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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2001
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
incorporation or organization) Identification No.)
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 November 9, 2001, there were outstanding 24,835,108 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, 2001
INDEX
PART OR ITEM PAGE
Part I. FINANCIAL STATEMENTS 3
Item 1. Interim Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets - September 30, 2001
and December 31, 2000 3
Condensed Consolidated Statements of Operations - Three and nine months ended
September 30, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows - Nine months ended
September 30, 2001 and 2000 5
Notes to the Interim Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 10
Part II. OTHER INFORMATION 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
Part I
Item 1.
NOVAMED EYECARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
September 30, December 31,
ASSETS 2001 2000
---------------- ---------------
Current assets: (unaudited)
Cash and cash equivalents $ 904 $ 785
Accounts receivable, net 9,597 10,651
Notes receivable 1,348 2,731
Inventory 1,875 2,380
Current tax assets, net 2,378 79
Other current assets 1,137 1,167
Current assets of discontinued operations, net 2,349 11,442
-------- --------
Total current assets 19,588 29,235
Property and equipment, net 12,081 13,236
Intangible assets, net 25,468 27,341
Noncurrent deferred tax assets, net 18,795 --
Other assets, net 569 2,083
Noncurrent assets of discontinued operations, net 10,228 44,164
-------- --------
Total assets $ 86,729 $116,059
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,757 $ 3,325
Accrued expenses 3,000 1,967
Restructuring reserves 8,436 --
Current maturities of long-term debt 413 218
-------- --------
Total current liabilities 14,606 5,510
-------- --------
Long-term debt, net of current maturities 22,295 26,184
-------- --------
Deferred income tax liability -- 1,501
-------- --------
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, 2001 and December 31, 2000, respectively -- --
Common stock, $0.01 par value, 81,761,465 shares
authorized, 24,835,108 and 24,679,357 shares issued
and outstanding at September 30, 2001 and
December 31, 2000, respectively 248 247
Additional paid-in-capital 77,614 77,362
Retained earnings (deficit) (28,034) 5,255
-------- --------
Total stockholders' equity 49,828 82,864
-------- --------
Total liabilities and stockholders' equity $ 86,729 $116,059
======== ========
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,
-------------------------------- -------------------------------
2001 2000 2001 2000
---------- ----------- ----------- -----------
Net revenue:
Surgical facilities $ 8,985 $ 10,603 $ 30,384 $ 31,200
Product sales and other 7,852 7,153 23,676 19,703
---------- ----------- ----------- -----------
Total net revenue 16,837 17,756 54,060 50,903
---------- ----------- ----------- -----------
Operating expenses:
Salaries, wages and benefits 4,133 4,703 13,466 13,272
Cost of sales and medical supplies 8,449 7,247 25,400 21,555
Selling, general and administrative 2,577 2,823 7,433 7,816
Restructuring and special charges 10,912 -- 10,912 --
Other charges 3,719 -- 3,719 --
Depreciation and amortization 1,251 955 3,621 2,616
---------- ----------- ----------- -----------
Total operating expenses 31,041 15,728 64,551 45,259
---------- ----------- ----------- -----------
Income (loss) from continuing operations (14,204) 2,028 (10,491) 5,644
Other expense, net 227 366 880 568
---------- ----------- ----------- -----------
Income (loss) from continuing operations
before income taxes (14,431) 1,662 (11,371) 5,076
Income tax provision (benefit) (5,817) 713 (4,486) 2,161
---------- ----------- ----------- -----------
Net income (loss) from continuing operations (8,614) 949 (6,885) 2,915
Net income from discontinued operations 116 208 795 1,178
Net loss on disposal of discontinued operations (27,213) -- (27,213) --
---------- ----------- ----------- -----------
Net income (loss) $ (35,711) $ 1,157 $ (33,303) $ 4,093
========== =========== =========== ===========
Basic earnings per common share:
Income (loss) from continuing operations $ (0.35) $ 0.04 $ (0.28) $ 0.12
Income (loss) from discontinued operations (1.09) 0.01 (1.06) 0.05
---------- ----------- ----------- -----------
Net income (loss) $ (1.44) $ 0.05 $ (1.34) $ 0.17
========== =========== =========== ===========
Diluted earnings per common share:
Income (loss) from continuing operations $ (0.35) $ 0.04 $ (0.28) $ 0.11
Income (loss) from discontinued operations (1.09) 0.01 (1.06) 0.05
---------- ----------- ----------- -----------
Net income (loss) $ (1.44) $ 0.05 $ (1.34) $ 0.16
========== =========== =========== ===========
Weighted average common shares outstanding 24,804 24,590 24,767 24,433
Dilutive effect of employee stock options -- 1,048 -- 1,699
---------- ----------- ----------- -----------
Diluted weighted average common shares outstanding 24,804 25,638 24,767 26,132
========== =========== =========== ===========
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,
-----------------------------------
2001 2000
------------- ------------
Cash flows from operating activities:
Net income (loss) $ (33,303) $ 4,093
Adjustments to reconcile net income to net cash provided by continuing
operations, net of effects of purchase transactions--
(Income) loss from discontinued operations 26,418 (1,178)
Restructuring and other charges 14,631 --
Depreciation and amortization 3,621 2,616
Deferred taxes (5,501) 610
Changes in working capital items--
Accounts receivable (1,159) (2,314)
Inventory 483 65
Other current assets (391) 617
Other noncurrent assets (731) 142
Accounts payable and accrued expenses (1,333) (1,010)
------------- ------------
Net cash provided by operating activities 2,735 3,641
------------- ------------
Cash flows from investing activities:
Purchases of property and equipment (1,609) (6,491)
Acquisitions of and affiliations with entities, net -- (7,809)
Issuance of notes receivable to affiliated providers (115) (3,068)
------------- ------------
Net cash used in investing activities (1,724) (17,368)
------------- ------------
Cash flows from financing activities:
Borrowings under revolving line of credit 33,965 70,500
Payments under revolving line of credit (38,063) (49,350)
Proceeds from the issuance of common stock 254 880
Payments of other debt, debt issuance fees and capital lease obligations 92 (449)
------------- ------------
Net cash provided (used) by financing activities (3,752) 21,581
------------- ------------
Cash flows from discontinued operations:
Operating activities 3,763 3,480
Investing activities (1,112) (11,039)
Financing activities 209 (71)
------------- ------------
Net cash provided (used) by discontinued operation 2,860 (7,630)
------------- ------------
Net increase in cash and cash equivalents 119 224
Cash and cash equivalents, beginning of period 785 1,828
------------- ------------
Cash and cash equivalents, end of period $ 904 $ 2,052
============= ============
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, 2001
(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, 2000, filed by
NovaMed Eyecare, Inc. (the "Company") with the Securities and Exchange
Commission on Form 10-K. The unaudited interim condensed consolidated financial
statements as of September 30, 2001 and for the three and nine months ended
September 30, 2001 and 2000, 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 2 below.
2. DISCONTINUED OPERATIONS
On September 27, 2001 the Company's Board of Directors approved a Plan of
Discontinued Operations and Restructuring (the "Plan"). This involves the
divestiture of the management services segment or physician practice management
("PPM") business over the next twelve months. The plan contemplates the Company
pursuing and/or negotiating the following -- (a) termination or transfer of all
Management Service Agreements for all ophthalmology and optometric practices
(until such time, the Company intends to perform its obligations under these
agreements); (b) termination or transfer of all employees providing services in
practices and regional business offices; (c) closure or transfer of all regional
business operations locations; (d) sale of all practice based assets including
fixed assets, equipment and accounts receivable; and (e) termination or transfer
of corporate and information technology employees providing services primarily
to the management services segment. As a result, the Company has restated its
prior period financial statements to reflect the appropriate accounting for
these businesses as discontinued operations.
The operating results of these discontinued operations are summarized as
follows:
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
2001 2000 2001 2000
-------- ------- -------- -------
Net revenue $ 17,862 $17,322 $ 54,871 $49,886
Operating expenses 17,435 16,638 52,653 47,243
Interest and other expense, net 202 316 790 592
-------- ------- ------- -------
Income from operations before income taxes 225 368 1,428 2,051
Income tax provision 109 160 633 873
-------- ------- ------- -------
Net income from operations 116 208 795 1,178
Estimated gain (loss) on disposal (39,181) -- (39,181) --
Estimated operating losses through disposal date (4,741) -- (4,741) --
-------- ------- ------- -------
Estimated loss on disposal before tax benefit (43,922) -- (43,922) --
Income tax benefit (16,709) -- (16,709) --
-------- ------- ------- -------
Net gain (loss) on disposal (27,213) -- (27,213) --
-------- ------- ------- -------
Total income (loss)of discontinued operations $(27,097) $ 208 $(26,418) $ 1,178
======== ======= ======== =======
6
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2001
(Dollars in thousands, except per share data; unaudited)
The balance sheet components of these discontinued operations are summarized as
follows:
September 30, December 31,
2001 2000
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Accounts and notes receivable $14,318 $14,007
Inventories 1,154 1,272
Other current assets 838 1,017
Accounts payable (1,820) (2,107)
Accrued expenses (3,011) (2,713)
Notes payable and capitalized lease obligations (46) (34)
Discontinued operations reserves (9,084) --
------- -------
Current assets of discontinued operations, net $ 2,349 $11,442
======= =======
Net property and equipment $ 4,661 $ 9,300
Intangible assets 5,567 34,864
------- -------
Noncurrent assets of discontinued operations, net $10,228 $44,164
======= =======
The estimated gain (loss) on disposal includes $28.3 million for
impairment of goodwill, $3.8 million of asset impairments related to practice
assets that will be abandoned rather than sold, and $4.3 million for expected
future cash outlays to divest the PPM business. These amounts are estimates,
actual results could differ.
Net interest expense allocated to discontinued operations was $208,000
and $809,000 for the three and nine months ended September 30, 2001,
respectively and $329,000 and $625,000 for the three and nine months ended
September 30, 2000, respectively. Interest was allocated to discontinued
operations based on the guidance in EITF 87-24 - Allocation of Interest to
Discontinued Operations.
Included in the balance sheet line "Discontinued operations reserves"
at September 30, 2001 are reserves of $4.7 million for estimated operating
losses to be incurred through the date of sale and $4.4 million for costs to
exit the PPM business.
Deferred tax assets of $16.7 million were recorded as a result of these
transactions. Management believes that taxable income in prior carryback years,
future reversals of existing taxable temporary differences and expected future
taxable earnings will be available to fully utilize these tax assets.
7
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2001
(Dollars in thousands, except per share data; unaudited)
3. RESTRUCTURING AND SPECIAL CHARGES-- OTHER CHARGES
The Plan approved on September 27, 2001 by the Company's Board of
Directors contemplates the Company pursuing and/or negotiating the following --
(a) closure of certain facilities due to under-performing results including one
ASC, seven LVCs and one fixed laser site; (b) termination of an acquisition
contract; and (c) reorganization and downsizing of the Company's information
technology function to conform to the needs of continuing operations and the
pursuit of our discontinued operations plan. The Company recorded the following
restructuring charges totaling $10.9 million in the third quarter of 2001:
Facility closures--
Asset impairments $ 3,305
Lease commitments 1,766
Contract termination 1,851
Reorganization of IT--
Asset impairments 3,296
Lease commitments 456
Other 238
-------
Restructuring charges $10,912
=======
During the third quarter of 2001, the Company recorded other charges of
$3.7 million. Included in these charges were -- (a) a $2.0 million increase in
facility accounts receivable reserves; (b) professional fees incurred in
development of the Plan of $0.5 million; and (c) severance and other employee
costs incurred prior to approval of the Plan of $1.2 million.
4. REVOLVING CREDIT FACILITY
The Company amended its revolving credit facility on August 29, 2001. The
primary purpose of this amendment was to revise the acquisitions and affiliation
covenants to better conform to the Company's surgical facilities focus. On
October 23, 2001, the Company amended its revolving credit agreement to reflect
implementation of the discontinued operations plan. The amendment includes an
initial reduction of the maximum commitment available under the facility from
$50 million to $45 million. Beginning January 1, 2002, the maximum commitment
available under the facility will be reduced by $2.5 million per quarter,
resulting in a maximum commitment of $35 million as of October 1, 2002. The
credit agreement expires on June 30, 2003. Under the amended facility, interest
on borrowings under the credit agreement is payable at an annual rate equal to
our lender's published base rate plus the applicable borrowing margin ranging
from 0% to 1.0% or LIBOR plus a range from 1.5% to 3.0%, varying upon our
ability to meet financial covenants. The weighted average interest rate on
credit line borrowings for the three months and nine months ended September 30,
2001 was approximately 6.0% and 6.9%, respectively. 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.
8
NOVAMED EYECARE, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2001
(Dollars in thousands, except per share data; unaudited)
5. OPERATING SEGMENTS
The table below presents information about operating data and segment
assets of the Company as of and for the three months and nine months ended
September 30, 2001 and 2000. These amounts exclude discontinued operations (in
thousands):
Product
Surgical Sales and
Facilities Other Corporate Eliminations Total
---------- --------- --------- ------------ --------
Three months ended September 30, 2001
Net revenue $ 8,985 $ 7,912 $ -- $ (60) $ 16,837
Earnings (loss) before tax 2,552 529 (17,512) -- (14,431)
Depreciation and amortization 552 82 617 -- 1,251
Interest income -- 2 3 -- 5
Interest expense 2 2 214 -- 218
Identifiable assets 13,384 6,630 54,138 -- 74,152
------- ------- ------- ------- --------
Three months ended September 30, 2000
Net revenue $10,603 $ 7,350 $ -- $(197) $ 17,756
Earnings (loss) before tax 4,135 1,233 (3,706) -- 1,662
Depreciation and amortization 394 92 469 -- 955
Interest income -- 4 22 -- 26
Interest expense -- -- 371 -- 371
Identifiable assets 12,900 5,865 44,017 -- 62,782
------- ------- ------- ------- --------
Nine months ended September 30, 2001
Net revenue $30,384 $23,951 $ -- $(275) $ 54,060
Earnings (loss) before tax 10,341 2,060 (23,772) -- (11,371)
Depreciation and amortization 1,553 210 1,858 -- 3,621
Interest income -- 3 41 -- 44
Interest expense 2 2 798 -- 802
Identifiable assets 13,384 6,630 54,138 -- 74,152
------- ------- -------- ------- --------
Nine months ended September 30, 2000
Net revenue $31,200 $20,285 $ -- $(582) $ 50,903
Earnings (loss) before tax 12,304 2,619 (9,847) -- 5,076
Depreciation and amortization 1,123 167 1,326 -- 2,616
Interest income -- 9 67 -- 76
Interest expense -- -- 638 -- 638
Identifiable assets 12,900 5,865 44,017 -- 62,782
------- ------- -------- ------- --------
9
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion below contains forward-looking statements (as such term
is defined in Section 21E of the Securities Exchange Act of 1934) that are based
on the beliefs of our management, as well as assumptions made by, and
information currently available to, our management. Our results, performance and
achievements in 2001 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 13.
Outlook
On October 24, 2001, the Company announced that it had adopted a plan
to divest its management services operations. The Company recorded a net loss in
connection with the anticipated disposal of discontinued operations of $27.2
million. As part of this strategy, the Company also plans to restructure its
corporate support and information technology functions and to close
under-performing facilities. The Company also recorded restructuring charges
totaling $10.9 million and other charges totaling $3.7 million during the third
quarter 2001. In addition to retaining its surgical facilities segment, the
Company will retain its product sales segment as a complementary ancillary
business.
The Company provides a comprehensive range of eye care services, focused
primarily around its surgical facilities, including its ownership and operation
of 15 ambulatory surgery centers (ASCs), and its operation of 15 laser vision
correction centers. Eye care professionals perform laser vision correction,
cataract and other eye-related surgical procedures in the surgical facilities
owned and/or operated by the Company. An uncertain economic environment in the
United States impacted the net revenue and earnings results in the third quarter
and first nine months of 2001. We expect this environment to continue for the
foreseeable future.
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, 2001 and 2000. 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, 2001 Compared to the Three Months Ended
September 30, 2000
Net Revenue. Net revenue for third quarter 2001 decreased 5.2% to $16.8
million from $17.8 million in the prior year period. Surgical facilities net
revenue decreased 15.3% from $10.6 million to $9.0 million, the result of a 47%
decrease in laser vision correction procedures, partially offset by a 20%
increase in cataract procedures. Product sales and other net revenue increased
9.8% from $7.2 million to $7.9 million.
Salaries, Wages and Benefits. Salaries, wages and benefits expense
decreased 12.1% from $4.7 million to $4.1 million. As a percentage of net
revenue, salaries, wages and benefits expense decreased from 26.5% to 24.5%. The
decrease in salaries, wages and benefits expense is primarily due to reductions
in corporate staffing.
Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased 16.6% from $7.2 million to $8.4 million, a direct result of
higher volumes at our product sales group. As a percentage of net revenue, cost
of sales and medical supplies expense increased from 40.8% to 50.2%. This
increase is due to the greater contribution from product sales to total net
revenues this year versus last year (46.6% as compared to 40.3%) accompanied by
a revenue shift within product sales to our buying group which has had
historically low margins.
Selling, General and Administrative. Selling, general and
administrative ("SG&A") expense decreased 8.7% from $2.8 million to $2.6
million. As a percentage of net revenue, SG&A expense decreased from 15.9% to
15.3%. The decrease is due to a reduction in selling and marketing expense of
approximately $150,000 as compared to the third quarter of 2000.
10
Depreciation and Amortization. Depreciation and amortization expense
increased 31.1% from $1.0 million to $1.3 million. Acquisitions and capital
expenditures have increased overall depreciation and amortization expense.
Other Expense. Other expense decreased from $366,000 to $227,000. 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
2001 (6.0%) as compared to the 2000 period (8.8%).
Income Tax Benefit. Our effective tax rate reflects the impact of
nondeductible amortization expense. Our effective tax rate decreased to 40.3%
from 42.9% in the third quarter of 2000. The Company recorded approximately
$20.8 million of deferred tax assets related to the restructuring and
discontinued operations reserves established during the third quarter.
Management believes that taxable income in prior carryback years, future
reversals of existing taxable temporary differences and expected future taxable
earnings will be available to fully utilize these tax assets.
Nine months Ended September 30, 2001 Compared to the Nine months Ended September
30, 2000
Net Revenue. Net revenue for the first nine months of 2001 increased
6.2% to $54.1 million from $50.9 million in the prior year period. Surgical
facilities net revenue decreased 2.6% from $31.2 million to $30.4 million,
primarily as a result of a 13% decrease in laser vision correction procedures
offset by a 20% increase in cataract procedures, compared to the first nine
months of 2000. We believe that the uncertain economic conditions have
contributed to a softening demand for laser vision correction procedures. The
increase in cataract procedures mainly resulted from an overall increase in
demand as well as new affiliations and agreements with eye care professionals.
Product sales and other net revenue increased 20.2% from $19.7 million to $23.7
million, primarily as a result of strong product demand and, to a lesser extent,
net revenue contributed by our eye care marketing products and services
operations, which we acquired in May 2000.
Salaries, Wages and Benefits. Salaries, wages and benefits expense
increased 1.5% from $13.3 million to $13.5 million. As a percentage of net
revenue, salaries, wages and benefits expense decreased from 26.1% to 24.9%. The
absolute increase in salaries, wages and benefits expense is primarily due to
new acquisitions and affiliations in the Southeast during the third and fourth
quarters of 2000. The decrease as a percentage of net revenue is due to a
reduction in corporate staffing.
Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased 17.8% from $21.6 million to $25.4 million, a direct result of
higher volumes at our product sales group. As a percentage of net revenue, cost
of sales and medical supplies expense increased from 42.3% to 47.0%. This
increase is due to the greater contribution from product sales to total net
revenue this year versus last year (43.8% as compared to 38.7%) accompanied by a
revenue shift within product sales to the buying group which has had
historically low margins.
Selling, General and Administrative. Selling, general and
administrative expense decreased 4.9% from $7.8 million to $7.4 million. As a
percentage of net revenue, SG&A expense decreased from 15.4% to 13.7%. The
decrease is due to a reduction in selling and marketing expenses of
approximately $575,000 offset by expenses at new acquisitions.
Depreciation and Amortization. Depreciation and amortization expense
increased 38.4% from $2.6 million to $3.6 million. Acquisitions and capital
expenditures have increased overall depreciation and amortization expense.
Other Expense. Other expense increased from $568,000 to $880,000. The
increase in other expense was primarily related to an increase in interest
expense as a result of higher average outstanding indebtedness during the first
nine months of 2001, offset in part by lower average interest rates of 6.9% in
2001 as compared to 8.5% in the 2000 period. The Company also recorded $149,000
as its share of losses on a nonconsolidated 50% owned affiliate versus $39,000
of losses recorded during the 2000 period.
Income Tax Benefit. Our effective tax rate reflects the impact of
nondeductible amortization expense. Our effective tax rate in 2001 decreased to
39.4% from 42.6% in 2000. The Company recorded approximately $20.8 million of
deferred tax assets related to the restructuring and discontinued operations
reserves established during the third quarter. Management believes that taxable
income in prior carryback years, future reversals of existing taxable temporary
differences and expected future taxable earnings will be available to fully
utilize these tax assets.
11
Liquidity and Capital Resources
Net cash provided by continuing operating activities was $2.7 million
and $3.6 million for the nine months ended September 30, 2001 and 2000,
respectively. The Company used $1.7 million of cash for investing activities
during the first nine months of 2001, primarily for the purchase of equipment.
During the first nine months of 2001, the Company's net borrowings under its
revolving credit line decreased $3.9 million from the December 31, 2000 level.
At September 30, 2001, the Company had working capital of $ 22.5 million
(excluding restructuring and discontinued operations reserves).
The Company amended its revolving credit facility on August 29, 2001.
The primary purpose of this amendment was to revise the acquisitions and
affiliation covenants to better conform to the Company's surgical facilities
focus. On October 23, 2001, the Company amended its revolving credit agreement
to reflect implementation of the discontinued operations plan. The amendment
includes an initial reduction of the maximum commitment available under the
facility from $50 million to $45 million. Beginning January 1, 2002, the maximum
commitment available under the facility will be reduced by $2.5 million per
quarter, resulting in a maximum commitment of $35 million as of October 1, 2002.
The credit agreement expires on June 30, 2003. Under the amended facility,
interest on borrowings under the credit agreement is payable at an annual rate
equal to our lender's published base rate plus the applicable borrowing margin
ranging from 0% to 1.0% or LIBOR plus a range from 1.5% to 3.0%, varying upon
our ability to meet financial covenants. The weighted average interest rate on
credit line borrowings for the three months and nine months ended September 30,
2001 was approximately 6.0% and 6.9%, respectively. 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. As of September 30,
2001 the Company was in compliance with all of its amended credit agreement
covenants.
We believe that our funds from operations, proceeds from divestitures, our
cash and our access to bank credit lines will be sufficient to fund our
operations and capital expenditures for at least the next 12 months. Our future
capital requirements and the adequacy of available funds will depend on many
factors, including the timing and success of our divestiture activities, new
acquisitions of surgical facilities and capital requirements associated with our
business.
On June 15, 2000, we entered into an agreement to acquire two ASCs,
contingent upon the resolution of certain requirements associated with the
seller (the "Contingencies"). Certain of these Contingencies were satisfied in
2000 with respect to one of the ambulatory surgery centers, which we acquired in
December 2000. We are currently discussing various alternative structures with
the seller that could include, without limitation, refraining from purchasing
the second ambulatory surgery center and paying a termination fee, as well as
possibly selling back to the seller the ambulatory surgery center acquired in
December 2000.
One of our affiliated eye care professionals has the option,
exercisable through November 1, 2002, to acquire up to a 25% interest in one of
our ASCs.
Effective March 1, 2001, we entered into a new five-year supply
agreement with Alcon Laboratories, Inc. setting forth the terms upon which we
can procure and utilize excimer lasers manufactured by Alcon. This agreement
amended and superseded our previous agreement originally entered into with
Summit Technology, Inc., which was acquired by Alcon in 2000. During the
five-year term, we will pay Alcon monthly based on the number of procedures
performed on each of our APEX/Infinity lasers and LADARVision Systems. We are
required to pay for a minimum number of annual procedures on each LADARVision
System during the five-year term, whether or not these procedures are performed.
As of September 30, 2001, we have entered into commitments to pay Alcon up to
approximately $1.4 million annually during the five-year term. The minimum
commitment will increase if we deploy additional laser systems.
12
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 2001 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, 2000 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.
13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
10.24 Employment Agreement dated August 17, 2001 with Stephen J. Winjum
10.25 Employment Agreement dated August 17, 2001 with E. Michele Vickery
10.26 $50,000,000 Amended and Restated Credit Agreement dated as of
August 29, 2001
21 Subsidiaries
B. Reports on Form 8-K
We did not file any reports on Form 8-K during the third quarter of 2001.
14
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, 2001
--------------------- -----------------
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, 2001
------------------- -----------------
Robert L. Hiatt Date
Vice President Finance
(principal accounting officer)
15
EXHIBIT INDEX
Exhibit
Number Exhibit Name
------ ------------
10.24 Employment Agreement dated August 17, 2001 with Stephen J. Winjum
10.25 Employment Agreement dated August 17, 2001 with E. Michele Vickery
10.26 $50,000,000 Amended and Restated Credit Agreement dated as of
August 29, 2001
21 Subsidiaries
16