<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 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), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of November 9, 2000, there were outstanding 24,679,357 shares of the
registrant's common stock, par value $.01 per share.
================================================================================
<PAGE>
NOVAMED EYECARE, INC.
FORM 10-Q FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 - September 30, 2000 and
December 31, 1999 3
Condensed Consolidated Statements of Operations - Three and nine months
ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows - Nine months ended
September 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 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
<PAGE>
Part I
------
Item 1.
NOVAMED EYECARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- ----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,052 $ 1,828
Accounts receivable, net 19,564 14,501
Due from affiliated providers, net 1,509 1,931
Notes receivable from affiliated providers 3,410 342
Inventory 3,740 3,427
Other current assets 2,728 2,113
--------------- ----------------
Total current assets 33,003 24,142
Property and equipment, net 21,738 16,065
Intangible assets, net 61,160 47,852
Other assets, net 2,641 193
--------------- ----------------
Total assets $ 118,542 $ 88,252
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,577 $ 3,608
Accrued expenses 5,495 4,662
Income taxes payable - 275
Current maturities of long-term debt 411 3,617
--------------- ----------------
Total current liabilities 10,483 12,162
--------------- ----------------
Long-term debt, net of current maturities 24,350 196
--------------- ----------------
Deferred income tax liability 2,186 1,113
--------------- ----------------
Commitments and contingencies
Stockholders' equity:
Series E junior participating preferred stock ($.01 par value,
1,912,000 shares authorized, none outstanding at September 30,
2000 and December 31,1999, respectively) - -
Common stock ($.01 par value, 81,761,465 shares authorized,
24,680,750 and 24,159,199 shares outstanding at September 30,
2000 and December 31, 1999, respectively) 246 242
Additional paid-in capital 77,271 74,628
Retained earnings (deficit) 4,006 (89)
--------------- ----------------
Total stockholders' equity 81,523 74,781
--------------- ----------------
Total liabilities and stockholders' equity $ 118,542 $ 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 Nine months ended
September 30, September 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net revenue:
Surgery and laser centers $ 10,348 $ 8,177 $ 30,945 $ 21,467
Management services 18,331 13,889 52,358 38,315
Product sales and other 6,400 4,408 17,486 11,554
------------ ------------ ------------ ------------
Total net revenue 35,079 26,474 100,789 71,336
------------ ------------ ------------ ------------
Operating expenses:
Salaries, wages and benefits 13,143 9,813 37,245 27,043
Cost of sales and medical supplies 8,916 7,061 26,322 19,321
Selling, general and administrative 8,374 5,581 23,489 15,529
Depreciation and amortization 1,933 1,274 5,446 3,499
Compensation expense related to stock options - 2,472 - 2,690
------------ ------------ ------------ ------------
Total operating expenses 32,366 26,201 92,502 68,082
------------ ------------ ------------ ------------
Income from operations 2,713 273 8,287 3,254
Other expense, net 683 225 1,159 1,265
Discount to initial public offering price upon the
exchange of subordinated notes for common stock - 2,425 - 2,425
------------ ------------ ------------ ------------
Income (loss) before income taxes 2,030 (2,377) 7,128 (436)
Provision (benefit) for income taxes 873 (460) 3,035 409
------------ ------------ ------------ ------------
Net income (loss) 1,157 (1,917) 4,093 (845)
Accretion of Series C and Series D convertible
preferred stock - 1,441 - (2,035)
------------ ------------ ------------ ------------
Income (loss) available to Series A and Series B
convertible preferred and common stockholders $ 1,157 $ (476) $ 4,093 $ (2,880)
============ ============ ============ ============
Basic earnings (loss) per common share $ .05 $ .05 $ .17 $ .04
============ ============ ============ ============
Diluted earnings (loss) per common share $ .05 $ (.09) $ .16 $ (.18)
============ ============ ============ ============
Basic weighted average common shares outstanding 24,590 12,654 24,433 5,880
============ ============ ============ ============
Diluted weighted average common shares outstanding 25,638 21,172 26,132 15,896
============ ============ ============ ============
</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>
Nine months ended
September 30,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,093 $ (845)
Adjustments to reconcile net income to net cash provided by
operating activities, net of effects of purchase transactions--
Depreciation and amortization 5,446 3,499
Amortization of deferred compensation - 2,690
Discount from conversion of subordinated exchangeable notes to
common stock - 2,425
Deferred taxes 610 (1,491)
Changes in noncash working capital items--
Accounts receivable and due from affiliated providers, net (3,180) (1,933)
Inventory (249) (613)
Other current assets 103 (1,085)
Other noncurrent assets 142 126
Accounts payable, accrued expenses and income taxes payable 156 988
------------ ------------
Net cash provided by operating activities 7,121 3,761
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (8,171) (6,428)
Acquisitions of and affiliations with entities, net (17,168) (6,982)
Receipt (issuance) of notes receivable from/(to) affiliated providers (3,068) 472
------------ ------------
Net cash used in investing activities (28,407) (12,938)
------------ ------------
Cash flows from financing activities:
Borrowings under revolving line of credit 70,500 23,400
Payments under revolving line of credit (49,350) (31,885)
Payments of subordinated debt - (2,200)
Proceeds from the issuance of common stock 880 25,404
Payments of other debt, debt issuance fees and capital lease obligations (520) (293)
------------ ------------
Net cash provided by financing activities 21,510 14,426
------------ ------------
Net increase (decrease) in cash and cash equivalents 224 5,249
Cash and cash equivalents, beginning of period 1,828 1,875
------------ ------------
Cash and cash equivalents, end of period $ 2,052 $ 7,124
============ ============
</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
September 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 September 30, 2000 and for the three and nine months ended
September 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.
Certain prior year immaterial amounts have been reclassified as required by
Emerging Issues Task Force ("EITF") Issue No. 00-14 "Accounting for Certain
Sales Incentives," issued in May, 2000.
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 Nine months ended
September 30, September 30,
----------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Income (loss) available to Series A and Series B
convertible preferred and common stockholders $ 1,157 $ (476) $ 4,093 $ (2,880)
Eliminate compensation expense related to stock options (a) - 2,472 - 2,690
Eliminate discount to IPO price upon the exchange of
subordinated notes for common stock (b) - 2,425 - 2,425
Eliminate preferred stock accretion upon conversion to
common stock (c) - (1,441) - 2,035
Eliminate interest expense upon debt conversion to
common stock (d) - - - 400
Related income tax effect - (1,589) - (1,866)
----------- ----------- ---------- -----------
Pro forma net income $ 1,157 $ 1,391 $ 4,093 $ 2,804
=========== =========== ========== ===========
Pro forma earnings per diluted common share $ .05 $ .06 $ .16 $ .12
=========== =========== ========== ===========
Pro forma weighted average diluted shares outstanding 25,638 23,948 26,132 22,894
=========== =========== ========== ===========
</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 additional interest expense
which resulted from the exchange of subordinated exchangeable promissory
notes into common stock at a discount to the IPO price.
6
<PAGE>
(c) 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.
(d) 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.
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 Nine months ended
September 30, September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Income (loss) available to Series A and B convertible
preferred and common stockholders $ 1,157 $ (476) $ 4,093 $ (2,880)
Income (loss) allocated to preferred stockholders - (1,136) - (3,130)
------------- -------------- -------------- --------------
Income (loss) available to common stockholders--basic $ 1,157 $ 660 $ 4,093 $ 250
============= ============== ============== ==============
Income (loss) available to common stockholders--diluted $ 1,157 $ (1,917) $ 4,093 $ (2,880)
============= ============== ============== ==============
Basic weighted average number of common shares
outstanding 24,590 12,654 24,433 5,880
Weighted average number of common shares issuable
upon the conversion of dilutive preferred shares - 8,518 - 10,016
Effect of dilutive securities--stock options 1,048 - 1,699 -
------------- -------------- -------------- --------------
Diluted weighted average number of shares outstanding 25,638 21,172 26,132 15,896
============= ============== ============== ==============
Earnings (loss) per common share:
Basic $ .05 $ .05 $ .17 $ .04
============= ============== ============== ==============
Diluted $ .05 $ (.09) $ .16 $ (.18)
============= ============== ============== ==============
</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>
4. 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 nine months ended September 30, 2000 and 1999
(in thousands):
<TABLE>
<CAPTION>
Surgery Product
and Laser Management Sales and
centers Services Other Corporate Eliminations Total
------- ---------- --------- --------- ------------ ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Three months ended September 30, 2000
-------------------------------------
Net revenue $ 10,348 $ 20,867 $ 6,400 $ - $ (2,536) $ 35,079
Earnings before tax 3,579 869 941 (3,359) - 2,030
Depreciation and amortization 394 366 52 1,121 - 1,933
Interest income - 4 4 22 - 30
Interest expense - 10 - 699 - 709
Identifiable assets 12,900 18,152 4,935 82,555 - 118,542
======== ======== ======== ========= ========= =========
Three months ended September 30, 1999
-------------------------------------
Net revenue $ 8,177 $ 16,700 $ 4,408 $ - $ (2,811) $ 26,474
Earnings before tax 3,234 1,686 495 (2,895) - 2,520
Depreciation and amortization 238 298 50 688 - 1,274
Interest income - 5 5 63 - 73
Interest expense 1 1 - 293 - 295
Identifiable assets 8,945 13,813 4,206 55,685 - 82,649
======== ======== ======== ========= ========= =========
Nine months ended September 30, 2000
------------------------------------
Net revenue $ 30,945 $ 61,472 $ 17,486 $ - $ (9,114) $ 100,789
Earnings before tax 12,066 4,322 2,102 (11,362) - 7,128
Depreciation and amortization 1,123 1,033 147 3,143 - 5,446
Interest income - 14 9 67 - 90
Interest expense - 11 - 1,261 - 1,272
Identifiable assets 12,900 18,152 4,935 82,555 - 118,542
======== ======== ======== ========= ========= =========
Nine months ended September 30, 1999
------------------------------------
Net revenue $ 21,467 $ 46,792 $ 11,554 $ - $ (8,477) $ 71,336
Earnings before tax 8,336 4,626 1,241 (9,124) - 5,079
Depreciation and amortization 633 827 101 1,938 - 3,499
Interest income - 14 28 104 - 146
Interest expense 2 3 - 1,020 - 1,025
Identifiable assets 8,945 13,813 4,206 55,685 - 82,649
======== ======== ======== ========= ========= =========
</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
NovaMed Eyecare provides a comprehensive range of eye care services,
focused around its 14 surgical and laser facilities, where eye care
professionals perform laser vision correction, cataracts and other eye-related
surgical procedures. The revenue and earnings growth in the third quarter and
first nine months of 2000 was achieved despite the highly competitive conditions
in the laser vision correction ("LVC") consumer market place and the LVC
equipment and services sectors. LVC represented approximately 25 percent of net
revenue for the first nine months, 2000. 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 than in the previous year. Third quarter 2000
sales and marketing expense approximately doubled from third quarter 1999 but
was approximately 10 percent below the second quarter, 2000 level. We expect to
continue to support our premium priced LVC provider position and our regional
brands with sales and marketing spending.
The third quarter operating margins reflect the effects of efforts to
evaluate and streamline the Company's organizational structure in light of the
more competitive LVC environment. Approximately $200,000 of severance costs
recognized in the third quarter were offset by salary and related benefits
expense savings associated with the elimination of 61 positions during the
second half of the third quarter. The full effect of these cost reductions is
expected to be reflected in operating results beginning in the fourth quarter of
2000.
The discussion set forth below analyzes certain factors and trends related
to the financial results for each of the three and nine months ended September
30, 2000 and 1999. This discussion should be read in conjunction with the
condensed consolidated financial statements and notes to the condensed
consolidated financial statements above.
Results of Operations
Three Months Ended September 30, 2000 Compared to the Three Months Ended
September 30, 1999
Net Revenue. Net revenue for third quarter 2000 increased 32.5% to $35.1
million from $26.5 million in the prior year period. Surgery and laser center
net revenue increased 26.6% from $8.2 million to $10.3 million, primarily as a
result of an 86.6% 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 as well as new
affiliations and agreements with eye care professionals. We also experienced a
9.4% increase in the number of cataract procedures performed in our centers,
compared to the three months ended September 30, 1999. Management services net
revenue increased 32.0% from $13.9 million to $18.3 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. Product sales revenue increased 45.2% from $4.4 million to $6.4
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 33.9% from $9.8 million to $13.1 million. As a percentage of revenue,
salaries, wages and benefits expense increased from 37.1% to 37.5%. The absolute
increase in salaries, wages and benefits expense primarily reflects costs
associated with increased staffing levels to
9
<PAGE>
accommodate organic procedure volume growth, along with increased costs as a
result of new acquisitions and affiliations, and the severance costs referred to
above.
Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased 26.3% from $7.1 million to $8.9 million. As a percentage of
revenue, cost of sales and medical supplies expense decreased slightly to 25.4%
from 26.7%. 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 at 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 50.0% from $5.6 million to $8.4 million. As a
percentage of revenue, SG&A expense increased from 21.1% to 23.9%. 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 and other programs supporting our
laser vision correction business.
Depreciation and Amortization. Depreciation and amortization expense
increased 51.7% from $1.3 million to $1.9 million. Acquisitions, affiliations
and increased capital expenditures have increased overall depreciation and
amortization expense.
Other Expense. Other expense increased from $225,000 to $683,000. The
increase in other expense was primarily related to an increase in interest
expense as a result of higher average outstanding indebtedness during the third
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 43.0%
from 44.8% (pro forma). This was, in part, due to a decline in the proportion
of nondeductible goodwill amortization to total amortization from the 1999
period to the 2000 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. Based on
the IPO price of $8.00 per share, we recorded our final accretion adjustment of
$1.4 million to reduce the carrying value of the preferred stock during the
three months ended September 30, 1999.
Nine Months Ended September 30, 2000 Compared to the Nine Months Ended
September 30, 1999
Net Revenue. Net revenue for the first nine months of 2000 increased 41.3%
to $100.8 million from $71.3 million in the prior year period. Surgery and
laser center net revenue increased 44.2% from $21.5 million to $30.9 million,
primarily as a result of a 114% increase in laser vision correction procedures,
compared to the first nine months of 1999. The increase in laser vision
correction procedures mainly resulted from an overall increase in demand as well
as new affiliations and agreements with eye care professionals. We also
experienced a 17% increase in the number of cataract procedures, compared to the
nine months ended September 30, 1999. Management services net revenue increased
36.7% from $38.3 million to $52.4 million. The increase in management services
revenue was primarily a result of overall increases in laser vision correction,
cataract and other ophthalmic surgery procedures performed by our affiliated eye
care professionals as well as new affiliations with eye care professionals.
Product sales revenue increased 51.3% from $11.6 million to $17.5 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.
10
<PAGE>
Salaries, Wages and Benefits. Salaries, wages and benefits expense
increased 37.7% from $27.0 million to $37.2 million. As a percentage of revenue,
salaries, wages and benefits expense decreased from 37.9% to 37.0%. 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 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 36.2% from $19.3 million to $26.3 million. As a percentage of
revenue, cost of sales and medical supplies expense decreased to 26.1% from
27.1%. 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 at 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
expense increased 51.3% from $15.5 million to $23.5 million. As a percentage of
revenue, SG&A expense increased from 21.8% to 23.3%. 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 and other programs supporting our laser
vision correction business.
Depreciation and Amortization. Depreciation and amortization expense
increased 55.6% from $3.5 million to $5.5 million. Acquisitions, affiliations
and increased capital expenditures have increased overall depreciation and
amortization expense.
Other Expense. Other expense decreased slightly from $1.3 million to $1.2
million. Excluding interest expense on subordinated notes which were converted
to stock at the time of the IPO, interest expense increased to $1.3 million for
the nine months ended September 30, 2000 from $0.8 million for the comparable
prior year period. The increase resulted from higher average outstanding
borrowings and a higher average interest rate during the current nine-month
period.
Provision for Income Taxes. Our effective tax rate reflects the impact of
nondeductible amortization expense. Our effective tax rate in 2000 decreased to
42.6% from 44.8% (pro forma) in 1999, due to a higher level of pretax earnings
for the nine months ended September 30, 2000 and in part, due to a decline in
the proportion of nondeductible goodwill amortization to total amortization from
the 1999 period to the 2000 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 $2.0 million for the nine months ended September 30, 1999.
Liquidity and Capital Resources
Net cash provided by operating activities for the nine months ended
September 30, 2000 increased $3.4 million over the comparable 1999 period to
$7.1 million, mainly as a result of improved earnings. The Company used $28.4
million of cash for investing activities during the first nine months of 2000,
which included six acquisitions and/or affiliations and the purchase of
equipment. During the first nine months of 2000, the Company's net borrowings
under its revolving credit line increased $21.1 million primarily as a result of
borrowings used to fund acquisitions. Additionally, the Company received
$880,000 during the first nine months of 2000 from the issuance of common stock
in connection
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with the Company's stock option and employee stock purchase plans. At September
30, 2000, the Company had working capital of $22.5 million.
On June 28, 2000, the Company replaced its $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 the three and nine months ended September 30,
2000 was approximately 8.8% and 8.45%, respectively. 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 September 30,
2000, we were in compliance with all our credit agreement covenants. We had
$25.6 million available on our line of credit as of September 30, 2000.
We expect that our funds 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 September 30, 2000, we had a minimum remaining commitment under the supply
agreement of approximately $4.2 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, the Company 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 the 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
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forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to: the acceptance of laser vision
correction and other refractive surgical 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. Excepts 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 the Form
10-Q or for any other reason.
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PART II. OTHER INFORMATION
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 19, 2000, approximately 12.6 million shares of common stock
were subject to these lock-up agreements. The terms of these lock-up agreements
prohibited 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).
Effective November 10, 2000, our Board of Directors appointed C.A. Lance
Piccolo as a member of our Board of Directors. The appointment of Mr. Piccolo
fills a vacancy created when James B. Tananbaum resigned from the Board
effective as of August 1, 2000. Mr. Piccolo is President and Chief Executive
Officer of HealthPic Consultants, Inc., a strategic healthcare consulting firm.
Mr. Piccolo was formerly Chairman and Chief Executive Officer of Caremark
International, Inc., a 1992 spin-off from Baxter International, Inc., where he
served as Executive Vice President.
Separately, Peter Wendell, another member of our Board of Directors,
resigned from the Board effective as of November 13, 2000. Mr. Wendell is the
founder and a general partner of Sierra Ventures, a venture capital fund that
recently completed the distribution of its shares of NovaMed stock to its
limited partner investors.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K
We did not file any reports on Form 8-K during the third quarter of
2000.
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SIGNATURE
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.
/s/ Ronald G. Eidell November 13, 2000
-------------------- -----------------
Ronald G. Eidell Date
Executive Vice President, Chief
Financial Officer and Secretary
(on behalf of Registrant and as principal financial officer)
/s/ Robert L. Hiatt November 13, 2000
------------------- -----------------
Robert L. Hiatt Date
Vice President Finance
(principal accounting officer)
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EXHIBIT INDEX
Exhibit
Number Exhibit Name
------- ------------
27 Financial Data Schedule
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