SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
___________________
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR
THE
QUARTERLY PERIOD ENDED:
SEPTEMBER 30, 2005
COMMISSION
FILE NUMBER: 0-26625
NOVAMED,
INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
36-4116193
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
980
North Michigan Avenue, Suite 1620, Chicago, Illinois 60611
(Address
of principal executive offices)
Registrant's
telephone, including area code:
(312) 664-4100
___________________
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
o
Indicate
by check mark whether the registrant is an accelerated filer (as defined
in Rule
12b-2 of the Exchange Act).
Yes
o
No
x
As
of
November 7, 2005, there were outstanding 22,031,227 shares of the registrant's
common stock, par value $.01 per share.
NOVAMED,
INC.
FORM
10-Q FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
INDEX
|
PART
OR ITEM
|
PAGE
|
|
|
|
Part
I.
|
FINANCIAL
STATEMENTS
|
3
|
Item
1.
|
Interim
Condensed Consolidated Financial Statements (unaudited)
|
|
|
Condensed
Consolidated Balance Sheets -September 30, 2005 and
December 31,
2004
|
3
|
|
Condensed
Consolidated Statements of Operations - Three and nine months
ended
September 30, 2005 and 2004
|
4
|
|
Condensed
Consolidated Statements of Cash Flows - Nine months ended
September
30, 2005 and 2004
|
5
|
|
Notes
to the Interim Condensed Consolidated Financial Statements
|
6
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
12
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
19
|
|
|
|
Item
4.
|
Disclosure
Controls and Procedures
|
19
|
|
|
|
Part
II.
|
OTHER
INFORMATION
|
20
|
Item
6.
|
Exhibits
|
20
|
|
Signatures
|
21
|
Part
I
Item
1.
NOVAMED,
INC. AND SUBSIDIARIES
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
(Dollars
in thousands, except per share
data)
|
|
|
|
September
30,
|
|
|
December 31,
|
|
ASSETS
|
|
|
2005
|
|
|
2004
|
|
Current
assets:
|
|
|
(unaudited)
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,112
|
|
$
|
500
|
|
Accounts
receivable, net of allowances of $12,127 and
$10,083, respectively
|
|
|
11,901
|
|
|
10,237
|
|
Notes
and amounts due from related parties
|
|
|
541
|
|
|
719
|
|
Inventory
|
|
|
1,882
|
|
|
1,518
|
|
Other
current assets
|
|
|
1,359
|
|
|
1,182
|
|
Total
current assets
|
|
|
17,795
|
|
|
14,156
|
|
Property
and equipment, net
|
|
|
9,716
|
|
|
8,110
|
|
Intangible
assets, net
|
|
|
60,491
|
|
|
51,421
|
|
Noncurrent
deferred tax assets, net
|
|
|
1,093
|
|
|
2,248
|
|
Other
assets, net
|
|
|
1,052
|
|
|
1,052
|
|
Total
assets
|
|
$
|
90,147
|
|
$
|
76,987
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
5,816
|
|
$
|
4,848
|
|
Accrued
expenses and income taxes payable
|
|
|
3,850
|
|
|
3,168
|
|
Current
maturities of long-term debt
|
|
|
330
|
|
|
274
|
|
Current
liabilities of discontinued operations
|
|
|
122
|
|
|
246
|
|
Total
current liabilities
|
|
|
10,118
|
|
|
8,536
|
|
Long-term
debt, net of current maturities
|
|
|
9,432
|
|
|
5,314
|
|
Minority
interests
|
|
|
9,938
|
|
|
8,516
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Series
E Junior Participating Preferred Stock, $0.01 par value,
1,912,000 shares authorized, none outstanding at September
30, 2005 and December 31, 2004, respectively
|
|
|
—
|
|
|
—
|
|
Common
stock, $0.01 par value, 81,761,465 shares authorized,
26,396,462 and 25,649,921 shares issued at
September 30, 2005 and December 31, 2004, respectively
|
|
|
264
|
|
|
256
|
|
Additional
paid-in-capital
|
|
|
82,675
|
|
|
79,710
|
|
Accumulated
deficit
|
|
|
(14,822
|
)
|
|
(19,182
|
)
|
Treasury
stock, at cost, 4,386,641 and 4,208,743 shares at
September 30, 2005 and December 31, 2004, respectively
|
|
|
(7,458
|
)
|
|
(6,163
|
)
|
Total
stockholders’ equity
|
|
|
60,659
|
|
|
54,621
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
90,147
|
|
$
|
76,987
|
|
The
notes
to the interim condensed consolidated financial statements
are
an
integral part of these statements.
NOVAMED,
INC. AND SUBSIDIARIES
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
(Amounts
in thousands, except per share data;
unaudited)
|
|
|
Three
months ended
September
30,
|
|
Nine
months ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
revenue:
|
|
|
|
|
|
|
|
|
|
Surgical
facilities
|
|
$
|
15,626
|
|
$
|
12,890
|
|
$
|
44,563
|
|
$
|
33,382
|
|
Product
sales and other
|
|
|
5,522
|
|
|
4,504
|
|
|
15,734
|
|
|
13,716
|
|
Total
net revenue
|
|
|
21,148
|
|
|
17,394
|
|
|
60,297
|
|
|
47,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
wages and benefits
|
|
|
6,595
|
|
|
5,595
|
|
|
18,789
|
|
|
15,898
|
|
Cost
of sales and medical supplies
|
|
|
5,054
|
|
|
4,207
|
|
|
14,536
|
|
|
11,444
|
|
Selling,
general and administrative
|
|
|
4,167
|
|
|
3,620
|
|
|
12,767
|
|
|
10,133
|
|
Depreciation
and amortization
|
|
|
629
|
|
|
572
|
|
|
1,770
|
|
|
1,888
|
|
Total
operating expenses
|
|
|
16,445
|
|
|
13,994
|
|
|
47,862
|
|
|
39,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
4,703
|
|
|
3,400
|
|
|
12,435
|
|
|
7,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests in earnings of consolidated entities
|
|
|
1,940
|
|
|
1,485
|
|
|
5,378
|
|
|
3,415
|
|
Other
(income) expense, net
|
|
|
51
|
|
|
131
|
|
|
(6
|
)
|
|
(91
|
)
|
Income
before income taxes
|
|
|
2,712
|
|
|
1,784
|
|
|
7,063
|
|
|
4,411
|
|
Income
tax provision
|
|
|
1,085
|
|
|
714
|
|
|
2,825
|
|
|
1,765
|
|
Net
income from continuing operations
|
|
|
1,627
|
|
|
1,070
|
|
|
4,238
|
|
|
2,646
|
|
Net
income from discontinued operations
|
|
|
—
|
|
|
—
|
|
|
122
|
|
|
594
|
|
Net
income
|
|
$
|
1,627
|
|
$
|
1,070
|
|
$
|
4,360
|
|
$
|
3,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.07
|
|
$
|
0.05
|
|
$
|
0.20
|
|
$
|
0.12
|
|
Income
from discontinued operations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.03
|
|
Net
income
|
|
$
|
0.07
|
|
$
|
0.05
|
|
$
|
0.20
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.07
|
|
$
|
0.05
|
|
$
|
0.18
|
|
$
|
0.12
|
|
Income
from discontinued operations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.02
|
|
Net
income
|
|
$
|
0.07
|
|
$
|
0.05
|
|
$
|
0.18
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
21,880
|
|
|
21,145
|
|
|
21,637
|
|
|
21,130
|
|
Dilutive
effect of employee stock options
|
|
|
2,093
|
|
|
1,788
|
|
|
2,122
|
|
|
1,875
|
|
Diluted
weighted average common shares outstanding
|
|
|
23,973
|
|
|
22,933
|
|
|
23,759
|
|
|
23,005
|
|
The
notes
to the interim condensed consolidated financial statements are an integral
part
of these statements.
NOVAMED,
INC. AND SUBSIDIARIES
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Dollars
in thousands; unaudited)
|
|
|
Nine
months ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income from continuing operations
|
|
$
|
4,238
|
|
$
|
2,646
|
|
Adjustments
to reconcile net income to net cash provided by continuing
operations, net of effects of purchase transactions—
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,770
|
|
|
1,888
|
|
Current
and deferred taxes
|
|
|
2,825
|
|
|
1,654
|
|
Earnings
of non-consolidated affiliate
|
|
|
(103
|
)
|
|
—
|
|
Gain
on sale of minority interests
|
|
|
(110
|
)
|
|
(99
|
)
|
Minority
interests
|
|
|
5,378
|
|
|
3,415
|
|
Distributions
to minority partners
|
|
|
(5,329
|
)
|
|
(2,714
|
)
|
Changes
in operating assets and liabilities—
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(954
|
)
|
|
(2,676
|
)
|
Inventory
|
|
|
(255
|
)
|
|
7
|
|
Other
current assets
|
|
|
(177
|
)
|
|
(278
|
)
|
Accounts
payable and accrued expenses
|
|
|
919
|
|
|
1,489
|
|
Other
noncurrent assets
|
|
|
66
|
|
|
70
|
|
Net
cash provided by operating activities
|
|
|
8,268
|
|
|
5,402
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Payments
for acquisitions, net
|
|
|
(9,939
|
)
|
|
(22,203
|
)
|
Proceeds
from sale of minority interests
|
|
|
941
|
|
|
1,138
|
|
Purchases
of property and equipment
|
|
|
(2,049
|
)
|
|
(1,529
|
)
|
Proceeds
from sale of property and equipment
|
|
|
50
|
|
|
121
|
|
Other
|
|
|
40
|
|
|
74
|
|
Net
cash used in investing activities
|
|
|
(10,957
|
)
|
|
(22,399
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Borrowings
under revolving line of credit
|
|
|
29,000
|
|
|
14,000
|
|
Payments
under revolving line of credit
|
|
|
(25,000
|
)
|
|
(7,000
|
)
|
Proceeds
from the issuance of common stock
|
|
|
605
|
|
|
636
|
|
Payments
of other debt, debt issuance fees and capital lease
obligations
|
|
|
(309
|
)
|
|
(71
|
)
|
Net
cash provided by financing activities
|
|
|
4,296
|
|
|
7,565
|
|
|
|
|
|
|
|
|
|
Cash
flows from discontinued operations:
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
(62
|
)
|
|
(455
|
)
|
Investing
activities
|
|
|
67
|
|
|
502
|
|
Net
cash provided by discontinued operations
|
|
|
5
|
|
|
47
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
1,612
|
|
|
(9,385
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
500
|
|
|
11,801
|
|
Cash
and cash equivalents, end of period
|
|
$
|
2,112
|
|
$
|
2,416
|
|
The
notes
to the interim condensed consolidated financial statements
are
an
integral part of these statements.
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2005
(Dollars
in thousands, except per share data; unaudited)
The
information contained in the interim consolidated financial statements and
notes
is condensed from that which would appear in the annual consolidated financial
statements. Accordingly, the interim condensed consolidated financial statements
included herein should be read in conjunction with the consolidated financial
statements as of and for the year ended December 31, 2004, filed by NovaMed,
Inc. with the Securities and Exchange Commission on Form 10-K. The unaudited
interim condensed consolidated financial statements as of September 30, 2005
and
for the three and nine months ended September 30, 2005 and 2004, include
all
normal recurring adjustments which management considers necessary for a fair
presentation. The results of operations for the interim periods are not
necessarily indicative of the results that may be expected for the entire
fiscal
year.
2.
|
STATEMENT
OF CASH FLOWS - SUPPLEMENTAL
|
Supplemental
cash information:
|
|
|
Nine
months ended September 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
Interest
paid
|
|
$
|
436
|
|
$
|
62
|
|
Income
taxes paid
|
|
|
280
|
|
|
112
|
|
Income
tax refunds received
|
|
|
(21
|
)
|
|
(18
|
)
|
During
the first quarter of 2004, the Company received $237 as a cash settlement
from a
physician for the early termination of a laser services agreement. The laser
provided under this agreement was one of eight lasers whose procedures count
toward our minimum annual procedure requirement under our supply agreement
with
Alcon Laboratories. Because the Company continues to have obligations to
Alcon
for all eight lasers, the Company established a reserve for $237 which is
evaluated quarterly and adjusted as necessary. During the first nine months
of
2005, approximately $65 of the initial reserve was reversed and included
in
other income.
Non
cash investing and financing activities:
During
the third quarter of 2005, the Company received 129,180 shares of its common
stock from the estate of Stephen J. Winjum to fund the $995 aggregate option
exercise price of 240,000 options due to expire on August 21, 2005. These
were
recorded as treasury shares.
During
the first quarter of 2005, the Company received 31,200 shares of its common
stock from a former affiliated physician as final settlement of a lawsuit.
Treasury shares were recorded at $197 and this amount was reported as income
from discontinued operations. The Company also received 17,518 shares of
its
common stock to repay $104 of outstanding notes receivable from one of its
divestiture transactions.
The
Company received 365,344 shares of its common stock from a former affiliated
physician during the first quarter of 2004 to repay a $1,533 note receivable
against which the Company had established a $958 valuation allowance. Treasury
shares were recorded at $1,703, additional paid-in-capital was increased
by $170
and the valuation allowance was reversed and reported as income from
discontinued operations.
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2005
(Dollars
in thousands, except per share data; unaudited)
Goodwill
balances by reportable segment are summarized in the table below:
|
|
|
Unamortized
Goodwill
|
|
|
|
|
|
|
|
Surgical
Facilities
|
|
|
Product
Sales
|
|
|
Other
|
|
|
Total
|
|
|
Other
Intangibles
|
|
Balance
December 31, 2004
|
|
$
|
45,005
|
|
$
|
5,475
|
|
$
|
941
|
|
$
|
51,421
|
|
$
|
—
|
|
Acquisitions
|
|
|
5,511
|
|
|
—
|
|
|
—
|
|
|
5,511
|
|
|
108
|
|
Purchase
option buyout
|
|
|
3,602
|
|
|
—
|
|
|
—
|
|
|
3,602
|
|
|
—
|
|
Purchase
price adjustments
|
|
|
(129
|
)
|
|
—
|
|
|
—
|
|
|
(129
|
)
|
|
—
|
|
Amortization
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(22
|
)
|
Balance
September 30, 2005
|
|
$
|
53,989
|
|
$
|
5,475
|
|
$
|
941
|
|
$
|
60,405
|
|
$
|
86
|
|
The
Company generally acquires majority equity interests in ambulatory surgery
centers (ASCs) through the purchase method of accounting. The results of
operations are included in the consolidated financial statements of the Company
from the date of acquisition.
On
March
18, 2005, the Company acquired a 51% interest in The Cataract Specialty Surgical
Center, an ASC located in Berkley, MI for approximately $4,000, of which
the
Company allocated $3,375 to goodwill. The acquisition was funded from the
Company’s credit facility.
Effective
March 25, 2005, the Company entered into an Option Purchase Agreement with
its
two physician-partners in its Overland Park, KS ASC. These physician-partners
had previously given notice of their intent to exercise an option to purchase
all of the Company’s interest in this ASC effective as of April 15, 2005. Under
the terms of the Option Purchase Agreement, the Company purchased this option
from these physician-partners for an aggregate sum of $3,600, with $1,800
payable to each physician-partner. As a result of this transaction, the option
was terminated and the Company has retained its 51% interest in this
ASC.
On
May
16, 2005, the Company acquired a 51% interest in the Colorado Outpatient
Eye
Surgery Center, an ASC located in Denver, CO for approximately $2,200, of
which
the Company allocated $2,136 to goodwill. The acquisition was funded from
the
Company’s credit facility.
5.
|
DISCONTINUED
OPERATIONS
|
During
the first quarter of 2005 the Company received 31,200 shares of its common
stock
as settlement of a dispute related to liquidating damages due the Company
from a
former affiliated physician. The value of these shares as of the settlement
date
is reported as income from discontinued operations.
During
the first quarter of 2004 a former affiliated physician repaid a note secured
by
shares of the Company’s stock by tendering such shares to the Company. (For
additional information regarding the note please refer to Note 2 above and
the
Company’s 2004 Annual Report on Form 10K — Note 17 “Related Party
Transactions.”) When the Company adopted its Plan of Discontinued Operations and
Restructuring the market value of the shares with which the loan was secured
was
significantly below the value of the note. Included in the initial discontinued
operations charge was the establishment of a valuation allowance against
the
note to adjust it to its secured value based on the then current market value
of
the collateral shares. When shares were tendered in repayment of the note,
the
market value of the shares
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2005
(Dollars
in thousands, except per share data; unaudited)
exceeded
the original secured value. The Company reversed the valuation allowance
established on the note and reported it as income from discontinued operations.
The
discontinued operations reserve balance was $122 and $246 at September 30,
2005
and December 31, 2004, respectively. The reserve is for remaining costs from
exiting the physician practice management business. The operating results
of
discontinued operations are summarized below.
|
|
Nine
months ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
Net
revenue
|
|
$
|
—
|
|
$
|
—
|
|
Litigation
settlement
|
|
|
197
|
|
|
—
|
|
Reverse
valuation allowance
|
|
|
—
|
|
|
958
|
|
Income
before income taxes
|
|
|
197
|
|
|
958
|
|
Income
tax provision
|
|
|
75
|
|
|
364
|
|
Net
income per statement of operations
|
|
$
|
122
|
|
$
|
594
|
|
6.
|
OTHER
(INCOME) EXPENSE
|
|
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
Interest
expense
|
|
$
|
188
|
|
$
|
76
|
|
$
|
500
|
|
$
|
132
|
|
Interest
income
|
|
|
(7
|
)
|
|
(14
|
)
|
|
(24
|
)
|
|
(68
|
)
|
Earnings
of non-consolidated affiliate
|
|
|
(3
|
)
|
|
—
|
|
|
(103
|
)
|
|
—
|
|
(Gain)
loss on sale of minority interests
|
|
|
(74
|
)
|
|
64
|
|
|
(110
|
)
|
|
(99
|
)
|
Other,
net
|
|
|
(53
|
)
|
|
5
|
|
|
(269
|
)
|
|
(56
|
)
|
Other
(income) expense, net
|
|
$
|
51
|
|
$
|
131
|
|
$
|
(6
|
)
|
$
|
(91
|
)
|
During
the second quarter of 2005 the Company sold a 26% minority interest in its
Columbus, GA ASC to eleven physicians and sold a 29% minority interest in
its
Richmond, VA ASC to two physicians, increasing the minority ownership in
this
ASC to 49%. During the third quarter of 2005 the Company sold a 2.5% minority
interest in its Columbus, GA ASC to one physician increasing the minority
ownership in this ASC to 28.5%. Also during the third quarter of 2005, the
Company sold a 5% minority interest in its River Forest, IL ASC to one of
its
existing partners, increasing his ownership to 10% and increasing total minority
ownership in this ASC to 30%.
During
the first quarter of 2004 the Company sold a 22.5% minority interest in its
Chattanooga, TN ASC to four physicians and sold an additional 10% interest
in
its New Albany, IN ASC to an affiliate of its existing minority partners,
thereby increasing minority ownership in this ASC to 30%. During the second
quarter of 2004, the Company sold an additional 8% minority interest in its
Chattanooga, TN ASC to a fifth physician increasing minority ownership in
this
ASC to 30.5%. During the third quarter of 2004 the Company sold a 5% and
a 2.5%
minority interest in its Chattanooga, TN ASC to two of its existing partners,
increasing their minority interest ownership to 10% and 5%, respectively,
and
increasing total minority ownership interest in this ASC to 38%.
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2005
(Dollars
in thousands, except per share data; unaudited)
7.
|
REVOLVING
CREDIT FACILITY
|
At
September 30, 2005, the Company had $9,000 of borrowings outstanding under
its
revolving credit facility and was in compliance with all of its credit agreement
covenants. The maximum commitment available under the Company’s credit facility
that expires June 30, 2008 is $50,000. Maximum borrowing availability and
applicable interest rates under the facility are calculated based on a ratio
of
total indebtedness to earnings before interest, taxes, depreciation and
amortization. Interest on borrowings under the facility is payable at an
annual
rate equal to the Company’s lender’s published base rate plus the applicable
borrowing margin ranging from 0% to .5% or LIBOR plus a range from 1.25%
to
2.0%, varying depending upon the Company’s ratios and ability to meet other
financial covenants. The credit agreement contains covenants that include
limitations on indebtedness, liens, capital expenditures, acquisitions,
investments and share repurchases, as well as restrictions on the payment
of
dividends.
The
Company has an outstanding letter of credit issued to one of its optical
products buying group vendors in the amount of $175 that expires on March
31,
2006.
8.
|
STOCK
BASED COMPENSATION
|
As
discussed in Note 2 to the Company’s 2004 financial statements on Form 10-K, the
Company had planned to adopt a new accounting standard regarding its accounting
for stock based compensation effective July 1, 2005. In April 2005 the
Securities and Exchange Commission deferred the implementation date of this
accounting standard. As a result, the Company now plans to adopt the new
accounting standard effective January 1, 2006. Until that date the Company
will
continue to follow its current policy in accounting for its stock-based
compensation, as discussed below.
The
Company accounts for its stock-based employee compensation plans under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
No stock-based employee compensation cost is reflected in net income, as
all
options granted under those plans had an exercise price equal to or above
the
market value of the underlying common stock at the date of grant. During
the
first quarter of 2005, the Company granted its employees options to purchase
42,000 shares with an average exercise price of $6.58 per share. During the
second quarter of 2005, the Company granted its employees options to purchase
442,500 shares and granted its five outside directors options to purchase
75,000
shares, all with an exercise price of $5.96 per share. Also during the second
quarter, options to acquire 100,000 shares were granted to Robert J. Kelly
as
compensation for his role as Presiding Director with an exercise price of
$5.15.
The following table illustrates the effect on net income and earnings per
share
if the Company had applied the fair value recognition provisions of Statement
of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation.
|
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
Net
income - as reported
|
|
$
|
1,627
|
|
$
|
1,070
|
|
$
|
4,360
|
|
$
|
3,240
|
|
Deduct:
Total stock based compensation expense, net of related tax
effects
|
|
|
(175
|
)
|
|
(157
|
)
|
|
(456
|
)
|
|
(712
|
)
|
Pro
forma net income
|
|
$
|
1,452
|
|
$
|
913
|
|
$
|
3,904
|
|
$
|
2,528
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
Basic
— as reported
|
|
$
|
0.07
|
|
$
|
0.05
|
|
$
|
0.20
|
|
$
|
0.15
|
|
Basic
— pro forma
|
|
$
|
0.07
|
|
$
|
0.04
|
|
$
|
0.18
|
|
$
|
0.12
|
|
Diluted
— as reported
|
|
$
|
0.07
|
|
$
|
0.05
|
|
$
|
0.18
|
|
$
|
0.14
|
|
Diluted
— pro forma
|
|
$
|
0.06
|
|
$
|
0.04
|
|
$
|
0.16
|
|
$
|
0.11
|
|
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2005
(Dollars
in thousands, except per share data; unaudited)
The
table
below presents information about operating data and segment assets as of
and for
the three and nine months ended September 30, 2005 and 2004:
|
|
Surgical
Facilities
|
|
Product
Sales
|
|
Other
|
|
Corporate
|
|
Total
|
|
Three
months ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
15,626
|
|
$
|
3,562
|
|
$
|
1,927
|
|
$
|
33
|
|
$
|
21,148
|
|
Earnings
(loss) before taxes
|
|
|
2,982
|
|
|
821
|
|
|
176
|
|
|
(1,267
|
)
|
|
2,712
|
|
Depreciation
and amortization
|
|
|
469
|
|
|
67
|
|
|
26
|
|
|
67
|
|
|
629
|
|
Interest
income
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
7
|
|
Interest
expense
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
179
|
|
|
188
|
|
Capital
expenditures
|
|
|
553
|
|
|
3
|
|
|
21
|
|
|
26
|
|
|
603
|
|
Accounts
receivable
|
|
|
6,399
|
|
|
4,855
|
|
|
552
|
|
|
95
|
|
|
11,901
|
|
Identifiable
assets
|
|
|
71,546
|
|
|
11,877
|
|
|
1,746
|
|
|
4,978
|
|
|
90,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
12,890
|
|
$
|
2,715
|
|
$
|
1,789
|
|
$
|
—
|
|
$
|
17,394
|
|
Earnings
(loss) before taxes
|
|
|
2,310
|
|
|
545
|
|
|
168
|
|
|
(1,239
|
)
|
|
1,784
|
|
Depreciation
and amortization
|
|
|
417
|
|
|
46
|
|
|
27
|
|
|
82
|
|
|
572
|
|
Interest
income
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|
14
|
|
Interest
expense
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
74
|
|
|
76
|
|
Capital
expenditures
|
|
|
410
|
|
|
15
|
|
|
19
|
|
|
16
|
|
|
460
|
|
Accounts
receivable
|
|
|
7,423
|
|
|
4,418
|
|
|
869
|
|
|
—
|
|
|
12,710
|
|
Identifiable
assets
|
|
|
56,123
|
|
|
11,305
|
|
|
2,110
|
|
|
7,843
|
|
|
77,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
|
44,563
|
|
|
10,083
|
|
|
5,618
|
|
|
33
|
|
$
|
60,297
|
|
Earnings
(loss) before taxes
|
|
|
8,372
|
|
|
2,170
|
|
|
505
|
|
|
(3,984
|
)
|
|
7,063
|
|
Depreciation
and amortization
|
|
|
1,332
|
|
|
155
|
|
|
79
|
|
|
204
|
|
|
1,770
|
|
Interest
income
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
24
|
|
Interest
expense
|
|
|
22
|
|
|
—
|
|
|
—
|
|
|
478
|
|
|
500
|
|
Capital
expenditures
|
|
|
1,722
|
|
|
181
|
|
|
80
|
|
|
66
|
|
|
2,049
|
|
Accounts
receivable
|
|
|
6,399
|
|
|
4,855
|
|
|
552
|
|
|
95
|
|
|
11,901
|
|
Identifiable
assets
|
|
|
71,546
|
|
|
11,877
|
|
|
1,746
|
|
|
4,978
|
|
|
90,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
33,382
|
|
$
|
8,167
|
|
$
|
5,549
|
|
$
|
—
|
|
$
|
47,098
|
|
Earnings
(loss) before taxes
|
|
|
6,621
|
|
|
1,660
|
|
|
433
|
|
|
(4,303
|
)
|
|
4,411
|
|
Depreciation
and amortization
|
|
|
1,339
|
|
|
146
|
|
|
88
|
|
|
315
|
|
|
1,888
|
|
Interest
income
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
65
|
|
|
68
|
|
Interest
expense
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
128
|
|
|
132
|
|
Capital
expenditures
|
|
|
1,321
|
|
|
84
|
|
|
39
|
|
|
85
|
|
|
1,529
|
|
Accounts
receivable
|
|
|
7,423
|
|
|
4,418
|
|
|
869
|
|
|
—
|
|
|
12,710
|
|
Identifiable
assets
|
|
|
56,123
|
|
|
11,305
|
|
|
2,110
|
|
|
7,843
|
|
|
77,381
|
|
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2005
(Dollars
in thousands, except per share data; unaudited)
On
October 27, 2005, the Company announced that its Board of Directors had named
Thomas S. Hall as President and Chief Executive Officer and appointed Robert
J.
Kelly to serve as its non-executive Chairman, both effective as of November
14,
2005. Mr. Kelly had been serving as Presiding Director of the Company since
March 29, 2005.
Effective
November 1, 2005, the Company acquired a 51% majority interest in a
multi-specialty ASC located in Whittier, CA and effective November 10, 2005
the
Company acquired a 51% majority interest in a urology ASC located in Fremont,
NE. The Company funded the $12,200 aggregate purchase price of these two
ASCs
with existing cash and borrowings under the Company’s credit
facility.
Effective
November 1, 2005, the Company sold its 80% ownership interest in the St.
Joseph,
MO ASC to its two existing minority partners. This ASC accounted for less
than
2% of the Company’s reported surgical procedures and net income during the nine
months ended September 30, 2005.
ITEM
2.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis presents our consolidated financial condition
at September 30, 2005 and the results of operations for the three and nine
months ended September 30, 2005 and 2004. You should read the following
discussion together with our consolidated financial statements and the related
notes contained elsewhere in this quarterly report. In addition to the
historical information provided below, we have made certain estimates and
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated or implied by these
estimates and forward-looking statements as a result of certain factors,
including those discussed in the CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS on page 19 of this quarterly report.
Overview
We
consider our core business to be the ownership and operation of ambulatory
surgery centers (ASCs). As of September 30, 2005, we owned and operated 27
ASCs,
of which 24 were jointly owned with physician-partners. We also own other
businesses including an optical laboratory, an optical products purchasing
organization, and a marketing products and services company. In addition,
we
provide management services to two eye care practices.
Year-to-Date Financial
Highlights:
|
·
|
Consolidated
revenue increased 28.0% to $60.3 million. Surgical facilities revenue
increased 33.5% to $44.6 million (same-facility surgical revenue
increased
5.4% to $31.7 million).
|
|
·
|
Operating
income increased 60.8% to $12.4
million.
|
|
·
|
Acquired
a majority interest in two ASCs for $6.2 million and purchased
a buy-out
option in our Overland Park, KS ASC for $3.6 million. Also sold
a 28.5%,
29% and 5% minority interest in our Columbus, GA, Richmond, VA
and River
Forest, IL ASCs, respectively, resulting in aggregate cash proceeds
of
$0.9 million.
|
As
previously announced, Stephen J. Winjum, our Chairman, President and Chief
Executive Officer, died unexpectedly on March 30, 2005. On October 27, 2005,
our
Board of Directors announced the appointment of Thomas S. Hall as President
and
Chief Executive Officer, effective November 14, 2005.
Results
of Operations
The
following table summarizes our operating results as a percentage of net
revenue:
|
|
Three
months ended September 30,
|
|
Nine
months ended September 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
Revenue:
|
|
|
|
|
|
|
|
|
|
Surgical
facilities
|
|
|
73.9
|
%
|
|
74.1
|
%
|
|
73.9
|
%
|
|
70.9
|
%
|
Product
sales and other
|
|
|
26.1
|
|
|
25.9
|
|
|
26.1
|
|
|
29.1
|
|
Total
net revenue
|
|
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
wages and benefits
|
|
|
31.2
|
|
|
32.2
|
|
|
31.2
|
|
|
33.8
|
|
Cost
of sales and medical supplies
|
|
|
23.9
|
|
|
24.2
|
|
|
24.1
|
|
|
24.3
|
|
Selling,
general and administrative
|
|
|
19.7
|
|
|
20.8
|
|
|
21.2
|
|
|
21.5
|
|
Depreciation
and amortization
|
|
|
3.0
|
|
|
3.3
|
|
|
2.9
|
|
|
4.0
|
|
Total
operating expenses
|
|
|
77.8
|
|
|
80.5
|
|
|
79.4
|
|
|
83.6
|
|
Operating
income
|
|
|
22.2
|
|
|
19.5
|
|
|
20.6
|
|
|
16.4
|
|
Minority
interests in earnings of consolidated entities
|
|
|
9.2
|
|
|
8.5
|
|
|
8.9
|
|
|
7.3
|
|
Other
(income) expense
|
|
|
0.2
|
|
|
0.7
|
|
|
0.0
|
|
|
(0.2
|
)
|
Income
before income taxes
|
|
|
12.8
|
|
|
10.3
|
|
|
11.7
|
|
|
9.3
|
|
Income
tax provision
|
|
|
5.1
|
|
|
4.1
|
|
|
4.7
|
|
|
3.7
|
|
Net
income from continuing operations
|
|
|
7.7
|
|
|
6.2
|
|
|
7.0
|
|
|
5.6
|
|
Net
income from discontinued operations
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
1.3
|
|
Net
income
|
|
|
7.7
|
%
|
|
6.2
|
%
|
|
7.2
|
%
|
|
6.9
|
%
|
Three
Months Ended September 30, 2005 Compared to the Three Months Ended September
30,
2004
Net
Revenue
Consolidated.
Total
net revenue increased 21.6% from $17.4 million to $21.1 million. Net revenue
by
segment is discussed below.
Surgical
Facilities.
The
table below summarizes surgical facilities net revenue and procedures performed
for the third quarter of 2005 and 2004. Revenues generated from surgical
facilities are derived from the fees charged for the procedures performed
in our
ASCs and through our laser services agreements. Our procedure volume is directly
impacted by the number of ASCs we operate, the number of excimer lasers in
service, and their respective utilization rates. Net surgical facilities
revenue
increased 21.2% from $12.9 million to $15.6 million. This increase was primarily
the result of $2.2 million of net revenue from ASCs acquired or developed
after
July 1, 2004 (“new ASCs”) and a $0.5 million increase from ASCs that we owned
for the entire comparable reporting periods (“same-facility”). The increase in
same-facility revenue was primarily the result of a 1.5% increase in the
number
of same-facility procedures performed and a 3.1% increase in the net revenue
per
procedure due to a change in procedure mix.
|
|
Three
Months Ended September 30,
|
|
Increase
|
|
Dollars
in thousands
|
|
2005
|
|
2004
|
|
(Decrease)
|
|
Surgical
Facilities:
|
|
|
|
|
|
|
|
Same-facility:
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
12,261
|
|
$
|
11,711
|
|
$
|
550
|
|
#
of procedures
|
|
|
14,861
|
|
|
14,638
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
New
ASCs:
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
3,365
|
|
$
|
1,179
|
|
$
|
2,186
|
|
#
of procedures
|
|
|
4,450
|
|
|
1,433
|
|
|
3,017
|
|
Product
Sales and Other.
The
table below summarizes net product sales and other revenue by significant
business component. Product sales and other revenue increased 22.6% from
$4.5
million to $5.5 million. Net revenue at our marketing products and services
business increased $0.6 million. This increase is due to the addition of
marketing consulting services associated with the acquisition of a complementary
business in the first quarter of 2005 and increased services provided to
medical
device manufacturers. Net revenue from our ophthalmology practice increased
$0.1
million primarily due to an increase in the number of patient visits.
|
|
Three
Months Ended September 30,
|
|
Increase
|
|
Dollars
in thousands
|
|
2005
|
|
2004
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
Product
Sales:
|
|
|
|
|
|
|
|
Optical
laboratories
|
|
$
|
1,418
|
|
$
|
1,267
|
|
$
|
151
|
|
Optical
products purchasing organization
|
|
|
619
|
|
|
555
|
|
|
64
|
|
Marketing
products and services
|
|
|
1,058
|
|
|
425
|
|
|
633
|
|
Optometric
practice/retail store
|
|
|
467
|
|
|
468
|
|
|
(1
|
)
|
|
|
|
3,562
|
|
|
2,715
|
|
|
847
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
Ophthalmology
practice
|
|
|
1,821
|
|
|
1,682
|
|
|
139
|
|
Other
|
|
|
139
|
|
|
107
|
|
|
32
|
|
|
|
|
1,960
|
|
|
1,789
|
|
|
171
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Net Product Sales and Other Revenue
|
|
$
|
5,522
|
|
$
|
4,504
|
|
$
|
1,018
|
|
Salaries,
Wages and Benefits
Consolidated.
Salaries, wages and benefits expense increased 17.9% from $5.6 million to
$6.6
million. As a percentage of net revenue, salaries, wages and benefits expense
decreased from 32.2% to 31.2% primarily due to minimal increases in corporate
staffing necessary to service the new ASCs. Salaries, wages and benefits
expense
by segment is discussed below.
Surgical
Facilities.
Salaries, wages and benefits expense in our surgical facilities segment
increased 27.0% from $2.7 million to $3.4 million. The increase was the result
of staff costs associated with new ASCs and staffing required at same-facility
ASCs due to increased procedure volume.
Product
Sales and Other.
Salaries, wages and benefits expense in our product sales and other segments
increased 16.7% from $1.7 million to $2.0 million. The increase is primarily
due
to the addition of new marketing consulting services within our marketing
products and services business.
Corporate. Salaries,
wages and benefits expense remained flat at $1.2 million. Decreases due to
the
vacancy of the CEO position and related incentive compensation accrual
reductions were offset by additional employees required to service the new
ASCs
and annual salary increases.
Cost
of Sales and Medical Supplies
Consolidated.
Cost of
sales and medical supplies expense increased 20.2% from $4.2 million to $5.0
million. As a percentage of net revenue, cost of sales and medical supplies
expense decreased from 24.2% to 23.9%. Cost of sales and medical supplies
expense by segment is discussed below.
Surgical
Facilities.
Cost of
sales and medical supplies expense in our surgical facilities segment increased
16.1% from $3.0 million to $3.5 million. The expense increase was the result
of
costs associated with our new ASCs and an increase in procedures performed
at
same-facility ASCs.
Product
Sales and Other.
Cost of
sales and medical supplies expense in our product sales and other segments
increased 30.4% from $1.2 million to $1.5 million primarily due to costs
associated with increased orders for marketing products within our marketing
products and services business.
Selling,
General and Administrative
Consolidated.
Selling,
general and administrative expense increased 15.1% from $3.6 million to $4.2
million. As a percentage of net revenue, selling, general and administrative
expense decreased from 20.8% to 19.7%. Selling, general and administrative
expense by segment is discussed below.
Surgical
Facilities.
Selling,
general and administrative expense in our surgical facilities segment increased
20.4% from $2.7 million to $3.2 million. The increase is due to costs associated
with our new ASCs and increased professional fees which include management
and
billing/collections fees charged to the ASCs for services rendered by our
corporate personnel.
Product
Sales and Other.
Selling,
general and administrative expense in our product sales and other segments
increased 3.6% from $0.8 to $0.9 million primarily due to the revenue increase
within our marketing products and services business.
Corporate.
Corporate selling, general and administrative expense remained flat at $0.1
million. Increases due to costs associated with the CEO search and increased
costs associated with being a public company due to our efforts to comply
with
section 404 of the Sarbanes-Oxley Act were offset by management and
billing/collection fees charged to our ASCs for services rendered by our
corporate personnel. We expect to continue to incur costs associated with
being
a public company throughout 2005 and in future years.
Depreciation
and Amortization.
Depreciation and amortization expense remained flat at $0.6 million. Increases
in depreciation associated with our new ASCs and capital expenditures in
our
surgical facilities segment were offset by decreases within the corporate
segment.
Minority
Interests and Other (Income) Expense.
Minority interests in the earnings of our ASCs increased from $1.5 million
to
$1.9 million due to new ASCs, increases in same-facility operating income
and
sales of minority interests during 2005.
Provision
for Income Taxes.
Our
effective tax rate was unchanged at 40.0%. 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.
Nine
Months Ended September 30, 2005 Compared to the Nine Months Ended September
30,
2004
Net
Revenue
Consolidated.
Total
net revenue increased 28.0% from $47.1 million to $60.3 million. Net revenue
by
segment is discussed below.
Surgical
Facilities.
The
table below summarizes surgical facilities net revenue and procedures performed
for the first nine months of 2005 and 2004. Revenues generated from surgical
facilities are derived from the fees charged for the procedures performed
in our
ASCs and through our laser services agreements. Our procedure volume is directly
impacted by the number of ASCs we operate, the number of excimer lasers in
service, and their respective utilization rates. Net surgical facilities
revenue
increased 33.5% from $33.4 million to $44.6 million. This increase was primarily
the result of $9.6 million of net revenue from ASCs acquired or developed
after
January 1, 2004 (“new ASCs”) and a $1.6 million increase from ASCs that we owned
for the entire comparable reporting periods (“same-facility”). The increase in
same-facility revenue was primarily the result of a 1.9% increase in the
number
of same-facility procedures performed and a 3.5% increase in the net revenue
per
procedure due to a change in procedure mix.
|
|
Nine
Months Ended September 30,
|
|
Increase
|
|
Dollars
in thousands
|
|
2005
|
|
2004
|
|
(Decrease)
|
|
Surgical
Facilities:
|
|
|
|
|
|
|
|
Same-facility:
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
31,745
|
|
$
|
30,119
|
|
$
|
1,626
|
|
#
of procedures
|
|
|
38,633
|
|
|
37,920
|
|
|
713
|
|
|
|
|
|
|
|
|
|
|
|
|
New
ASCs:
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
12,818
|
|
$
|
3,263
|
|
$
|
9,555
|
|
#
of procedures
|
|
|
17,322
|
|
|
3,724
|
|
|
13,598
|
|
Product
Sales and Other.
The
table below summarizes net product sales and other revenue by significant
business component. Product sales and other revenue increased 14.7% from
$13.7
million to $15.7 million. Net revenue at our marketing products and services
business increased $1.5 million. This increase is due to the addition of
marketing consulting services associated with the acquisition of a complementary
business in the first quarter of 2005 and increased services provided to
medical
device manufacturers.
|
|
Nine
Months Ended September 30,
|
|
Increase
|
|
Dollars
in thousands
|
|
2005
|
|
2004
|
|
(Decrease)
|
|
Product
Sales:
|
|
|
|
|
|
|
|
Optical
laboratories
|
|
$
|
4,075
|
|
$
|
3,840
|
|
$
|
235
|
|
Optical
products purchasing organization
|
|
|
1,792
|
|
|
1,687
|
|
|
105
|
|
Marketing
products and services
|
|
|
2,774
|
|
|
1,285
|
|
|
1,489
|
|
Optometric
practice/retail store
|
|
|
1,442
|
|
|
1,355
|
|
|
87
|
|
|
|
|
10,083
|
|
|
8,167
|
|
|
1,916
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
Ophthalmology
practice
|
|
|
5,295
|
|
|
5,226
|
|
|
69
|
|
Other
|
|
|
356
|
|
|
323
|
|
|
33
|
|
|
|
|
5,651
|
|
|
5,549
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Net Product Sales and Other Revenue
|
|
$
|
15,734
|
|
$
|
13,716
|
|
$
|
2,018
|
|
Salaries,
Wages and Benefits
Consolidated.
Salaries, wages and benefits expense increased 18.2% from $15.9 million to
$18.8
million. As a percentage of net revenue, salaries, wages and benefits expense
decreased from 33.8% to 31.2% primarily due to minimal increases in corporate
staffing necessary to service the new ASCs. Salaries, wages and benefits
expense
by segment is discussed below.
Surgical
Facilities.
Salaries, wages and benefits expense in our surgical facilities segment
increased 34.9% from $7.0 million to $9.4 million. The increase was the result
of staff costs associated with new ASCs and staffing required at same-facility
ASCs due to increased procedure volume.
Product
Sales and Other.
Salaries, wages and benefits expense in our product sales and other segments
increased 10.3% from $5.3 million to $5.9 million. The increase is primarily
due
to the addition of new marketing consulting services within our marketing
products and services business.
Corporate. Salaries,
wages and benefits expense decreased 2.9% from $3.6 million to $3.5 million.
The
decrease was primarily due to the vacancy of the CEO position and related
incentive compensation accrual reductions partially offset by additional
employees required to service the new ASCs and annual salary
increases.
Cost
of Sales and Medical Supplies
Consolidated.
Cost of
sales and medical supplies expense increased 27.0% from $11.4 million to
$14.5
million. As a percentage of net revenue, cost of sales and medical supplies
expense decreased from 24.3% to 24.1%. Cost of sales and medical supplies
expense by segment is discussed below.
Surgical
Facilities.
Cost of
sales and medical supplies expense in our surgical facilities segment increased
29.3% from $7.9 million to $10.2 million. The expense increase was the result
of
costs associated with our new ASCs and an increase in procedures performed
at
same-facility ASCs.
Product
Sales and Other.
Cost of
sales and medical supplies expense in our product sales and other segments
increased 21.9% from $3.6 million to $4.4 million primarily due to costs
associated with increased orders for marketing products within our marketing
products and services business.
Selling,
General and Administrative
Consolidated.
Selling,
general and administrative expense increased 26.0% from $10.1 million to
$12.8
million. As a percentage of net revenue, selling, general and administrative
expense decreased from 21.5% to 21.2%. Selling, general and administrative
expense by segment is discussed below.
Surgical
Facilities.
Selling,
general and administrative expense in our surgical facilities segment increased
38.8% from $6.9 million to $9.6 million. The increase is due to costs associated
with our new ASCs and increased professional fees which include management
and
billing/collections fees charged to the ASCs for services rendered by our
corporate personnel.
Product
Sales and Other.
Selling,
general and administrative expense in our product sales and other segments
increased 2.9% from $2.5 million to $2.6 million primarily due to the revenue
increase within our marketing products and services business.
Corporate.
Corporate selling, general and administrative expense decreased 20.5% from
$0.7
million to $0.5 million. The decrease was primarily due to increased management
fees and billing/collections fees charged to the operating segments for services
rendered by our corporate personnel partially offset by incremental costs
associated with the CEO search and costs associated with being a public company
due to our efforts to comply with section 404 of the Sarbanes-Oxley Act.
We
expect to continue to incur costs associated with being a public company
throughout 2005 and in future years.
Depreciation
and Amortization.
Depreciation and amortization expense decreased 6.3% from $1.9 million to
$1.8
million primarily due to assets becoming fully depreciated within our
same-facility ASCs and corporate segment. This decrease was partially offset
by
depreciation associated with our new ASCs.
Minority
Interests and Other (Income) Expense.
Minority interests in the earnings of our ASCs increased from $3.4 million
to
$5.4 million. Of this increase, 84.3% is attributable to new ASCs.
Provision
for Income Taxes.
Our
effective tax rate was unchanged at 40.0%. 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.
Liquidity
and Capital Resources
Operating
activities in the first nine months of 2005 generated $8.3 million in cash
flow
from continuing operations compared to $5.4 million in the comparable 2004
period. The increase in operating cash flow from continuing operations resulted
primarily from an increase in earnings and working capital management, offset
by
increased cash distributions to our minority interest partners.
Investing
activities in the first nine months of 2005 resulted in negative cash flow
of
$11.0 million. Investing activities included the acquisition of two ASCs
for
$6.3 million, the buy-out of the Overland Park option for $3.6 million and
the
purchase of property and equipment for $2.0 million. These expenditures were
partially offset by the receipt of $0.9 million relating to the sale of minority
interests in three ASCs during the first nine months of 2005.
Cash
flows from financing activities in the first nine months of 2005 included
$4.0
million of net borrowings under our credit facility, $0.6 million of proceeds
from the exercise of stock options and issuance of stock to employees as
part of
our employee stock purchase plan offset by $0.3 million in repayments of
capital
lease obligations. At September 30, 2005, we had $9.0 million of borrowings
outstanding under our revolving credit facility and were in compliance with
all
of our credit agreement covenants. The maximum commitment available under
our
credit facility that expires June 30, 2008 is $50.0 million. Maximum borrowing
availability and applicable interest rates under the facility are calculated
based on a ratio of total indebtedness to earnings before interest, taxes,
depreciation and amortization. Interest on borrowings under the facility
is
payable at an annual rate equal to our lender’s published base rate plus the
applicable borrowing margin ranging from 0% to .5% or LIBOR plus a range
from
1.25% to 2.0%, varying depending upon our ratios and ability to meet other
financial covenants. The credit agreement contains covenants that include
limitations on indebtedness, liens, capital expenditures, acquisitions,
investments and share repurchases, as well as restrictions on the payment
of
dividends.
As
of
September 30, 2005, we had cash and cash equivalents of $2.1 million and
working
capital of $7.7 million.
We
expect
our cash flow from operations and funds available under our existing credit
facility to 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 and expansion
activities, capital requirements associated with our surgical facilities,
and
the future cost of surgical equipment.
We
are a
party to option agreements with physicians pursuant to which the physicians
have
the right to purchase or sell equity interests in four of our ASCs. These
are
summarized as follows:
|
o
|
One
of our existing physician-partners who owns a 30% interest in our
Thibodaux, LA ASC has the right to sell us up to a 10% interest
in the ASC
in November 2006; and
|
|
o
|
We
own a 25% interest in our Fort Lauderdale, FL ASC and have an option
to
acquire an additional 26% interest at anytime between November
16, 2005
and July 16, 2007. If we elect not to exercise this option during
this
period, then our physician-partner in the facility has the option
to
purchase our 25% interest in the
facility.
|
Effective
March 25, 2005, we entered into an Option Purchase Agreement with our two
physician-partners in our Overland Park, KS ASC. These physician-partners
had
previously given us notice of their intent to exercise an option to purchase
all
of our interests in this ASC effective as of April 15, 2005. Under the terms
of
the Option Purchase Agreement, we purchased this option from our
physician-partners for an aggregate sum of $3.6 million, with $1.8 million
payable to each physician-partner. As of result of this transaction, the
option
was terminated and we have retained our 51% interest in this ASC.
We
have a
nonexclusive supply agreement with Alcon Laboratories, Inc. pursuant to which
we
can procure and utilize excimer lasers and other equipment manufactured by
Alcon. Through the termination date of December 31, 2006, we will pay Alcon
monthly based on the number of procedures performed on each of our LADARVision
Systems. We are required to pay for a minimum number of annual procedures
on
each LADARVision System during the remaining term, whether or not these
procedures are performed. Assuming we do not procure additional LADARVision
Systems under the agreement, the annual minimum commitment for each of 2005
and
2006 would be approximately $1.2 million and $0.8 million,
respectively.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS. This Form 10-Q contains certain
"forward-looking statements" 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 that could cause
our
actual results, performance or achievements in 2005 and beyond to differ
materially from those expressed in, or implied by, such statements. These
risks
and uncertainties include: our ability to acquire, develop or manage a
sufficient number of profitable surgical facilities, including facilities
that
are not exclusively dedicated to eye-related procedures; reduced prices and
reimbursement rates for surgical procedures; our ability to maintain successful
relationships with the physicians who use our surgical facilities; the
application of existing or proposed government regulations, or the adoption
of
new laws and regulations, that could limit our business operations, require
us
to incur significant expenditures or limit our ability to relocate our
facilities if necessary; the continued acceptance of laser vision correction
and
other refractive surgical procedures; and demand for elective surgical
procedures generally. See “Management’s Discussion and Analysis of Financial
Conditions and Results of Operations - Risk Factors” in our Annual Report on
Form 10-K for the year ended December 31, 2004 for further discussion. 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-Q
or
to reflect the occurrence of unanticipated events.
Item
3. 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
and term borrowings under our credit facility. On September 30, 2005, we
had $9
million 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 0.50% or LIBOR plus a range
from
1.25% to 2.00%, 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
4. Disclosure Controls and Procedures
We
maintain a system of disclosure controls and procedures, as such term is
defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are
designed
to provide reasonable assurance that information required to be disclosed
by us
in the reports that we file under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our
management, including our Executive Vice President and Chief Financial Officer,
who is currently performing similar functions to a principal executive officer
and who is our principal financial officer, as appropriate, to allow timely
decisions regarding required disclosures.
We
have
carried out an evaluation under the supervision and with the participation
of
the Company’s management, including the Company’s Executive Vice President and
Chief Financial Officer, of the effectiveness of the design and operation
of our
disclosure controls and procedures. Based on his evaluation, and subject
to the
foregoing, our Executive Vice President and Chief Financial Officer concluded
that such controls and procedures were effective as of the end of the period
covered by this report, in all material respects, to ensure that required
information will be disclosed on a timely basis in our reports filed under
the
Exchange Act.
In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed
and
operated, can provide only reasonable assurance of achieving the desired
control
objectives, and our management necessarily was required to apply their judgment
in evaluating the cost-benefit relationship of possible controls and procedures.
We believe our disclosure controls and procedures provide such reasonable
assurance.
PART
II.
OTHER INFORMATION
Item
6. Exhibits
|
21
|
Subsidiaries
of the Registrant
|
|
|
|
|
31
|
Certification
by the Principal Executive Officer and Chief Financial Officer
pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
32
|
Certification
of Principal Executive Officer and Chief Financial Officer pursuant
to
Section 906 of the Sarbanes-Oxley Act of
2002
|
SIGNATURES
Pursuant
to the requirement of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
NOVAMED,
INC.
/s/
Scott T. Macomber
|
November
11, 2005
|
Scott
T. Macomber
|
Date
|
Executive
Vice President and
|
|
Chief
Financial Officer
|
|
(on
behalf of Registrant and as principal financial officer)
|
|
|
|
|
|
/s/
John P. Hart
|
November
11, 2005
|
John
P. Hart
|
Date
|
Vice
President, Corporate Controller
|
|
(as
principal accounting officer)
|
|