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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: SEPTEMBER 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
-------------------
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 13, 2002, there were outstanding 23,156,867 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 SEPTEMBER 30, 2002
INDEX
PART OR ITEM PAGE
Part I. FINANCIAL STATEMENTS 3
Item 1. Interim Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets - September 30, 2002 and
December 31, 2001 3
Condensed Consolidated Statements of Operations - Three and nine months ended
September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows - Nine months ended
September 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
Item 4. Disclosure Controls and Procedures 16
Part II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 17
Signatures 18
Part I
- ------
Item 1.
NOVAMED EYECARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
September 30, December 31,
ASSETS 2002 2001
------------- ------------
Current assets: (unaudited)
Cash and cash equivalents $ 1,965 $ 967
Accounts receivable, net 7,331 6,700
Notes and amounts due from affiliated providers 1,725 1,654
Inventory 1,385 1,142
Current tax assets, net 4,111 5,073
Other current assets 1,238 999
Current assets of discontinued operations 6,462 16,225
------------ ------------
Total current assets 24,217 32,760
Property and equipment, net 7,022 7,945
Intangible assets, net 26,741 23,797
Noncurrent deferred tax assets, net 10,774 12,133
Other assets, net 1,812 564
Noncurrent assets of discontinued operations, net 5,876 13,866
------------ ------------
Total assets $ 76,442 $ 91,065
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,870 $ 2,808
Accrued expenses 2,702 2,317
Restructuring reserves 2,429 5,023
Current maturities of long-term debt 122 404
Current liabilities of discontinued operations 7,898 9,084
------------ ------------
Total current liabilities 17,021 19,636
------------ ------------
Long-term debt, net of current maturities 7,871 20,708
------------ ------------
Minority interest 1,101 142
------------ ------------
Commitments and contingencies
Stockholders' equity:
Series E Junior Participating Preferred Stock, $0.01 par value, 1,912,000
shares authorized, none outstanding at
September 30, 2002 and December 31, 2001, respectively -- --
Common stock, $0.01 par value, 81,761,465 shares
authorized, 23,156,867 and 24,835,108 shares issued
and outstanding at September 30, 2002 and
December 31, 2001, respectively 249 248
Additional paid-in-capital 77,716 77,673
Retained earnings (deficit) (26,287) (27,342)
Treasury stock, at cost, 1,748,640 shares at September 30, 2002 (1,229) --
------------ ------------
Total stockholders' equity 50,449 50,579
------------ ------------
Total liabilities and stockholders' equity $ 76,442 $ 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 Nine months ended
September 30, September 30,
------------------- -------------------
2002 2001 2002 2001
------- -------- ------- --------
Net revenue:
Surgical facilities $ 8,277 $ 8,018 $24,473 $ 26,788
Product sales and other 9,027 7,553 26,950 22,857
------- -------- ------- --------
Total net revenue 17,304 15,571 51,423 49,645
------- -------- ------- --------
Operating expenses:
Salaries, wages and benefits 3,589 3,908 10,406 12,750
Cost of sales and medical supplies 9,637 8,058 28,329 24,223
Selling, general and administrative 2,283 2,448 6,713 7,089
Restructuring and special charges -- 10,912 -- 10,912
Other charges -- 3,719 -- 3,719
Depreciation and amortization 626 1,180 1,896 3,415
------- -------- ------- --------
Total operating expenses 16,135 30,225 47,344 62,108
------- -------- ------- --------
Income (loss) from continuing operations 1,169 (14,654) 4,079 (12,463)
Other (income) expense, net (444) 226 (756) 881
Minority interest 222 -- 350 --
------- -------- ------- --------
Income (loss) from continuing operations
before income taxes 1,391 (14,880) 4,485 (13,344)
Income tax provision (benefit) 556 (5,998) 1,794 (5,266)
------- -------- ------- --------
Net income (loss) from continuing operations before
cumulative effect of change in accounting principle 835 (8,882) 2,691 (8,078)
Net income from discontinued operations -- 384 181 1,988
Net gain (loss) on disposal of discontinued operations 5 (27,213) (23) (27,213)
Cumulative effect of change in accounting principle,
net of tax -- -- (1,803) --
------- -------- ------- --------
Net income (loss) $ 840 $(35,711) $ 1,046 $(33,303)
======= ======== ======= ========
Basic earnings per common share:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ 0.04 $ (0.36) $ 0.11 $ (0.32)
Income (loss) from discontinued operations -- (1.08) -- (1.02)
Cumulative effect of change in accounting principle -- -- (0.07) --
------- -------- ------- --------
Net income (loss) $ 0.04 $ (1.44) $ 0.04 $ (1.34)
======= ======== ======= ========
Diluted earnings per common share:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ 0.04 $ (0.36) $ 0.11 $ (0.32)
Income (loss) from discontinued operations -- (1.08) -- (1.02)
Cumulative effect of change in accounting principle -- -- (0.07) --
------- -------- -------- --------
Net income (loss) $ 0.04 $ (1.44) $ 0.04 $ (1.34)
======= ======== ======== ========
Weighted average common shares outstanding 23,129 24,804 24,170 24,767
Dilutive effect of employee stock options 144 -- 65 --
------- -------- -------- --------
Diluted weighted average common shares outstanding 23,273 24,804 24,235 24,767
======= ======== ======== ========
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)
Nine months ended September 30,
-------------------------------
2002 2001
-------- ---------
Cash flows from operating activities:
Net income (loss) $ 1,046 $(33,303)
Adjustments to reconcile net income (loss) to net cash provided by
continuing operations, net of effects of purchase transactions--
Net (income) loss of discontinued operations (158) 25,225
Restructuring and other charges -- 14,631
Cumulative effect of change in accounting principle, net 1,803 --
Gain on sale of minority interests (537) --
Depreciation and amortization 1,896 3,415
Minority interest 350 --
Distribution to minority partners (45) --
Deferred taxes 1,900 (5,501)
Changes in operating assets and liabilities--
Accounts receivable 292 (326)
Inventory (152) 246
Other current assets 1,305 (379)
Accounts payable and accrued expenses 1,019 (1,193)
Other (47) (731)
-------- --------
Net cash provided by operating activities 8,672 2,084
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (1,051) (1,565)
Acquisitions of ASCs (6,151) --
Proceeds from sale of minority interest 937 --
Other (222) (115)
-------- --------
Net cash used by investing activities (6,487) (1,680)
-------- --------
Cash flows from financing activities:
Borrowings under revolving line of credit 24,590 33,965
Payments under revolving line of credit (37,420) (38,063)
Other (379) 346
-------- --------
Net cash used by financing activities (13,209) (3,752)
-------- --------
Cash flows from discontinued operations:
Operating activities 3,508 4,414
Proceeds from divestitures 8,975 --
Investing activities (433) (1,156)
Financing activities (28) 209
-------- --------
Net cash provided by discontinued operation 12,022 3,467
-------- --------
Net increase in cash and cash equivalents 998 119
Cash and cash equivalents, beginning of period 967 785
-------- --------
Cash and cash equivalents, end of period $ 1,965 $ 904
======== ========
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
September 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
September 30, 2002 and for the three and nine months ended September 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 5,869 --
Amortization expense -- (14)
------- ----
Balance as of September 30, 2002 $26,323 $418
======= ====
6
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 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 Nine Months
ended ended
September 30, September 30,
2001 2001
------------- -------------
Reported net loss from continuing operations $(8,882) $(8,078)
Add back: Goodwill amortization 246 740
Less: Related tax effect (59) (178)
------- -------
Adjusted net loss from continuing operations $(8,695) $(7,516)
======= =======
Three Months Nine Months
ended ended
September 30, September 30,
2001 2001
------------- -------------
Basic Earnings Per Share
------------------------
Reported net loss from continuing operations $ (0.36) $ (0.32)
Goodwill amortization 0.01 0.02
------- -------
Adjusted net loss from continuing operations $ (0.35) $ (0.30)
======= =======
Diluted Earnings Per Share
--------------------------
Reported net loss from continuing operations $(0.36) $ (0.32)
Goodwill amortization 0.01 0.02
------- -------
Adjusted net loss from continuing operations $(0.35) $ (0.30)
======= =======
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. We have sold two ambulatory
surgery centers and three optical dispensary businesses during 2002, 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
September 30, 2002, we had completed nine planned divestiture transactions.
7
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2002
(Dollars in thousands, except per share data; unaudited)
As of September 30, 2002, from the sale of our discontinued operations, we
have received proceeds of $11.7 million, consisting of $9.5 million in cash and
$2.2 million in promissory notes with multi-year terms. We also received as
consideration 1.7 million shares of our common stock.
Net interest expense allocated to discontinued operations was $0 and
$212,000 for the three months ended September 30, 2002 and 2001, respectively,
and $125,000 and $809,000 for the nine months ended September 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 Nine months ended
September 30, September 30,
------------------- -------------------
2002 2001 2002 2001
------- -------- ------- --------
Net revenue $ 9,974 $ 19,129 $37,762 $ 59,285
Operating expenses 10,029 18,252 36,891 55,095
Interest and other expense, net (1) 202 106 790
------- -------- ------- --------
Income (loss) from operations before
income taxes (54) 675 765 3,400
Income tax provision (benefit) (22) 291 306 1,412
------- -------- ------- --------
Net income (loss) from operations (32) 384 459 1,988
(Income) loss charged (credited) to reserves 32 -- (278) --
------- -------- ------- --------
Net income (loss) per statement of operations $ -- $ 384 $ 181 $ 1,988
======= ======== ======= ========
Gain (loss) on disposal of
discontinued operations $ 10 $(43,922) $ (37) $(43,922)
Income tax expense (benefit) (5) (16,709) (14) (16,709)
------- -------- ------- --------
Net gain (loss) on disposal of
discontinued operations $ 5 $(27,213) $ (23) $(27,213)
======= ======== ======= ========
8
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2002
(Dollars in thousands, except per share data; unaudited)
The balance sheet components of discontinued operations are summarized as
follows:
September 30, December 31,
2002 2001
---------------- ----------------
Accounts and notes receivable $ 5,713 $ 14,192
Inventories 382 1,310
Other current assets 367 723
---------- ----------
Current assets of discontinued operations $ 6,462 $ 16,225
========== ==========
Net property and equipment $ 3,412 $ 5,494
Long-term note receivable 184 184
Intangible assets 2,280 8,188
---------- ----------
Noncurrent assets of discontinued operations $ 5,876 $ 13,866
========== ==========
Accounts payable $ 696 $ 1,174
Accrued expenses 1,573 2,590
Notes payable and capitalized lease obligations 58 78
Discontinued operations reserves 5,571 5,242
---------- ----------
Current liabilities of discontinued operations $ 7,898 $ 9,084
========== ==========
During the first nine months of 2002, approximately $1.4 million of cash
payments and $200,000 of noncash items were charged against the reserves to exit
the PPM business. The reserves increased by approximately $2.0 million for
discontinued operating results and net gains on disposals. Included in the
balance sheet caption "Discontinued operations reserves" at September 30, 2002
are reserves of $2.8 million for projected operating results and estimated gain
or loss on disposal and $2.8 million for costs to exit the PPM business.
4. RESTRUCTURING RESERVES
The following represents activity in the restructuring reserves from year-end
through September 30, 2002:
Reserve at Reserve at
December 31, Charges September 30,
2001 Utilized 2002
----------------- ----------------- ----------------
Facility closures--
Asset impairments $ 905 $ (215) $ 690
Lease commitments 1,717 (615) 1,102
Contract termination 1,836 (1,702) 134
Reorganization of IT--
Asset impairments 12 -- 12
Lease commitments 456 (26) 430
Other 97 (36) 61
---------- --------- ----------
Total reserve balance $ 5,023 $ (2,594) $ 2,429
========== ========= ==========
During the first nine months 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)
September 30, 2002
(Dollars in thousands, except per share data; unaudited)
5. OTHER (INCOME) EXPENSE
Three months ended Nine months ended
September 30, September 30,
---------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ -------------
Interest expense $ 108 $ 218 $ 364 $ 802
Interest income (7) (5) (68) (44)
Legal settlement (443) -- (443) --
Losses of equity affiliates -- 17 -- 149
Gain on sale of minority interest (101) -- (537) --
Other, net (1) (4) (72) (26)
--------- -------- --------- --------
Other (income) expense, net $ (444) $ 226 $ (756) $ 881
========= ======== ========= ========
During the second quarter of 2002 we sold a 20% interest in an ASC to two
former affiliated eye care professionals and during the third quarter of 2002 we
sold a 5% interest in that ASC to another former affiliated eye care
professional, reducing our interest in that ASC to 75%. During the third quarter
of 2002, we received proceeds from the settlement of an antitrust class action
lawsuit against a joint venture of two laser manufacturers.
6. REVOLVING CREDIT FACILITY
At September 30, 2002, we had $7.9 million outstanding under our revolving
credit facility that expires on June 30, 2003. The maximum commitment available
under our facility is $30 million. 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 5.1% and
4.9% for the three and nine months ended September 30, 2002, respectively, and
3.7% at September 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. In addition, the
terms of our credit facility allow us to sell minority interests in our existing
ASCs to the extent such a sale, when combined with other minority interest sales
during the preceding twelve month period, does not reduce our EBITDA by more
than $3 million. As of September 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)
September 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 nine months ended September 30, 2002 and
2001:
Surgical Product Sales
Facilities and Other Corporate Total
--------------- --------------- --------------- ---------------
Three months ended September 30, 2002
- -------------------------------------
Net revenue $ 8,277 $ 9,027 $ -- $ 17,304
Earnings (loss) before tax 2,346 342 (1,297) 1,391
Depreciation and amortization 455 74 97 626
Interest income 2 -- 5 7
Interest expense 2 -- 106 108
Identifiable assets 9,508 5,772 61,162 76,442
============== ============= ============ ===========
Three months ended September 30, 2001
- -------------------------------------
Net revenue $ 8,018 $ 7,553 $ -- $ 15,571
Earnings (loss) before tax 2,127 469 (17,476) (14,880)
Depreciation and amortization 515 81 584 1,180
Interest income -- -- 5 5
Interest expense 1 2 215 218
Identifiable assets 11,303 6,362 83,205 100,870
============== ============= ============ ===========
Nine months ended September 30, 2002
- ------------------------------------
Net revenue $ 24,473 $ 26,950 $ -- $ 51,423
Earnings (loss) before tax 7,636 1,259 (4,410) 4,485
Depreciation and amortization 1,372 213 311 1,896
Interest income 3 1 64 68
Interest expense 5 -- 359 364
Identifiable assets 9,508 5,772 61,162 76,442
============== ============= ============ ===========
Nine months ended September 30, 2001
- ------------------------------------
Net revenue $ 26,788 $ 22,857 $ -- $ 49,645
Earnings (loss) before tax 8,494 1,835 (23,673) (13,344)
Depreciation and amortization 1,450 205 1,760 3,415
Interest income -- 3 41 44
Interest expense 2 2 798 802
Identifiable assets 11,303 6,362 83,205 100,870
============== ============= ============ ===========
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.
General
We provide a comprehensive range of eye care services, focused primarily
around our surgical facilities, including our ownership and operation of 16
ambulatory surgery centers ("ASCs"), and our operation of 11 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 nine months ended September 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 September 30, 2002 Compared to the Three Months Ended
September 30, 2001
Net Revenue. Net revenue increased 10.9% from $15.6 million to $17.3
million. Surgical facilities net revenue increased 3.8% from $8.0 million to
$8.3 million due to the acquisition of new ASCs. During the third quarter of
2002, total surgical procedures performed in our surgical facilities decreased
5.1% to 9,428. Cataract procedures increased 12.0%, LVC procedures decreased
44.0% and other procedures increased 9.8%, compared to 2001. The increase in
cataract and other procedures came from our Thibodaux, Louisiana, Colorado
Springs, Colorado and Tyler, Texas ASCs, which we acquired in November 2001, May
2002 and September 2002, respectively. Management believes that the demand for
elective LVC surgery continues to be negatively impacted by the general economic
conditions.
Product sales and other net revenue increased 18.4% from $7.6 million to
$9.0 million, primarily as a result of a 28.7% net revenue increase at our
optical products purchasing organization. This increase was offset by a 24.1%
decrease in net revenue at our optical dispensaries, a 34.9% decrease in net
revenue at our marketing products business and a 3.5% decrease in net revenue at
our optical laboratories. Approximately 54% of the increase in net revenue at
our optical products purchasing organization is from sales to optical businesses
that we divested that were previously eliminated as intercompany sales. In
connection with each applicable divestiture transaction, we seek 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 46% 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 at this business.
12
Salaries, Wages and Benefits. Salaries, wages and benefits expense
decreased 7.7% from $3.9 million to $3.6 million. As a percentage of net
revenue, salaries, wages and benefits expense decreased from 25.1% to 20.7%. The
decrease in salaries, wages and benefits expense is the result of certain
corporate salaries being charged to the discontinued operations reserves in
accordance with the Plan; staff reductions at some surgical facilities in
response to the reduction in LVC procedures; and the closure of several LVC
centers and optical dispensaries in the fourth quarter of 2001 and the first
quarter of 2002.
Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased 18.5% from $8.1 million to $9.6 million. As a percentage of
net revenue, cost of sales and medical supplies expense increased from 51.8% to
55.7%. 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 52.2% of total net revenue in the third quarter of 2002, up from
48.5% 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 4.2% from $2.4 million to $2.3 million. As a
percentage of net revenue, SG&A expense decreased from 15.7% to 13.2%. The
absolute decrease in SG&A expense is primarily the result of closing several LVC
centers and optical dispensaries in the fourth quarter of 2001 and the first
quarter of 2002 coupled with cost reductions at our corporate office. The effect
of these reductions was somewhat offset by expenses at newly acquired ASCs.
Depreciation and Amortization. Depreciation and amortization expense
decreased 47.8% from $1.2 million to $626,000. The cessation of goodwill
amortization as of January 1, 2002 contributed $246,000 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 $444,000 of other income in the third
quarter of 2002 versus other expense of $226,000 in the third quarter of 2001.
The current year income includes a $101,000 gain on the sale of a 5% interest in
one of our ASCs and $443,000 of income from proceeds received from a class
action lawsuit settlement. Excluding these items, other expense of $100,000 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 third quarter of 2002 (5.1%) as compared to the third quarter
of 2001 (6.0%) as well as lower average borrowings of $7.7 million during the
third quarter of 2002 as compared to $25.0 million during the third quarter of
2001.
Provision for Income Taxes. The effective tax rate was 40.0% for the third
quarter of 2002 as compared to an effective rate of 40.3% in the third quarter
of 2001. A rate of 38.0% was used to determine the tax benefit from
restructuring and other charges recorded during the third quarter of 2001 which
reduced our overall effective rate that had exceeded 43% prior to our adoption
of the Plan. The adoption of FAS 142 at the beginning of 2002 reduced our
effective tax rate to 40.0% from the 2001 rates because 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.
Nine Months Ended September 30, 2002 Compared to the Nine Months Ended
September 30, 2001
Net Revenue. Net revenue increased 3.6% from $49.6 million to $51.4
million. The contribution from our operating segments shifted from 54.0%
surgical facilities and 46.0% product sales in 2001 to 47.6% surgical facilities
and 52.4% product sales in 2002. Surgical facilities net revenue decreased 8.6%
from $26.8 million to $24.5 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 55.7% of
the decrease in surgical facilities revenue. During the first nine months of
2002, total surgical procedures performed in our surgical facilities decreased
14.6% to 28,440. Cataract procedures increased 7.1%, LVC procedures decreased
44.5% and other procedures decreased 2.0%, compared to 2001. The increase in
cataract procedures came from our Thibodaux, Louisiana, Colorado Springs,
Colorado and Tyler, Texas ASCs, which we acquired in November 2001, May 2002 and
September 2002, respectively. Management believes that the demand for elective
LVC surgery continues to be negatively impacted by the general economic
conditions.
13
Product sales and other net revenue increased 17.9% from $22.9 million to
$27.0 million, primarily as a result of a 27.4% net revenue increase at our
optical products purchasing organization coupled with an 2.5% increase in net
revenue at our optical laboratories. These increases were offset by a 34.3%
decrease in net revenue at our optical dispensaries and a 30.6% decrease in net
revenue at our marketing products business. Approximately 40% 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. Approximately 62% 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 18.8% from $12.8 million to $10.4 million. As a percentage of net
revenue, salaries, wages and benefits expense decreased from 25.7% to 20.2%. Of
the decrease in salaries, wages and benefits expense approximately 74% 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 the first quarter of 2002.
Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased 16.9% from $24.2 million to $28.3 million. As a percentage of
net revenue, cost of sales and medical supplies expense increased from 48.8% to
55.1%. 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 52.4% of total net revenue in the first nine months of 2002, up
from 46.0% 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 5.6% from $7.1 million to $6.7 million. As a percentage of net
revenue, SG&A expense decreased from 14.3% to 13.1%. 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 the first quarter of 2002.
Excluding those closures, SG&A expense increased 0.9% compared to the prior year
due to expenses at newly acquired ASCs.
Depreciation and Amortization. Depreciation and amortization expense
decreased 44.1% from $3.4 million to $1.9 million. The cessation of goodwill
amortization as of January 1, 2002 contributed $740,000 of this decrease as
compared to the first nine 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 $756,000 of other income for the
first nine months of 2002 versus other expense of $881,000 in 2001. The current
year income includes an aggregate gain of $537,000 from the sales of a 20%
interest and 5% interest in one of our ASCs and $443,000 of income from proceeds
received from a class action lawsuit settlement. Excluding these items, other
expense of $224,000 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 (4.9%) as compared to the
2001 period (6.9%) as well as lower average borrowings of $12.6 million during
the first nine months of 2002 as compared to $27.0 million during the same
period of 2001.
Provision for Income Taxes. The effective tax rate was 40.0% for the first
nine months of 2002 as compared to an effective rate of 39.5% for the first nine
months of 2001. A rate of 38.0% was used to determine the tax benefit from
restructuring and other charges recorded during the third quarter of 2001 which
reduced our overall effective rate that had exceeded 43% prior to our adoption
of the Plan. The adoption of FAS 142 at the beginning of 2002 reduced our
effective tax rate to 40.0% from the 2001 rates because 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.
14
Liquidity and Capital Resources
Net cash provided by continuing operating activities was $8.7 million and
$2.1 for the nine months ended September 30, 2002 and 2001, respectively. The
period ended September 30, 2002 included a $1.5 million refund of 2001 estimated
federal tax payments and $443,000 of proceeds from a class action lawsuit. We
used $6.5 million of cash for investing activities during the first nine months
of 2002, which included the purchase of a majority interest in ambulatory
surgery centers in Colorado Springs, Colorado and Tyler, Texas. During the first
nine months of 2002, our net borrowings under our revolving credit line
decreased $12.8 million from the December 31, 2001 level, using cash generated
by operations and proceeds from divestiture transactions. At September 30, 2002,
we had working capital of $10.5 million (excluding restructuring reserves and
discontinued operations).
During the first nine months of 2002, we completed eight divestiture
transactions. We received total proceeds of $10.5 million, consisting of $8.8
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. In
addition, we sold a 25% interest in one of our ASCs to three former affiliated
eye care professionals during the second and third quarters of 2002. The cash
proceeds from these transactions were used to reduce debt as required under our
revolving credit facility.
At September 30, 2002, we had $7.9 million outstanding under our revolving
credit facility that expires on June 30, 2003. The maximum commitment available
under our facility is $30 million. 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 5.1% and
4.9% for three and nine months ended September 30, 2002, respectively, and 3.7%
at September 30, 2002. The variance between the weighted average interest rate
for the three and nine months and the 3.7% at September 30, 2002 is primarily
due to declining interest rates and the inclusion of commitment fees on our
unused line of credit in the three and nine month numbers. 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. In addition, the terms of our credit facility allow us to sell
minority interests in our existing ASCs to the extent such a sale, when combined
with other minority interest sales during the preceding twelve month period,
does not reduce our EBITDA by more than $3 million. As of September 30, 2002, we
were in compliance with all our credit agreement covenants. 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 plan to use the funds
available under our credit facility to finance acquisitions. 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.
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.
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
Subsequent Event
On October 18, 2002, we consummated a divestiture transaction with the
physician-shareholders of Hunkeler Eye Centers, P.C. ("HEC"), a professional
entity that had been a party to a long-term services agreement with us since
March 1997. Consistent with our plan to discontinue our management services
business, this transaction involved the termination of our long-term services
agreement with HEC, as well as the sale of management services assets to the
physician-shareholders of HEC.
In addition to selling management services assets, we entered into
agreements to sell minority equity interests in our three ASCs located in the
Kansas City metropolitan area. We sold a 20% equity interest in one of these
ASCs to two HEC physicians, and entered into an agreement to sell to these two
physicians a 20% equity interest in a second ASC (subject to state licensure
approvals). We also sold a 49% equity interest in the third ASC to two other HEC
physicians. We also restructured our laser vision correction business in the
Kansas City market by entering into fixed-site laser services agreements with
four HEC physicians pursuant to which we will provide them with excimer lasers
and other surgical equipment on an exclusive basis. In addition, the two
physicians who own a 49% minority interest in one of these ASCs have an option
to purchase our remaining 51% interest on April 15, 2005 at a purchase price of
$1.7 million. While these ASC transactions will increase the minority interest
deduction to our income, they are consistent with our previously announced plans
to jointly own some or all of our existing ASCs with physicians in the local
market.
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 acquire,
develop or manage a sufficient number of profitable surgical facilities; reduced
prices and reimbursement rates for surgical procedures; our ability to
successfully implement our discontinued operations plan on acceptable terms
consistent with our credit facility; the resulting changes in our physician
relationships following our divestiture transactions; the increase in minority
interest deduction resulting from the sale of minority interests in our existing
ASCs, and, absent other factors such as an increase in surgical procedures, the
resulting reduction in our income; demand for elective surgical procedures
generally and in response to a protracted economic downturn; the continued
acceptance of laser vision correction and other refractive surgical procedures,
particularly in locations where we are operating under a fixed-site laser
services agreement; 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.
Item 4. Disclosure Controls and Procedures
Under the supervision and with the participation of the Company's Chairman
and Chief Executive Officer, and Executive Vice President and Chief Financial
Officer (its principal executive officer and principal financial officer),
management has evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures within 90 days of the filing date
of this quarterly report. Based on that evaluation, the Chairman and Chief
Executive Officer, and Executive Vice President and Chief Financial Officer have
concluded that these controls and procedures are effective with respect to
timely communicating to them all material information required to be disclosed
in this report. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation.
16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
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 filed a report on Form 8-K dated June 15, 2002, to report, pursuant to
Item 2, a disposition of assets.
We filed a report on Form 8-K dated July 25, 2002, to report, pursuant to
Item 4, a change in certifying accountants.
17
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 November 13, 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 November 13, 2002
- ------------------- -----------------
Robert L. Hiatt Date
Vice President Finance
(on behalf of Registrant and as principal accounting officer)
18
Certification
(pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended)
I, Stephen J. Winjum, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NovaMed Eyecare, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Stephen J. Winjum
---------------------
Stephen J. Winjum
Chief Executive Officer
19
Certification
(pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended)
I, Scott T. Macomber, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NovaMed Eyecare, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Scott T. Macomber
---------------------
Scott T. Macomber
Chief Financial Officer
20