by the chief operating decision maker of the Company
as of and for the three months and six months ended June 30, 2000 and 1999 (in
thousands):
<TABLE>
<CAPTION>
Product
Surgery and Management Sales and
Laser centers Services Other Corporate Eliminations Total
--------------- ------------ ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Three months ended June 30, 2000
--------------------------------
Net revenue $ 10,702 $ 20,738 $ 6,111 $ - $ (3,457) $ 34,094
Earnings before tax 4,440 1,532 711 (4,146) - 2,537
Depreciation and amortization 365 325 50 1,074 - 1,814
Interest (income) - (6) (4) (23) - (33)
Interest expense - - - 335 - 335
Identifiable assets 11,314 18,371 5,413 77,425 - 112,523
---------- --------- -------- -------- --------- --------
Three months ended June 30, 1999
--------------------------------
Net revenue $ 7,404 $ 15,681 $ 3,858 $ - $ (3,107) $ 23,836
Earnings before tax 2,964 1,565 355 (3,410) - 1,474
Depreciation and amortization 210 273 13 633 - 1,129
Interest (income) - (4) (11) (21) - (36)
Interest expense - - - 584 - 584
Identifiable assets 7,927 13,555 4,172 45,959 - 71,613
--------- --------- -------- -------- --------- --------
Six months ended June 30, 2000
------------------------------
Net revenue $ 20,597 $ 40,605 $ 11,086 $ - $ (6,578) $ 65,710
Earnings before tax 8,319 3,621 1,162 (8,004) - 5,098
Depreciation and amortization 728 666 96 2,023 - 3,513
Interest (income) - (10) (6) (44) - (60)
Interest expense - 1 - 562 - 563
Identifiable assets 11,314 18,371 5,413 77,425 - 112,523
--------- --------- -------- -------- --------- --------
Six months ended June 30, 1999
------------------------------
Net revenue $ 13,290 $ 30,092 $ 7,146 $ - $ (5,666) $ 44,862
Earnings before tax 5,102 2,940 746 (6,847) - 1,941
Depreciation and amortization 395 529 51 1,250 - 2,225
Interest (income) - (9) (23) (41) - (73)
Interest expense 1 2 - 1,127 - 1,130
Identifiable assets 7,927 13,555 4,172 45,959 - 71,613
--------- --------- -------- -------- --------- --------
</TABLE>
8
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The discussion below contains forward-looking statements (as such term is
defined in Section 21E of the Securities Exchange Act of 1934) that are based on
the beliefs of our management, as well as assumptions made by, and information
currently available to, our management. Our results, performance and
achievements in 2000 and beyond could differ materially from those expressed in,
or implied by, any such forward looking statements. See "Cautionary note
regarding forward-looking statements" on page 12.
Outlook
We achieved revenue and earnings growth in the second quarter and first
half of 2000 despite the highly competitive conditions in the laser vision
correction ("LVC") consumer market place and the LVC equipment and services
sectors. We expect this competitive environment to continue for the foreseeable
future.
In an effort to drive demand for LVC and to support our premium LVC pricing
and core regional brands in this competitive environment, we incurred higher
sales and marketing expenses in the second quarter. Such higher levels of sales
and marketing spending are expected to continue throughout the second half of
2000 and into 2001, in an effort to continue driving above-market LVC procedure
growth.
During the second quarter, operating margins were also unfavorably impacted
by higher levels of investment spending associated with our application service
provider platform ("ASP Model") with its information technology business
solutions and its related offering of business services and e-services. Higher
levels of spending to further develop and roll out our ASP Model are planned for
the second half of 2000 and into 2001 in order to meet the anticipated demand
for our ASP Model.
The discussion set forth below analyzes certain factors and trends related
to the financial results for each of the three and six months ended June 30,
2000 and 1999. This discussion should be read in conjunction with the condensed
consolidated financial statements and notes to the condensed consolidated
financial statements.
Results of Operations
Three Months Ended June 30, 2000 Compared to the Three Months Ended June 30,
1999
Net Revenue. Net revenue for second quarter 2000 increased 43.0% to $34.1
million from $23.8 million in the prior year period. Management services
revenue increased 37.4% from $12.6 million to $17.3 million. The increase in
management services revenue was primarily a result of overall increases in laser
vision correction, cataract and other ophthalmic surgery procedures performed by
our affiliated eye care professionals as well as new affiliations with eye care
professionals. Surgery and laser center revenue increased 44.5% from $7.4
million to $10.7 million, primarily as a result of a 144.4% increase in laser
vision correction procedures, compared to the same three months of 1999. The
increase in laser vision correction procedures mainly resulted from an overall
increase in demand and new affiliations with eye care professionals. We also
experienced an 18.4% increase in the number of cataract procedures performed in
our centers, compared to the three months ended June 30, 1999. Product sales
revenue increased 58.4% from $3.9 million to $6.1 million, reflecting strong
product demand and revenue contributed by our eye care marketing products and
services group which we acquired in May 2000.
Salaries, Wages and Benefits. Salaries, wages and benefits expense
increased 36.9% from $9.0 million to $12.3 million. As a percentage of revenue,
salaries, wages and benefits expense decreased from 37.8% to 36.1%. The absolute
increase in salaries, wages and benefits expense primarily reflects costs
associated with increased staffing levels to accommodate organic procedure
volume growth, along with increased costs as a result of new acquisitions and
affiliations. The decrease in salaries, wages and benefits expense as a
percentage of revenue was mainly attributable to better utilization of staff,
which in turn was due primarily to the increased volume of laser vision
correction and cataract procedures.
9
<PAGE>
Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased 41.2% from $6.5 million to $9.2 million. As a percentage of
revenue, cost of sales and medical supplies expense decreased slightly to 27.0%
from 27.4%. The absolute increase in cost of sales and medical supplies expense
is primarily attributable to higher volumes at our Optical Product Sales
business, along with costs incurred as a result of new acquisitions and
affiliations. Supply costs associated with the volume increases in laser vision
correction and cataract procedures also contributed to the absolute increase
during the period.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expense increased 57.6% from $5.0 million to $7.9 million. As a
percentage of revenue, SG&A expense increased from 21.1% to 23.2%. The absolute
increase in SG&A expense related primarily to the expansion of sales and
marketing efforts in connection with our laser vision correction business (which
includes the continued investment in developing regional brands), and
acquisitions. In addition, we increased information technology spending related
to our enterprise-wide information systems, other programs supporting our laser
vision correction business and our ASP Model.
Depreciation and Amortization. Depreciation and amortization expense
increased 60.7% from $1.1 million to $1.8 million. Acquisitions, affiliations
and increased capital expenditures have increased overall depreciation and
amortization expense.
Other Expense. Other expense decreased 43.4% from $532 thousand to $301
thousand. The decrease in other expense was primarily related to the reduction
of interest expense as a result of lower average outstanding indebtedness during
the second quarter of 2000 as compared to the 1999 period.
Provision for Income Taxes. Our effective tax rate reflects the impact of
nondeductible amortization expense. Our effective tax rate decreased to 42.5%
from 44.8%, due to a higher level of pretax earnings for the three months ended
June 30, 2000, which absorbed a higher percentage of nondeductible expenses as
compared to the prior year period.
Accretion of Series C and Series D Convertible Preferred Stock. In
connection with the IPO, approximately 16.3 million shares of Series A, Series
B, Series C and Series D convertible preferred stock, which represented all of
the issued and outstanding shares of preferred stock, converted into our common
stock. Prior to the IPO, however, the holders of the Series C and Series D
convertible preferred stock had the right to tender their stock for redemption
in 2004 and 2005 at the greater of the amount originally paid for the preferred
stock or its fair market value. Because the redemption right was outside of our
control, generally accepted accounting principles required that until the
redemption date, we increase the value of the preferred stock to its ultimate
redemption value, a principle known as accretion. The accretion was deducted
from net income in the 1999 consolidated financial statements to arrive at the
income available for common stockholders. Upon the conversion of the Series C
and Series D convertible preferred stock into common stock, the redemption
rights terminated, thus eliminating the need for further accretion. We recorded
accretion of $2.9 million for the three months ended June 30, 1999.
Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999
Net Revenue. Net revenue for the first half of 2000 increased 46.5% to
$65.7 million from $44.9 million in the prior year period. Management services
revenue increased 39.3% from $24.4 million to $34.0 million. The increase in
management services revenue was primarily a result of overall increases in laser
vision correction, cataract and other ophthalmic surgery procedures performed by
our affiliated eye care professionals as well as new affiliations with eye care
professionals. Surgery and laser center revenue increased 55.0% from $13.3
million to $20.6 million, primarily as a result of a 132.4% increase in laser
vision correction procedures, compared to the first half of 1999. The increase
in laser vision correction procedures mainly resulted from an overall increase
in demand and new affiliations with eye care professionals. We also experienced
a 21.2% increase in the number of cataract procedures, compared to the six
months ended June 30, 1999. Product sales revenue increased 55.1% from $7.1
million to $11.1 million, primarily as a result of strong product demand and, to
a lesser extent, revenue contributed by our eye care marketing products and
services operations which we acquired in May, 2000.
Salaries, Wages and Benefits. Salaries, wages and benefits expense
increased 39.9% from $17.2 million to $24.1 million. As a percentage of revenue,
salaries, wages and benefits expense decreased from 38.4% to 36.7%.
10
<PAGE>
The absolute increase in salaries, wages and benefits expense primarily reflects
costs associated with increased staffing levels to accommodate organic procedure
volume growth and to support the company's information technology/ASP platform,
along with increased costs as a result of new acquisitions and affiliations. The
decrease in salaries, wages and benefits expense as a percentage of revenue was
mainly attributable to better utilization of staff, which in turn was due
primarily to the increased volume of laser vision correction and cataract
procedures.
Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased 42.0% from $12.3 million to $17.4 million. As a percentage of
revenue, cost of sales and medical supplies expense decreased slightly to 26.5%
from 27.3%. The absolute increase in cost of sales and medical supplies expense
is primarily attributable to higher volumes at our Optical Product Sales
business, along with costs incurred as a result of new acquisitions and
affiliations. Supply costs associated with the increase in laser vision
correction and cataract procedures also contributed to the absolute increase
during the period.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expense increased 51.9% from $9.9 million to $15.1 million. As a
percentage of revenue, SG&A expense increased from 22.2% to 23.0%. The absolute
increase in SG&A expense related primarily to the expansion of sales and
marketing efforts in connection with our laser vision correction business (which
includes the continued investment in developing regional brands), and
acquisitions. In addition, we increased information technology spending related
to our enterprise-wide information systems, other programs supporting our laser
vision correction business and our ASP Model.
Depreciation and Amortization. Depreciation and amortization expense
increased 57.9% from $2.2 million to $3.5 million. Acquisitions, affiliations
and increased capital expenditures have increased overall depreciation and
amortization expense.
Other Expense. Other expense decreased 54.2% from $1.0 million to $476
thousand. The decrease in other expense was primarily related to the reduction
of interest expense as a result of lower average outstanding indebtedness during
the first half of 2000 as compared to the 1999 period.
Provision for Income Taxes. Our effective tax rate reflects the impact of
nondeductible amortization expense. Our effective tax rate decreased to 42.4%
from 44.8%, due to a higher level of pretax earnings for the six months ended
June 30, 2000, which absorbed a higher percentage of nondeductible expenses as
compared to the prior year period.
Accretion of Series C and Series D Convertible Preferred Stock. In
connection with the IPO, approximately 16.3 million shares of Series A, Series
B, Series C and Series D convertible preferred stock, which represented all of
the issued and outstanding shares of preferred stock, converted into our common
stock. Prior to the IPO, however, the holders of the Series C and Series D
convertible preferred stock had the right to tender their stock for redemption
in 2004 and 2005 at the greater of the amount originally paid for the preferred
stock or its fair market value. Because the redemption right was outside of our
control, generally accepted accounting principles required that until the
redemption date, we increase the value of the preferred stock to its ultimate
redemption value, a principle known as accretion. The accretion was deducted
from net income in the 1999 consolidated financial statements to arrive at the
income available for common stockholders. Upon the conversion of the Series C
and Series D convertible preferred stock into common stock, the redemption
rights terminated, thus eliminating the need for further accretion. We recorded
accretion of $3.5 million for the six months ended June 30, 1999.
Liquidity and Capital Resources
Net cash provided by operating activities for the six months ended June 30,
2000 increased $1.5 million over the comparable 1999 period to $2.5 million,
mainly as a result of improved earnings. We used $22.0 million of cash for
investing activities during the first half of 2000, which included four
acquisitions and/or affiliations and the purchase of leasehold improvements and
equipment, including that associated with 4 new laser vision correction centers,
which commenced operations in the first half of 2000. During the first half of
2000, our net borrowings under our revolving credit line increased $17.3 million
primarily to fund acquisitions. At June 30, 2000, the Company had working
capital of $20.8 million.
11
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On June 28, 2000, we replaced our $35 million revolving credit agreement
with a new three-year, $50 million revolving credit agreement. Interest on
borrowings under the new credit agreement is payable at an annual rate equal to
our lender's published base rate plus the applicable borrowing margin ranging
from 0 to 0.75% or LIBOR plus a range from 1.5% to 2.25%, varying upon our
ability to meet financial covenants. The weighted average interest rate on
credit line borrowings for both the three and six month periods ended June 30,
2000 was approximately 8.2%. The new credit agreement contains covenants that
include limitations on indebtedness, liens, capital expenditures, acquisitions
and affiliations and ratios that define borrowing availability and restrictions
on the payment of dividends. As of June 30, 2000, we were in compliance with
all our credit agreement covenants. We had $29.5 million available on our line
of credit as of June 30, 2000.
We expect that cash from operations and access to bank credit lines will be
sufficient to fund our operations and capital expenditures for at least 12
months. Our future capital requirements and the adequacy of available funds
will depend on many factors, including the timing of our acquisition activities,
new affiliations with eye care professionals, capital requirements associated
with our laser vision correction services and facilities, expansions and the
future cost of surgical equipment.
Most of our current FDA-approved lasers are subject to a supply agreement
with a laser manufacturer. Under this agreement, we utilize lasers for periods
ranging from 36 to 42 months. During these periods, we pay the manufacturer
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 June 30, 2000, we have a minimum remaining commitment under the supply
agreement of approximately $4.6 million.
On June 15, 2000, we entered into an agreement to acquire two surgery and
laser centers, contingent upon the resolution of certain requirements associated
with the seller (the "Contingencies"). Upon the resolution of the
Contingencies, which the seller has up to five years to satisfy, we will be
required to pay approximately $10.5 million in cash consideration, with us
having the discretion to fund up to approximately $2.3 million in the form of
our common stock. As of June 15, 2000, we have deposited approximately $1.3
million in escrow in advance of these transactions, which deposit is included in
Other Assets, net, on the accompanying condensed consolidated balance sheets.
This transaction is excluded from the acquisition limitations of the new Credit
Agreement discussed above.
As disclosed in our prospectus filed with the Securities and Exchange
Commission on August 18, 1999, in connection with the exchange of $9.7 million
of our subordinated exchangeable promissory notes resulting from our IPO, we
agreed to lend each of these noteholders 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 owned as of April 1, 2000. In accordance with these agreements,
we loaned $2.7 million to the holders, the majority of which was advanced in
April 2000. The tax loans are noninterest bearing, nonrecourse 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 as of April 1, 2000. The tax loans are 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.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS. This Form 10-Q
contains certain forward-looking statements that reflect our current
expectations about our future operating results, performance, and opportunities
that involve substantial risks and uncertainties. When used in this Form 10-Q,
the words "anticipate," "believe," "estimate," "plan," "intend," and "expect,"
and similar expressions, as they relate to us or our management, are intended to
identify such forward-looking statements. These forward-looking statements are
based on information currently available to us and are subject to a number of
risks, uncertainties and other factors that could cause our actual results,
performance, prospects and opportunities to differ materially from those
expressed in or implied by, these forward-looking statements. Factors that
could cause or contribute to such difference include, but are not limited to,
the acceptance of laser vision correction and other refractive surgical
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procedures by eye care professionals and the general public; our ability to
establish and maintain profitable affiliations with eye care professionals; the
adoption of competing new technologies for vision correction surgery; reductions
in prices for laser vision correction procedures and other reimbursement rates;
and proposed health care reforms. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations - Factors that Could Affect our
Operations" in our Annual Report on Form 10-K for the year ended December 31,
1999 for further description of factors that could affect our operating results,
performance and opportunities. Except as required by the Federal securities
law, we do not undertake any obligation to release publicly any revisions to any
forward-looking statements to reflect events or circumstances after the date of
this Form 10-Q or for any other reason.
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PART II. OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds
Sales of Unregistered Securities from April 1, 2000 through June 30, 2000
On May 1, 2000, we issued 80,000 shares of common stock as partial
consideration to acquire an eye care marketing products and services company.
In connection with the agreement to acquire two surgery and laser centers
discussed above, we have the discretion to fund up to approximately $2.3 million
of the purchase price with our common stock.
No underwriters were engaged in connection with the foregoing sale of
securities. The sales of securities listed above were made in reliance upon the
exemption from registration in Section 4(2) of the Securities Act of 1933 for
transactions not involving a public offering.
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Item 4. Submission of Matters to a Vote of Security Holders
We held our 2000 Annual Meeting of Stockholders on May 17, 2000, at which
the following items were submitted to and voted upon by the stockholders:
1. The stockholders voted to re-elect two Class I directors for a term of
three years expiring at our 2003 Annual Meeting of Stockholders. Results of the
voting were as follows:
Authority Broker
Directors For Withheld Abstentions Non-Votes
--------- --- -------- ----------- ---------
Stephen J. Winjum 21,926,633 35,525 -- --
Peter C. Wendell 21,926,633 35,525 -- --
John D. Hunkeler, M.D., R. Judd Jessup, Scott H. Kirk, M.D., Steven V.
Napolitano, James B. Tananbaum, and Douglas P. Williams, M.D. continued their
terms of office as directors of the Company after the 2000 Annual Meeting of
Stockholders.
2. The stockholders voted to approve our Amended and Restated Stock Incentive
Plan. Results of the voting were as follows:
Authority Broker
For Withheld Abstentions Non-Votes
--- -------- ----------- ---------
18,247,284 176,729 112,638 3,425,507
3. The stockholders voted to approve our Amended and Restated 1999 Stock
Purchase Plan. Results of the voting were as follows:
Authority Broker
For Withheld Abstentions Non-Votes
--- -------- ----------- ---------
18,325,785 97,428 113,438 3,425,507
Item 5. Other Information
As previously disclosed in our prospectus filed with the Securities and
Exchange Commission on August 18, 1999, our affiliated eye care professionals
who were also stockholders as of the IPO have entered into lock-up agreements
with the Company's underwriters that restrict their ability to sell our common
stock. As of August 9, 2000, approximately 12.6 million shares of common stock
are subject to these lock-up agreements. The terms of these lock-up agreements
prohibit the affiliated eye care professionals from selling any shares until
August 19, 2000. Thereafter, the lock-up agreements limit the volume of shares
an affiliated eye care professional can sell during the one-year period
commencing August 19, 2000 and ending August 19, 2001. During this one-year
period, an affiliated eye care professional cannot, without the written consent
of Donaldson, Lufkin & Jenrette, sell in any ninety-day period an amount greater
than the lesser of 40,000 shares or 10% of the amount of common stock
beneficially owned by such individual. Based on these restrictions, a maximum
of approximately 690,000 shares could be sold in the aggregate by these
affiliated eye care professionals during the ninety-day period beginning August
19, 2000 (or a maximum of approximately 2.8 million shares during the one-year
period beginning August 19, 2000 and ending August 19, 2001).
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James B. Tananbaum, a member of our Board of Directors, has resigned from
the Board effective as of August 1, 2000. Mr. Tananbaum's resignation decreases
the size of our Board of Directors from eight to seven members. We have no
immediate plans to replace Mr. Tananbaum.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 10.21 - $50,000,000 Credit Agreement
Exhibit 10.22 - Amended and Restated Stock Incentive Plan
Exhibit 21 - Subsidiaries
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K
We did not file any reports on Form 8-K during the second quarter
of 2000.
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOVAMED EYECARE, INC.
August 11, 2000
____________________________________ ---------------
Ronald G. Eidell Date
Executive Vice President, Chief
Financial Officer and Secretary
(on behalf of Registrant and as principal
financial officer)
August 11, 2000
____________________________________ ---------------
Martin A. Koehler Date
Vice President Finance
(principal accounting officer)
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EXHIBIT INDEX
Exhibit
Number Exhibit Name
------ ------------
10.21 $50,000,000 Credit Agreement
10.22 Amended and Restated Stock Incentive Plan
21 Subsidiaries
27 Financial Data Schedule
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