Edgar Filing: NOVAMED EYECARE INC

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2000

Commission File Number: 0-26625

NOVAMED EYECARE, INC.
(Exact name of registrant as specified in its charter)

Delaware 36-4116193
(State or other jurisdiction (I.R.S. EmployerIdentification No.)
of incorporation or organization)

980 North Michigan Avenue, Suite 1620, Chicago, Illinois 60611
(Address of principal executive offices) (zip code)

Registrant's telephone number, including area code: (312) 664-4100

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)

Preferred Stock Purchase Rights
(Title of Class)

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 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 [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

The aggregate market value of the registrant's 18,265,135 shares of voting
stock held by non-affiliates of the registrant, based upon the last reported
sale price of the registrant's Common Stock on March 15, 2001 was
$41,096,553.75. The number of shares outstanding of the registrant's Common
Stock, par value $.01, as of March 15, 2001 was 24,698,640.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Definitive Proxy Statement in connection with
the registrant's 2001 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Report on Form 10-K.

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PART I

Item 1. Business

Because we want to provide investors with more meaningful and useful
information, this Annual Report on Form 10-K (the "Form 10-K") contains, and
incorporates by reference, certain "forward-looking statements" (as such term
is defined in Section 21E of the Securities Exchange Act of 1934, as amended)
that reflect our current expectations regarding our future results of
operations, performance and achievements. These forward-looking statements are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. We have tried, wherever possible, to identify
these forward-looking statements by using words such as "anticipates,"
"believes," "estimates," "expects," "plans," "intends" and similar
expressions. These statements reflect our current beliefs and are based on
information currently available to us. Accordingly, these statements are
subject to certain risks, uncertainties and contingencies 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 acquire, develop and manage
profitable surgical facilities; the acceptance of laser vision correction and
other refractive surgical procedures by eye care professionals and the general
public; our ability to establish and maintain profitable affiliations with eye
care professionals; the adoption of competing new technologies for eye
surgical procedures, including vision correction surgery; reductions in prices
and reimbursement rates for surgical procedures, including prices for laser
vision correction procedures; proposed health care reforms; and the factors
set forth under "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors." You should not place undue
reliance on any forward-looking statements. 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-K or to reflect
the occurrence of unanticipated events.

Unless the context requires otherwise, you should understand all references
to "we," "us" and "our" to include NovaMed Eyecare, Inc. and its consolidated
subsidiaries.

General

We are an eye care services company and one of the nation's leading owners
and operators of practice-based, single-specialty ambulatory surgery centers
(ASCs). We own and operate 15 ASCs and operate 15 practice-based laser vision
correction centers (LVC centers) in six core U.S. regional markets, including:
Chicago, Illinois; Kansas City, Missouri; Louisville, Kentucky; Richmond,
Virginia; St. Louis, Missouri; and the Atlanta, Georgia and Chattanooga,
Tennessee metropolitan areas.

As of March 15, 2001, we own and operate:

. 15 practice-based, single-specialty ambulatory surgery centers where our
affiliated eye care professionals perform surgical procedures, primarily
cataract and refractive surgery (laser vision correction or LVC).

. an optical services and products organization that sells: eye care
products and accessories to eye care professionals; corrective lenses and
eyeglasses produced by our two wholesale optical laboratories; eyeglass
frames and contact lenses purchased from manufacturers by our optical
products purchasing organization; and marketing products and services.

. an eye-only research organization that provides clinical and other
research services to eye care device, product and pharmaceutical
manufacturers.

As of March 15, 2001, we also operate under service agreements 15 laser
vision correction centers, or LVC centers, where our affiliated eye care
professionals perform laser vision correction surgery.

Generally, we enter into long-term business relationships, or affiliations,
with eye care professionals by:

. acquiring their non-medical assets including equipment, leasehold
interests and working capital

. hiring their non-medical personnel

. assuming their office leases

. entering into long-term service agreements with their professional
entities

Under these service agreements, we provide business, information technology,
administrative and financial services to our affiliated eye care professionals
and their optical retail outlets in exchange for a management fee.

As of March 15, 2001, we have affiliated with 120 eye care professionals.
Our affiliated eye care professionals provide a wide range of eye care services
to patients including basic eye examinations, the diagnosis and treatment of
complex eye conditions and eye surgery, primarily cataract and LVC surgery. Our
affiliated eye care professionals currently practice in 66 eye care clinics
which are leased and staffed by us. In addition, our affiliated eye care
professionals operate 33 optical retail outlets, each of which is located
within one of our affiliated eye care clinics, where they sell eyeglasses,
contact lenses and other optical products and accessories to patient-consumers.
In addition, we have entered into five fixed-site laser services agreements in
Delaware, Illinois, Ohio and Oklahoma.

We were originally organized as a Delaware limited liability company in
March 1995, under the name NovaMed Eyecare Management, LLC. In connection with
a capital infusion from venture capital investors in November 1996, NovaMed
Holdings Inc., an Illinois corporation, was formed to serve as a holding
company, responsible for overall strategic planning, with NovaMed Eyecare
Management, LLC as an operating subsidiary. In May 1999, NovaMed Holdings Inc.
reincorporated as a Delaware corporation and changed its name to NovaMed
Eyecare, Inc. In June 1999, we changed the name of our principal operating
subsidiary to NovaMed Eyecare Services, LLC. In August 1999, we consummated our
initial public offering.

Eye Care Industry

General

The eye care market consists of a large, diverse group of services and
products. The eye care services market includes routine eye examinations as
well as diagnostic and surgical procedures that address complex eye and vision
conditions. The most common conditions addressed by eye care professionals are
nearsightedness, farsightedness and astigmatism. Other frequently treated
conditions include cataracts, glaucoma, macular degeneration and diabetic
retinopathy. Eye and vision conditions are typically treated with surgery,
pharmaceuticals, prescription glasses, contact lenses or some combination of
these treatments. Additional services offered by eye care professionals include
research services for eye care devices or pharmaceuticals being developed or
tested in clinical trials. The optical products market consists of the
manufacture, distribution and sale of optical goods including corrective
lenses, eyeglasses, frames, contact lenses and other optical products and
accessories.

Eye care represents one of the largest health care service and product
markets in the U.S. Projected annual spending in 2001 for health care costs
associated with eye and vision conditions is expected to be $29 billion, while
annual spending on retail optical products is expected to be an additional $18
billion, representing a total market of approximately $47 billion.

Ambulatory Surgery Center Market

The delivery of ambulatory surgery--procedures performed on a
nonhospitalized patient who is able to return home the same day--has changed
dramatically since the inception of outpatient surgery centers (ASCs) in the
early 1970s. Since then, the industry has grown, with almost 3,200 ASCs in
business as of June 2000, up 20% from 1998. The ASC market has capitalized on
new medical technologies, including improvements in surgical lasers,
anesthesiology, endoscopy and arthroscopic surgical instruments. An estimated
6.7 million surgeries were performed in ASCs in 2000, up 15% from 1998.
Ophthalmology is the largest single surgical area of outpatient surgery, with
approximately 1.76 million outpatient surgeries in 2000, representing

approximately 26% of all outpatient surgeries. Outpatient surgical procedures
are forecasted to grow 7% annually through 2006, when approximately 9 million
procedures are expected.

Cataract Surgery. Cataract surgery is currently the most widely performed
surgical procedure in the U.S., with an estimated 2.7 million cataract
surgeries in 2000. Cataract procedures are forecast to grow 2.2% annually over
each of the next five years. A cataract occurs when the normally transparent
lens of the eye becomes cloudy as part of the aging process. In cataract
surgery, the ophthalmologist removes the clouded natural lens and replaces it
with a synthetic intraocular lens. Cataract surgery is typically performed on
an outpatient basis using local anesthesia, and the procedure time is typically
less than 30 minutes. More than 63% of people over the age of 60 have some
degree of cataract formation. Cataract procedures are expected to continue to
increase for many years, driven primarily by the aging of the population and
the introduction of improved technologies and surgical techniques. With the
preponderance of cataract surgery patients being over the age of 65, the
Medicare program has been the primary source of reimbursement for cataract
surgery providers. In the U.S., 34.7 million people are age 65 or older,
representing 12.6% of the population. By 2010, this group is expected to
increase 13.5% to 39.4 million and represent 13.2% of the population.

Vision Correction Surgery. Approximately 166 million people in the U.S.
require eyeglasses or contact lenses to correct refractive vision conditions
that result from the improper curvature of the cornea. If the cornea's
curvature is not correct, the cornea cannot properly focus the light passing
through it onto the retina, and the person will see a blurred image. The three
most common refractive conditions are:

. myopia, commonly referred to as nearsightedness, which is caused by a
steepening of the cornea, resulting in the blurring of distant objects

. hyperopia, commonly referred to as farsightedness, which is caused by a
flattening of the cornea, resulting in the blurring of close objects

. astigmatism, in which images are not focused on any point due to the
varying curvature of the eye along different axes, which results in a
distorted view of images

New surgical technologies and techniques have been developed over the years
to correct common vision conditions that result from the improper curvature of
the cornea. Laser In-Situ Keratomileusis, or LASIK, was introduced in 1996,
leading to a dramatic increase in the popularity of laser vision correction
surgery. The introduction of LASIK offered significant benefits to
ophthalmologists over preceding refractive surgical techniques such as Radial
Keratotomy, or RK, and the first vision correction surgery that used laser
technology, Photorefractive Keratectomy, or PRK. Relative to the earlier
refractive surgical techniques, the LASIK procedure provides significant
reductions in patient pain or discomfort, patient recovery times ranging from a
few hours after the procedure to two weeks, and reduced complication rates.

In the LASIK procedure, an ophthalmologist uses an automated microsurgical
instrument to peel back a thin layer of corneal tissue that remains hinged to
the eye. A number of laser pulses are then applied to the cornea to remove
tissue and thereby correct the patient's vision by flattening the shape of the
cornea in nearsighted patients and steepening the shape of the cornea in
farsighted patients. After the surgeon replaces the layer of corneal tissue, no
bandages are required and most patients experience virtually no discomfort. A
LASIK procedure typically takes 10 to 15 minutes from set-up to completion,
with the length of time of the actual laser treatment lasting 15 to 90 seconds,
depending on the degree of correction required. LASIK is performed in an
outpatient setting, with only topical anesthesia. Only ophthalmologists are
licensed to perform LASIK, although optometrists are actively involved in
identifying appropriate candidates for the procedure and in providing pre- and
post-operative care.

The number of vision correction procedures performed in the U.S. has grown
rapidly since 1996, primarily as a result of the advantages of the LASIK
procedure. In 2000, eye care professionals performed an estimated 1.43 million
laser vision correction surgery procedures in the U.S., representing an
increase of approximately 50% over the approximately 950,000 procedures
performed in 1999. Volume is projected to grow to approximately 1.82 million
procedures in 2001. Despite this rapid growth, the number of vision correction

surgery patients in 2000 represented approximately 0.4% of the 166 million
people with refractive vision conditions in the U.S. LVC procedures performed
in the U.S. from 1997 through 2000 represented cumulatively less than 1% of the
relevant market opportunity.

Other Eye Disorders. Other common eye disorders include glaucoma, macular
degeneration and diabetic retinopathy. Glaucoma is one of the leading causes of
preventable blindness in the U.S. and the single most common cause of blindness
among African-Americans. By 2030, industry sources project that the number of
glaucoma cases diagnosed will double, primarily as a result of the aging of the
general population and an increase in the average life span. Age-related
macular degeneration is the leading cause of visual impairment for persons age
75 and older, and it is the most common cause of new cases of visual impairment
among those over age 65. Diabetic retinopathy is a leading cause of vision loss
and blindness. More than 40% of patients with diabetes for 15 years or more
have some degree of blood vessel damage that may result in diabetic
retinopathy. Incidence of this disease is expected to increase dramatically as
a result of a growing number of patients diagnosed with diabetes. Medicare and
other third party payors generally reimburse the treatment of these eye and
vision conditions.

Optical Services and Products

While the number of patient options for vision correction has increased with
improved surgical vision correction technologies and techniques, the market for
basic optical goods including corrective lenses, eyeglass frames, contact
lenses and other optical products and accessories, remains a significant
market. Projected 2001 consumer spending is expected to be approximately $18
billion on eyewear. Eyeglass frames are typically sold through retail optical
outlets located in optometrist and ophthalmologist clinics, as well as through
retail stores.

Our Business Model

We have focused on building regional clusters of ASCs, LVC centers and
affiliated eye care professionals. We structure these regional clusters to
achieve a hub and spoke configuration of affiliated eye care professionals
around our ASCs and LVC centers. We believe our business model provides us with
several advantages in assisting our affiliated eye care professionals,
including our ability to:

. establish and maintain long-term relationships with leading
ophthalmologists and optometrists through access to our ASCs and LVC
centers, and through a wide range of business, information technology,
administrative and financial services

. assist our affiliated eye care professionals in establishing regional
market leadership in eye care through our clinical research, information
technology and marketing know-how

. create multiple sources of revenue through the range of business,
information technology, administrative and financial services and eye
care products that we offer

We work with our affiliated eye care professionals to develop a patient-
consumer approach that we believe benefits not only the growth of their
practices, but all aspects of their continuum of eye care services, ranging
from basic eye examinations to the treatment of complex eye and vision
conditions, including surgery.

We implement our business model by building around the following key
components:

Single-specialty, practice-based ASCs and LVC Centers

We own and operate 15 practice-based, single specialty ASCs, each of which
is a wholly-owned, state-licensed and Medicare-certified ambulatory surgical
center. Ophthalmologists perform cataract, laser vision correction and other
eye related surgical procedures in our ASCs. We also operate under service
agreements 15 LVC centers where our affiliated eye care professionals perform
laser vision correction surgery. We also have five fixed-site laser service
agreements pursuant to which we lease excimer lasers and provide various
services to eye care providers in Delaware, Illinois, Ohio and Oklahoma. As of
March 15, 2001, we have 30 excimer

lasers in service. We plan to selectively deploy additional excimer lasers
during 2001, including replacing some currently installed lasers with newer
technology models.

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. The agreement sets forth
pricing terms for our existing APEX/Infinity lasers, as well as the procurement
and pricing terms for Alcon's most technologically advanced laser, the
LADARVision System. During the five-year term, we will pay Alcon monthly based
on the number of procedures performed on each laser, with minimum annual
procedure requirements for each LADARVision System procured under the
agreement. As of March 15, 2001, we have twenty-one Apex/Infinity lasers and
two LADARVision Systems covered by the agreement, and we have agreed to order
and take installation and delivery of additional LADARVision Systems by April
15, 2001. Alcon may terminate the agreement if we fail, after reasonable cure
periods, to comply with the material terms of the agreement. We may terminate
the agreement if the Food and Drug Administration, or FDA, withdraws or
materially restricts its approval of the use of any laser covered by the
agreement or if patent issues or changes render the lasers unusable.

Management Services

As of March 15, 2001, we have long-term service agreements in place with
professional entities covering 62 ophthalmologists and 58 optometrists, who
provide eye care services in one or more of our 66 eye care clinics. Generally,
we seek to cluster eye care clinics within regional markets that can support
one or more ASCs and one or more LVC centers. Our strategy involves affiliating
with leading eye care professionals within a regional market until we have
achieved a cluster of eye care clinics, affiliated eye care professionals, ASCs
and LVC centers in a hub and spoke configuration throughout the regional
market.

We provide services, facilities and equipment to our affiliated eye care
professionals under long-term service agreements. These service agreements are
generally for a 40-year term and require us to provide all of the business,
administrative and financial services necessary to operate the eye care clinics
and optical retail outlets. These services typically include:

. billing, collection and cash management services

. procuring and maintaining all office space, equipment and supplies

. subject to federal and state law, recruiting, employing, supervising and
training all non-professional personnel

. assisting our affiliated eye care professionals in recruiting additional
ophthalmologists and optometrists

. all administrative and support services

. information technology services

. marketing services

Optical Services and Products

We own and operate two full-service wholesale optical laboratories that
specialize in surfacing, finishing and distributing corrective lenses and
eyeglasses. Our laboratories have in excess of 500 active customers, including
affiliated and non-affiliated ophthalmologists, optometrists, opticians and
optical retail chains. Our optical products purchasing organization allows
affiliated and non-affiliated eye care professionals to purchase optical
products through us at volume discounts. We have in excess of 750 customers
that utilize our optical products purchasing organization. We also provide
monthly reports to our customers that allow them to identify purchasing trends
and manage their optical product inventories more efficiently. Our marketing
services and products company provides eye care professionals with a range of
products and services including brochures, videos and advertising design.

Research

We own and operate an eye-only research organization that conducts Phase II-
IV clinical trials on eye care devices and pharmaceuticals, with an emphasis on
laser vision correction. Our research organization is based in Kansas City,
Missouri, and currently has research sponsor agreements relating to
approximately 65 clinical studies involving up to approximately 1,300 potential
patients participating in clinical trials.

Our Growth Strategy

We are focused on the large and rapidly growing U.S. market for eye care,
particularly around the growth in eye surgeries which we believe will result in
additional procedures being performed in our surgical facilities. Our goal is
to be one of the leading owners and/or operators of single-specialty, practice-
based ASCs and LVC centers. We intend to achieve this goal by continuing to
acquire and develop ASCs and LVC centers, maintain and/or establish contractual
and other affiliations with leading eye care professionals and by continuing to
implement a growth strategy which includes the following specific components:

Expanding our Presence in Existing Regional Markets. We believe that there
are significant growth opportunities in our existing regional markets. These
growth opportunities will be driven largely by:

. acquiring or developing ASCs and LVC centers

. continuing to affiliate with leading eye care professionals

. helping our affiliated eye care professionals grow and develop their
practices

Selectively Targeting and Entering New Markets. We believe our management
team's experience in acquiring, building and developing ASCs and LVC centers,
as well as helping affiliated professionals build successful eye care
businesses, will continue to enable us to effectively identify and enter new
markets. We intend to enter new markets through multiple avenues, including:

. acquiring existing or establishing new ASCs

. opening new LVC centers

. entering into contractual affiliations with leading ophthalmologists and
optometrists

Competition

Surgical Facilities. In acquiring and developing practice-based, single
specialty ASCs and LVC centers, we compete with both corporations and eye care
professionals. There are several publicly held and private companies actively
engaged in the acquisition, development and operation of ASCs and LVC centers.
Certain of these companies may acquire and develop multi-specialty ASCs,
practice-based ASCs focusing on varying specialties, or a combination of the
two. Moreover, some of these companies have the acquisition and development of
ASCs as their core business, while other competitors include larger publicly
held companies that have subsidiaries or divisions engaged in this business.
Other companies focus more exclusively on the development and operation of LVC
centers. Many of these competitors have greater resources than us.

The majority of practice-based, ophthalmic ASCs continue to be owned by eye
care professionals. Eye care professionals also own and operate LVC centers.
Our ASCs and LVC centers compete with these provider-owned centers. In
deploying excimer laser technology, eye care professionals either elect to
procure this technology on their own or enter into an arrangement with a
corporate entity that can provide the necessary capital. For the fourth quarter
2000, industry sources estimate that 46.6% of total laser vision correction
procedures in the U.S. were performed in corporate-owned facilities, and 43.3%
were performed in physician-owned centers. Laser vision correction and other
refractive surgery procedures also compete with more traditional non-surgical
treatments for refractive conditions, including eyeglasses and contact lenses.

Management Services. Our management services are provided to eye care
professionals through long-term affiliations. The market for these management
services is fragmented, and we do not face any single, dominant

U.S. national competitor. Eye care professionals may seek a corporate partner
to assist them in the growth and development of their practices, as well as
with the day-to-day management and administration of their businesses. Factors
that may influence an eye care professional's decision to retain a corporate
partner to provide management services are the corporate partner's experience
and scope and quality of services offered, the eye care professional's need for
these services, and the price for such services.

Optical Products and Services. Our two wholesale optical laboratories face a
variety of national, regional and local competitors. We compete in the optical
laboratory market on the bases of quality of service, breadth of services,
reputation and price.

In the market for providing optical group purchasing services, we primarily
compete with national and regional buying groups, as well as large vendors.
Competition in this market is based upon service, price, and the strength of
the purchasing organization, including the ability to negotiate discounts.

Employees

As of March 15, 2001, we had approximately 1,175 employees, 959 of whom are
full-time employees. We are not a party to any collective bargaining
agreements.

Trademarks

We have registered the name, NovaMed Eyecare Management, as a U.S. Service
mark.

Governmental Regulation

As a participant in the health care industry, our operations and the
operations of our affiliated ophthalmologists and optometrists are subject to
extensive and increasing regulation by governmental entities at the Federal,
state and local levels. Many of these laws and regulations are subject to
varying interpretations, and we believe courts and regulatory authorities
generally have provided little clarification. Moreover, state and local laws
and interpretations vary from jurisdiction to jurisdiction. As a result, we may
not always be able to accurately predict interpretations of applicable law, and
some of our activities, or the activities of our affiliated eye care
professionals, could be challenged.

We cannot assure you that Federal or state regulatory authorities would not
challenge any of our business operations and arrangements with our affiliated
eye care professionals. If any of our activities are challenged, we may have to
divert substantial time, attention and resources from running our business to
defend against these challenges regardless of their merit. If we do not
successfully defend these challenges, we and our affiliated eye care
professionals may face a variety of adverse consequences including service
agreements being terminated or rendered unenforceable, third party payor
agreements being terminated, affiliated providers losing their eligibility to
participate in Medicare, Medicaid or other Federal or state health care
programs, or losing other contracting privileges and, in some instances, civil
or criminal fines. Under some circumstances, we may be able to redesign or
reformulate our relationships or arrangements to address these challenges. Any
of these consequences could have a material adverse effect on our business,
financial condition and results of operations.

The regulatory environment in which we and our affiliated eye care
professionals operate may change significantly in the future. Numerous
legislative proposals have been introduced in the U.S. Congress and in various
state legislatures over the past several years that could cause major reforms
of the U.S. health care system. In addition, several sets of regulations have
been recently adopted that may require substantial changes in the way health
care providers operate over the coming years. In response to new or revised
laws, regulations or interpretations, we could be required to revise the
structure of our legal arrangements or the structure of our fees, incur
substantial legal fees, fines or other costs, or curtail our business
activities, reducing the potential profit to us of some of our legal
arrangements, any of which may have a material adverse effect on our business,
financial condition and results of operations.

The following is a summary of some of the health care regulatory issues
affecting us, our affiliated eye care providers and our respective operations.

Federal Law

Anti-Kickback Statute. The Federal anti-kickback statute prohibits the
knowing and willful solicitation, receipt, offer or payment of any direct or
indirect remuneration in return for the referral of patients or the ordering or
purchasing of items or services payable under Medicare, Medicaid or other
Federal health care programs. Violations of this statute may result in criminal
penalties, including imprisonment or criminal fines of up to $25,000 per
violation, civil penalties of up to $50,000 per violation plus up to three
times the amount of the underlying remuneration, and exclusion from Federal
programs including Medicare or Medicaid.

The Federal anti-kickback statute contains a number of exceptions. In order
to address the problems created by the broad language of the statute, Congress
directed the Department of Health and Human Services, or DHHS, to develop
regulatory exceptions, known as safe harbors, to the Federal anti-kickback
statute's referral prohibitions. When possible, we have attempted to structure
our business operations and our relationships with our affiliated providers
within a safe harbor. However, some aspects of our business, the business of
our affiliated providers, and our relationships with our affiliated providers
either do not meet the prescribed safe harbor standards, or relate to practices
for which no safe harbor standards have been proposed. Because there is no
legal requirement that relationships fit within a safe harbor, a business
arrangement that does not comply with the relevant safe harbor, or for which a
safe harbor does not exist, does not necessarily violate the anti-kickback
statute.

Included among the safe harbors to the anti-kickback statute are certain
safe harbors for investment interests in general, and for investment interests
in ASCs. While we do not currently co-own ASCs with physicians, it is
foreseeable that we may do so in the future. If so, it is unlikely that our co-
ownership would meet all of the parameters of the general investment interest
safe harbors or the ASC investment interest safe harbors. However, as discussed
above, an arrangement that does not fit squarely within a safe harbor is not
per se unlawful under the anti-kickback statute. It is our intent to structure
all such co-ownership arrangements in a manner that complies with as many of
the safe harbor components as possible, that meets the objectives of the anti-
kickback statute, and that follows the other available regulatory guidance
regarding ASC co-ownership arrangements. By structuring the co-ownership
arrangements in this manner, we believe that they will be in compliance with
the anti-kickback statute.

Self-Referral Law. Subject to limited exceptions, the Federal self-referral
law, known as the "Stark Law," prohibits physicians and optometrists from
referring their Medicare or Medicaid patients for the provision of "designated
health services" to any entity with which they or their immediate family
members have a financial relationship. "Financial relationships" include both
compensation and ownership relationships. "Designated health services" include
clinical laboratory services, radiology and ultrasound services, durable
medical equipment and supplies, and prosthetics, orthotics and prosthetic
devices, as well as seven other categories of services. We do not provide
"designated health services." Our affiliated providers, however, do provide
limited categories of designated health services, specifically, ultrasound
services, including A-scans and B-scans, and prosthetic devices, including
eyeglasses and contact lenses furnished to patients following cataract surgery.

Violating the Stark Law may result in denial of payment for the designated
health services performed, civil fines of up to $15,000 for each service
provided pursuant to a prohibited referral, a fine of up to $100,000 for
participation in a circumvention scheme, and exclusion from the Medicare,
Medicaid and other Federal health care programs. The Stark Law is a strict
liability statute. Any referral made where a financial relationship exists that
fails to meet an exception constitutes a violation of the law.

On January 4, 2001, the Health Care Financing Administration published Phase
I of the final Stark regulations interpreting the provisions of the Stark Law.
These regulations will have an effective date of

January 4, 2002. It is anticipated that Phase II will be issued later this year
and will focus on compensation issues and the statute's application to
Medicaid. While Phase I of the final rule still defines eyeglasses and contact
lenses to be prosthetic devices and A-scans and B-scans to be radiology
services, the final rule creates certain exemptions for referrals for these
services. Phase I also creates an exemption for referrals for eyeglasses and
contact lenses furnished to patients following cataract surgery and for
"designated health services" that are personally performed by the referring
doctor.

The Stark law does not prohibit physician ownership or investment interests
in ASCs to which they refer patients. HCFA clarified this in the Phase I
regulations by providing that services that would otherwise constitute a
"designated health service," but that are paid by Medicare as part of bundled
rate, will not be considered designated health services for purposes of the
Stark Law. Thus, when an intraocular lens, or IOL, used in cataract surgery is
included in an ASC bundled payment rate, the IOL will not be considered to be a
"designated health service."

Civil False Claims Act. The Federal Civil False Claims Act prohibits
knowingly presenting or causing to be presented any false or fraudulent claim
for payment by the government, or using any false or fraudulent record in order
to have a false or fraudulent claim paid. Violations of the law may result in
repayment of three times the damages suffered by the government and penalties
from $5,000 to $10,000 per false claim. Collateral consequences of a violation
of the False Claims Act include administrative penalties and possible exclusion
from participation in Medicare, Medicaid and other Federal health care
programs.

Health Insurance Portability and Accountability Act. In August of 1996,
Congress enacted the Health Insurance Portability and Accountability Act of
1996 (HIPAA). Included within HIPAA's health care reform provisions are its
"administrative simplification" provisions, which require that health care
transactions be conducted in a standardized format, and that the privacy and
security of certain individually identifiable health information be protected.
Proposed rules for many of the administrative simplification subject areas have
been published. Final rules covering "Standards for Electronic Transactions and
Code Sets" were published on August 17, 2000, and set forth the standardized
billing codes and formats that our affiliated eye care professionals and we
must use when conducting certain health care transactions and activities. The
effective date of these final rules was October 16, 2000, and we have until
October 16, 2002 to come into compliance with these rules. On December 28,
2000, the DHHS published final rules addressing "Standards for Privacy of
Individually Identifiable Health Information" under HIPAA's administrative
simplification provisions. Compliance with these rules is required by April 14,
2003, however, there have been recent efforts in Congress to overturn these
rules, so the status of the privacy rules under HIPAA is unclear. Regardless of
the final form of the rules implementing HIPAA's administrative simplification
provisions, it is likely that these rules will create substantial new
compliance issues for all "covered entities"--which include health care
providers, health plans, and health care clearinghouses--that engage in
regulated transactions and activities. The operations of our affiliated eye
care professionals and certain of our operations are covered by the final rules
enacted thus far, and, to the extent that the final privacy and other rules
resemble those that were published in December 2000, we believe these
operations will be covered by the final HIPAA rules enacted in the future.
Violations of HIPAA can result in civil penalties of up to $25,000 per person
per year for each violation and criminal penalties of up to $250,000 and/or up
to 10 years in prison per violation.

State Law

Facility Licensure and Certificate of Need. We may be required to obtain
licenses from the state departments of health in states where we open or
acquire ASCs and LVC centers. We believe that we have obtained the necessary
licenses in states where licenses are required. However, we believe courts and
state regulatory authorities generally have provided little clarification as to
some of the regulations governing licensure requirements. It is possible that a
state regulatory authority could challenge our position. With respect to future
expansion, we cannot assure you that we will be able to obtain the required
licenses. However, we

have no reason to believe that, in states requiring facility licenses, we will
not be able to obtain this license without unreasonable expense or delay.

Some states require a Certificate of Need, or CON, prior to the construction
or modification of an ASC or the purchase of specified medical equipment in
excess of a dollar amount set by the state. We believe that we have obtained
the necessary CONs in states where a CON is required. However, we believe
courts and state regulatory authorities generally have provided little
clarification as to some of the regulations governing the need for CONs. It is
possible that a state regulatory authority could challenge our determination.
With respect to future expansion, we cannot assure you that we will be able to
acquire a CON in all states where a CON is required.

Anti-Kickback Laws. In addition to the Federal anti-kickback law, a number
of states have enacted laws that prohibit the payment for referrals and other
types of kickback arrangements. Some of these state laws apply to all patients
regardless of their source of payment, while others limit their scope to
patients whose care is paid for by particular payors.

Self-Referral Laws. In addition to the Federal Stark Law, a number of states
have enacted laws that require disclosure of or prohibit referrals by health
care providers to entities in which the providers have an investment interest
or compensation relationship. In some states, these restrictions apply
regardless of the patient's source of payment.

Corporate Practice of Medicine Laws. A number of states have enacted laws or
have common law that prohibit the corporate practice of medicine. These laws
are designed to prevent interference in the medical decision-making process by
anyone who is not a licensed physician. Many states have similar restrictions
in connection with the practice of optometry. Application of the corporate
practice of medicine prohibition varies from state to state. Because the
corporate practice of medicine doctrine has been seldom enforced or litigated
in the states where we do business, the precise parameters of the doctrine have
not been defined, particularly in terms of the management responsibilities that
may be delegated to a company that provides management services. Because of
this, although we neither employ doctors nor provide medical services, to the
extent any act or service to be performed by us is construed by a court or
enforcement agency to constitute the practice of medicine, our service
agreements provide that our obligations to perform the act or service is
waived. We cannot be sure that a particular state court or enforcement agency
may not construe our arrangements as violating that jurisdiction's corporate
practice of medicine doctrine. In such an event, we may be required to redesign
or reformulate our relationships with our affiliated eye care professionals and
there is a possibility that some provisions of our service agreements may not
be enforceable.

Fee-Splitting Laws. The laws of some states prohibit providers from dividing
with anyone, other than providers who are part of the same group practice, any
fee, commission, rebate or other form of compensation for any services not
actually and personally rendered. Penalties for violating these fee-splitting
statutes or regulations may include revocation, suspension or probation of a
provider's license, or other disciplinary action. In addition, courts have
refused to enforce contracts found to violate state fee-splitting prohibitions.
The precise language and judicial interpretation of fee-splitting prohibitions
varies from state to state. Courts in some states have interpreted fee-
splitting statutes to prohibit all percentage of gross revenue and percentage
of net profit management fee arrangements. Other state statutes apply only to
prohibit fee splitting in return for referrals.

We believe our management fee arrangements differ from those invalidated as
unlawful fee splits because they establish a flat monthly fee that is subject
to adjustment based on the degree to which actual practice revenues or expenses
vary from budget. However, there is some risk that our arrangements could be
construed by a state court or enforcement agency to run afoul of state fee-
splitting prohibitions. Accordingly, all of our service agreements contain
either a reformation provision or a mechanism establishing an alternative fee
structure, or both.

Insurance Provisions. Many states also regulate the establishment of various
health care provider networks. These laws do not typically affect providers of
business and administrative services to professional entities. We are aware,
however, of some state insurance regulations requiring organizations involved
in specified types of contracting arrangements to register with the state
department of insurance and purchase surety bonds. It also is possible that a
state could require our licensure as a provider network or organization, health
maintenance organization or insurer. However, as long as another entity in the
chain of contracts is licensed by the state department of insurance, we believe
that we are unlikely to be viewed by any state where we do business as
requiring a license from the department. Because we do not enter into any
capitated or other risk-sharing contract without an HMO or other licensed
entity in the chain of contracts, we believe that we are not required to be
licensed under the insurance provisions of any states in which we currently
operate. However, we believe courts and state regulatory authorities generally
have provided little clarification as to some of the regulations governing the
need for licensure. It is possible that a state regulatory authority could
challenge our determination. We cannot assure you that we will be able to
acquire an insurance license in all states where licensure is required.
However, we have no reason to believe that in those states that require an
insurance or other license, we will not be able to obtain one.

Excimer Laser Regulation

Medical devices, including the excimer lasers used in our eye surgery and
laser centers, are subject to regulation by the U.S. Food and Drug
Administration, referred to as the FDA. Medical devices may not be marketed for
commercial sale in the U.S. until the FDA grants pre-market approval for the
device.

Failure to comply with applicable FDA requirements could subject us, our
affiliated providers or laser manufacturers to enforcement action, product
seizures, recalls, withdrawal of approvals and civil and criminal penalties.
Further, failure to comply with regulatory requirements, or any adverse
regulatory action, could result in a limitation on or prohibition of our use of
excimer lasers.

Regulation of Laser Vision Correction Marketing

The marketing and promotion of laser vision correction and other vision
correction surgery procedures in the U.S. are subject to regulation by the FDA
and the Federal Trade Commission, referred to as the FTC. The FDA and FTC have
released a joint communique on the requirements for marketing these procedures
in compliance with the laws administered by both agencies. The FTC staff also
issued more detailed guidance on the marketing and promotion of these
procedures and has been monitoring marketing activities in this area through a
non-public inquiry to identify areas that may require further FTC attention.
The FDA has traditionally taken the position that the promotion and advertising
of lasers by manufacturers and physicians should be limited to the uses
approved by the FDA.

Item 2. Properties

We do not own any real property. We lease space for our corporate
headquarters in Chicago, our regional offices, our ASCs and LVC centers, the
clinics of our affiliated eye care professionals and our optical services
operations. In some cases, these facilities are leased from our affiliated eye
care professionals and other related parties. See "Item 13--Certain
Relationships and Related Transactions." Our corporate offices in the Chicago
metropolitan area consist of 12,824 square feet in downtown Chicago, and 10,499
square feet in Des Plaines, Illinois.

The terms and conditions of our real property leases vary. The forms of
lease range from "modified triple net" to "gross" leases, with terms generally
ranging from month-to-month to ten years, with certain leases having multiple
five-year renewal terms at our option. Generally, our ASCs, LVC centers, eye
care clinics and optical retail outlets are located in medical complexes,
office buildings or free-standing buildings. The square

footage of these offices range from 300 to 22,993 square feet, and the terms of
these leases have expiration dates ranging from April 30, 2001 to February 29,
2010. Any capacity constraints with our affiliated eye care clinics and optical
retail outlets can generally be resolved either through a build-out of adjacent
space or the leasing of additional office space in other proximate locations.
Depending on state licensing and Certificate of Need issues, addressing
capacity constraints in any of our ASCs in a similar manner may require state
regulatory approval.

The following tables list the locations of our surgical facilities:

Medicare-Certified and Licensed ASCs

Number of
Location Operating Rooms
-------- ---------------

Atlanta, GA.............. 2
Columbus, GA............. 3
Chicago, IL.............. 1
Maryville, IL............ 1
River Forest, IL......... 2
Hammond, IN.............. 2
Merrillville, IN......... 2
New Albany, IN........... 2
Overland Park, KS........ 3
Florissant, MO........... 1
Kansas City, MO.......... 2
St. Joseph, MO........... 1
Cincinnati, OH........... 2
Chattanooga, TN.......... 1
Richmond, VA............. 1

LVC Centers

Athens, GA Evansville, IN
Columbus, GA Overland Park, KS
Duluth, GA Wichita, KS
Kennesaw, GA Columbia, MO
Davenport, IA Kansas City, MO
Arlington Heights, IL St. Louis, MO
Naperville, IL Richmond, VA
Tinley Park, IL

Item 3. Legal Proceedings

We are not a party to any lawsuits or administrative actions pending, or to
our knowledge, threatened, which we would expect to have a material adverse
effect upon our business, financial condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

We did not submit any matter to a vote of our security holders during the
fourth quarter of 2000.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Price Range of Common Stock

Since August 18, 1999, our common stock has been traded on the Nasdaq
National Market under the symbol NOVA. The following table sets forth, for the
periods indicated, the range of high and low sale prices for our common stock
on the Nasdaq National Market:

High Low
------ -----

Fiscal year ending December 31, 2000:
First Quarter............................................. $18.25 $6.81
Second Quarter............................................ $14.38 $5.81
Third Quarter............................................. $10.00 $2.50
Fourth Quarter............................................ $ 2.75 $0.88
Fiscal year ending December 31, 1999:
Third Quarter (beginning August 18, 1999)................. $15.63 $7.88
Fourth Quarter............................................ $11.69 $4.81

On March 15, 2001, the last reported sale price of our common stock was
$2.25, and there were approximately 346 holders of record of our common stock.
This figure does not consider the number of individual holders of securities
that are held in the "street name" of a securities dealer.

Dividends

We have never paid a cash dividend on our common stock. We plan to retain
all future earnings to finance the development and growth of our business.
Therefore, we do not currently anticipate paying any cash dividends on our
common stock. Any future determination as to the payment of dividends will be
at our board of directors' discretion and will depend on our results of
operations, financial condition, capital requirements and other factors our
board of directors considers relevant. Moreover, our credit agreement prohibits
the payment of dividends on our common stock.

Item 6. Selected Financial Data

The consolidated statement of operations data set forth below for the years
ended December 31, 2000, 1999, and 1998 and the balance sheet data at December
31, 2000 and 1999, are derived from our respective audited consolidated
financial statements which are included elsewhere herein. The consolidated
statement of operations data set forth below with respect to the years ended
December 31, 1997 and 1996 and the consolidated balance sheet data at December
31, 1998, 1997 and 1996 are derived from our audited financial statements which
are not included in this Form 10-K.

The data set forth below should be read in conjunction with the consolidated
financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein.

Year Ended December 31,
---------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- ------- -------
(in thousands, except per share data)

Consolidated Statement of
Operations Data:
Net revenue..................... $135,638 $101,143 $63,729 $42,408 $15,850
-------- -------- ------- ------- -------
Operating expenses.............. 125,070 92,086 58,986 40,387 16,679
Compensation expense related to
stock options (a).............. -- 2,690 -- -- --
-------- -------- ------- ------- -------
Income (loss) from operations... $ 10,568 $ 6,367 $ 4,743 $ 2,021 $ (829)
======== ======== ======= ======= =======
Net income (loss)............... $ 5,344 $ 874 $ 1,706 $ 105 $ (912)
Accretion of Series C and Series
D convertible preferred stock
(a)............................ -- (2,035) (739) -- --
-------- -------- ------- ------- -------
Income (loss) available to
Series A and Series B
convertible preferred and
common stockholders............ $ 5,344 $ (1,161) $ 967 $ 105 $ (912)
======== ======== ======= ======= =======
Diluted earnings (loss) per
common share................... $ 0.21 $ (0.06) $ 0.06 $ 0.01 $ (0.08)
======== ======== ======= ======= =======
Diluted weighted average common
shares outstanding............. 26,039 17,965 16,003 17,237 11,358
======== ======== ======= ======= =======
Pro forma net income (a)........ $ 4,523 $ 2,111
======== =======
Pro forma diluted earnings per
common share................... $ 0.20 $ 0.10
======== =======
Pro forma weighted average
number of common shares
outstanding.................... 22,476 21,649
======== =======

2000 1999 1998 1997 1996
-------- -------- ------- ------- -------

Other Data:
EBITDA (b)...................... $ 18,150 $ 13,969 $ 8,076 $ 4,247 $ (23)
EBITDA as percent of net
revenue........................ 13.4% 13.8% 12.7% 10.0% --
Number of surgical facilities
operated as of the end of
period:
ASCs........................... 15 12 10 10 6
LVC centers.................... 15 5 -- -- --
Number of surgical procedures
performed:
LVC............................ 24,229 13,366 5,083 1,676 --
Cataracts...................... 17,252 15,877 13,681 10,816 5,308
Other eye surgery procedures... 13,128 10,843 8,845 6,464 1,337

As of December 31,
---------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- ------- -------

Consolidated Balance Sheet Data:
Working capital................. $ 23,728 $ 11,980 $ 9,220 $10,452 $ 7,887
Total assets.................... 120,913 88,252 62,679 52,734 27,694
Total debt, excluding current
portion........................ 26,187 196 20,427 15,838 6,378
Redeemable convertible preferred
stock.......................... -- -- 16,430 12,680 5,794
Total stockholders' equity...... 82,864 74,781 16,954 18,149 12,755

--------
Notes:
(a) In connection with our initial public offering consummated on August 18,
1999 (IPO), we recorded noncash, nonrecurring charges for compensation
expense related to stock options and a discount to the IPO offering price
upon the exchange of subordinated notes for

common stock in 1999 and 1998. In addition, we recorded accretion of Series C
and Series D convertible preferred stock to increase the carrying value of
such stock to its potentially redeemable value. The pro forma net income
gives effect to these noncash, nonrecurring charges, as well as the pro forma
elimination of the interest expense related to the subordinated notes which
were exchanged at the IPO. Please see the notes to consolidated financial
statements included elsewhere in this Form 10-K for more discussion.
(b) EBITDA represents the sum of income before income taxes, interest expense
and depreciation and amortization, and in 1999 noncash, stock-based
compensation. We understand that industry analysts generally consider
EBITDA to be one measure of the financial performance of a company that
investors find useful in analyzing the operating performance of a company
and its ability to service debt. EBITDA, however, is not a measure of
financial performance under generally accepted accounting principles and
should not be considered an alternative to net income as a measure of
operating performance or to cash flows from operating, investing or
financing activities as a measure of liquidity. Given that EBITDA is not a
measurement determined in accordance with generally accepted accounting
principles and is thus susceptible to varying calculations, EBITDA, as
presented, may not be comparable to other similarly titled measures of
other companies.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

You should read the following discussion along with our consolidated
financial statements and related notes included elsewhere herein. Our actual
results, performance and achievements in 2001 and beyond may differ materially
from those expressed in or implied by forward-looking statements contained in
this discussion. Such forward-looking statements are made within the meaning of
the Private Securities Litigation Reform Act of 1995.

Results of Operations

Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999

Net Revenue. Net revenue increased 34.1% from $101.1 million to $135.6
million. Surgical facilities revenue increased 33.6% from $31.2 million to
$41.7 million, primarily as a result of owning and operating additional ASCs
and operating additional LVC centers, resulting in growth in the number of
surgical procedures performed. In 2000, total surgical procedures performed in
our surgical facilities increased 36% to 54,700. LVC procedures increased 81.3%
and cataract surgical procedures increased 8.7%, compared to 1999. Surgical
procedures in 2000 grew despite the adverse effects of particularly bad winter
weather in December 2000, when surgical procedures in ASCs we owned and
operated for one year or more declined 15% from December 1999. In those ASCs we
owned for a year or more, our ASCs averaged 3,924 surgical procedures for the
full year 2000, up from 3,860 in 1999. Management services revenue in 2000
increased 30.3% from $54.3 million to $70.8 million. The increase in management
services revenue was primarily a result of overall increases in laser vision
correction, cataract and other ophthalmic surgery procedures performed by our
affiliated eye care professionals, as well as new affiliations with eye care
professionals. Product sales revenue increased 48.5% from $15.6 million to
$23.2 million, primarily as a result of higher volumes at our optical products
purchasing organization, and to a lesser extent, the revenue associated with
our acquisition of a marketing products and services company in May 2000.

Salaries, Wages and Benefits. Salaries, wages and benefits expense increased
35.5% from $37.4 million to $50.7 million. As a percentage of revenue,
salaries, wages and benefits expense increased from 37.0% to 37.4%. The
absolute increase in salaries, wages and benefits expense primarily reflects
the additional payroll incurred as a result of new acquisitions and
affiliations. Also contributing to the increase was approximately $320,000 of
severance costs associated with the streamlining of our organizational
structure during the second half of the year.

Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased 30.7% from $26.3 million to $34.3 million. As a percentage of
revenue, cost of sales and medical supplies expense decreased from 26.0% to
25.3%. The absolute increase in cost of sales and medical supplies expense is
primarily a result of higher volumes at our optical products purchasing
organization. Higher supply costs associated with the increase in laser vision
correction procedures also contributed to the absolute increase during the
period. In general, our optical laboratories and purchasing organization have a
relatively higher cost of sales percentage to revenue than the optical retail
outlets of the Company's affiliated eye care professionals.

The decrease in cost of sales and medical supplies as a percentage of revenue
reflects efforts during the year to negotiate corporate contracts with selected
strategic suppliers.

Selling, General and Administrative. Selling, general and administrative
expense increased 38.2% from $23.5 million to $32.4 million. As a percentage of
revenue, selling, general and administrative expense increased from 23.2% to
23.9%. The absolute increase in selling, general and administrative expense was
the result of costs incurred at new acquisitions and affiliations, along with
increased marketing expenditures during the first half of 2000.

Depreciation and Amortization. Depreciation and amortization expense
increased 54.4% from $4.9 million to $7.6 million. Acquisitions and
affiliations, as well as increased capital expenditures, increased overall
depreciation and amortization expense.

Other Expense. Interest expense increased 26.6% from $1.5 million to $1.9
million, the result of higher interest rates and higher average outstanding
balances when compared with the prior year period.

Provision for Income Taxes. Our effective tax rate decreased to 39.2% from
44.8% (excluding the effect of the IPO-related items in 1999). Our effective
tax rate is affected by expenses that are deducted from operations in arriving
at pre-tax income that are not allowed as a deduction on our Federal income tax
return, primarily goodwill amortization. The increase in income before income
taxes in 2000 better covered these nondeductible expenses, resulting in a lower
overall effective tax rate.

Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998

Net Revenue. Net revenue increased 58.7% from $63.7 million to $101.1
million. Surgical facilities revenue increased 55.1% from $20.1 million to
$31.2 million, primarily as a result of a 45% increase in procedures performed
in our facilities, compared to 1998. The 163% increase in laser vision
correction procedures was a result of both an increase in the overall demand
for the procedure as well as an increase in the number of our affiliated eye
care professionals performing the procedure. We also experienced a 16.1%
increase in the number of cataract surgical procedures, compared to 1998.
Management services revenue increased 50.7% from $36.1 million to $54.3
million. The increase in management services revenue was primarily a result of
overall increases in laser vision correction, cataract and other ophthalmic
surgery procedures performed by our affiliated eye care professionals as well
as new affiliations with eye care professionals. Product sales revenue
increased 106.7% from $7.5 million to $15.6 million, primarily as a result of
the revenue added through the acquisition of Midwest Uncuts, Inc., a wholesale
optical laboratory, in January 1999.

Salaries, Wages and Benefits. Salaries, wages and benefits expense increased
48.2% from $25.3 million to $37.4 million. As a percentage of revenue,
salaries, wages and benefits expense decreased from 39.6% to 37.0%. The
absolute increase in salaries, wages and benefits expense primarily reflects
the additional payroll incurred as a result of new acquisitions and
affiliations. The decrease in salaries, wages and benefits expense as a
percentage of net revenue was a result of better utilization of staff due
primarily to the increased volume of laser vision correction, cataract and
other eye-related surgical procedures.

Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased 66.7% from $15.8 million to $26.3 million. As a percentage of
revenue, cost of sales and medical supplies expense increased from 24.7% to
26.0%. The absolute increase in cost of sales and medical supplies expense is
primarily a result of the January 1, 1999 acquisition of Midwest Uncuts, Inc.
and of higher volumes at our optical products purchasing organization. The
increase in laser vision correction procedures and the related supply costs
also contributed to the absolute increase during the period.

Selling, General and Administrative. Selling, general and administrative
expense increased 60.4% from $14.6 million to $23.5 million. As a percentage of
revenue, selling, general and administrative expense

increased from 22.9% to 23.2%. The absolute increase in selling, general and
administrative expenditures related primarily to the expansion of sales and
marketing efforts in connection with our laser vision correction business. In
addition, we increased our information technology expenditures related to our
enterprise-wide information systems and other programs supporting our laser
vision correction business.

Depreciation and Amortization. Depreciation and amortization expense
increased 47.4% from $3.3 million to $4.9 million. Acquisitions and
affiliations, as well as increased capital expenditures, increased overall
depreciation and amortization expense.

Compensation Expense Related to Stock Options. During July 1999, we fully
vested all options granted from February 1, 1999 through July 23, 1999. We
issued options to acquire 1,050,800 shares of our common stock during this time
period, which were granted with exercise prices below the fair market value.
Accordingly, we recorded a noncash, pre-tax charge of $2.7 million as
compensation expense related to those options, which became fully vested on the
completion of our initial public offering.

Other Expense. Other expense decreased 8.2% from $1.4 million to $1.3
million. The decrease in other expense was primarily related to the reduction
of interest expense as a result of the reduction of outstanding indebtedness
from the application of the proceeds of our initial public offering, which
occurred on August 18, 1999. In addition, $9.7 million of our subordinated
exchangeable promissory notes were exchanged for our common stock, based upon
the initial public offering price for each $0.80 worth of outstanding principal
on the notes. We recorded the difference between the value of common stock and
the notes as nonrecurring, noncash interest expense of $2.4 million.

Provision for Income Taxes. Our effective tax rate increased to 67.4% from
49.4%. Our effective tax rate is affected by expenses that are deducted from
operations in arriving at pre-tax income that are not allowed as a deduction on
our Federal income tax return, primarily goodwill amortization and the
nondeductible portion of the additional interest expense resulting from the
exchange of the subordinated notes for common stock, discussed above

Accretion of Series C and Series D Convertible Preferred Stock. In
connection with our initial public offering, approximately 16.3 million shares
of Series A, Series B, Series C and Series D preferred stock, which represented
all of the issued and outstanding shares of preferred stock, converted into
shares of our common stock. Prior to the initial public offering, however, the
holders of the Series C and Series D convertible preferred stock had the right
to tender their stock for redemption in 2004 and 2005 at the greater of the
amount originally paid for the preferred stock or its fair market value.
Because the redemption right was outside of our control, generally accepted
accounting principles require that until the redemption date, we increased the
value of the preferred stock to its ultimate redemption value, a principle
known as accretion. This accretion is deducted from net income in the
accompanying consolidated statements of operations to arrive at the income
available for common stockholders. Although we did not have an independent
appraisal, we estimated the potential future redemption value based upon
various transactions with third parties, through comparison to similar public
companies and the initial price range established during the filing of our
registration statement on Form S-1 in May 1999. Based upon these estimates, we
recorded accretion of $2.0 million up to the effective date of the IPO on
August 18, 1999, and $739,000 for the twelve months ended December 31, 1998.

Liquidity and Capital Resources

We generated cash from operating activities for the year ended December 31,
2000 of $9.0 million. We used $33.3 million in our investing activities in
2000, which included ten acquisitions and/or affiliations, the purchase of
property and equipment and the issuance of certain notes receivable related to
the conversion of subordinated exchangeable promissory notes in connection with
our IPO. We used net bank borrowings of $23.0 million and net cash from
operating activities to fund our investing activities. As of December 31, 2000
and 1999, we had cash and cash equivalents of approximately $785,000 and $1.8
million, respectively, and working capital of approximately $23.7 million and
$12.0 million, respectively.

On June 28, 2000, we replaced our $35 million revolving credit agreement
with a new, three-year, $50 million revolving credit agreement. Interest on
borrowings under the new credit agreement is payable at an annual rate equal
to our lender's published base rate plus the applicable borrowing margin
ranging from 0 to 0.75% or LIBOR plus a range from 1.5% to 2.25%, varying upon
our ability to meet financial covenants. The weighted average interest rate on
credit line borrowings was 8.6% for the twelve months ended December 31, 2000.
The new credit agreement contains covenants that include limitations on
indebtedness, liens, capital expenditures, acquisitions and affiliations and
ratios that define borrowing availability and restrictions on the payment of
dividends. As of December 31, 2000, we were in compliance with all our credit
agreement covenants. At December 31, 2000, we had outstanding borrowings under
the new credit line of $26.2 million, the interest rate on which was 8.7%.

We expect 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, new affiliations with eye care professionals, capital
requirements associated with our surgical facilities, expansions and the
future cost of surgical equipment.

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. Upon the resolution of the Contingencies affecting the other
ambulatory surgery center and other conditions to closing, which could occur
as early as May 1, 2001, we will be required to purchase the other ambulatory
surgery center for approximately $9.3 million in cash consideration. We may
elect to fund up to approximately $2.3 million of this purchase price in the
form of our common stock. This transaction is excluded from the acquisition
limitations of the new Credit Agreement discussed above.

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.

Risk Factors

Investors should consider the following risks in connection with an
investment in us.

Risks Relating to Our Business

Our failure to grow, or to manage our growth, could reduce our ability to
continue to achieve or sustain profitability

Our growth strategy is focused on our existing and future regional markets
and involves:

.acquiring or developing additional ASCs and LVC centers

.affiliating with additional eye care professionals

.helping our affiliated eye care professionals grow and develop their
practices

Pursuing the acquisition and development of ASCs and LVC centers, as well
as affiliations with eye care professionals presents us with a variety of
challenges. We may not experience an increase in surgical procedures at our
existing ASCs or LVC centers, or management fees from our affiliated eye care
professionals. We may not be able to achieve the economies of scale and
patient base, or provide the business, administrative

and financial services, required to sustain profitability in our existing and
future ASCs and LVC centers, or in the clinics of our affiliated eye care
professionals.

If we are unable to successfully implement our growth strategy or manage
our growth effectively, our business, financial condition and results of
operations, including our ability to achieve and sustain profitability, could
be adversely affected.

Our failure to acquire or develop a sufficient number of profitable surgical
facilities could limit our profitability and revenue growth

Our success depends upon our ability to acquire or develop a sufficient
number of profitable ASCs and LVC centers in our existing and future markets.
We may not be able to identify suitable acquisition or development targets,
successfully negotiate the acquisition or development of these facilities on
satisfactory terms, or have the access to capital to finance these endeavors.
Newly acquired or developed facilities may generate losses or suffer lower
operating margins than our more established facilities, or they may not
generate returns that justify our investment. In addition, if vision
correction technology becomes available to ophthalmologists that is less
expensive than the medical equipment currently required for laser vision
correction, eye care professionals might have less interest in using our ASCs
and LVC centers.

We may not compete effectively with other companies that have more resources
and experience than us

Competitors with substantially greater financial, technical, managerial,
marketing and other resources and experience may compete more effectively than
us. We and our affiliated eye care professionals compete with other
businesses, including ASC companies, refractive laser center companies,
hospitals, individual ophthalmologists and optometrists, other ASCs, LVC
centers, eye care clinics and providers of retail optical products.
Competitors with substantially greater resources may be more successful in
acquiring and developing surgical facilities and/or affiliating with eye care
professionals. Our wholesale optical laboratories and optical products
purchasing organization also face competition on national, regional and local
levels. Companies in other health care industry segments, including managers
of hospital-based medical specialties or large group medical practices, may
become competitors in providing ASCs and LVC centers as well as competitive
eye care related services. Competition for retaining the services of highly
qualified ophthalmologists and optometrists and medical, technical and
managerial personnel is significant, and we may not be able to help our
affiliated eye care professionals identify, hire, train, retain and affiliate
with these types of individuals in the future.

Reduced prices and reimbursement rates for surgical procedures as a result
of competition or Medicare and private third party payor cost containment
efforts could reduce our revenue, profitability and cash flow.

We estimate that for the year ended December 31, 2000, revenue from laser
vision correction procedures comprised 24% of our consolidated revenue. The
market for providing laser vision correction and other refractive surgery
procedures is becoming increasingly competitive. This competitiveness has
resulted in many of our competitors offering laser vision correction or other
refractive surgery services at lower prices than the prices charged by us and
our affiliated eye care professionals. If price competition continues,
however, we may choose to lower the prices we charge. If we lower prices, we
could experience reductions in our revenue, profitability and cash flow.

We estimate that for the year ended December 31, 2000, government sponsored
health care programs, directly or indirectly, accounted for approximately 26%
of our consolidated revenue. This includes facility fees we receive directly
for eye care professionals' use of our ASCs, as well as management fee revenue
from affiliated eye care professionals who receive payments from these
programs. This revenue does not include amounts derived from laser vision
correction, which is an elective procedure that patient-consumers pay for out-
of-pocket.

The health care industry is continuing to experience a trend toward cost
containment as government and private third-party payors seek to impose lower
reimbursement and utilization rates and to negotiate reduced payment schedules
with health care providers. For example, recent legislation requires that DHHS
implement a new Medicare reimbursement rate methodology for ASCs over a four-
year period beginning no earlier than January 1, 2002. These trends may result
in a reduction from historical levels in per patient revenue received by our
ASCs and affiliated eye care professionals. Changes in Medicare payment rates
have in the past reduced payments to ophthalmologists and optometrists. Private
insurance payments also could be affected to the extent that these insurance
companies use payment methodologies based on Medicare rates.

Reductions in payments to our ASCs, LVC centers and affiliated eye care
professionals or other changes in reimbursement for eye care services could
reduce our revenue, profitability and cash flow.

If eye care professionals and the general population do not continue to
accept laser vision correction and other refractive surgical procedures as
alternatives to eyeglasses and contact lenses, an important source of our
historical and future revenue and earnings growth will be limited

Our profitability and growth will depend, in part, upon continued acceptance
by eye care professionals and the general population of laser vision correction
and other refractive surgical procedures in the U.S. Eye care professionals and
the general population might not continue to accept laser vision correction
surgery because of the cost of the procedure that, to date, has primarily been
paid directly by patients, and concerns about the safety and effectiveness of
laser vision correction. If eye care professionals and the general population
do not continue to accept laser vision correction and other refractive surgical
procedures, an important source of our historical and future revenue and
earnings growth will be limited.

Rapid technological advances may reduce our sources of revenue and our
profitability

Adoption of new technologies that may be comparable or superior to existing
technologies for excimer lasers and other surgical equipment could reduce the
amount of the facility fees we receive from eye care professionals who use our
surgical facilities and management fees we receive from affiliated professional
entities. Reduction of these sources of revenue could decrease our
profitability. In this case, we might have to expend significant capital
resources to deploy new technology and related equipment to remain competitive.
Our inability to provide access to new and improving technology could deter eye
care professionals from using our surgical facilities or affiliating with us.

Our failure to maintain or establish profitable affiliations with a
sufficient number of eye care professionals could limit our profitability
and revenue growth

Our success depends, in part, upon our ability to establish and maintain
affiliations with eye care professionals in our existing and future markets. We
may not be able to enter into contractual arrangements with ophthalmologists or
optometrists on satisfactory terms, and these affiliations may not be
profitable for us. In addition, if vision correction technology becomes
available to ophthalmologists that is less expensive than the medical equipment
currently required for laser vision correction, eye care professionals might
have less interest in our services and our surgical facilities. If we fail to
establish or maintain profitable affiliations with a sufficient number of
qualified ophthalmologists and optometrists, we could experience reductions in
our profitability and revenue growth.

For the years ended December 31, 2000, 1999 and 1998, the management
services revenue of one of our affiliated professional entities accounted for
12.8%, 15.4% and 15.4% of our consolidated net revenue, respectively. Another
affiliated professional entity, created during 1999 from a combination of a
group of our affiliated practices, accounted for 11.5% and 8.6% of our
consolidated net revenue in the years ended December 31, 2000 and 1999,
respectively. If we fail to maintain our existing affiliations with these and
other affiliated professional entities, we could experience reductions in our
profitability and revenue growth.

Loss of the services of ophthalmologists or optometrists could impair our
sources of revenue and our ability to grow our business

Our success depends, in part, on the services of the ophthalmologists and
optometrists with whom we affiliate. Our inability to attract and retain eye
care professionals could limit our sources of revenue and our ability to grow
our business. Generally, our affiliated ophthalmologists enter into five-year
employment agreements with our affiliated professional entities. These
agreements generally contain noncompete and nonsolicitation covenants and
often require the ophthalmologist to pay liquidated damages that are generally
in excess of $500,000 in the event that he or she quits prior to the end of
the initial term. Our affiliated optometrists enter into employment contracts
with our affiliated professional entities which also contain noncompete and
nonsolicitation covenants. The noncompete and nonsolicitation covenants
generally preclude the ophthalmologist or optometrist from competing with his
or her employer within a specified geographic area, or soliciting the
employer's patients or employees, during the employment term and for a one-
year period following termination. The damages provisions and restrictive
covenants may not effectively deter affiliated eye care professionals from
quitting if they elect to pay the liquidated damages or establish a practice
outside the geographic scope of the noncompete covenant.

The enforceability of restrictive covenants of these types will depend upon
a variety of equitable factors, including public policy concerns regarding
broad restrictions that might limit the availability of medical care. If a
court deems the scope or duration of the restrictive covenants or liquidated
damages provisions excessive, they may not be enforceable.

Loss of the services of key management personnel could adversely affect our
business

Our success depends, in part, on the services of key management personnel,
including Stephen J. Winjum, our Chairman of the Board, President and Chief
Executive Officer; Ronald G. Eidell, our Executive Vice President and Chief
Financial Officer; and E. Michele Vickery, our Executive Vice President of
Operations. We do not know of any reason why we might be likely to lose the
services of any of these officers. However, in light of the role that each of
these officers has played in our growth to date, if we lost the services of
any of these officers, we believe that our business could be adversely
affected.

Lack of adequate financing could limit our growth

Successful implementation of our growth strategy will require continued
access to capital. If we do not have sufficient cash resources, our growth
could be limited unless we are able to obtain capital through additional
equity or debt financings. We intend to finance future acquisitions,
affiliations and our other strategic initiatives by using a combination of
cash, debt and capital stock. However, if our stock is not at a sufficient
value, or is not deemed to be an acceptable form of consideration, we may be
required to use more of our cash resources or obtain other financing. Capital
may not be available to us for acquisitions, affiliations or other needs.
Further, if financing is available, it may not be on terms that are favorable
to us or sufficient for our needs.

The nature of our business could subject us to potential malpractice,
product liability and other claims

The provision of eye care services entails the potentially significant risk
of physical injury to patients and an inherent risk of potential malpractice,
product liability and other similar claims. Our insurance may not be adequate
to satisfy claims or protect us or our affiliated eye care professionals and
this coverage may not

continue to be available at acceptable costs. A partially or completely
uninsured claim against us could reduce our earnings and working capital.

If a change in events or circumstances causes us to write-off a large
portion of intangible assets, our total assets would be reduced
significantly and we could incur a substantial charge to earnings

Our assets include substantial intangible assets in the form of service
agreements with our affiliated eye care professionals and goodwill. At
December 31, 2000, intangible assets represented approximately 51% of total
assets and 75% of stockholders' equity. The intangible asset value represents
the excess of cost over the fair value of the separately identifiable net
assets acquired in connection with rights we receive under our service
agreements. The value of these assets may not be realized. We regularly
evaluate whether events and circumstances have occurred that indicate all or a
portion of the carrying amount of the asset may no longer be recoverable, in
which case an additional charge to earnings may become necessary. If, during
our evaluation, we determine that the undiscounted cash flow from an ASC, an
LVC center or an affiliated practice is not sufficient to recover the
unamortized intangible asset, we will reduce the unamortized balance to its
realizable amount and incur a corresponding charge to earnings. To date, we
have not written off a significant portion of unamortized intangible assets
attributable to service agreements or goodwill. If, in the future, we
determine that our unamortized intangible assets have suffered an impairment
which requires us to write off a large portion of unamortized intangible
assets due to a change in events or circumstances, this write off would
significantly reduce our total assets and we could incur a substantial charge
to earnings.

Risks Relating to Our Industry

Application of existing or proposed government regulation could impair our
sources of revenue and limit our ability to grow our business

We are subject to extensive government regulation and supervision,
including:

. Federal and State:

--anti-kickback statutes

--self-referral laws

--civil false claims acts

--privacy laws

. State:

--facility license requirements and certificates of need

--corporate practice of medicine restrictions

--fee-splitting laws

. Food and Drug Administration regulation of medical devices, including
laser vision correction and other refractive surgery equipment, and
pharmaceuticals and related clinical trials

. Federal Trade Commission guidelines for marketing and promoting laser
vision correction and other refractive surgery procedures

Many of these laws and regulations are subject to varying interpretations,
and courts and regulatory authorities generally have provided little
clarification. Moreover, state and local laws and interpretations vary from
jurisdiction to jurisdiction. As a result, we may not always be able to
accurately predict interpretations of applicable law, and Federal and state
authorities could challenge some of our activities. If any of our activities
are challenged, we may have to divert substantial time, attention and
resources from running our business to defend our activities against these
challenges, regardless of their merit. If we do not successfully defend these
challenges, we may face a variety of adverse consequences, including:

. loss of use of, or a decline in the revenue and profitability of, our
ASCs and LVC centers

. our affiliated eye care professionals terminating their service
agreements or having these agreements rendered unenforceable

. third party payors terminating their agreements with our affiliated eye
care professionals

. our affiliated eye care professionals losing their eligibility to
participate in Medicare or losing other contracting privileges

. in some instances, civil or criminal fines

Any of these results could impair our sources of revenue and our
profitability and limit our ability to grow our business.

Becoming compliant with federal regulations enacted under the Health
Insurance Portability and Accountability Act could require us to expend
significant resources and capital, and could impair our profitability and
limit our ability to grow our business

Recently released federal regulations adopted under the Health Insurance
Portability and Accountability Act of 1996 (HIPAA) require that our affiliated
eye care professionals and we be capable of conducting certain standardized
health care transactions, including billing and other claims transactions, by
October 16, 2002. In addition, on December 28, 2000, HIPAA regulations
governing patient privacy were released, and compliance with those regulations
is required by April 15, 2003. Due to efforts in Congress to overturn these
privacy rules, their status is currently unclear. Regardless of Congress'
actions on these privacy rules, HIPAA requires that patient privacy regulations
must be enacted. Depending on their ultimate form, these privacy regulations
may require substantial compliance efforts on behalf of our affiliated eye care
professionals and us. Although difficult to predict at this time, the amount of
time, effort and expense associated with becoming compliant with existing and
expected HIPAA regulations could require us to divert time, attention and
resources from our business operations, and/or require us to spend substantial
sums that could impair our profitability. HIPAA violations could also expose us
to civil penalties of up to $25,000 per person per year for each violation and
criminal penalties with fines of up to $250,000 and/or up to 10 years in prison
per violation.

Risks Relating to our Common Stock

Any return on your investment in our stock will depend on your ability to
sell our stock at a profit

Some investors favor companies that pay dividends. We have never declared or
paid any dividends and our credit agreement prohibits payment of dividends on
our common stock. We anticipate that we will not declare dividends at any time
in the foreseeable future. Instead we will retain earnings for use in our
business. As a result, your return on an investment in our stock likely will
depend on your ability to sell our stock at a profit.

In addition, the stock market has, from time to time, experienced extreme
price and volume fluctuations. These broad market fluctuations may adversely
affect the market price of our common stock.

Fluctuations in our quarterly operating results may make it difficult to
predict our future results of operations and may cause volatility in our
stock price

During 2000, the market price of our common stock has been volatile,
fluctuating from a high trading price of $18.25 to a low trading price of $0.88
per share. Our results of operations have varied and may continue to fluctuate
from quarter to quarter. We have a high level of fixed operating costs,
including compensation costs and minimum usage commitments on our excimer
lasers. As a result, our profitability depends to a large degree on the volume
of surgical procedures performed in, and on our ability to utilize the capacity
of, our surgical facilities and on the volume of patients treated in the
clinics of our affiliated eye care professionals.

We experience some seasonality in our operating results during the first
calendar quarter. The timing and degree of fluctuations in our operating
results will depend on several factors, including:

. general economic conditions

. decreases in demand for non-emergency procedures due to severe weather

. availability or sudden loss of the services of our affiliated eye care
professionals

. availability or shortages of laser and other vision correction surgery-
related products and equipment

. the timing and relative size of acquisitions and affiliations with eye
care professionals

These kinds of fluctuations in quarterly operating results may make it
difficult for you to assess our future results of operations and may cause a
decline or volatility in our stock price.

Provisions of our charter and bylaws, Delaware law and our Rights Agreement
could deter takeover attempts

Provisions of our Restated Certificate of Incorporation, our Bylaws,
Delaware law and our Rights Agreement may have the effect of delaying,
deterring or preventing a change in control, even if a change in control would
be beneficial to you. Members of our board of directors may have interests in a
change of control that differ from you. These interests could cause them to
resist a change in control that would help you better realize the value of your
investment.

Our existing stockholders will have the ability to control our affairs and
to deter a change in control and their interests in a change in control may
differ from your interests

As of March 15, 2001, our Rule 144 Affiliates and affiliated eye care
professionals owned approximately 53% of the outstanding shares of our stock.
As a result, if these persons act together, they will have the ability to
exercise substantial control over our affairs and to elect a sufficient number
of directors to control our board of directors. Because of their relationships
with us, many of these persons may have interests in a change in control that
differ from your interests.

For example, our affiliated eye care professionals may have an interest in
the quality and nature of management services to be rendered following a change
in control. This interest could cause them to resist a change in control that
they perceive will result in new, different or less desirable management
services being offered to them.

In addition, our affiliated eye care professionals who were also
stockholders as of our initial public offering in August 1999 have entered into
lock-up agreements with our underwriters that subject any sale of common stock
through August 18, 2001, to volume limitations. Consequently, the ownership
position of our Rule 144 Affiliates and affiliated eye care professionals, as
well as the contractual restrictions agreed to by our affiliated eye care
professionals, may also have the effect of delaying, deterring or preventing a
change in control, even if a change in control would be beneficial to you.

50% of our total outstanding shares are restricted from resale but may be
sold into the market in the future, which could cause our stock price to
drop significantly

As of March 15, 2001, there were 24,698,640 shares of our common stock
outstanding. This includes the 4,600,000 shares sold in our initial public
offering in August 1999, which can be resold in the public market immediately
unless acquired by our affiliates, as that term is defined under the Securities
Act of 1933. Our affiliated eye care professionals who were also stockholders
as of our initial public offering in August 1999 have entered into lock-up
agreements with the Company's underwriters that restrict their ability to sell
our common stock. These lock-up agreements limit the volume of shares an
affiliated eye care professional can sell until August 19, 2001. Until August
19, 2001, an affiliated eye care professional cannot, without the written
consent of Credit Suisse First Boston, sell in any ninety-day period an amount
greater than the lesser of 40,000 shares or 10% of the amount of common stock
beneficially owned by such individual.

As of March 15, 2001, approximately 12.3 million shares of common stock held
in certificate form are subject to these lock-up agreements. There may be
additional shares of common stock owned by our affiliated eye care
professionals that are subject to these lock-up agreements that are held in
"street name."

As restrictions on resale end, our stock price could drop significantly if
the holders of these restricted shares sell them or if the market perceives
that these holders intend to sell shares. This could occur without regard to
the performance of our business.

If our common stock is delisted from the Nasdaq National Market, the
liquidity, visibility and price of our common stock may decrease

Since our initial public offering our common stock has been listed on the
Nasdaq National Market (NNM). Shares of our common stock could be delisted from
the NNM if we fail to satisfy the continued listing requirements of the NNM,
including a minimum bid price of $1.00. If our common stock is delisted from
the NNM, we would be forced to list our common stock on the OTC Bulletin Board
or some other quotation medium, depending on our ability to meet the specific
listing requirements of those quotation systems. If this happens, an investor
might find it more difficult to buy and sell, or to obtain accurate price
quotations for, shares of our common stock. This lack of visibility and
liquidity could further decrease the price of our common stock. In addition,
delisting from the NNM might negatively impact our reputation and, as a
consequence, our business.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to interest rate risk relates primarily to our debt obligations
and temporary cash investments. Interest rate risk is managed through variable
rate borrowings under our credit facility. On December 31, 2000, we had $26.2
million of debt outstanding under our credit facility. Our revolving line of
credit bears interest at an annual rate equal to our lender's published base
rate plus applicable borrowing margin ranging from 0 to 0.75% or LIBOR plus a
range from 1.5% to 2.25%, varying upon our ability to meet financial covenants.

We do not use any derivative financial instruments relating to the risk
associated with changes in interest rates.

Item 8. Financial Statements and Supplementary Data

The consolidated financial statements and financial statement schedules,
with the report of independent public accountants, listed in Item 14 are
included in this Form 10-K.

Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

The information in response to this item is incorporated by reference from
the "Proposal 1 -- Election of Directors," "Other Directors" and "Executive
Officers" sections of the Definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with our 2001 Annual Meeting
of Stockholders (the "2001 Proxy Statement").

Item 11. Executive Compensation

The information in response to this item is incorporated by reference from
the "Executive Compensation" section of the 2001 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information in response to this item is incorporated by reference from
the "Security Ownership of Certain Beneficial Owners and Management" section of
the 2001 Proxy Statement.

Item 13. Certain Relationships and Related Transactions

The information in response to this item is incorporated by reference from
the "Certain Relationships and Related Transactions" section of the 2001 Proxy
Statement.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) The following documents are filed as part of this Form 10-K:

1. The following consolidated financial statements of the Company, with
the report of independent public accountants, are filed as part of
this Form 10-K:

. Report of Independent Public Accountants

. Consolidated Balance Sheets

. Consolidated Statements of Operations

. Consolidated Statements of Stockholders' Equity

. Consolidated Statements of Cash Flows

. Notes to Consolidated Financial Statements

2. The following consolidated financial statement schedules of the
Company are filed as part of this Form 10-K:

Schedule I--Rule 12-09 Valuation Reserves

3. The following exhibits are filed with this Form 10-K or incorporated
by reference as set forth below.

Exhibit
Number Exhibit
------- -------

3.1+ Amended and Restated Certificate of Incorporation of the Registrant
3.2 Amended and Restated Bylaws of the Registrant
4.1+ Specimen stock certificate representing Common Stock
4.2+ Registrant's Rights Agreement
10.1++ Registrant's Amended and Restated Stock Incentive Plan
10.2+ Registrant's Amended and Restated 1999 Stock Purchase Plan
10.3+ Indemnification Agreement
10.4+ Registration Rights Agreement
10.5+ Subordinated Registration Rights Agreement
10.6+ Employment Agreement
10.8++ $50,000,000 Credit Agreement dated as of June 28, 2000
10.12+* Management Services Agreement (SureVision Eye Centers, L.L.C.)
10.13+* Management Services Agreement (Hunkeler Eye Centers. P.C.)
10.15+ Registrant's 401(k) Plan
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP

--------
+ Incorporated by reference to the corresponding Exhibit of the
Registrant's Registration Statement on Form S-1 (Reg.
No. 333-79271).
++ Incorporated by reference to the corresponding Exhibit of the
Registrant's Form 10-Q filed with the Securities and Exchange
Commission on August 14, 2000.
* Portions of this Exhibit have been omitted based upon a request for
confidential treatment of this document; omitted portions have been
separately filed with the Commission.

(b) Reports on Form 8-K:

We did not file any reports on Form 8-K during 2000.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board Directors of
NovaMed Eyecare, Inc.:

We have audited the accompanying consolidated balance sheets of NOVAMED
EYECARE, INC. AND SUBSIDIARIES as of December 31, 2000 and 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2000. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NovaMed Eyecare, Inc. and
Subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Rule 12-09 Valuation Reserve
Schedule is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This information has been subject to the auditing procedures applied in our
audit of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

Arthur Andersen LLP

Chicago, Illinois
February 7, 2001

F-1

NOVAMED EYECARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

December 31, December 31,
ASSETS 2000 1999
------ ------------ ------------

Current assets:
Cash and cash equivalents.......................... $ 785 $ 1,828
Accounts receivable, net of allowances of $17,023
and $12,714, respectively......................... 23,287 14,501
Due from affiliated providers, net................. 878 1,931
Notes receivable from affiliated providers......... 3,225 342
Inventory.......................................... 3,651 3,427
Other current assets............................... 2,263 2,113
-------- -------
Total current assets............................. 34,089 24,142
Property and equipment, net.......................... 22,536 16,065
Intangible assets, net............................... 62,205 47,852
Other assets, net.................................... 2,083 193
-------- -------
Total assets..................................... $120,913 $88,252
======== =======

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Current liabilities:
Accounts payable................................... $ 5,432 $ 3,608
Accrued expenses................................... 4,680 4,662
Income taxes payable............................... -- 275
Current maturities of long-term debt............... 249 3,617
-------- -------
Total current liabilities........................ 10,361 12,162
-------- -------
Long-term debt, net of current maturities............ 26,187 196
-------- -------
Deferred income tax liability........................ 1,501 1,113
-------- -------
Commitments and contingencies
Stockholders' equity:
Series E Junior Participating Preferred Stock,
$0.01 par value, 1,912,000 shares authorized, none
outstanding at December 31, 2000 and 1999,
respectively...................................... -- --
Common stock, $0.01 par value, 81,761,465 shares
authorized, 24,679,357 and 24,159,199 shares
issued and outstanding at December 31, 2000 and
1999, respectively................................ 247 242
Additional paid-in-capital......................... 77,362 74,628
Retained earnings (deficit)........................ 5,255 (89)
-------- -------
Total stockholders' equity....................... 82,864 74,781
-------- -------
Total liabilities and stockholders' equity....... $120,913 $88,252
======== =======

The accompanying notes are an integral part of these consolidated financial
statements.

F-2

NOVAMED EYECARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

Years Ended December 31,
---------------------------
2000 1999 1998
-------- -------- -------

Net revenue:
Surgical facilities............................ $ 41,720 $ 31,223 $20,131
Management services............................ 70,759 54,321 36,053
Product sales and other........................ 23,159 15,599 7,545
-------- -------- -------
Total net revenue............................ 135,638 101,143 63,729
-------- -------- -------
Operating expenses:
Salaries, wages and benefits................... 50,733 37,437 25,266
Cost of sales and medical supplies............. 34,346 26,278 15,762
Selling, general and administrative............ 32,409 23,459 14,625
Depreciation and amortization.................. 7,582 4,912 3,333
Compensation expense related to stock options.. -- 2,690 --
-------- -------- -------
Total operating expenses..................... 125,070 94,776 58,986
-------- -------- -------
Income from operations....................... 10,568 6,367 4,743
-------- -------- -------
Other (income) expense:
Interest expense............................... 1,915 1,513 1,546
Interest income................................ (137) (214) (273)
Minority interests in earnings of consolidated
entities...................................... -- -- 132
Other.......................................... -- (39) (32)
Discount to initial public offering price upon
the exchange of subordinated notes for common
stock......................................... -- 2,425 --
-------- -------- -------
Total other expense.......................... 1,778 3,685 1,373
-------- -------- -------
Income before income taxes....................... 8,790 2,682 3,370
Provision for income taxes....................... 3,446 1,808 1,664
-------- -------- -------
Net income....................................... 5,344 874 1,706
Less--Accretion of Series C and Series D
convertible preferred stock..................... -- (2,035) (739)
-------- -------- -------
Income (loss) available to Series A and Series B
convertible preferred and common stockholders... $ 5,344 $ (1,161) $ 967
======== ======== =======
Earnings (loss) per common share:
Basic.......................................... $ 0.22 $ 0.19 $ 0.07
======== ======== =======
Diluted........................................ $ 0.21 $ (0.06) $ 0.06
======== ======== =======
Weighted average common shares outstanding:
Basic.......................................... 24,495 10,464 2,751
======== ======== =======
Diluted........................................ 26,039 17,965 16,003
======== ======== =======

The accompanying notes are an integral part of these consolidated financial
statements.

F-3

NOVAMED EYECARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Dollars and shares in thousands)

Series A Series B
Preferred Preferred Common Stock Treasury Stock
-------------- ------------ ------------ Additional Retained --------------- Total
Par Par Par Paid-In Deferred Earnings Stockholders'
Shares Value Shares Value Shares Value Capital Compensation (Deficit) Shares At Cost Equity
------- ----- ------ ----- ------ ----- ---------- ------------ --------- ------ ------- -------------

Balance,
December 31,
1997............ 11,733 $ 117 400 $ 4 2,748 $ 27 $18,083 $ -- $ 105 (78) $ (187) $18,149
Stock options
exercised/sold.. 7 -- -- -- 3 1 32 -- -- -- -- 33
Redemption of
Series A
preferred stock,
net............. -- -- -- -- -- -- (71) -- -- (1,228) (5,380) (5,451)
Issuance of
Treasury stock
in conjunction
with practice
affiliations.... -- -- -- -- -- -- (89) -- -- 799 3,345 3,256
Accretion of
Series C and D
preferred
stock........... -- -- -- -- -- -- -- -- (739) -- -- (739)
Net income...... -- -- -- -- -- -- -- -- 1,706 -- -- 1,706
------- ----- ---- ---- ------ ---- ------- ------- ------- ------ ------- -------
Balance,
December 31,
1998............ 11,740 117 400 4 2,751 28 17,955 -- 1,072 (507) (2,222) 16,954
Common stock
issuances, net.. -- -- -- -- 3,202 32 22,257 -- -- 398 2,017 24,306
Conversion of
preferred stock
to common
stock........... (11,740) (117) (400) (4) 16,464 165 18,422 -- -- -- -- 18,466
Conversion of
subordinated
notes to common
stock........... -- -- -- -- 1,516 15 12,110 -- -- -- -- 12,125
Common stock
reacquired from
affiliates...... -- -- -- -- -- -- -- -- -- (437) (2,179) (2,179)
Deferred
compensation
expense......... -- -- -- -- -- -- 2,690 (2,690) -- -- -- --
Amortization of
deferred
compensation
expense......... -- -- -- -- -- -- -- 2,690 -- -- -- 2,690
Issuance of
stock in
conjunction with
affiliations and
acquisitions.... -- -- -- -- 60 1 656 -- -- 345 1,511 2,168
Stock options
exercised/sold.. -- -- -- -- 166 1 538 -- -- 201 873 1,412
Accretion of
Series C and
Series D
preferred
stock........... -- -- -- -- -- -- -- -- (2,035) -- -- (2,035)
Net income...... -- -- -- -- -- -- -- -- 874 -- -- 874
------- ----- ---- ---- ------ ---- ------- ------- ------- ------ ------- -------
Balance,
December 31,
1999............ -- -- -- -- 24,159 242 74,628 -- (89) -- -- 74,781
Issuance of
stock in
conjunction with
affiliations and
acquisitions.... -- -- -- -- 88 1 596 -- -- -- -- 597
Stock options
exercised/sold.. -- -- -- -- 371 4 1,876 -- -- -- -- 1,880
Shares issued--
employee stock
purchase plan... -- -- -- -- 61 -- 262 -- -- -- -- 262
Net income...... -- -- -- -- -- -- -- -- 5,344 -- -- 5,344
------- ----- ---- ---- ------ ---- ------- ------- ------- ------ ------- -------
Balance,
December 31,
2000............ -- $ -- -- $-- 24,679 $247 $77,362 $ -- $ 5,255 -- $ -- $82,864
======= ===== ==== ==== ====== ==== ======= ======= ======= ====== ======= =======

The accompanying notes are an integral part of this consolidated financial
statement

F-4

NOVAMED EYECARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, except share data)

Years Ended December 31,
---------------------------
2000 1999 1998
-------- -------- -------

Cash flows from operating activities:
Net income...................................... $ 5,344 $ 874 $ 1,706
Adjustment to reconcile net income to net cash
provided by operating activities, net of
effects of purchase transactions--
Depreciation and amortization................. 7,582 4,912 3,333
Non-cash employee stock option compensation... -- 2,690 --
Discount from conversion of subordinated
exchangeable notes to common stock........... -- 2,425 --
Deferred taxes................................ 566 (631) 1,237
Minority interests............................ -- -- (46)
Changes in working capital items--
Accounts receivable and due (to) from
affiliated providers, net.................. (4,960) (4,152) (3,204)
Inventory................................... (149) (1,251) (374)
Other current assets........................ 302 (1,452) (260)
Other noncurrent assets..................... (108) 221 (70)
Accounts payable, accrued expenses and
income taxes payable....................... 415 (2,636) 65
-------- -------- -------
Net cash provided by operating
activities............................... 8,992 1,000 2,387
-------- -------- -------
Cash flows from investing activities:
Purchases of property and equipment............. (9,964) (8,744) (4,466)
Acquisitions of and affiliations with entities,
net............................................ (20,069) (10,305) (3,649)
Receipt (issuance) of notes receivable from(to)
affiliated providers........................... (3,218) 452 1,491
-------- -------- -------
Net cash used in investing activities..... (33,251) (18,597) (6,624)
-------- -------- -------
Cash flows from financing activities:
Borrowings under revolving line of credit....... 83,534 26,600 14,735
Payments under revolving line of credit......... (60,550) (31,885) (6,250)
Payments of subordinated debt................... -- (2,200) (3,700)
Proceeds from the issuance of stock, net of
issuance costs................................. 972 25,718 3,044
Payments for the redemption of preferred stock,
net of transaction costs....................... -- -- (5,262)
Other long-term debt and capital lease
obligations.................................... (740) (683) (464)
-------- -------- -------
Net cash provided by financing
activities............................... 23,216 17,550 2,103
-------- -------- -------
Net decrease in cash and cash equivalents......... (1,043) (47) (2,134)
Cash and cash equivalents, beginning of year...... 1,828 1,875 4,009
-------- -------- -------
Cash and cash equivalents, end of year............ $ 785 $ 1,828 $ 1,875
======== ======== =======

The accompanying notes are an integral part of these consolidated financial
statements.

F-5

NOVAMED EYECARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL INFORMATION

Description of the Business

NovaMed Eyecare, Inc. (NovaMed) along with its wholly-owned subsidiaries
(collectively, the Company), is an eye care services company engaged in the
business of: (i) owning, operating and/or managing ambulatory surgery centers,
laser vision correction centers, optical retail outlets, wholesale optical
laboratories, and an optical products purchasing organization; (ii) providing
financial, administrative, information technology, marketing and other business
services to ophthalmic and optometric providers; and (iii) providing clinical
and other research services to eye care device, product and pharmaceutical
manufacturers. The Company operates within the United States in six core
regional markets including Chicago, Illinois; Kansas City, Missouri;
Louisville, Kentucky; Richmond, Virginia; St. Louis, Missouri; and the Atlanta,
Georgia and Chattanooga, Tennessee metropolitan areas.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Statement Presentation

The consolidated financial statements have been prepared on the accrual
basis of accounting and include the accounts of NovaMed and its wholly owned
subsidiaries. The Company acquires certain net operating assets and assumes
certain liabilities of physician groups (the Affiliated Professional Entities).
The Company provides services, facilities and equipment to affiliated eye care
professionals under long-term service agreements (SA). The Company does not
consolidate the financial statements of the Affiliated Professional Entities,
because it does not have a "controlling financial interest" in them as defined
by EITF 97-2, "Applications of FASB Statement No. 94 and APB No. 16 to
Physician Practice Management Entities and Certain Other Entities under
Contractual Management Arrangements." All significant intercompany accounts and
transactions have been eliminated. Certain prior year immaterial amounts have
been reclassified as required by EITF 00-14 "Accounting for Certain Sales
Incentives," issued in May 2000, or to conform to current year presentation.

Cash and Cash Equivalents

Cash and cash equivalents include all highly liquid instruments with an
original maturity of three months or less from the date of purchase.

Due (To) From Affiliated Providers

Amounts due (to) from affiliated providers, which are unsecured, non-
interest-bearing and due on demand, include amounts owed to Affiliated
Professional Entities for services performed under SAs, receivables from
Affiliated Professional Entities and affiliated providers for expenses paid on
their behalf and certain other receivables.

Inventory

Inventory consists primarily of optical products such as spectacle frames
and lenses as well as surgical supplies used in connection with the operation
of the Company's ambulatory surgery centers (ASCs) and laser vision correction
(LVC) centers. Inventory is valued at the lower of cost or market, with cost
determined using the first-in, first-out (FIFO) method. The Company routinely
reviews its inventory for obsolete, slow moving or otherwise impaired inventory
and records a related expense in the period such impairment is known and
quantifiable.

F-6

NOVAMED EYECARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Property and Equipment

Property and equipment are stated at cost or fair market value at the date
of acquisition. Depreciation of property and equipment is calculated using the
straight-line method over the estimated useful lives of the related assets,
generally three to seven years for equipment, computer software, furniture and
fixtures, and the lesser of the lease term or 10 years for leasehold
improvements. Routine maintenance and repairs are charged to expense as
incurred.

Intangible Assets

The Company's affiliations involve the purchase of tangible and intangible
assets and the assumption of certain liabilities. As part of the purchase price
allocation, the Company allocates the purchase price to the tangible assets
acquired and liabilities assumed, based on estimated fair market values.
Because the Company does not practice medicine, maintain patient relationships,
hire physicians or enter into employment agreements with the physicians, the
intangible asset created in the affiliation is solely with the SA for the
Affiliated Professional Entity and there are no other significant, identifiable
intangible assets. In connection with the determination of the appropriate life
of the SAs' identifiable intangible assets, the Company analyzes the nature of
each Affiliated Professional Entity with which an SA is entered into, including
the Affiliated Professional Entity's historical profitability, the number of
physicians in each Affiliated Professional Entity, number of service sites,
ability to recruit additional physicians, relative market position, the length
of time each Affiliated Professional Entity has been in existence, and the term
of the SA. Based on this evaluation, the Company's SAs are amortized over a
composite period ranging between 5 and 25 years. For practices with a 25-year
amortization period, the Company believes that the related physician groups are
long-lived entities with an indeterminate life and that the physicians, patient
demographics and customer relationships will be continuously replaced. In
addition, for these practices, none of the Affiliated Professional Entities or
physicians, individually, are material to the results of operations of the
Company. Also, each Affiliated Practice Entity has had positive operating
income and/or positive operating cash flow since the date of affiliation. The
Company also has the right to require the Affiliated Professional Entity to
purchase the assets (including unamortized intangible assets) and assume the
liabilities and obligations of the practice upon the involuntary termination of
the SA. Through December 31, 2000, there have been no involuntary terminations.

Impairment of Long-Lived Assets

The Company reviews the carrying value of the identifiable intangible assets
and goodwill at least quarterly on an entity-by-entity basis to determine if
facts and circumstances exist which would suggest that assets might be impaired
or that the amortization period needs to be modified. Among the factors the
Company considers in making the evaluation are changes in the Affiliated
Professional Entity or SLC's market position (including an evaluation of the
regional density position created through a series of acquisitions and
affiliations in a market), reputation, profitability and geographical
penetration. If facts and circumstances are present which may indicate
impairment is probable, the Company will prepare a projection of the
undiscounted cash flows of the specific Affiliated Professional Entity/ASC/LVC
center/regional market position and determine if the identifiable intangible
assets and/or goodwill are recoverable based on these undiscounted cash flows.
If impairment is indicated, then an adjustment will be made to reduce the
carrying amount of these assets to their fair value. To date, no such
impairments have been incurred.

Income Taxes

The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Statement Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes." Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities

F-7

NOVAMED EYECARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

for financial reporting purposes and the amounts used for income tax purposes,
using enacted tax rates in effect for the year in which the differences are
expected to reverse. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized.

Fair Value of Financial Instruments

The carrying value of all financial instruments such as accounts receivable,
amounts due (to) from affiliated providers, accounts payable and accrued
expenses are reasonable estimates of their fair value because of the short
maturity of these items. The Company believes the carrying amounts of the
Company's notes receivable from related parties, line of credit and obligations
under capital leases approximate fair value because the interest rates on these
instruments are subject to change with, or approximate, market interest rates.

Minority Interests

Until November 1998, the Company owned 75% of two ASCs, and recorded the
results of their operations under the consolidation method of accounting. The
interests of the minority owners in the earnings of these ASCs were reflected
as minority interests in the consolidated balance sheets. In November 1998, the
Company purchased the remaining minority interests of two ASCs held by certain
persons associated with Affiliated Professional Entities for 160,000 shares of
the Company's Series A convertible preferred stock. Accordingly, the Company
now owns 100% of 15 ASCs. The acquisition of the minority interests was
accounted for under the purchase method of accounting.

One of the Company's affiliated eye care professionals has the option,
exercisable through November 1, 2002, to acquire up to a 25% interest in one of
our ASCs.

Revenue Recognition

Surgical Facilities

Revenue in the Company's ASCs and LVC centers is based on fees charged to
patients, third-party payors or others for use of the facilities and relate
primarily to cataract, laser vision correction and other surgery procedures.
Revenue from fixed-site laser services installations is the fee charged to the
doctor for use of the laser placed in that doctor's facility. ASC and LVC
center revenue is net of contractual adjustments and a provision for doubtful
accounts. Although the Company does not separately track contractual
adjustments and provisions for doubtful accounts, management believes that the
amounts related to bad debts are immaterial for all periods presented. This
revenue is recognized by the Company and is not subject to SAs.

Management Services

The Company generally acquires certain net operating assets and assumes
certain liabilities of its Affiliated Professional Entities. The Company
provides services, facilities and equipment to affiliated eye care
professionals under the SAs. Each of the SAs is generally for a 40-year term
and requires the Company to provide all of the business, administrative and
financial services necessary to operate the eye care clinics and optical
dispensaries.

The SAs provide that the Affiliated Professional Entities retain sole and
exclusive control over the dispensing of all medical and other professional
services to their patients. The SAs also provide that the Affiliated
Professional Entities retain control over all decisions relating to the
selecting, hiring, compensating and terminating of eye care professionals;
retain control over all corporate governance decisions and other internal
matters affecting the operation of their legal entities; and employ or
otherwise retain a sufficient number of ophthalmologists and optometrists to
provide professional eye care services to their patients.

F-8

NOVAMED EYECARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Under the SAs, the Company is generally required to pay all expenses
incurred in connection with the business and medical operations of the eye care
clinics and optical dispensaries, except for the salaries and benefits of those
eye care professionals who have an ownership interest in the professional
entity employing them. The Affiliated Professional Entities then reimburse the
Company on a monthly basis for those expenses that are paid on the Affiliated
Professional Entities' behalf.

In addition to being reimbursed for eye care clinic and optical dispensary
overhead, the Company is paid a monthly fee for its services. This fee is
generally based on a fixed monthly amount established in an annual budget that
the Company negotiates each year with its Affiliated Professional Entities. If
the revenue or expenses of the eye care clinics and retail optical outlets in
any month vary from the budget for that month, then the fee is adjusted to
reflect the actual results of the eye care clinics and retail optical outlets.
There are no limitations on the amount of these fee adjustments. On average,
the fees paid to the Company in 2000 represented approximately 32.9% of the
earnings before interest and taxes of the Affiliated Professional Entities,
compared to 36.6% and 35.5% in 1999 and 1998, respectively.

The SAs are generally not terminable by the Affiliated Professional Entities
unless a court makes a final determination that the Company has breached a
material fiduciary duty owed to the eye care professionals, or that the Company
has misappropriated or misapplied funds of the eye care professionals. The
Company generally can not terminate the SAs unless one or a group of Affiliated
Professionals loses their medical license; the professional entity loses its
Medicare provider number or ability to treat Medicare patients; the
professional entity is dissolved or goes bankrupt; or the affiliated eye care
professionals default in the performance of any of their material duties.

Management services revenue is equal to the net revenue of the Affiliated
Professional Entities, less amounts retained by the Affiliated Professional
Entities. The amounts retained by the Affiliated Professional Entities
represent the net billings of the Affiliated Professional Entities less
operating expenses and the Company's management fee. Management services
revenue is recognized when the Affiliated Professional Entities render services
and recognize operating expenses under the accrual method of accounting. Net
revenue is recorded by the Affiliated Professional Entities at established
rates reduced by a provision for contractual adjustments and doubtful accounts.
Contractual adjustments arise due to the terms of certain reimbursement
contracts. Such adjustments represent the difference between the charges at
established rates and estimated recoverable amounts and are recognized in the
period the services are rendered. Any differences between estimated contractual
adjustments and actual final settlements under reimbursement contracts, which
are immaterial, are recognized as contractual adjustments in the period of
final settlements.

For the years ended December 31, 2000, 1999 and 1998, management services
revenue was as follows (in thousands):

Years Ended December 31,
--------------------------
2000 1999 1998
-------- ------- -------

Net revenue of the Affiliated Professional
Entities................................... $ 82,973 $65,098 $46,285
Less--amounts retained by Affiliated
Professional Entities...................... (12,214) (10,777) (10,232)
-------- ------- -------
$ 70,759 $54,321 $36,053
======== ======= =======

For the years ended December 31, 2000, 1999 and 1998, the management
services revenue of one Affiliated Professional Entity accounted for 12.8%,
15.4% and 15.4% of total net revenue, respectively. Another Affiliated
Professional Entity, created during 1999 from a combination of a group of our
affiliated practices, accounted for 11.5% and 8.6% of total net revenue in the
years ended December 31, 2000 and 1999, respectively.

F-9

NOVAMED EYECARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Product Sales and Other

Through 1998, product sales consisted solely of revenue from our optical
products purchasing organization (the Alliance). The Alliance negotiates volume
buying discounts with optical products manufacturers. Products are sold to both
affiliated and non-affiliated ophthalmologists and optometrists. All sales to
affiliated ophthalmologists and optometrists are eliminated in consolidation.
Most of the products are shipped directly from the manufacturer to the
customer. Revenue is recognized, net of an allowance for returns, based on the
amount billed to the customer and is recorded upon receipt of the invoice from
the manufacturer or the shipping date if shipped from the Alliance. In January
1999, the Company acquired a wholesale optical laboratory, Midwest Uncuts,
Inc., which manufactures and distributes corrective lenses and eyeglasses to
both affiliated and non-affiliated ophthalmologists and optometrists (see Note
5). The Company's wholesale optical laboratory recognizes revenue when product
is shipped, net of an allowance for returns. In May 2000, the Company acquired
a producer of sales and marketing products and services; revenue is recognized
when the product is shipped or service rendered.

Cost of Sales and Medical Supplies

Cost of sales and medical supplies includes the cost of optical products
such as frames, optical lenses, contact lenses and medical supplies.

Stock Compensation

In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which allows entities to
measure compensation costs related to awards of stock based compensation using
either the fair value method or the intrinsic value method. The Company has
elected to account for stock-based compensation programs using the intrinsic
value method. See Note 14 for the pro forma disclosures of the effect on net
income (loss) and earnings (loss) per share.

Concentration of Credit Risk

For the years ended December 31, 2000, 1999 and 1998, approximately 26%, 38%
and 49%, respectively, of the Company's net revenue was received from Medicare
and other governmental programs, which reimburse providers based on fee
schedules determined by the related governmental agency. In the ordinary course
of business, providers receiving reimbursement from Medicare and other
governmental programs are potentially subject to a review by regulatory
agencies concerning the accuracy of billings and sufficiency of supporting
documentation.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.

3. UNAUDITED PRO FORMA INFORMATION

In connection with the Company's Initial Public Offering in August 1999
("IPO"), certain noncash, nonrecurring charges were recorded in the
accompanying 1999 and 1998 consolidated statements of operations.

F-10

NOVAMED EYECARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following unaudited pro forma summary presents the results of operations as
if the events described more fully in the notes below had occurred at the
beginning of the periods presented (amounts in thousands, except per share
data):

Years ended
December 31,
----------------
1999 1998
------- -------

Income (loss) available to Series A and Series B
convertible preferred and common stockholders ...... $(1,161) $ 967
Eliminate compensation expense related to stock
options (a)......................................... 2,690 --
Eliminate discount to IPO price upon the exchange of
subordinated notes for common stock (b)............. 2,425 --
Eliminate preferred stock accretion upon conversion
to common stock (c)................................. 2,035 739
Eliminate interest expense upon debt conversion to
common
stock (d)........................................... 400 800
Related income tax benefit........................... (1,866) (395)
------- -------
Pro forma net income................................. $ 4,523 $ 2,111
======= =======
Pro forma earnings per diluted common share.......... $ 0.20 $ 0.10
======= =======
Pro forma weighted average diluted shares
outstanding......................................... 22,476 21,649
======= =======

--------
Notes:
(a) Represents the pro forma elimination of the compensation expense associated
with the IPO-related vesting of certain stock options granted in 1999.
(b) Represents the pro forma elimination of the additional interest expense
which resulted from the exchange of subordinated exchangeable promissory
notes into common stock at a discount to the IPO price per share.
(c) Represents the pro forma elimination of the accretion of the Series C and
Series D convertible preferred stock through the IPO to its estimated fair
market value. Upon the completion of the IPO, the Series C and Series D
convertible preferred stock converted into common stock.
(d) Represents the pro forma elimination of the interest expense from the
subordinated exchangeable promissory notes which were converted to common
stock at the time of the IPO.

4. EARNINGS (LOSS) PER COMMON SHARE

Prior to the Company's IPO, the Company had multiple classes of convertible
preferred stock outstanding. Upon the completion of the IPO, all outstanding
classes of preferred stock converted into common stock of the Company. In
addition, $9.7 million of subordinated exchangeable promissory notes were
exchanged into 1,516,000 shares of common stock. For the computation of
earnings per share, the Series A and Series B Preferred Stock was assumed to be
outstanding through the IPO date of August 18, 1999.

Since the Series A and Series B Convertible Preferred Stock participated
along with the common stock in the Company's earnings, the Company used the two
class method for calculation of earnings per share (EPS). Under the two class
method, earnings or loss is allocated to the Series A and Series B convertible
preferred stock as one class, and to common stock as a second class. For each
class of stock, Basic EPS is calculated by dividing allocated earnings (loss)
allocable to the class by the weighted average number of shares outstanding of
that class during the period. Diluted EPS is calculated by dividing net income
(loss) by the weighted average number of common shares, including the dilutive
effect of potential common shares outstanding during the period. Potential
common shares consist of outstanding options, warrants, convertible debt and
preferred stock. The dilutive effect of options and warrants are calculated
using the treasury stock method. The dilutive effect of the Series A and Series
B convertible preferred shares are calculated using the if converted method.

F-11

NOVAMED EYECARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

For 1999 and 1998, total earnings were allocated to each class of stock
based upon the weighted average shares outstanding for each class as a
percentage of total weighted average shares outstanding.

Earnings (loss) per common share is calculated as follows (amounts in
thousands, except per share data):

Years Ended December 31,
-------------------------
2000 1999 1998
------- -------- -------

Income (loss) available to Series A and B
convertible preferred and common stockholders.... $ 5,344 $ (1,161) $ 967
Income (loss) allocated to preferred
stockholders..................................... -- (3,130) 784
------- -------- -------
Income available to common stockholders--basic.... $ 5,344 $ 1,969 $ 183
======= ======== =======
Income (loss) available to common stockholders--
diluted.......................................... $ 5,344 $ (1,161) $ 967
======= ======== =======
Basic weighted average number of common shares
outstanding...................................... 24,495 10,464 2,751
Weighted average number of common shares issuable
upon the conversion of dilutive preferred
shares........................................... -- 7,501 11,780
Effect of dilutive securities--stock options...... 1,544 -- 1,472
------- -------- -------
Diluted weighted average number of shares
outstanding...................................... 26,039 17,965 16,003
------- -------- -------
Earnings (loss) per common share:
Basic........................................... $ 0.22 $ 0.19 $ 0.07
======= ======== =======
Diluted......................................... $ 0.21 $ (0.06) $ 0.06
======= ======== =======

The following items are not included in diluted earnings per share
calculation since their effects are anti-dilutive (in thousands):

2000 1999 1998
---- ----- -----

Subordinated exchangeable promissory notes.............. -- 1,135 4,714
Series C and Series D convertible preferred stock....... -- 2,713 4,130
Stock options........................................... -- 1,799 --

5. AFFILIATIONS AND ACQUISITIONS

The Company generally acquires certain net assets of Affiliated
Professional Entities and LVC centers and the entire operations of the ASCs.
In addition, the Company acquires the right to provide services to Affiliated
Professional Entities. The following represents the significant practice
affiliations occurring in 2000, 1999 and 1998:

Effective
Affiliated Professional Entity Date Location
------------------------------ --------- --------

2000
Richard H. Blue (2).......................... January 2000 Athens, GA
Atlanta Eye Surgery Group (1)................ August 2000 Atlanta, GA
SureVision Surgery Center (1)................ August 2000 Columbus, GA
Omni Eye Services............................ November 2000 Atlanta, GA and
Chattanooga, TN
1999:
Eye Healthcare Associates.................... November 1999 St. Louis, MO
Young Eye Clinic (1)......................... December 1999 St. Joseph, MO
Pomerance Eye Center (1)..................... December 1999 Chattanooga, TN
1998:
Eyecare Midwest.............................. July 1998 Kansas City, MO

F-12

NOVAMED EYECARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

--------
(1) Affiliation includes ASC(s)
(2) Affiliation includes LVC center(s)

The acquisitions of nonmedical operating assets and liabilities have been
accounted for using the purchase method of accounting and, accordingly, the
purchase price has been allocated to the tangible assets acquired and
liabilities assumed based on the estimated fair values at the dates of
acquisition. The following is an allocation of purchase price for the
acquisitions completed during the years 2000, 1999 and 1998 (in thousands):

2000 1999 1998
------- ------ ------

Intangible assets.............................. $13,313 $8,856 $6,920
Total assets acquired (liabilities assumed),
net........................................... 1,584 (1,993) (15)
------- ------ ------
Total purchase............................. 14,897 6,863 6,905
Less--
Fair value of stock issued................... (74) (1,073) (3,256)
Notes issued................................. -- (550) --
------- ------ ------
Cash purchase price........................ $14,823 $5,240 $3,649
======= ====== ======

In May 2000, the Company acquired a producer of sales and marketing products
and services. In January 1999, the Company acquired Midwest Uncuts, Inc., a
wholesale optical laboratory with two manufacturing locations, from a related
party (See Note 16). The aforementioned transactions were accounted for by the
purchase method of accounting and the results of operations are included in the
consolidated financial statements since the date of acquisition.

6. PROPERTY AND EQUIPMENT

Property and equipment consist of the following as of December 31, 2000 and
1999 (in thousands):

2000 1999
-------- -------

Equipment.............................................. $ 23,196 $15,780
Equipment under capital lease obligations.............. 1,039 1,039
Computer software...................................... 2,696 2,059
Furniture and fixtures................................. 1,988 1,070
Leasehold improvements................................. 5,317 2,745
-------- -------
34,236 22,693
Less--Accumulated depreciation and amortization........ (11,700) (6,628)
-------- -------
$ 22,536 $16,065
======== =======

Depreciation and amortization expense for property and equipment in 2000,
1999 and 1998 was approximately $5.1 million, $3.1 million and $1.9 million,
respectively.

F-13

NOVAMED EYECARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

7. INTANGIBLE ASSETS

Intangible assets consist of the following as of December 31, 2000 and 1999
(in thousands):

Amortization
Period 2000 1999
------------ -------- -------

SAs and goodwill.......................... 5-25 Years $ 68,964 $52,112
Less--Accumulated amortization............ (6,759) (4,260)
-------- -------
$ 62,205 $47,852
======== =======

Amortization expense for intangible assets in 2000, 1999 and 1998 was
approximately $2.5 million, $1.8 million and $1.4 million, respectively.
Effective January 1, 1998, the Company reduced the maximum useful life of the
costs associated with affiliations under the SAs from 32 years to 25 years.
This change was made to conform the Company's policy with that adopted by other
health care services and facilities companies during 1998 and to better
represent the useful lives of the SAs. The change in the estimated useful life
was treated on a prospective basis and increased 1998 amortization expense by
$250,000.

8. ACCRUED EXPENSES

Accrued expenses consist of the following as of December 31, 2000 and 1999
(in thousands):

2000 1999
------ ------

Accrued payroll and related benefits....................... $2,390 $2,113
Accrued interest........................................... 715 83
Accrued other.............................................. 1,575 2,466
------ ------
$4,680 $4,662
====== ======

9. INCOME TAXES

The provision for income tax expenses consists of the following for the
years ended December 31, 2000, 1999 and 1998 (in thousands):

2000 1999 1998
------ ------ ------

Current
Federal........................................... $2,498 $2,094 $ 366
State............................................. 382 345 61
------ ------ ------
Deferred............................................ 2,880 2,439 427
------ ------ ------
Federal........................................... 539 (542) 1,062
State............................................. 27 (89) 175
------ ------ ------
566 (631) 1,237
------ ------ ------
$3,446 $1,808 $1,664
====== ====== ======

The reason for the differences between the income tax expense and the
amounts calculated using the U.S. statutory rate of 34% were as follows (in
thousands):

2000 1999 1998
------ ------ ------

Tax expense at U.S. statutory rate................. $2,989 $ 912 $1,146
Intangible asset amortization...................... 438 435 283
State taxes, net................................... 413 150 235
Discount on conversion of notes.................... -- 459 --
Other.............................................. (394) (148) --
------ ------ ------
Provision for income taxes..................... $3,446 $1,808 $1,664
====== ====== ======

F-14

NOVAMED EYECARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Deferred tax assets (liabilities) are comprised of the following at December
31, 2000 and 1999 (in thousands):

2000 1999
-------- -------

Current deferred tax assets (liabilities)
Compensation expense................................ $ 341 $ 216
Receivable allowances............................... 232 208
Prepaid expense..................................... (587) (568)
Other............................................... 93 (24)
-------- -------
79 (168)
-------- -------
Long-term deferred tax assets (liabilities)
Depreciation and amortization....................... (2,262) (1,769)
Acquisitions........................................ (113) (705)
Compensation expense related to stock options....... 522 1,067
Discount on conversion of notes..................... 363 416
Other............................................... (11) (122)
-------- -------
(1,501) (1,113)
-------- -------
$(1,422) $(1,281)
======== =======

The Company paid $2.1 million, $2.8 million and $594,000 for income taxes in
2000, 1999 and 1998, respectively.

10. LONG-TERM DEBT

Long-term debt consists of the following as of December 31, 2000 and 1999
(in thousands):

2000 1999
------- -------

Revolving line of credit................................ $26,184 $ 3,200
Other................................................... 252 613
------- -------
26,436 3,813
Less--Current maturities of long-term debt.............. (249) (3,617)
------- -------
$26,187 $ 196
======= =======

Subordinated Exchangeable Promissory Notes

The Company issued subordinated exchangeable promissory notes (the Notes) in
connection with the acquisition of certain net assets of Affiliated
Professional Entities and certain ASCs, and the right to provide services to
Affiliated Professional Entities. In connection with the IPO, $9.7 million of
subordinated exchangeable promissory notes were exchanged for 1.5 million
shares of the Company's common stock at an exchange ratio of $1.00 worth of
common stock, based upon the initial public offering price, for each $0.80 of
outstanding principal on the Notes. The Company recorded the difference between
the value of the common stock and the Notes as a non-recurring, non-cash
expense. Accordingly, the Company recorded additional interest expense of $2.4
million related to the discount on the exchange of the Notes. During 1999, the
Company retired the remaining $2.2 million of the Notes.

As disclosed in our prospectus filed with the Securities and Exchange
Commission on August 18, 1999, in connection with the exchange of $9.7 million
of our subordinated exchangeable promissory notes resulting

F-15

NOVAMED EYECARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

from our IPO, we agreed to lend each of these noteholders an amount equal to
the Federal and state income taxes payable by the holder as a result of the
exchange of the notes, but only for those shares of our common stock received
in the exchange which they still owned as of April 1, 2000. In accordance with
these agreements, the Company loaned $2.7 million to the holders, the majority
of which was advanced in April 2000. The tax loans are noninterest bearing,
nonrecourse to the debtor and secured by a number of shares of our common stock
held by the debtor having a value, based on the offering price, equal to two
times the loan amount. Upon the sale by a debtor after April 1, 2000 of any
shares of our common stock issued in exchange for a note, the debtor will be
required to repay a fraction of the debtor's initial tax loan amount equal to
the number of shares sold divided by the total number of shares of our common
stock previously issued in exchange for a note and owned by the debtor as of
April 1, 2000. The tax loans are payable by the debtors upon our demand for
payment. Currently, we intend to allow the debtors to repay these loans as they
dispose of their shares of our common stock. We also have agreed to reimburse
these debtors on a grossed-up basis, for any Federal or state taxes that they
recognize as a result of imputed interest on the tax loans.

Revolving Credit Facility

On June 28, 2000, the Company replaced its $35 million revolving credit
agreement with a new, three-year, $50 million revolving credit agreement.
Interest on borrowings under the new credit agreement is payable at an annual
rate equal to our lender's published base rate plus the applicable borrowing
margin ranging from 0 to 0.75% or LIBOR plus a range from 1.5% to 2.25%,
varying upon our ability to meet financial covenants. The weighted average
interest rate on credit line borrowings was 8.6% for the twelve months ended
December 31, 2000. The new credit agreement contains covenants that include
limitations on indebtedness, liens, capital expenditures, acquisitions and
affiliations and ratios that define borrowing availability and restrictions on
the payment of dividends. As of December 31, 2000, we were in compliance with
all our credit agreement covenants.

Interest Expense

The Company paid $1.2 million, $1.9 million and $1.4 million for interest
and commitment fees during 2000, 1999 and 1998, respectively. Interest on funds
used to finance construction of significant additions to property and equipment
is capitalized and amortized over the remaining life of the asset. During the
year ended December 31, 2000, $37,300 of interest was capitalized. No interest
was capitalized in the years ended December 31, 1999 or 1998.

11. OPERATING LEASES

The Company has commitments under long-term, non-terminable operating
leases, principally for facility and office space. Lease terms generally cover
one to ten years. Certain leases contain consecutive renewal options of five-
year periods. At December 31, 2000, minimum annual rental commitments under
operating leases with terms in excess of one year are as follows (in
thousands):

2001............................. $ 6,616
2002............................. 6,072
2003............................. 5,565
2004............................. 4,717
2005 and thereafter.............. 8,080
-------
Total minimum lease payments... $31,050
=======

Rent expense related to operating leases amounted to approximately $8.1
million, $5.2 million and $3.6 million during 2000, 1999 and 1998,
respectively.

F-16

NOVAMED EYECARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

12. COMMITMENTS AND CONTINGENCIES

Litigation

The Company is subject to various claims and legal actions that arise in the
ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.

Professional Liability Risk

The Company maintains third party professional liability insurance for its
ASCs and business activities and procures insurance for its Affiliated
Professional Entities through a third-party insurer. Although the Company
believes that this insurance is adequate as to the amounts at risk, there can
be no assurance that any claim asserted against the Company will not exceed the
coverage limits of such insurance.

Insurance

The Company and the Affiliated Professional Entities are insured with
respect to medical malpractice risks on a claims-made basis. Management is not
aware of any claims against the Company or the Affiliated Professional Entities
that might have a material impact on the Company's financial position or
results of operations.

Purchase Commitments

Effective March 1, 2001, the Company entered into a new five-year medical
supply agreement which amended and superseded the Company's existing agreement.
As of March 15, 2001, the Company has commitments to pay up to approximately
$1.4 million annually during the five-year term. The minimum commitment will
increase as additional laser systems are deployed.

On June 15, 2000, the Company 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 ASCs, which the Company acquired in December
2000. Upon the resolution of the Contingencies affecting the other ASC and
other conditions to closing, which could occur as early as May 1, 2001, the
Company will be required to purchase the other ASC for approximately $9.3
million in cash consideration. The Company may elect to fund up to
approximately $2.3 million of this purchase price in the form of the Company's
common stock. This transaction is excluded from the acquisition limitations of
the new Credit Agreement discussed above.

13. STOCKHOLDERS' EQUITY

NovaMed was incorporated in November 1996. In conjunction with a
recapitalization on December 20, 1996 (the Recapitalization), NovaMed issued
11,584,000 shares of Series A convertible preferred stock, par value $.01 per
share (Series A Stock), to replace previously granted 5,792 units of NovaMed
LLC. In addition, the Company issued options to purchase 1,528,000 shares of
Series A Stock in exchange for options to purchase 764 units of NovaMed LLC.

Contemporaneous with the Recapitalization, NovaMed issued 400,000 shares of
Series B convertible preferred stock, par value $.01 per share (Series B
Stock), for $2.50 per share; 2,000,000 shares of Series C convertible preferred
stock, par value $.01 per share (Series C Stock), for $3.00 per share; and
warrants to

F-17

NOVAMED EYECARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

purchase an aggregate of 684,932 shares of Series D convertible preferred
stock, par value $.01 per share (Series D Stock), at $4.38 per share. The
warrant to purchase the Series D stock was exercised in April 1998. In
addition, in connection with the Company's IPO, Series A Stock, Series B Stock,
Series C Stock and Series D Stock converted into common stock on a share-for-
share basis. Following conversion of the outstanding preferred stock into
common stock at the IPO, the Series A, B, C and D convertible preferred stock
were eliminated or canceled and these shares are not available for reissuance.

On August 18, 1999, the Company sold 3,000,000 new shares of common stock in
an initial public offering at a price of $8.00 per share. Net proceeds were
approximately $20.2 million after deducting underwriting discounts and
commissions and offering expenses. In addition, the underwriters exercised
their over-allotment option on September 1, 1999, to acquire additional 600,000
shares of the Company's common stock at $8.00 per share, contributing $4.5
million of additional net proceeds.

Redemption Right

In connection with the issuance of the Series C and Series D Stock (Senior
Preferred Stock), NovaMed amended its articles of incorporation (the Amendment)
to provide that holders of at least two-thirds of the then outstanding Senior
Preferred Stock may elect to redeem for cash up to 50% of their respective
shares each year after April 2004, and April 2005, at the greater of a
prescribed liquidation preference amount per share (the Carrying Value), or the
fair value of such preferred stock as established by independent appraisers.
The Amendment provided for a mandatory conversion of each share of convertible
preferred stock to one share of common stock in the event NovaMed undertook a
qualifying IPO.

Although the Company had not obtained an independent appraisal, it had
estimated the potential future redemption value based upon various transactions
with third parties and through comparison to comparable publicly traded
companies. Based upon the estimates the Company recorded accretion of $2.0
million and $739,000 to increase the carrying value of the Senior Preferred
Stock to the date of the IPO in 1999 and for the year ended December 31, 1998.
In connection with the Company's IPO, the Senior Preferred Stock converted into
common stock thereby eliminating the need for future accretion.

Rights Agreement

Certain shareholders possess rights to purchase fractional shares of Series
E Junior Participating Preferred Stock with a par value of $.01 per share at a
price of $110 per one one-thousandth of a share, subject to adjustment as
defined in the Rights agreements. These rights are not exercisable until the
announcement of the occurrence of certain events as defined in an agreement
which also describes the various shareholders' rights.

Upon the occurrence of certain events, each right holder will be entitled to
receive shares of common stock, or in specified circumstances other assets
having a value of two times the purchase price of the right. Additionally, the
Board of Directors may exchange the rights, in whole or in part, without
additional payment, for shares of common stock at an exchange ratio defined in
the agreement. At any time prior to certain events, the Board of Directors may
redeem all, but not less than all, of the rights at a redemption price of $.01
per right.

14. EMPLOYEE BENEFIT PLANS

Employee Benefits and Compensation

The Company maintains a voluntary savings plan (the Plan) for eligible
employees under section 401(k) of the Internal Revenue Code whereby
participants may contribute a percentage of up to 15% of their compensation.
The Plan provides for the Company to match 50% of the employee's contributions
on the first 3% of salary contributed by each employee. The Company's matching
contributions approximated $362,000, $251,000 and $136,000 for 2000, 1999 and
1998, respectively.

F-18

NOVAMED EYECARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Employee Stock Purchase Plan

The Company has an employee stock purchase plan for all eligible employees.
Under the plan, shares of the Company's common stock may be purchased at six-
month intervals at 85% of the lower of the fair market value on the first or
the last day of each six-month period. Employees may purchase shares having a
value not exceeding 10% of their gross compensation during an offering period;
however, the amount of an employee's purchase may not exceed $20,000 in any
offering period or $25,000 in any calendar year. Approximately 61,500 shares
were purchased during 2000. The plan began on October 1, 1999 and, accordingly,
no shares were purchased during 1999. At December 31, 2000, 338,500 shares were
reserved for future issuance.

Stock Option Plans

The Company is authorized to issue up to 7,751,800 shares of its common
stock, par value $.01 per share. Authorized options for common stock under the
Plan are generally exercisable over a four-year period with vesting beginning
six months from the date of each grant and 1/48th of the total options granted
becoming exercisable each month thereafter. The option period for Common Stock
options is 10 years from the date each option is granted. All current
outstanding options are nonqualified stock options.

The Company grants stock options to employees and nonemployee members of the
Company's Board of Directors. Pursuant to Accounting Principles Board No. 25,
the Company recognizes as compensation expense the difference between the
exercise price and the fair market value of its common stock on the date of
grant. Stock-based compensation expense is deferred and recognized over the
vesting period of the stock option. During the years ended December 31, 2000
and 1998, the Company did not recognize any stock based compensation expense.
During July, 1999, the Company fully vested all options granted from February
1, 1999 through July 23, 1999, contingent on the completion of the IPO. The
Company had issued options to purchase 1,050,800 shares of common stock during
this time period. Accordingly, the Company recorded $1.6 million, net of tax,
as compensation expense during 1999 related to those options which became fully
vested on the date of the IPO.

In addition, the Company has granted stock options to physicians employed by
Affiliated Professional Entities. The physicians reimburse the Company in full
for the compensation recorded upon the granting of these options, which is
equal to their estimated fair market value on the date of the grant as
determined by the Black-Scholes option-pricing model.

The following table summarizes the activity in the stock option plan:

Weighted
Options Price Per Average
Outstanding Share Exercise Price
----------- ------------ --------------

Balance at December 31, 1997..... 3,143,416 $1.25-$ 4.38 $1.81
Granted........................ 1,129,000 $3.50-$ 6.00 $4.53
Exercised...................... (7,388) $1.25-$ 2.50 $1.93
Canceled....................... (122,028) $1.25-$ 3.85 $2.05
---------
Balance at December 31, 1998..... 4,143,000 $1.25-$ 6.00 $2.55
Granted........................ 1,343,850 $4.38-$10.80 $6.69
Exercised...................... (367,562) $1.25-$ 9.00 $2.93
Canceled....................... (111,053) $1.25-$10.80 $4.48
---------
Balance at December 31, 1999..... 5,008,235 $1.25-$10.80 $3.52
Granted........................ 1,610,350 $1.06-$14.94 $8.26
Exercised...................... (372,231) $1.25-$10.00 $1.91
Canceled....................... (764,912) $1.88-$13.44 $7.37
---------
Balance at December 31, 2000 .... 5,481,442 $4.53
========= =====

F-19

NOVAMED EYECARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The weighted average fair value of options granted in 2000 was $6.70 per
share.

The following table summarizes information about stock options outstanding
at December 31, 2000:

Options Outstanding Options Exercisable
------------------------------- --------------------
Range of Number Average Number Average
Exercise Outstanding at Average Exercise Exercisable Exercise
Prices 12/31/00 Life Price at 12/31/00 Price
-------- -------------- ------- -------- ----------- --------

$ 1.06- 1.56 1,036,500 6.4 $ 1.24 689,000 $ 1.25
$ 1.69- 2.50 1,753,274 6.0 2.02 1,538,473 2.01
$ 3.00- 4.38 626,849 7.0 3,79 430,409 3.76
$ 5.00- 7.25 956,000 7.9 5.63 670,510 5.46
$ 7.94-10.80 403,800 8.8 9.15 214,252 9.59
$12.00-14.94 705,019 9.1 12.15 139,760 12.14
------------ --------- --- ------ --------- ------
$ 1.06-14.94 5,481,442 7.1 $ 4.53 3,682,404 $ 3.53
============ ========= === ====== ========= ======

The Company believes the exercise price of stock options granted prior to
the IPO, approximated or exceeded the fair value of the applicable class of
stock at the date of grant based on the pricing of transactions involving the
preferred stock as discussed in Note 13, and the Company's financial condition
at the date of grant. Following the IPO, options have been granted with
exercise prices which are either equal to or above the market value of the
stock on the date of grant.

The following summarizes the pro forma effect on net income (loss) if the
fair values of stock based compensation had been recognized in the year
presented as compensation expense on a straight-line basis over the vesting
period of the grant (in thousands, except per share data):

2000 1999 1998
------ ------- ----

Net income (loss) available to common
stockholders..................................... $3,648 $(3,507) $578
Earnings (loss) per common share:
Basic........................................... $ .15 $ .04 $.04
Diluted......................................... $ .14 $ (.20) $.04

The fair value of these options was estimated using the Black-Scholes
option-pricing model for 2000 and 1999 and the minimum value method in 1998
with the following assumptions:

2000 1999 1998
---- ---- ----

Expected option life in years........................... 4 4.92 10
Risk-free interest rate................................. 5.93% 5.22% 6.06%
Dividend yield.......................................... -- -- --
Expected volatility..................................... .950 .850 N/A

15. OPERATING SEGMENTS

During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Company manages its business
segments by types of service provided. The Company's reportable segments are as
follows:

Surgical facilities. Surgical facilities include the results of
operations from owning, managing and operating ASCs, LVC centers, and fixed
site laser services agreements.

Management services. Management services include medical services
provided to patients, the sale of optical products and research.

F-20

NOVAMED EYECARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Product sales. Product sales include the Alliance, the Company's optical
products purchasing organization, Midwest Uncuts, Inc., a wholesale optical
laboratory, and beginning in May 2000, a producer of marketing products and
services.

The accounting policies of the various segments are the same as those
described in the "Summary of Significant Accounting Policies" in Note 2, except
for the management services segment. Management services revenue is reported to
management using the net revenue of the Affiliated Professional Entities as the
total revenue. The revenue for the management services segment on the
accompanying Consolidated Statements of Operations is the net revenue of the
Affiliated Professional Entities reduced by amounts retained by the Affiliated
Professional Entities (See Note 2). Under either approach, the earnings before
income taxes (EBT) are identical.

The Company evaluates the performance of its segments based on EBT and cash
flow (EBITDA). Segment EBT includes all revenue and expenses directly
attributable to the segment except amortization of intangible assets and
excludes certain expenses that are managed outside the reportable segment.
Items excluded from the segment EBT primarily consist of corporate expenses for
salaries, wages and benefits, general and administrative, interest on debt, and
amortization of intangible assets. Segment EBITDA includes earnings before
interest, taxes, depreciation and amortization.

The Company excludes intercompany transfers for management reporting
purposes, as they have no effect on the EBT of the individual segments. Segment
identifiable assets include accounts receivable, inventory, other current
assets and long-lived assets of the segment. Corporate identifiable assets
represent all other assets of the Company including cash and cash equivalents,
corporate other current assets, and corporate long-lived assets, which include
property and equipment, notes receivable, intangible assets, and other long-
term assets. Capital expenditures for long-lived assets are not reported to
management by segment and are excluded, as presenting such information is not
practical.

Surgical Management Product
Facilities Services Sales Corporate Eliminations Total
---------- ---------- ------- --------- ------------ --------
(In thousands)

2000--
Net revenue........... $41,720 $82,973 $23,159 $ -- $(12,214) $135,638
Earnings before
taxes................ 17,107 6,519 2,551 (17,387) -- 8,790
Depreciation and
amortization......... 1,575 1,448 207 4,352 -- 7,582
Interest (income)..... -- (18) (13) (106) -- (137)
Interest expense...... 2 9 -- 1,904 -- 1,915
Identifiable assets... 14,157 22,526 5,157 79,073 -- 120,913
======= ======= ======= ======== ======== ========
1999--
Net revenue........... $31,223 $65,098 $15,599 $ -- $(10,777) $101,143
Earnings before
taxes................ 12,588 6,185 1,483 (17,574) -- 2,682
Depreciation and
amortization......... 920 1,142 142 2,708 -- 4,912
Interest (income)..... -- (18) (31) (165) -- (214)
Interest expense...... 2 3 1 1,507 -- 1,513
Identifiable assets... 10,273 15,601 3,329 59,049 -- 88,252
======= ======= ======= ======== ======== ========
1998--
Net revenue........... $20,131 $46,285 $ 7,545 $ -- $(10,232) $ 63,729
Earnings before
taxes................ 7,181 5,707 546 (10,064) -- 3,370
Depreciation and
amortization......... 563 874 5 1,891 -- 3,333
Interest (income)..... -- (14) (11) (248) -- (273)
Interest expense...... 1 17 1 1,527 -- 1,546
Identifiable assets... 7,236 12,120 1,301 42,022 -- 62,679
======= ======= ======= ======== ======== ========

F-21

NOVAMED EYECARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company has no revenues attributed to customers outside of the United
States and no assets located in foreign countries.

16. RELATED-PARTY TRANSACTIONS

Facility Rent

The Company leases facility space from various related parties, which
include affiliated providers. Rent expense on related-party operating leases
amounted to approximately $2.1 million, $1.6 million and $1.5 million during
2000, 1999 and 1998, respectively.

Notes Receivable

The Company holds notes receivable of $3.2 million from physicians
affiliated with the Company. This includes $2.7 million of noninterest bearing
tax loans issued in connection with the IPO (See Note 10). The remainder of the
loans bear interest rates between 9.0-9.5%, are secured against future
services, and are either payable upon demand of the Company or within a
prescribed term.

Acquisition of Midwest Uncuts, Inc.

Effective January 1, 1999, the Company acquired all of the issued and
outstanding shares of Midwest Uncuts, Inc. in exchange for $4.6 million in net
cash and 250,000 shares of Series A convertible preferred stock. The
stockholders were Mr. and Mrs. John P. Winjum, the parents of the Company's
Chairman of the Board, President and Chief Executive Officer. Prior to this
acquisition, the Company had retained Midwest Uncuts, Inc., to finish and
surface lenses on a purchase order basis on market terms. The Company made
payments of approximately $982,000 during 1998, to Midwest Uncuts for services
provided under the purchase order.

Other

The Company receives professional services from a firm that employs a
director of the Company. Total payments for services received during 2000, 1999
and 1998 were approximately $617,000, $1.8 million, and $422,000, respectively.

F-22

NOVAMED EYECARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

17. QUARTERLY FINANCIAL DATA (Unaudited)

Summarized quarterly financial data for 2000 and 1999 is as follows (in
thousands except per share data):

Quarter
----------------------------------
First Second Third Fourth
------- ------- ------- -------

2000
Net revenue............................... $31,616 $34,094 $35,079 $34,849
Income from operations.................... 2,736 2,838 2,713 2,281
Net income................................ 1,478 1,458 1,157 1,251
Basic earnings per share.................. .06 .06 .05 .05
Diluted earnings per share................ .06 .06 .05 .05
1999--Actual
Net revenue............................... $21,026 $23,836 $26,474 $29,807
Income from operations.................... 975 2,006 273 3,113
Net income (loss)......................... 258 814 (1,917) 1,719
Basic earnings per share.................. (.02) (.15) .05 .07
Diluted earnings per share................ (.02) (.15) (.09) .07
1999--Proforma (1)
Income from operations.................... 1,032 2,167 2,745 3,113
Net income................................ 400 1,049 1,355 1,719
Diluted earnings per share................ .02 .04 .06 .07

--------
(1) In connection with the Company's IPO, certain noncash, nonrecurring charges
were recorded in 1999. The proforma data presented excludes the effect of
these items. See Note 3.

F-23

SCHEDULE I

NOVAMED EYECARE, INC.

RULE 12-09 VALUATION RESERVES

(in 000's)

Balance at Charged to Balance at
Allowance for contractual beginning costs and end of
adjustments and bad debt of period expenses Deductions period
------------------------- ---------- ---------- ---------- ----------

1998.............................. $ 6,994 $40,647 $(37,294) $10,347
======= ======= ======== =======
1999.............................. $10,347 $56,536 $(54,169) $12,714
======= ======= ======== =======
2000.............................. $12,714 $76,760 $(72,451) $17,023
======= ======= ======== =======

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on the 30th day of
March, 2001.

NovaMed Eyecare, Inc.

/s/ Stephen J. Winjum
By: _________________________________
Stephen J. Winjum
President, Chief Executive Officer
and
Chairman of the Board of Directors

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 30th day of March, 2001.

Signature Title
--------- -----

/s/ Stephen J. Winjum President, Chief Executive Officer
______________________________________ (Principal Executive Officer),
Stephen J. Winjum Chairman of the Board of Directors,
and a Director

/s/ Ronald G. Eidell Executive Vice President, Chief
______________________________________ Financial Officer and Secretary
Ronald G. Eidell (Principal Financial Officer)

/s/ Robert L. Hiatt Vice President Finance (Principal
______________________________________ Accounting Officer)
Robert L. Hiatt

/s/ John D. Hunkeler, M.D. National Medical Director and Director
______________________________________
John D. Hunkeler, M.D.

/s/ R. Judd Jessup Director
______________________________________
R. Judd Jessup

/s/ Scott H. Kirk, M.D. Director
______________________________________
Scott H. Kirk, M.D.

/s/ Steven V. Napolitano Director
______________________________________
Steven V. Napolitano

/s/ C.A. Lance Piccolo Director
______________________________________
C.A. Lance Piccolo

/s/ Douglas P. Williams, M.D. Director
______________________________________
Douglas P. Williams, M.D.