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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, 2002
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
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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 August 12, 2002, there were outstanding 23,128,908 shares of the
registrant's common stock, par value $.01 per share.
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NOVAMED EYECARE, INC.
FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 2002
INDEX
PART OR ITEM PAGE
Part I. FINANCIAL STATEMENTS 3
Item 1. Interim Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets - June 30, 2002 and
December 31, 2001 3
Condensed Consolidated Statements of Operations - Three and six months ended
June 20, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows - Six months ended
June 30, 2002 and 2001 5
Notes to the Interim Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Continuing Operations 12
Part II. OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 6 Exhibits and Reports on Form 8-K 16
Signatures 17
Part I
Item 1.
NOVAMED EYECARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
June 30, December 31,
ASSETS 2002 2001
--------------- --------------
Current assets: (unaudited)
Cash and cash equivalents $ -- $ 967
Accounts receivable, net 7,666 6,794
Notes and amounts due from affiliated providers 1,717 1,654
Inventory 1,309 1,142
Current tax assets, net 3,511 5,073
Other current assets 847 999
Current assets of discontinued operations 7,659 16,131
--------------- --------------
Total current assets 22,709 32,760
Property and equipment, net 7,326 7,945
Intangible assets, net 22,173 23,797
Noncurrent deferred tax assets, net 11,934 12,133
Other assets, net 1,713 748
Noncurrent assets of discontinued operations, net 7,796 13,682
--------------- --------------
Total assets $ 73,651 $ 91,065
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,702 $ 2,808
Accrued expenses 2,208 2,317
Restructuring reserves 2,499 5,023
Current maturities of long-term debt 161 404
Current liabilities of discontinued operations 7,847 9,084
--------------- --------------
Total current liabilities 16,417 19,636
--------------- --------------
Long-term debt, net of current maturities 6,906 20,708
--------------- --------------
Minority interest 735 142
--------------- --------------
Commitments and contingencies
Stockholders' equity:
Series E Junior Participating Preferred Stock, $0.01 par value, 1,912,000
shares authorized, none outstanding at
June 30, 2002 and December 31, 2001, respectively -- --
Common stock, $0.01 par value, 81,761,465 shares
authorized, 23,128,908 and 24,835,108 shares issued
and outstanding at June 30, 2002 and
December 31, 2001, respectively 249 248
Additional paid-in-capital 77,699 77,673
Retained earnings (deficit) (27,126) (27,342)
Treasury stock, at cost, 1,748,640 shares at June 30, 2002 (1,229) --
--------------- --------------
Total stockholders' equity 49,593 50,579
--------------- --------------
Total liabilities and stockholders' equity $ 73,651 $ 91,065
=============== ==============
The notes to the interim condensed consolidated financial
statements are an integral part of these statements.
3
NOVAMED EYECARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data; unaudited)
Three months ended Six months ended
June 30, June 30,
---------------------------- ------------------------------
2002 2001 2002 2001
----------- ----------- ------------ -----------
Net revenue:
Surgical facilities $ 8,331 $ 9,467 $ 16,196 $ 18,771
Product sales and other 9,381 7,976 17,922 15,304
----------- ----------- ------------ -----------
Total net revenue 17,712 17,443 34,118 34,075
----------- ----------- ------------ -----------
Operating expenses:
Salaries, wages and benefits 3,518 4,476 6,816 8,843
Cost of sales and medical supplies 9,828 8,454 18,692 16,164
Selling, general and administrative 2,200 2,279 4,430 4,642
Depreciation and amortization 671 1,156 1,270 2,235
----------- ----------- ------------ -----------
Total operating expenses 16,217 16,365 31,208 31,884
----------- ----------- ------------ -----------
Income from continuing operations 1,495 1,078 2,910 2,191
Other (income) expense, net (261) 247 (184) 660
----------- ----------- ------------ -----------
Income from continuing operations
before income taxes 1,756 831 3,094 1,531
Income tax provision 702 368 1,238 666
----------- ----------- ------------ -----------
Net income from continuing operations before cumulative
effect of change in accounting principle 1,054 463 1,856 865
Net income from discontinued operations 259 766 153 1,542
Cumulative effect of change in accounting principle,
net of tax -- -- (1,803) --
----------- ----------- ------------ -----------
Net income $ 1,313 $ 1,229 $ 206 $ 2,407
=========== =========== ============ ===========
Basic earnings per common share:
Income from continuing operations before cumulative
effect of change in accounting principle $ 0.04 $ 0.02 $ 0.07 $ 0.04
Income from discontinued operations 0.01 0.03 0.01 0.06
Cumulative effect of change in accounting principle -- -- (0.07) --
----------- ----------- ------------ -----------
Net income $ 0.05 $ 0.05 $ 0.01 $ 0.10
=========== =========== ============ ===========
Diluted earnings per common share:
Income from continuing operations before cumulative
effect of change in accounting principle $ 0.04 $ 0.02 $ 0.07 $ 0.04
Income (loss) from discontinued operations 0.01 0.03 0.01 0.06
Cumulative effect of change in accounting principle -- -- (0.07) --
----------- ----------- ------------ -----------
Net income $ 0.05 $ 0.05 $ 0.01 $ 0.10
=========== =========== ============ ===========
Weighted average common shares outstanding 24,563 24,803 24,699 24,748
Dilutive effect of employee stock options 52 500 26 486
----------- ----------- ------------ -----------
Diluted weighted average common shares outstanding 24,615 25,303 24,725 25,234
=========== =========== ============ ===========
The notes to the interim condensed consolidated financial
statements are an integral part of these statements.
4
NOVAMED EYECARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands; unaudited)
Six months ended June 30,
-----------------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 206 $ 2,407
Adjustments to reconcile net income to net cash provided by continuing
operations, net of effects of purchase transactions--
Net earnings of discontinued operations (153) (1,542)
Cumulative effect of change in accounting principle, net 1,803 --
Gain on sale of minority interest (436) --
Depreciation and amortization 1,270 2,235
Minority interest 128 --
Deferred taxes 1,238 319
Changes in working capital items--
Accounts receivable (355) (697)
Inventory (127) 244
Other current assets 1,695 (479)
Accounts payable and accrued expenses 410 (1,283)
Other (41) (496)
------------ ------------
Net cash provided by operating activities 5,638 708
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (648) (843)
Acquisitions of ASCs (1,446) --
Proceeds from sale of minority interest 750 --
Other (33) (41)
------------ ------------
Net cash used by investing activities (1,377) (884)
------------ ------------
Cash flows from financing activities:
Borrowings under revolving line of credit 14,150 24,463
Payments under revolving line of credit (27,945) (25,853)
Other (328) 152
------------ ------------
Net cash used by financing activities (14,123) (1,238)
------------ ------------
Cash flows from discontinued operations:
Operating activities 2,495 1,819
Proceeds from divestitures 6,745 --
Investing activities (326) (1,167)
Financing activities (19) (23)
------------ ------------
Net cash provided by discontinued operation 8,895 629
------------ ------------
Net decrease in cash and cash equivalents (967) (785)
Cash and cash equivalents, beginning of period 967 785
------------ ------------
Cash and cash equivalents, end of period $ -- $ --
============ ============
Noncash investing activity:
--------------------------
Fair value of stock received in divestiture transactions $ 1,229 $ --
============ ============
The notes to the interim condensed consolidated financial
statements are an integral part of these statements.
5
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(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, 2001, filed by
NovaMed Eyecare, Inc. with the Securities and Exchange Commission on Form 10-K.
The unaudited interim condensed consolidated financial statements as of June 30,
2002 and for the three and six months ended June 30, 2002 and 2001, 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.
Prior year amounts have been reclassified to conform to current year
presentation as further discussed in Note 3 below.
2. GOODWILL AND OTHER INTANGIBLE ASSETS-- CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Effective January 1, 2002 we adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (FAS 142). Under the
new rules, we are no longer required to amortize goodwill and other intangible
assets with indefinite lives. We are required to periodically evaluate the
carrying value of these assets for impairment. Impairment losses for goodwill
and indefinite-lived intangible assets that arise due to the initial application
of FAS 142 are required to be reported as a change in accounting principle.
We performed an evaluation of all our existing goodwill as of January 1,
2002 and determined that the goodwill associated with one of our ancillary
businesses was impaired. This business sells marketing products to the laser
vision correction market, which has lately shown a downturn in demand. This
downturn has negatively impacted the prospects for this business. We are in the
process of developing new products at this business to diversify its revenue
base. The business was evaluated using an expected cash flow valuation method
that indicated the carrying value of the business had been impaired by
approximately $2.9 million. We recorded a net of tax charge of $1.8 million to
write-off a portion of acquired goodwill in our first quarter financial
statements as a change in accounting principle. All intangible assets are
reported in our Corporate segment.
The intangible assets that are continuing to be amortized over 25 years
are related to the Management Services Agreements at our remaining optical
dispensaries.
Unamortized Amortizable
Intangible Intangible
Assets Assets
------------- -------------
Balance as of December 31, 2001 $ 23,365 $ 432
Initial impairment upon adoption of FAS 142 (2,911) --
Acquisition of ASCs 1,296 --
Amortization expense -- (9)
------------- -------------
Balance as of June 30, 2002 $ 21,750 $ 423
============= =============
6
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002
(Dollars in thousands, except per share data; unaudited)
The following tables summarize the results of continuing operations and earnings
per share had FAS 142 been adopted at the beginning of 2001:
Three Months ended Six Months ended
June 30, 2001 June 30, 2001
------------------ ----------------
Reported net income from continuing operations $ 463 $ 865
Add back: Goodwill amortization 247 495
Less: Related tax effect (71) (136)
------------------ ----------------
Adjusted net income from continuing operations $ 639 $ 1,224
================== ================
Three Months ended Six Months ended
June 30, 2001 June 30, 2001
------------------ ----------------
Basic Earnings Per Share
------------------------
Reported net income from continuing operations $ 0.02 $ 0.04
Goodwill amortization 0.01 0.01
------------------ ----------------
Adjusted net income from continuing operations $ 0.03 $ 0.05
================== ================
Diluted Earnings Per Share
--------------------------
Reported net income from continuing operations $ 0.02 $ 0.04
Goodwill amortization 0.01 0.01
------------------ ----------------
Adjusted net income from continuing operations $ 0.03 $ 0.05
================== ================
3. DISCONTINUED OPERATIONS
As required, effective January 1, 2002 we adopted Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets" ("FAS 144") under which we will report as
discontinued operations certain entities that have been disposed of or are
classified as held for sale. Under FAS 144 projected operating results and the
estimated gain or loss on sale is no longer accrued for when the decision to
sell is made. Rather, the earnings or losses of discontinued operations continue
to be reported, and any gain or loss is recognized at the time of sale. In the
first half of 2002, we sold two ambulatory surgery centers and two optical
dispensary businesses and agreed to sell one additional optical dispensary, all
of which are reported as discontinued operations under the provisions of FAS
144. Prior period financial statements have been restated to reflect these
entities as discontinued.
During 2001, we implemented a Plan of Discontinued Operations and
Restructuring (the "Plan"). This involves the divestiture of the management
services segment or physician practice management ("PPM") business. The results
of these discontinued operations are accounted for under Accounting Principles
Board Opinion No. 30 "Reporting the Results of Operations -- Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" ("APB 30"). Under APB 30, the
projected operating results and the estimated gain or loss on disposal was
accrued for at the date the plan was adopted. We reported a charge of $27.2
million, net of tax in our third quarter 2001 financial statements. As of June
30, 2002, we had completed seven of eighteen planned divestiture transactions.
To date, from the sale of our discontinued operations, we have received
proceeds of $9.1 million, consisting of $7.3 million in cash and $1.8 million in
promissory notes with multi-year terms. We also received as consideration 1.7
million shares of our common stock.
7
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002
(Dollars in thousands, except per share data; unaudited)
Net interest expense allocated to discontinued operations was $32,500
and $288,000 for the three months ended June 30, 2002 and 2001 and $125,000 and
$597,000 for the six months ended June 30, 2002 and 2001, respectively. Interest
was allocated to discontinued operations accounted for under APB 30, based on
the proportion of net assets of discontinued operations to consolidated net
assets plus consolidated debt as prescribed by EITF 87-24 -- Allocation of
Interest to Discontinued Operations.
The operating results of all discontinued operations are summarized below.
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net revenue $ 11,963 $ 19,910 $ 27,789 $ 40,156
Operating expenses 11,683 18,250 26,862 36,844
Interest and other expense, net 34 280 107 582
----------- ----------- ----------- -----------
Income from operations before income taxes 246 1,380 820 2,730
Income tax provision 98 614 328 1,188
----------- ----------- ----------- -----------
Net income from operations 148 766 492 1,542
Gain (loss) on sale of discontinued operations 263 -- (47) --
Income tax expense (benefit) 100 -- (18) --
----------- ----------- ----------- -----------
Net gain (loss) on sale of discontinued
operations 163 -- (29) --
----------- ----------- ----------- -----------
Net income from discontinued operations $ 311 $ 766 $ 463 $ 1,542
=========== =========== =========== ===========
During the three and six months ended June 30, 2002, $52,000 and
$310,000, respectively, of the net income was credited to the discontinued
operations reserves previously established and reported under APB 30, which
resulted in a reported net income of discontinued operations of $259,000 and
$153,000 for the respective periods.
8
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002
(Dollars in thousands, except per share data; unaudited)
The balance sheet components of discontinued operations are summarized as
follows:
June 30, December 31,
2002 2001
------------- ------------
Accounts and notes receivable $ 6,699 $ 14,098
Inventories 374 1,310
Other current assets 586 723
------------- ------------
Current assets of discontinued operations $ 7,659 $ 16,131
============= ============
Net property and equipment $ 4,017 $ 5,494
Intangible assets 3,779 8,188
------------- ------------
Noncurrent assets of discontinued operations $ 7,796 $ 13,682
============= ============
Accounts payable $ 782 $ 1,174
Accrued expenses 1,263 2,590
Notes payable and capitalized lease obligations 88 78
Discontinued operations reserves 5,714 5,242
------------- ------------
Current liabilities of discontinued operations $ 7,847 $ 9,084
============= ============
During the first six months of 2002, approximately $1.3 million of cash
payments and $550,000 of noncash items were charged against the reserves to exit
the PPM business. The reserves increased by approximately $2.3 million for
discontinued operating results and net gains on disposals. Included in the
balance sheet caption "Discontinued operations reserves" at June 30, 2002 are
reserves of $2.7 million for projected operating results and estimated gain or
loss on disposal and $3.0 million for costs to exit the PPM business.
4. RESTRUCTURING RESERVES
The following represents activity in the restructuring reserves from year-end
through June 30, 2002:
Reserve at Reserve at
December 31, Charges June 30,
2001 Utilized 2002
------------- ------------- ------------
Facility closures--
Asset impairments $ 905 $ (210) $ 695
Lease commitments 1,717 (577) 1,140
Contract termination 1,836 (1,702) 134
Reorganization of IT--
Asset impairments 12 -- 12
Lease commitments 456 -- 456
Other 97 (35) 62
------------- ------------- ------------
Total reserve balance $ 5,023 $ (2,524) $ 2,499
============= ============= ============
During the first half of 2002, we terminated a contract to purchase an
ASC and negotiated the sublease of one closed LVC center.
9
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002
(Dollars in thousands, except per share data; unaudited)
5. OTHER (INCOME) EXPENSE
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
2002 2001 2002 2001
--------- -------- --------- --------
Interest expense $ 121 $ 280 $ 256 $ 588
Interest income (34) (14) (61) (38)
Minority interest 90 -- 128 --
Losses of equity affiliates -- 3 -- 132
Gain on sale of minority interest (436) -- (436) --
Other, net (2) (22) (71) (22)
--------- -------- --------- --------
Other (income) expense, net $ (261) $ 247 $ (184) $ 660
========= ======== ========= ========
During the second quarter of 2002 we sold a 20% interest in an ASC to
two former affiliated eye care professionals resulting in a pre-tax gain of
$436,000.
6. REVOLVING CREDIT FACILITY
At June 30, 2002, we had $6.9 million outstanding under our revolving
credit facility that expires on June 30, 2003. Under the credit facility,
interest on borrowings is payable at an annual rate equal to the lender's
published base rate plus the applicable borrowing margin ranging from 0% to 1.0%
or LIBOR plus a range from 1.5% to 3.0%, varying upon our ability to meet
financial covenants. The weighted average annual interest rate on credit line
borrowings was 5.0% and 4.8% for three and six months ended June 30, 2002,
respectively, and 3.6% at June 30, 2002. The 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. We are required to use 100% of the
cash proceeds from our divestiture transactions to pay down outstanding debt.
The sale of optical dispensary assets and one of our ambulatory surgery
centers in the 2002 second quarter required the approval of our lenders under
our credit facility. In addition to seeking their consent to this transaction,
we also approached our lenders about other modifications to our credit facility,
including an expansion of our ability to sell minority interests in our existing
ambulatory surgery centers, as well as providing us with the ability to sell
other optical dispensary assets as part of our divestiture transactions as we
deem appropriate. After considering these requests, our lenders consented to
this transaction and agreed to the other requested modifications. Previously,
the terms of our credit facility limited our ability to sell minority interests
in our existing ASCs to the extent any such sales reduced our overall EBITDA in
any 12-month period by more than $1 million. Our lenders agreed to increase this
limit from $1 million to $3 million.
In consideration for the lenders consenting to the sale of our
ambulatory surgery center and approving these modifications to our credit
facility, we agreed to reduce the maximum commitment available under our
facility to $35 million effective as of June 13, 2002, with an additional
reduction to $30 million as of October 1, 2002. Before giving effect to this
amendment, the maximum commitment available under our credit facility had been
$40 million, with additional quarterly reductions of $2.5 million on each of
July 1, 2002 and October 1, 2002, resulting in a maximum commitment of $35
million as of October 1, 2002. As of June 30, 2002, we were in compliance with
all our credit agreement covenants.
10
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002
(Dollars in thousands, except per share data; unaudited)
7. OPERATING SEGMENTS
The table below presents information about operating data and segment
assets as of and for the three and six months ended June 30, 2002 and 2001:
Surgical Product Sales
Facilities and Other Corporate Total
-------------- ------------- ------------ -----------
Three months ended June 30, 2002
- --------------------------------
Net revenue $ 8,331 $ 9,381 $ -- $ 17,712
Earnings (loss) before tax 2,808 425 (1,477) 1,756
Depreciation and amortization 454 70 147 671
Interest income 1 -- 33 34
Interest expense 2 -- 119 121
Identifiable assets 9,710 5,893 58,048 73,651
============== ============= ============ ===========
Three months ended June 30, 2001
- --------------------------------
Net revenue $ 9,467 $ 7,976 $ -- $ 17,443
Earnings (loss) before tax 3,066 656 (2,891) 831
Depreciation and amortization 495 65 596 1,156
Interest income -- 1 13 14
Interest expense 1 -- 279 280
Identifiable assets 14,180 6,509 100,937 121,626
============== ============= ============ ===========
Six months ended June 30, 2002
- ------------------------------
Net revenue $ 16,196 $ 17,922 $ -- $ 34,118
Earnings (loss) before tax 5,301 916 (3,123) 3,094
Depreciation and amortization 918 139 213 1,270
Interest income 2 -- 59 61
Interest expense 3 -- 253 256
Identifiable assets 9,710 5,893 58,048 73,651
============== ============= ============ ===========
Six months ended June 30, 2001
- ------------------------------
Net revenue $ 18,771 $ 15,304 $ -- $ 34,075
Earnings (loss) before tax 6,367 1,366 (6,202) 1,531
Depreciation and amortization 935 125 1,175 2,235
Interest income -- 2 36 38
Interest expense 1 -- 587 588
Identifiable assets 14,180 6,509 100,937 121,626
============== ============= ============ ===========
11
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
CONTINUING 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 2002 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 16.
Management's discussion and analysis of financial condition and results
of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
U.S. The preparation of these financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosures. On an ongoing basis, we evaluate our
estimates and judgments based on historical experience and various other factors
that are believed to be reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions or conditions.
Outlook
We provide a comprehensive range of eye care services, focused
primarily around our surgical facilities, including our ownership and operation
of 15 ambulatory surgery centers ("ASCs"), and our operation of 13 laser vision
correction ("LVC") centers and fixed-site laser services agreements. Eye care
professionals perform cataract, laser vision correction and other eye-related
surgical procedures in the surgical facilities we own and/or operate.
The discussion set forth below analyzes certain factors and trends
related to the financial results of continuing operations for each of the three
and six months ended June 30, 2002 and 2001. 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 June 30, 2002 Compared to the Three Months Ended
June 30, 2001
Net Revenue. Net revenue increased 1.7% from $17.4 million to $17.7
million. Surgical facilities net revenue decreased 11.7% from $9.4 million to
$8.3 million primarily due to the decrease in surgical procedures performed as
well as the change in surgical procedure mix. LVC centers closed during 2001 and
the first quarter of 2002, accounted for 30.7% of the decrease in surgical
facilities revenue. During the second quarter of 2002, total surgical procedures
performed in our surgical facilities decreased 18.7% to 9,354. Cataract
procedures increased 5.0%, LVC procedures decreased 47.9% and other procedures
decreased 12.0%, compared to 2001. Management believes that the demand for
elective LVC surgery continues to be negatively impacted by the general economic
conditions. The increase in cataract procedures came from our Thibodaux,
Louisiana and Colorado Springs, Colorado ASCs, which we acquired in November
2001 and May 2002, respectively.
Product sales and other net revenue increased 17.5% from $8.0 million
to $9.4 million, primarily as a result of a 26.5% net revenue increase at our
optical products purchasing organization coupled with a 3.0% increase in net
revenue at our optical laboratories. These increases were offset by a 35.7%
decrease in net revenue at our optical dispensaries and a 33.3% decrease in net
revenue at our marketing products business. Approximately 48% of the increase in
net revenue at our optical products purchasing organization and optical
laboratories is from sales to optical businesses that we divested that were
previously eliminated as intercompany sales. As a condition to each applicable
divestiture transaction, we are attempting to negotiate multi-year supply
agreements where we will continue to be the primary supplier of optical products
to our former affiliated eye care professionals. Approximately 64% of the
decrease in net revenue from our optical dispensaries was due to the closing of
optical dispensaries in 2001. Our marketing products business has sold products
primarily to the laser vision correction
12
market. Management believes the downturn in this market was the cause of the
decline in net revenue at this business.
Salaries, Wages and Benefits. Salaries, wages and benefits expense
decreased 22.2% from $4.5 million to $3.5 million. As a percentage of net
revenue, salaries, wages and benefits expense decreased from 25.7% to 19.9%. Of
the decrease in salaries, wages and benefits expense, approximately 65% is due
to the fact that certain corporate salaries were charged to the discontinued
operations reserves in accordance with the Plan. The remaining decrease in
salaries, wages and benefits expense is a result of staff reductions at some
surgical facilities in response to the reduction in LVC procedures as well as
corporate staff reductions and the closure of several LVC centers and optical
dispensaries in the fourth quarter of 2001 and first quarter of 2002.
Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased 15.3% from $8.5 million to $9.8 million. As a percentage of
net revenue, cost of sales and medical supplies expense increased from 48.5% to
55.5%. The absolute increase in cost of sales and medical supplies expense is
primarily a result of higher sales volumes at our optical products purchasing
organization. The increase in cost of sales and medical supplies as a percentage
of net revenue is due to our product sales and other segment net revenue
increasing to 53.0% of total net revenue in the second quarter of 2002, up from
45.7% in 2001. This segment has a much higher cost of sales and medical supplies
expense relative to net revenue than our surgical facilities segment.
Selling, General and Administrative. Selling, general and
administrative ("SG&A") expense decreased 4.3% from $2.3 million to $2.2
million. As a percentage of net revenue, SG&A expense decreased from 13.1% to
12.4%. The absolute decrease in SG&A expense is the result of closing several
LVC centers and optical dispensaries in the fourth quarter of 2001 and first
quarter of 2002. Excluding those closures, SG&A expense increased 1.4% compared
to the prior year quarter due to expenses at newly acquired ASCs.
Depreciation and Amortization. Depreciation and amortization expense
decreased 42.0% from $1.2 million to $671,000. The cessation of goodwill
amortization as of January 1, 2002 contributed $247,000 of this decrease as
compared to the same quarter of 2001. The remainder of the decrease is due to
the write-off of assets at the end of our 2001 third quarter related to our
restructuring plan.
Other Income / Expense. We recognized $261,000 of other income in the
second quarter of 2002 versus other expense of $247,000 in the second quarter of
2001. The current year income includes a $436,000 gain on the sale of a 20%
interest in one of our ASCs. Excluding this gain, other expense of $175,000 was
down from the prior year level. The decrease in other expense was primarily
related to a decrease in interest expense as a result of lower average interest
rates during the second quarter of 2002 (5.0%) as compared to the 2001 quarter
(6.8%) as well as lower average borrowings of $11.3 million during the second
quarter of 2002 as compared to $27.4 million during the second quarter of 2001.
Provision for Income Taxes. The adoption of FAS 142 reduced our
effective tax rate to 40.0% from 44.3% in the second quarter of 2002. Under the
new accounting pronouncement we no longer amortize most of our intangible assets
which substantially reduces the amount of permanent differences in our tax
calculation.
Six Months Ended June 30, 2002 Compared to the Six Months Ended
June 30, 2001
Net Revenue. Net revenue was $34.1 million for both the six months
ended June 30, 2002 and 2001. The contribution from our operating segments
shifted from 55.1% surgical facilities and 44.9% product sales in 2001 to 47.5%
surgical facilities and 52.5% product sales in 2002. Surgical facilities net
revenue decreased 13.8% from $18.8 million to $16.2 million primarily due to the
decrease in surgical procedures performed as well as the change in surgical
procedure mix. LVC centers closed during 2001 and first quarter of 2002
accounted for 44.4% of the decrease in surgical facilities revenue. During the
first half of 2002, total surgical procedures performed in our surgical
facilities decreased 18.6% to 19,012. Cataract procedures increased 4.5%, LVC
procedures decreased 44.7% and other procedures decreased 7.5%, compared to
2001. Management believes that the demand for elective LVC surgery continues to
be negatively impacted by the general economic conditions. The increase in
cataract procedures came from our Thibodaux, Louisiana and Colorado Springs,
Colorado ASCs, which we acquired in November 2001 and May 2002, respectively.
13
Product sales and other net revenue increased 17.0% from $15.3 million
to $17.9 million, primarily as a result of a 26.8% net revenue increase at our
optical products purchasing organization coupled with an 5.6% increase in net
revenue at our optical laboratories. These increases were offset by a 38.6%
decrease in net revenue at our optical dispensaries and a 28.8% decrease in net
revenue at our marketing products business. Approximately 32% of the increase in
net revenue at our optical products purchasing organization and optical
laboratories is from sales to optical businesses that were divested from the
company that were previously eliminated as intercompany sales. Approximately 65%
of the decrease in net revenue from our optical dispensaries was due to the
closing of optical dispensaries in 2001. Our marketing products business has
sold products primarily to the laser vision correction market. Management
believes the downturn in this market was the cause of the decline in net revenue
in this business and led us to take a $1.8 million net charge to write off a
portion of the carrying value of goodwill created when we acquired the company
in 2000. This charge is reported as a change in accounting principle.
Salaries, Wages and Benefits. Salaries, wages and benefits expense
decreased 22.7% from $8.8 million to $6.8 million. As a percentage of net
revenue, salaries, wages and benefits expense decreased from 26.0% to 20.0%. Of
the decrease in salaries, wages and benefits expense approximately 64% is due to
the fact that certain corporate salaries were charged to the discontinued
operations reserves in accordance with the Plan. The remaining decrease in
salaries, wages and benefits expense is a result of staff reductions at some
surgical facilities in response to the reduction in LVC procedures as well as
corporate staff reductions and the closure of several LVC centers and optical
dispensaries in the fourth quarter of 2001 and first quarter 2002.
Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased 15.4% from $16.2 million to $18.7 million. As a percentage of
net revenue, cost of sales and medical supplies expense increased from 47.4% to
54.8%. The absolute increase in cost of sales and medical supplies expense is
primarily a result of higher sales volumes at our optical products purchasing
organization. The increase in cost of sales and medical supplies as a percentage
of net revenue is due to our product sales and other segment net revenue
increasing to 52.5% of total net revenue in the first half of 2002, up from
44.9% in 2001. This segment has a much higher cost of sales and medical supplies
expense relative to net revenue than our surgical facilities segment.
Selling, General and Administrative. Selling, general and
administrative expense decreased 4.3% from $4.6 million to $4.4 million. As a
percentage of net revenue, SG&A expense decreased from 13.6% to 13.0%. The
absolute decrease in SG&A expense is the result of closing several LVC centers
and optical dispensaries in the fourth quarter of 2001 and first quarter 2002.
Excluding those closures, SG&A expense increased 1.8% compared to the prior year
due to expenses at newly acquired ASCs.
Depreciation and Amortization. Depreciation and amortization expense
decreased 40.9% from $2.2 million to $1.3 million. The cessation of goodwill
amortization as of January 1, 2002 contributed $495,000 of this decrease as
compared to the first six months of 2001. The remainder of the decrease is due
to the write-off of assets at the end of our 2001 third quarter related to our
restructuring plan.
Other Income / Expense. We recognized $184,000 of other income for the
first six months of 2002 versus other expense of $660,000 in 2001. The current
year income includes a $436,000 gain on the sale of a 20% interest in one of our
ASCs. Excluding this gain, other expense of $252,000 was down from the prior
year level. The decrease in other expense was primarily related to a decrease in
interest expense as a result of lower average interest rates during the 2002
period (4.8%) as compared to the 2001 period (7.4%) as well as lower average
borrowings of $15.1 million during the first half of 2002 as compared to $27.9
million during the same period of 2001.
Provision for Income Taxes. The adoption of FAS 142 reduced our
effective tax rate to 40.0% from 43.5% in the first half of 2001. Under the new
accounting pronouncement we no longer amortize most of our intangible assets
which substantially reduces the amount of permanent differences in our tax
calculation.
Liquidity and Capital Resources
Net cash provided by continuing operating activities was $5.6 million
and $708,000 for the six months ended June 30, 2002 and 2001, respectively. The
period ended June 30, 2002 included a $1.5 million refund of 2001 estimated
federal tax payments. We used $1.4 million of cash for investing activities
during the first six months of 2002, which included the purchase of a majority
interest in an ambulatory surgery center in Colorado Springs, CO.
14
During the first six months of 2002, our net borrowings under our revolving
credit line decreased $13.8 million from the December 31, 2001 level, using cash
generated by operations and proceeds from divestiture transactions. At June 30,
2002, we had working capital of $ 9.0 million (excluding restructuring reserves
and discontinued operations).
During the first half of 2002, we completed six divestiture
transactions. We received total proceeds of $7.9 million, consisting of $6.5
million in cash and $1.4 million in promissory notes with multi-year terms. We
also received as consideration 1.7 million shares of our common stock. In
addition, we sold a 20% interest in one of our ASCs to two former affiliated eye
care professionals during the second quarter of 2002. The cash proceeds from
these transactions were used to reduce debt as required under our revolving
credit facility.
At June 30, 2002, we had $6.9 million outstanding under our revolving
credit facility that expires on June 30, 2003. Under the credit facility,
interest on borrowings is payable at an annual rate equal to the lender's
published base rate plus the applicable borrowing margin ranging from 0% to 1.0%
or LIBOR plus a range from 1.5% to 3.0%, varying upon our ability to meet
financial covenants. The weighted average annual interest rate on credit line
borrowings was 5.0% and 4.8% for three and six months ended June 30, 2002,
respectively, and 3.6% at June 30, 2002. The 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. We are required to use 100% of the
cash proceeds from our divestiture transactions to pay down outstanding debt.
Although we believe that our cash flow from operations and cash proceeds from
divestiture transactions will allow us to continue to pay down our outstanding
debt, we also plan to use the funds available under our credit facility to
finance acquisitions. Therefore, before June 30, 2003 when our existing credit
facility terminates, we intend to negotiate either an extension of our existing
credit facility or a new credit facility.
The sale of optical dispensary assets and one of our ambulatory surgery
centers in the 2002 second quarter required the approval of our lenders under
our credit facility. In addition to seeking their consent to this transaction,
we also approached our lenders about other modifications to our credit facility,
including an expansion of our ability to sell minority interests in our existing
ambulatory surgery centers, as well as providing us with the ability to sell
other optical dispensary assets as part of our divestiture transactions as we
deem appropriate. After considering these requests, our lenders consented to
this transaction and agreed to the other requested modifications. Previously,
the terms of our credit facility limited our ability to sell minority interests
in our existing ASCs to the extent any such sales reduced our overall EBITDA in
any 12-month period by more than $1 million. Our lenders agreed to increase this
limit from $1 million to $3 million.
In consideration for the lenders consenting to the sale of our
ambulatory surgery center and approving these modifications to our credit
facility, we agreed to reduce the maximum commitment available under our
facility to $35 million effective as of June 13, 2002, with an additional
reduction to $30 million as of October 1, 2002. Before giving effect to this
amendment, the maximum commitment available under our credit facility had been
$40 million, with additional quarterly reductions of $2.5 million on each of
July 1, 2002 and October 1, 2002, resulting in a maximum commitment of $35
million as of October 1, 2002. As of June 30, 2002, we were in compliance with
all our credit agreement covenants.
We believe that our cash flow from operations and funds available under
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 timing of our
acquisition activities, capital requirements associated with our surgical
facilities, expansion and the future cost of surgical equipment, and cost of
completing our discontinued operations plan. We also expect the cash proceeds
from divestitures to supplement our cash flow.
One of our former affiliated eye care professionals has the option,
exercisable beginning January 1, 2004 through January 1, 2006, to acquire up to
a 30% interest in one of our ASCs. In July 2002, we sold a 5% interest in one of
our ASCs to a former affiliated eye care professional, and simultaneously
entered into an agreement with such professional whereby he has an option,
beginning July 1, 2003 through July 1, 2005 to acquire an additional 5% interest
in the ASC. One of our partners in an ASC in which we own a majority interest
has the right to sell us up to a 10% interest in the ASC in November 2004 and up
to an additional 10% interest in November 2006.
15
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS. This Form 10-Q contains
certain forward-looking statements that reflect our current expectations about
our future results of operations, performance and achievements. When used in the
Form 10-Q, the words "anticipates," "believes," "estimates," "plans," "intends,"
and similar expressions, as they relate to us or our management, are intended to
identify such forward-looking statements. These forward-looking statements
reflect our current beliefs and are based on information currently available to
us. Accordingly, these statements are subject to certain risks and uncertainties
which could cause our actual results, performance or achievements in 2002 and
beyond to differ materially from those expressed in, or implied by, such
statements. These risks and uncertainties include: our ability to grow or manage
our growth; our ability to acquire, develop or manage a sufficient number of
profitable surgical facilities; reduced prices and reimbursement rates for
surgical procedures; the continued acceptance of laser vision correction and
other refractive surgical procedures; demand for elective surgical procedures
generally and in response to a protracted economic downturn; our ability to
successfully implement our discontinued operations plan on acceptable terms
consistent with our credit facility; and the application of existing or proposed
government regulations. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations - Risk Factors" in our Annual Report on
Form 10-K for the year ended December 31, 2001 for further discussion. We
undertake no obligation to update or revise any such forward-looking statements
that may be made to reflect events or circumstances after the date of this Form
10-Q or to reflect the occurrence of unanticipated events.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
We held our 2002 Annual Meeting of Stockholders on May 23, 2002 at
which the stockholders voted to re-elect three Class III directors for a term of
three years expiring at our 2005 Annual Meeting of Stockholders. Results of the
voting were as follows:
Authority Broker
Directors For Withheld Abstentions Non-Votes
--------- --- -------- ----------- ---------
R. Judd Jessup 15,624,552 191,788 -- --
Scott H. Kirk, M.D. 15,624,552 191,788
Steven V. Napolitano 15,624,552 191,788 -- --
C.A. Lance Piccolo and Stephen J. Winjum continued their terms of office as
directors of the Company after the 2002 Annual Meeting of Stockholders. The
election of directors was the only item submitted to and voted upon by the
stockholders.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 10.30 Consent and Second Amendment to Second Amended and
Restated Credit Agreement
Exhibit 21 Subsidiaries of Registrant
Exhibit 99 Certification of CEO and CFO pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
B. Reports on Form 8-K
We did not file any reports on Form 8-K during the second quarter of
2002.
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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/ Scott T. Macomber August 14, 2002
- --------------------- ---------------
Scott T. Macomber Date
Executive Vice President and
Chief Financial Officer
(on behalf of Registrant and as principal financial officer)
/s/ Robert L. Hiatt August 14, 2002
- ------------------- ---------------
Robert L. Hiatt Date
Vice President Finance
(on behalf of Registrant and as principal accounting officer)
17