SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
___________________
FORM
10-Q
ý
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
|
For
the quarterly period ended March 31, 2007
|
|
OR
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
EXCHANGE ACT OF 1934
|
For
the transition period from
to
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ¨
|
Accelerated
filer x
|
Non-accelerated
filer ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
As
of May
4, 2007, there were outstanding 24,388,175 shares of the registrant's common
stock, par value $.01 per share.
NOVAMED,
INC.
FORM
10-Q FOR QUARTERLY PERIOD ENDED MARCH 31, 2007
INDEX
|
PART
OR ITEM
|
PAGE
|
Part
I.
|
FINANCIAL
STATEMENTS
|
3
|
Item
1.
|
Interim
Condensed Consolidated Financial Statements (unaudited)
|
|
|
Condensed
Consolidated Balance Sheets - March 31, 2007 and December 31,
2006
|
3
|
|
Condensed
Consolidated Statements of Operations - Three months ended March 31,
2007 and 2006
|
4
|
|
Condensed
Consolidated Statement of Stockholders’ Equity - Three months ended March
31, 2007
|
5
|
|
Condensed
Consolidated Statements of Cash Flows - Three months ended March
31, 2007 and 2006
|
6
|
|
Notes
to the Interim Condensed Consolidated Financial Statements
|
7
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
15
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
20
|
|
|
|
Item
4.
|
Controls
and Procedures
|
21
|
|
|
|
Part
II.
|
OTHER
INFORMATION
|
22
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
22
|
|
|
|
Item
6.
|
Exhibits
|
22
|
|
Signatures
|
23
|
Part
I. FINANCIAL
INFORMATION
Item
1.
Interim Condensed Consolidated Financial Statements (unaudited)
NOVAMED,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Dollars
in thousands)
|
|
|
March
31,
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,662
|
|
$
|
2,743
|
|
Accounts
receivable, net of allowances of $33,538 and $32,282,
respectively
|
|
|
20,638
|
|
|
17,278
|
|
Notes
and amounts due from related parties
|
|
|
504
|
|
|
505
|
|
Inventory
|
|
|
2,460
|
|
|
2,187
|
|
Prepaid
expenses and deposits
|
|
|
1,160
|
|
|
1,361
|
|
Current
tax assets
|
|
|
1,102
|
|
|
569
|
|
Total
current assets
|
|
|
28,526
|
|
|
24,643
|
|
Property
and equipment, net
|
|
|
15,746
|
|
|
15,066
|
|
Intangible
assets, net
|
|
|
127,319
|
|
|
119,828
|
|
Other
assets, net
|
|
|
1,189
|
|
|
1,010
|
|
Total
assets
|
|
$
|
172,780
|
|
$
|
160,547
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
7,374
|
|
$
|
6,525
|
|
Accrued
expenses and income taxes payable
|
|
|
4,756
|
|
|
6,505
|
|
Current
maturities of long-term debt
|
|
|
1,063
|
|
|
1,373
|
|
Total
current liabilities
|
|
|
13,193
|
|
|
14,403
|
|
Long-term
debt, net of current maturities
|
|
|
69,614
|
|
|
61,227
|
|
Other
long-term liabilities
|
|
|
646
|
|
|
269
|
|
Deferred
income tax liabilities
|
|
|
3,112
|
|
|
2,236
|
|
Minority
interests
|
|
|
15,123
|
|
|
14,296
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Series
E Junior Participating Preferred Stock, $0.01 par value,
1,912,000 shares authorized, none outstanding at March
31, 2007 and December 31, 2006.
|
|
|
—
|
|
|
—
|
|
Common
stock, $0.01 par value, 81,761,465 shares authorized,
29,174,535 and 28,533,676 shares issued at
March 31, 2007 and December 31, 2006, respectively
|
|
|
290
|
|
|
285
|
|
Additional
paid-in-capital
|
|
|
91,834
|
|
|
89,653
|
|
Accumulated
deficit
|
|
|
(10,164
|
)
|
|
(11,656
|
)
|
Accumulated
other comprehensive loss
|
|
|
(286
|
)
|
|
(254
|
)
|
Treasury
stock, at cost, 4,805,613 and 4,713,417 shares at
March 31, 2007 and December 31, 2006, respectively
|
|
|
(10,582
|
)
|
|
(9,912
|
)
|
Total
stockholders’ equity
|
|
|
71,092
|
|
|
68,116
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
172,780
|
|
$
|
160,547
|
|
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
March
31,
|
|
|
|
2007
|
|
2006
|
|
Net
revenue:
|
|
|
|
|
|
Surgical
facilities
|
|
$
|
25,095
|
|
$
|
17,865
|
|
Product
sales and other
|
|
|
6,291
|
|
|
6,051
|
|
Total
net revenue
|
|
|
31,386
|
|
|
23,916
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Salaries,
wages and benefits
|
|
|
10,094
|
|
|
8,045
|
|
Cost
of sales and medical supplies
|
|
|
7,173
|
|
|
5,892
|
|
Selling,
general and administrative
|
|
|
6,004
|
|
|
4,503
|
|
Depreciation
and amortization
|
|
|
930
|
|
|
719
|
|
Total
operating expenses
|
|
|
24,201
|
|
|
19,159
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
7,185
|
|
|
4,757
|
|
|
|
|
|
|
|
|
|
Minority
interests in earnings of consolidated entities
|
|
|
3,521
|
|
|
2,218
|
|
Interest
(income) expense, net
|
|
|
1,327
|
|
|
376
|
|
Other
(income) expense, net
|
|
|
(109
|
)
|
|
(115
|
)
|
Income
before income taxes
|
|
|
2,446
|
|
|
2,278
|
|
Income
tax provision
|
|
|
954
|
|
|
911
|
|
Net
income from continuing operations
|
|
|
1,492
|
|
|
1,367
|
|
Net
income from discontinued operations
|
|
|
—
|
|
|
(1
|
)
|
Net
income
|
|
$
|
1,492
|
|
$
|
1,366
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.06
|
|
$
|
0.06
|
|
Income
from discontinued operations
|
|
|
—
|
|
|
—
|
|
Net
income
|
|
$
|
0.06
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.06
|
|
$
|
0.06
|
|
Income
from discontinued operations
|
|
|
—
|
|
|
—
|
|
Net
income
|
|
$
|
0.06
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
23,899
|
|
|
22,829
|
|
Dilutive
effect of employee stock options and restricted
stock
|
|
|
1,276
|
|
|
1,783
|
|
Diluted
weighted average common shares outstanding
|
|
|
25,175
|
|
|
24,612
|
|
The
notes
to the interim condensed consolidated financial statements are an integral
part
of these statements.
NOVAMED,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Dollars
and shares in thousands, unaudited)
|
|
Common
Stock
|
|
|
|
|
|
|
|
Treasury
Stock
|
|
|
|
|
|
Shares
|
|
Par
Value
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Deficit
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Shares
|
|
At
Cost
|
|
Total
Stockholders’
Equity
|
|
Balance,
December 31, 2006
|
|
|
28,534
|
|
$
|
285
|
|
$
|
89,653
|
|
$
|
(11,656
|
)
|
$
|
(254
|
)
|
|
(4,713
|
)
|
$
|
(9,912
|
)
|
$
|
68,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options exercised
|
|
|
550
|
|
|
5
|
|
|
1,497
|
|
|
—
|
|
|
—
|
|
|
(82
|
)
|
|
(625
|
)
|
|
877
|
|
Shares
issued - employee stock purchase plan
|
|
|
16
|
|
|
—
|
|
|
86
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
86
|
|
Restricted
stock grants
|
|
|
75
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11
|
)
|
|
(45
|
)
|
|
(45
|
)
|
Stock
compensation expense
|
|
|
—
|
|
|
—
|
|
|
598
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
598
|
|
Unrealized
loss on interest rate swaps
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(32
|
)
|
|
—
|
|
|
—
|
|
|
(32
|
)
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,492
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,492
|
|
Balance,
March 31, 2007
|
|
|
29,175
|
|
$
|
290
|
|
$
|
91,834
|
|
$
|
(10,164
|
)
|
$
|
(286
|
)
|
|
(4,806
|
)
|
$
|
(10,582
|
)
|
$
|
71,092
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NOVAMED,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars
in thousands; unaudited)
|
|
Three
months ended March
31,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
1,492
|
|
$
|
1,366
|
|
Adjustments
to reconcile net income to net cash provided by continuing
operations, net of effects of purchase transactions—
|
|
|
|
|
|
|
|
Net
earnings of discontinued operations
|
|
|
—
|
|
|
1
|
|
Depreciation
and amortization
|
|
|
930
|
|
|
719
|
|
Deferred
income taxes
|
|
|
627
|
|
|
911
|
|
Stock-based
compensation
|
|
|
598
|
|
|
417
|
|
Loss
(earnings) of non-consolidated affiliate
|
|
|
16
|
|
|
(20
|
)
|
Gain
on sale of minority interests
|
|
|
(79
|
)
|
|
(9
|
)
|
Minority
interests
|
|
|
3,521
|
|
|
2,218
|
|
Distributions
to minority partners
|
|
|
(3,336
|
)
|
|
(1,888
|
)
|
Changes
in operating assets and liabilities—
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(2,744
|
)
|
|
(1,767
|
)
|
Inventory
|
|
|
(160
|
)
|
|
(17
|
)
|
Other
current assets
|
|
|
200
|
|
|
237
|
|
Accounts
payable and accrued expenses
|
|
|
(778
|
)
|
|
530
|
|
Other
noncurrent assets
|
|
|
50
|
|
|
24
|
|
Net
cash provided by operating activities
|
|
|
337
|
|
|
2,722
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Payments
for acquisitions, net
|
|
|
(8,084
|
)
|
|
(12,617
|
)
|
Proceeds
from sale of minority interests
|
|
|
273
|
|
|
60
|
|
Purchases
of property and equipment
|
|
|
(1,013
|
)
|
|
(474
|
)
|
Other
|
|
|
—
|
|
|
18
|
|
Net
cash used in investing activities
|
|
|
(8,824
|
)
|
|
(13,013
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Borrowings
under revolving line of credit
|
|
|
19,800
|
|
|
21,000
|
|
Payments
under revolving line of credit
|
|
|
(11,500
|
)
|
|
(9,000
|
)
|
Proceeds
from the issuance of common stock
|
|
|
694
|
|
|
96
|
|
Payments
of other debt, debt issuance fees and capital lease
obligations
|
|
|
(588
|
)
|
|
(319
|
)
|
Net
cash provided by financing activities
|
|
|
8,406
|
|
|
11,777
|
|
|
|
|
|
|
|
|
|
Cash
flows from discontinued operations:
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
—
|
|
|
(4
|
)
|
Investing
activities
|
|
|
—
|
|
|
—
|
|
Net
cash used in discontinued operations
|
|
|
—
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(81
|
)
|
|
1,482
|
|
Cash
and cash equivalents, beginning of period
|
|
|
2,743
|
|
|
1,690
|
|
Cash
and cash equivalents, end of period
|
|
$
|
2,662
|
|
$
|
3,172
|
|
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
March
31, 2007
(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, 2006, filed by NovaMed,
Inc. with the Securities and Exchange Commission on Form 10-K. The unaudited
interim condensed consolidated financial statements as of March 31, 2007 and
for
the three months ended March 31, 2007 and 2006, 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:
|
|
Three
months ended March 31,
|
|
|
|
2007
|
|
2006
|
|
Interest
paid
|
|
$
|
1,266
|
|
$
|
243
|
|
Income
taxes paid
|
|
|
—
|
|
|
—
|
|
Income
tax refunds received
|
|
|
—
|
|
|
—
|
|
Non
cash investing and financing activities:
On
January 25, 2007, a former senior executive exercised stock options to acquire
287,199 shares of common stock. Per the terms of the stock option agreements
and
the Company’s stock incentive plans, the former executive tendered to the
Company 82,006 shares of the Company’s common stock to fund the $625 aggregate
exercise price. The Company added these tendered shares into treasury resulting
in an increase in treasury stock of $625.
On
February 1, 2006, the estate of Stephen J. Winjum exercised all remaining stock
options held by the estate to acquire 1,330,730 shares of common stock. Per
the
terms of the stock option agreements and the Company’s stock incentive plans,
the estate tendered to the Company 305,254 shares of the Company’s common stock
that the estate owned to fund the $2,296 aggregate exercise price. The Company
added these tendered shares into treasury. As a result of this transaction,
the
Company recorded additional paid-in-capital of $5,213, which includes a deferred
tax asset of $2,930.
During
the first three months of 2007 and 2006, the Company obtained medical equipment
by entering into capital leases for $38 and $263, respectively.
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
March
31, 2007
(Dollars
in thousands, except per share data; unaudited)
Inventory
consists primarily of surgical supplies used in connection with the operation
of
the Company's ambulatory surgery centers (ASCs) and optical products such as
eyeglass frames, optical lenses and contact lenses. 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.
Balances
as of: |
|
March
31, 2007
|
|
December
31, 2006
|
|
Surgical
supplies
|
|
$
|
1,349
|
|
$
|
1,136
|
|
Optical
products
|
|
|
999
|
|
|
912
|
|
Other
|
|
|
112
|
|
|
139
|
|
Total
inventory
|
|
$
|
2,460
|
|
$
|
2,187
|
|
Goodwill
balances by reportable segment are summarized in the table below:
|
|
Unamortized
Goodwill
|
|
|
|
|
|
Surgical Facilities
|
|
Product Sales
|
|
Other
|
|
Total
|
|
Other
Intangibles
|
|
Balance
December 31, 2006
|
|
$
|
113,364
|
|
$
|
5,475
|
|
$
|
941
|
|
$
|
119,780
|
|
$
|
48
|
|
Acquisitions
|
|
|
7,445
|
|
|
—
|
|
|
—
|
|
|
7,445
|
|
|
—
|
|
Other
|
|
|
53
|
|
|
—
|
|
|
—
|
|
|
53
|
|
|
—
|
|
Amortization
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
Balance
March 31, 2007
|
|
$
|
120,862
|
|
$
|
5,475
|
|
$
|
941
|
|
$
|
127,278
|
|
$
|
41
|
|
The
Company generally acquires majority equity interests in 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.
During the first three months of 2007, the Company made the following
acquisition, which was not significant enough to require pro forma disclosure.
On
January 1, 2007, the Company acquired a 54% interest in the St. Peters
Ambulatory Surgery Center, a multi-specialty ASC located in St. Peters,
Missouri, for $8,000, of which the Company allocated $7,445 to goodwill. The
acquisition was funded from the Company’s credit facility.
During
the first three months of 2006, the Company acquired a majority interest in
one
ASC for $12,450, of which the Company allocated $10,859 to
goodwill.
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
March
31, 2007
(Dollars
in thousands, except per share data; unaudited)
6. |
UNCERTAIN
TAX POSITIONS
|
The
Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction and various state jurisdictions. With few exceptions, the Company
is no longer subject to U.S. federal, state or local income tax examinations
by
tax authorities for years before 2003.
The
Company adopted the provisions of FASB Interpretation No. 48 Accounting
for Uncertainty in Income Taxes on
January 1, 2007 (“FIN 48”). As a result of the implementation of FIN 48, the
Company recognized a liability for unrecognized tax benefits of approximately
$416. No adjustment was made to the beginning retained earnings balance, as
the
ultimate deductibility of all these tax positions is highly certain but there
is
uncertainty about the timing of such deductibility. No interest or penalties
have been accrued relative to these positions due to the Company having either
a
tax loss or having utilized a net operating loss carryforward to offset any
taxable income in all subject years. Deferred tax assets have been recorded
to
recognize the future benefits of the positions reserved for in the FIN 48
liability. Because of the impact of deferred income tax accounting, the
temporary differences would not affect the annual effective tax
rate.
Should
the Company need to accrue interest or penalties on unrecognized tax positions,
it would recognize the interest in interest
expense and
penalties in operating expenses.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
Unrecognized
Tax Benefits — January 1, 2007
|
|
$
|
416
|
|
Gross
increases - tax positions in prior period
|
|
|
—
|
|
Gross
decreases - tax positions in prior period
|
|
|
—
|
|
Gross
increases - current period tax positions
|
|
|
—
|
|
Settlements
|
|
|
(72
|
)
|
Lapse
of statute of limitations
|
|
|
—
|
|
Unrecognized
Tax Benefits — March 31, 2007
|
|
$
|
344
|
|
7. |
OTHER
(INCOME) EXPENSE
|
|
|
Three
months ended
March
31,
|
|
|
|
2007
|
|
2006
|
|
Loss
(earnings) of non-consolidated affiliate
|
|
$
|
16
|
|
$
|
(20
|
)
|
Gain
on sale of minority interests
|
|
|
(79
|
)
|
|
(9
|
)
|
Other,
net
|
|
|
(46
|
)
|
|
(86
|
)
|
Other
(income) expense, net
|
|
$
|
(109
|
)
|
$
|
(115
|
)
|
During
the first quarter of 2007, the Company sold a 10% minority interest in its
Chicago, Illinois ASC to two physicians, increasing minority ownership in this
ASC to 30.5% and sold a 5% minority interest in its Chattanooga, Tennessee
ASC
to one of its existing partners, increasing minority interest ownership in
this
ASC to 43%. These transactions resulted in a net gain on the sale of minority
interests of $79 in the first quarter of 2007.
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
March
31, 2007
(Dollars
in thousands, except per share data; unaudited)
During
the first quarter of 2006, the Company sold a 3% minority interest in its
Maryville, Illinois ASC to a physician, increasing minority ownership in this
ASC to 23%. This transaction resulted in a net gain on the sale of minority
interest of $9 in the first quarter of 2006.
8. |
REVOLVING
CREDIT FACILITY
|
Effective
February 7, 2007, the Company amended its credit facility, increasing the
maximum commitment available under the facility from $80,000 to $125,000 and
extending the expiration date to February 5, 2010. The maximum commitment
available under the facility is the lesser of $125,000 or the maximum allowed
under the calculated ratio limitations. The amended credit agreement also
includes an option allowing the Company to increase the maximum commitment
available to $150,000 under certain conditions. Maximum borrowing availability
and applicable interest rates under the facility are based on a ratio of total
indebtedness to earnings before interest, taxes, depreciation and amortization
as defined in the credit agreement. The amended credit agreement provides for
temporary increases in this ratio through September 30, 2008 for purposes of
calculating the maximum borrowing availability. 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 1.00% to 2.25%, varying depending upon the calculated ratios
and the Company’s ability to meet other financial covenants. The credit
agreement continues to contain covenants that include limitations on
indebtedness, liens, capital expenditures, acquisitions, investments and share
repurchases, as well as restrictions on the payment of dividends; however,
many
of these limitations were changed by these amendments.
At
March 31, 2007, the Company had $66,000 of borrowings outstanding under its
revolving credit facility with a weighted average interest rate of 7.38% and
was
in compliance with all of its credit agreement covenants. The weighted average
interest rate on credit line borrowings during the three months ended March
31,
2007 was 7.28%. In addition, the Company paid a fee ranging from .175% to .250%
on the unused portion of the commitment.
During
the second quarter of 2006, the Company entered into two interest rate swap
agreements. The interest rate swaps protect the Company against certain interest
rate fluctuations of the LIBOR rate on $24,000 of the Company’s variable rate
debt under the credit facility. The date of the first interest rate swap was
April 12, 2006, and it expires on April 19, 2009. This interest rate swap
effectively fixes the Company’s LIBOR rate on $12,000 of variable rate debt at a
rate of 5.34%. The date of the second interest rate swap was June 28, 2006
and
it expires on September 30, 2008. This interest rate swap effectively fixes
the
Company’s LIBOR rate on $12,000 of variable rate debt at a rate of 5.75%. The
Company has recognized the fair value of these interest rate swaps as a
long-term liability of approximately $252 at March 31, 2007.
Effective
August 1, 2006, NovaMed Eye Surgery Center of New Albany, LLC, of which the
Company owns a 67.5% majority interest, entered into a five-year, $4,000
installment note to fund an acquisition. Interest is payable at the lender’s one
month LIBOR rate, designated or published on the first of each month, plus
2.0%.
The ASC entered into a five-year interest rate swap agreement that effectively
fixes the LIBOR rate on this debt at 5.51%. The ASC has recognized the fair
value of this interest rate swap as a long-term liability of approximately
$50
at March 31, 2007.
The
Company has two outstanding letters of credit issued to two of its optical
products buying group vendors in the amounts of $238 and $130 that expire on
March 31, 2008 and December 31, 2007, respectively. The outstanding letters
of
credit reduce the amount available under the credit facility.
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
March
31, 2007
(Dollars
in thousands, except per share data; unaudited)
9. |
OTHER
COMPREHENSIVE INCOME
|
The
Company reports other comprehensive income as a measure of changes in
stockholders’ equity that resulted from recognized transactions and other
economic events of the period from non-owner sources. Other comprehensive income
of the Company results from adjustments due to the fluctuation of the value
of
the Company’s interest rate swaps accounted for under Statement of Financial
Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended. The Company entered into two interest rate swaps during
the second quarter of 2006 and one of its 67.5% owned subsidiaries entered
into
an interest rate swap during the third quarter of 2006. The Company’s share of
the negative value of the interest rate swaps was $286 at March 31, 2007 and
is
recorded as accumulated other comprehensive loss in the accompanying unaudited
consolidated balance sheet. See Note 8 for further discussion of the interest
rate swaps. The total comprehensive income for the first three months of 2007
and 2006 was $1,206 and $1,366, respectively.
10. |
STOCK
BASED COMPENSATION
|
The
Company accounts for stock based compensation applying Statement of Financial
Accounting Standards No. 123 (revised 2004), “Share Based Payment” (“SFAS
123(R)”). SFAS 123(R) applies to new awards and to awards that were outstanding
as of December 31, 2005 that are subsequently vested, modified, repurchased
or
cancelled. Compensation expense recognized during the first three months of
2007
and 2006 includes the portion vesting during the period for (1) all share-based
payments granted prior to, but not yet vested as of December 31, 2005, based
on
the grant date fair value estimated in accordance with the original provisions
of Statement of Financial Accounting Standards No. 123, “Accounting for
Stock-Based Compensation” (“SFAS 123”) and (2) all share-based payments granted
subsequent to December 31, 2005, based on the grant-date fair value estimated
using the Black-Scholes option-pricing model. During the first three months
of
2007, the Company granted its directors and employees options to purchase
574,500 shares with an exercise price of $7.35 per share and options to purchase
75,000 shares with an exercise price of $6.24 per share. Stock compensation
expense of $446 and $303 was recognized on existing stock options during the
three months ended March 31, 2007 and 2006, respectively.
The
fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for stock options granted during the three months ended March
31,
2007. No stock options were granted during the first quarter of
2006.
|
|
Three
months ended March 31,
|
|
|
|
2007
|
|
2006
|
|
Expected
option life in years
|
|
|
6
|
|
|
—
|
|
Risk-free
interest rate
|
|
|
4.77
|
%
|
|
—
|
|
Dividend
yield
|
|
|
—
|
|
|
—
|
|
Expected
volatility
|
|
|
48.1
|
%
|
|
—
|
|
Per
share fair value
|
|
$
|
3.77
|
|
|
—
|
|
The
expected option life used for 2007 grants is the average of the vesting term
assuming options are exercised as vested and the original contractual term
of
the option. The risk free interest rate is based on the yield curve for U.S.
Treasury zero-coupon issues with an equivalent remaining term. The dividend
yield is based on the Company’s current dividend yield as the best estimate of
projected dividend yield for periods within the expected life of the options.
The expected volatility in 2007 is based on the historical volatility of
the
Company’s stock price for the period beginning January 1, 2003 through the
option grant date.
A
summary
of stock based compensation activity within the Company’s stock-based
compensation plans for the three months ended March 31, 2007 is as
follows:
|
|
Number
of Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual Term (Years)
|
|
Aggregate Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
4,604,068
|
|
$
|
4.15
|
|
|
|
|
|
|
|
Granted
|
|
|
649,500
|
|
$
|
7.22
|
|
|
|
|
|
|
|
Exercised
|
|
|
(550,084
|
)
|
$
|
2.33
|
|
|
|
|
|
|
|
Canceled
|
|
|
(46,271
|
)
|
$
|
11.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2007
|
|
|
4,657,213
|
|
$
|
4.71
|
|
|
6.6
|
|
$
|
10,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at March 31, 2007
|
|
|
2,933,247
|
|
$
|
3.58
|
|
|
5.2
|
|
$
|
10,187
|
|
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
March
31, 2007
(Dollars
in thousands, except per share data; unaudited)
The
aggregate intrinsic value for stock options outstanding and exercisable is
defined as the difference between the market value of the Company’s stock as of
the end of the period and the exercise price of the stock options. The total
intrinsic value of stock options exercised during the first three months of
2007
was $2,285. As a result of the stock options exercised, the Company recorded
common stock and additional paid-in-capital of $1,502, which includes $224
of
tax benefits recognized. During the first three months of 2007, cash received
from stock options exercised was $653.
On
January 25, 2007, a former senior executive exercised stock options to acquire
287,199 shares of common stock. Per the terms of the stock option agreements
and
the Company’s stock incentive plans, the former executive tendered to the
Company 82,006 shares of the Company’s common stock to fund the $625 aggregate
exercise price. The Company added these tendered shares into treasury resulting
in an increase in treasury stock of $625.
The
following is a summary of nonvested stock option activity:
|
|
Number
of Shares
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
|
|
|
|
|
|
Nonvested
at December 31, 2006
|
|
|
1,207,655
|
|
$
|
3.22
|
|
Granted
|
|
|
649,500
|
|
$
|
3.77
|
|
Vested
|
|
|
(126,917
|
)
|
$
|
3.51
|
|
Canceled
|
|
|
(6,271
|
)
|
$
|
3.42
|
|
|
|
|
|
|
|
|
|
Nonvested
at March 31, 2007
|
|
|
1,723,967
|
|
$
|
3.40
|
|
At
March
31, 2007, there was $5,868 of total unrecognized compensation cost related
to
nonvested stock options. This cost will be recognized over 4 years.
The
Company also grants restricted stock awards to certain employees. Restricted
stock awards are valued at the closing market value of the Company’s common
stock on the day prior to the grant, and the total value of the award is
recognized as expense ratably over the vesting period of the employees receiving
the grants. The Company granted 75,000 restricted stock awards during the first
quarter of 2007. As of March 31, 2007, the total amount of unrecognized
compensation expense related to nonvested restricted stock awards was
approximately $1,882, which is expected to be recognized over a weighted-average
period of approximately 3.1 years. The Company recognized compensation expense
of $138 and $101 on existing restricted stock awards during the three months
ended March 31, 2007 and 2006, respectively.
The
Company has an employee stock purchase plan (“ESPP”) 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. Approximately 15,800 and 9,000 shares
were purchased under this plan during the three months ended March 31, 2007
and
2006, respectively. Under the provisions of SFAS 123(R), the Company recognized
compensation expense of $14 and $13 during the first three months of 2007 and
2006, respectively. At March 31, 2007, 72,900 shares were reserved for future
issuance under the ESPP.
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
March
31, 2007
(Dollars
in thousands, except per share data; unaudited)
The
table
below presents information about operating data and segment assets as of the
three months ended March 31, 2007 and 2006:
|
|
Surgical
Facilities
|
|
Product
Sales
|
|
Other
|
|
Corporate
|
|
Total
|
|
Three
months ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
25,095
|
|
$
|
4,380
|
|
$
|
1,902
|
|
$
|
9
|
|
$
|
31,386
|
|
Earnings
(loss) before taxes
|
|
|
3,739
|
|
|
1,422
|
|
|
157
|
|
|
(2,872
|
)
|
|
2,446
|
|
Depreciation
and amortization
|
|
|
782
|
|
|
59
|
|
|
38
|
|
|
51
|
|
|
930
|
|
Interest
income
|
|
|
33
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
36
|
|
Interest
expense
|
|
|
86
|
|
|
—
|
|
|
—
|
|
|
1,277
|
|
|
1,363
|
|
Capital
expenditures
|
|
|
626
|
|
|
51
|
|
|
86
|
|
|
250
|
|
|
1,013
|
|
Accounts
receivable
|
|
|
13,989
|
|
|
5,906
|
|
|
691
|
|
|
52
|
|
|
20,638
|
|
Identifiable
assets
|
|
|
151,151
|
|
|
13,084
|
|
|
2,502
|
|
|
6,043
|
|
|
172,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
17,865
|
|
$
|
3,985
|
|
$
|
2,045
|
|
$
|
21
|
|
$
|
23,916
|
|
Earnings
(loss) before taxes
|
|
|
2,875
|
|
|
984
|
|
|
283
|
|
|
(1,864
|
)
|
|
2,278
|
|
Depreciation
and amortization
|
|
|
582
|
|
|
54
|
|
|
21
|
|
|
62
|
|
|
719
|
|
Interest
income
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
17
|
|
Interest
expense
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
380
|
|
|
393
|
|
Capital
expenditures
|
|
|
294
|
|
|
91
|
|
|
19
|
|
|
70
|
|
|
474
|
|
Accounts
receivable
|
|
|
7,568
|
|
|
5,808
|
|
|
700
|
|
|
76
|
|
|
14,152
|
|
Identifiable
assets
|
|
|
94,185
|
|
|
12,962
|
|
|
1,901
|
|
|
7,227
|
|
|
116,275
|
|
12. |
RECENT
ACCOUNTING PRONOUNCEMENTS
|
The
Company adopted the provisions of FASB Interpretation No. 48 Accounting
for Uncertainty in Income Taxes
on
January 1, 2007 (“FIN 48”). As a result of the implementation of FIN 48, the
Company recognized a liability for unrecognized tax benefits of approximately
$416. No adjustment was made to the beginning retained earnings balance, as
the
ultimate deductibility of all these tax positions is highly certain but there
is
uncertainty about the timing of such deductibility. No interest or penalties
have been accrued relative to these positions since the Company does not have
either a tax loss or have utilized a net operating loss carryforward to offset
any taxable income in all subject years. Deferred tax assets have been recorded
to recognize the future benefits of the positions reserved for in the FIN 48
liability. Because of the impact of deferred income tax accounting, the
temporary differences would not affect the annual effective tax
rate.
In
September 2006, the FASB issued SFAS No. 157, “Fair
Value Measurements.”
SFAS
No. 157 defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. SFAS No. 157
is effective for financial statements issued for fiscal years beginning after
November 15, 2007 and will become effective for the Company beginning with
the first quarter of 2008. The Company has not yet determined the impact of
the
adoption of SFAS No. 157 on its financial statements and note disclosures.
In
February 2007, the FASB issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities.”
SFAS
No. 159 allows entities the option to measure eligible financial
instruments at fair value as of specified dates. Such election, which may be
applied on an instrument by instrument basis, is typically irrevocable once
elected. SFAS No. 159 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and will become effective
for the Company beginning with the first quarter of 2008. The Company has not
yet determined the impact of the adoption of SFAS No. 159 on its financial
statements and note disclosures.
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 March 31, 2007 and the results of operations for the three months ended
March
31, 2007 and 2006. 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 20 of
this
quarterly report.
Overview
We
consider our core business to be the ownership and operation of ambulatory
surgery centers (ASCs). As of March 31, 2007, we owned and operated 37 ASCs,
of
which 35 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.
First
Quarter Financial
Highlights:
· |
Consolidated
net revenue increased 31.2% to $31.4 million. Surgical facilities
net
revenue increased 40.5% to $25.1 million (same-facility surgical
net
revenue increased 9.9% to $18.2
million).
|
· |
Operating
income increased 51.0% to $7.2
million.
|
· |
Increased
the available commitment under our credit facility to $125 million.
|
Results
of Operations
The
following table summarizes our operating results as a percentage of net
revenue:
|
|
Three
months ended March
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
Net
Revenue: |
|
|
|
|
|
|
|
Surgical
facilities
|
|
|
80.0
|
%
|
|
74.7
|
%
|
Product
sales and other
|
|
|
20.0
|
|
|
25.3
|
|
Total
net revenue
|
|
|
100.0
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Salaries,
wages and benefits
|
|
|
32.2
|
|
|
33.6
|
|
Cost
of sales and medical supplies
|
|
|
22.8
|
|
|
24.6
|
|
Selling,
general and administrative
|
|
|
19.1
|
|
|
18.8
|
|
Depreciation
and amortization
|
|
|
3.0
|
|
|
3.0
|
|
Total
operating expenses
|
|
|
77.1
|
|
|
80.0
|
|
Operating
income
|
|
|
22.9
|
|
|
20.0
|
|
Minority
interests in earnings of consolidated entities
|
|
|
11.2
|
|
|
9.3
|
|
Other
(income) expense
|
|
|
3.9
|
|
|
1.1
|
|
Income
before income taxes
|
|
|
7.8
|
|
|
9.6
|
|
Income
tax provision
|
|
|
3.0
|
|
|
3.8
|
|
Net
income from continuing operations
|
|
|
4.8
|
|
|
5.8
|
|
Net
income from discontinued operations
|
|
|
-
|
|
|
-
|
|
Net
income
|
|
|
4.8
|
%
|
|
5.8
|
%
|
Three
Months Ended March 31, 2007 Compared to the Three Months Ended March 31,
2006
Net
Revenue
Consolidated.
Total
net revenue increased 31.2% from $23.9 million to $31.4 million. Net revenue
by
segment is discussed below.
Surgical
Facilities.
The
table below summarizes surgical facilities net revenue and procedures performed
for the first quarter of 2007 and 2006. 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 40.5% from $17.9 million to $25.1 million. This increase was primarily
the result of $6.2 million of net revenue from ASCs acquired or developed after
January 1, 2006 (“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 7.1% increase in the number
of same-facility procedures performed and a 2.6% increase in the net revenue
per
procedure due to a change in procedure mix.
The
success of our business depends on our relationship with, and the success
and
efforts of, the physicians who perform surgical procedures at our ASCs. Our
revenue and profitability would decline if our relationship with key physicians
deteriorated or those physicians reduced or eliminated their use of our ASCs.
One of our ASCs acquired in 2006 has experienced a significant decline in
the
number of procedures performed. This ASC was dilutive to our earnings during
the
first quarter of 2007 when considering the interest expense on the purchase
price paid for the ASC.
|
|
Three
Months Ended
March
31,
|
|
Increase
|
|
Dollars
in
thousands |
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Surgical
Facilities:
|
|
|
|
|
|
|
|
Same-facility:
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
18,163
|
|
$
|
16,530
|
|
$
|
1,633
|
|
#
of procedures
|
|
|
21,838
|
|
|
20,392
|
|
|
1,446
|
|
|
|
|
|
|
|
|
|
|
|
|
New
ASCs:
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
6,906
|
|
$
|
685
|
|
$
|
6,221
|
|
#
of procedures
|
|
|
9,407
|
|
|
665
|
|
|
8,742
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
laser services agreement and ASC closures
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
26
|
|
$
|
650
|
|
$
|
(624
|
)
|
#
of procedures
|
|
|
—
|
|
|
1,318
|
|
|
(1,318
|
)
|
Product
Sales and Other.
The
table below summarizes net product sales and other revenue by significant
business component. Product sales and other revenue for the first quarter
increased 4.0% from $6.1 million to $6.3 million.
|
|
Three
Months Ended March 31,
|
|
Increase
|
|
Dollars
in thousands
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
Product
Sales:
|
|
|
|
|
|
|
|
Optical
laboratories
|
|
$
|
1,639
|
|
$
|
1,593
|
|
$
|
46
|
|
Optical
products purchasing organization
|
|
|
802
|
|
|
686
|
|
|
116
|
|
Marketing
products and services
|
|
|
1,461
|
|
|
1,260
|
|
|
201
|
|
Optometric
practice/retail store
|
|
|
478
|
|
|
446
|
|
|
32
|
|
|
|
|
4,380
|
|
|
3,985
|
|
|
395
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
Ophthalmology
practice
|
|
|
1,902
|
|
|
1,973
|
|
|
(71
|
)
|
Other
|
|
|
9
|
|
|
93
|
|
|
(84
|
)
|
|
|
|
1,911
|
|
|
2,066
|
|
|
(155
|
)
|
Total
Net Product Sales and Other Revenue
|
|
$
|
6,291
|
|
$
|
6,051
|
|
$
|
240
|
|
Salaries,
Wages and Benefits
Consolidated.
Salaries, wages and benefits expense increased 25.5% from $8.0 million to $10.1
million. As a percentage of net revenue, salaries, wages and benefits expense
decreased from 33.6% to 32.2% primarily due to minimal increases in product
sales staffing to service increased revenue. Salaries, wages and benefits
expense by segment is discussed below.
Surgical
Facilities.
Salaries, wages and benefits expense in our surgical facilities segment
increased 38.5% from $4.1 million to $5.6 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
remained flat at $2.1 million.
Corporate. Salaries,
wages and benefits expense increased 27.9% from $1.8 million to $2.4 million.
The increase was primarily due to higher stock-based compensation expense of
$0.2 million, additional employees required to service the new ASCs, annual
salary increases and increased corporate infrastructure expenses.
Cost
of Sales and Medical Supplies
Consolidated.
Cost of
sales and medical supplies expense increased 21.7% from $5.9 million to $7.2
million. As a percentage of net revenue, cost of sales and medical supplies
expense decreased from 24.6% to 22.8%. 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
30.8% from $4.2 million to $5.5 million. The expense increase was primarily
the
result of costs associated with our new ASCs and increased procedure volumes
at
some of our same-facility ASCs.
Product
Sales and Other.
Cost of
sales and medical supplies expense in our product sales and other segments
decreased $24,000 to $1.6 million. As a percentage of net revenue, cost of
sales
and medical supplies expense decreased from 27.5% to 26.1% primarily due an
increase in higher margin revenue within our marketing products and services
business.
Selling,
General and Administrative
Consolidated.
Selling,
general and administrative expense increased 33.3% from $4.5 million to $6.0
million. As a percentage of net revenue, selling, general and administrative
expense increased from 18.8% to 19.1%. Selling, general and administrative
expense by segment is discussed below.
Surgical
Facilities.
Selling,
general and administrative expense in our surgical facilities segment increased
42.4% from $3.6 million to $5.1 million. The increase is due to costs associated
with our new ASCs and an increase of $0.3 million in 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
remained flat at $0.9 million.
Corporate.
Corporate selling, general and administrative expense increased from $9,000
to
$14,000. This increase consists of two components. Corporate selling, general
and administrative expenses decreased by $0.3 million due to an increase of
$0.3
million in management and billing/collections fees charged to the operating
segments for services rendered by certain corporate personnel. Corporate
selling, general and administrative expenses increased by $0.3 million due
to
higher professional fees, information technology/consulting expenses and travel
costs.
Depreciation
and Amortization.
Depreciation and amortization expense increased 29.2% from $0.7 million to
$0.9
million due to increases in depreciation associated with our new ASCs and
capital expenditures in our surgical facilities segment.
Minority
Interests and Other (Income) Expense.
Minority interests in the earnings of our ASCs were $3.5 million in 2007 as
compared to $2.2 million in 2006. Of this increase, 68.2% is attributable to
new
ASCs.
Interest
(Income) Expense, net.
Interest
expense increased from $0.4 million to $1.3 million due to our increased
borrowings to fund our ASC acquisitions and higher borrowing costs primarily
related to an increase in interest rates over the past year.
Provision
for Income Taxes.
Our
effective tax rate in the first quarter of 2007 was 39.0%. 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 during the first three months of 2007 generated $0.3 million in
cash
flow from continuing operations compared to $2.7 million in the comparable
2006
period. Before considering changes in working capital, operating cash flow
from
continuing operations was flat compared to the first three months of 2006.
During the first quarter of 2007 and 2006, working capital consumed $3.5 million
and $1.5 million in cash, respectively. The increased cash consumption in the
first quarter of 2007 is primarily due to recent acquisitions and the delay
in
receiving new insurance provider numbers which delays the billing and collection
process, an increase in annual cash incentive payments compared to the first
quarter of 2006, and the timing of vendor payments.
Investing
activities during the first three months of 2007 resulted in negative cash
flow
of $8.8 million. Investing activities during the first three months of 2007
included the acquisition of one ASC for $8.0 million, the purchase of property
and equipment for $1.0 million and proceeds of $0.3 million relating to the
sale
of minority interests. Investing activities during the first three months of
2006 resulted in negative cash flow of $13.0 million which included the
acquisition of one ASC for $12.6 million, the purchase of property and equipment
for $0.5 million and proceeds of $0.1 million relating to the sale of minority
interests.
Cash
flows from financing activities during the first three months of 2007 included
$8.3 million of net borrowings under our credit facility and $0.7 million from
the exercise of stock options and issuance of stock to employees as part of
our
employee stock purchase plan. These financing activities were partially offset
by $0.6 million of capital lease and other debt obligation payments. Cash flows
from financing activities during the first three months of 2006 included $12.0
million of net borrowings under our credit facility and $0.1 million 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 of capital lease obligation
payments.
At
March
31, 2007, we had $66.0 million of borrowings outstanding under our revolving
credit facility and were in compliance with all of our credit agreement
covenants. Effective February 7, 2007, we amended our credit facility,
increasing the maximum commitment available under the facility from $80 million
to $125 million and extending the expiration date to February 5, 2010. The
maximum commitment available under the facility is the lesser of $125 million
or
the maximum allowed under the calculated ratio limitations. The amended credit
agreement also includes an option allowing us to increase the maximum commitment
available to $150 million under certain conditions. Maximum borrowing
availability and applicable interest rates under the facility are based on
a
ratio of our total indebtedness to our earnings before interest, taxes,
depreciation and amortization as defined in the credit agreement. The amended
credit agreement provides for temporary increases in this ratio through
September 30, 2008 for purposes of calculating our maximum borrowing
availability. 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 0.5% or LIBOR plus a range from 1.00% to 2.25%,
varying depending upon our ratios and ability to meet other financial covenants.
In addition, a fee ranging from .175% to .250% is charged on the unused portion
of the commitment. 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; however, many of these limitations were changed by these amendments.
The weighted average interest rate on credit line borrowings at March 31, 2007
was 7.38%.
During
2006, we entered into two interest rate swap agreements. The interest rate
swaps
protect us against certain interest rate fluctuations of the LIBOR rate on
$24
million of our variable rate debt under our credit facility. The date of the
first interest rate swap was April 12, 2006, and it expires on April 19, 2009.
This interest rate swap effectively fixes our LIBOR rate on $12 million of
variable rate debt at a rate of 5.34%. The date of the second interest rate
swap
was June 28, 2006 and it expires on September 30, 2008. This interest rate
swap
effectively fixes our LIBOR rate on $12 million of variable rate debt at a
rate
of 5.75%. Effective August 1, 2006, NovaMed Eye Surgery Center of New Albany,
LLC (“New Albany ASC”), of which we own a 67.5% majority interest, entered into
a $4 million installment note which matures on August 1, 2013. Interest is
payable at the lender’s one month LIBOR rate, designated or published on the
first of each month, plus 2.0%. The New Albany ASC entered into a five-year
interest rate swap agreement that effectively fixes the LIBOR rate on this
debt
at 5.51%.
As
of
March 31, 2007, we had cash and cash equivalents of $2.7 million of which $2.4
million was restricted pursuant to agreements with six of our ASCs. As of March
31, 2007, we had working capital of $15.3 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
have
an option to purchase an additional 26% equity interest from our
physician-partner in our Ft. Lauderdale, Florida ASC to enable us to increase
our interest in the ASC to a majority equity interest. The purchase price of
this 26% interest is based on a multiple of the ASC’s twelve-month trailing
EBITDA. If we do not to exercise this option by July 2007, we have the option
to
sell our minority interest to our physician-partner for the original purchase
price paid. If neither of the aforementioned options are exercised by us by
September 2007, our physician-partner has the option to purchase our minority
interest at the original purchase price paid.
Two
partners in our Richmond, Virginia ASC who each own a 14.5% equity interest
have
the option to sell us back their interest at the same price they paid to acquire
their interest.
Recent
Accounting Pronouncements
We
adopted the provisions of FASB Interpretation No. 48 Accounting
for Uncertainty in Income Taxes
on
January 1, 2007 (“FIN 48”). As a result of the implementation of FIN 48, we
recognized a liability for unrecognized tax benefits of approximately $0.4
million. No adjustment was made to the beginning retained earnings balance,
as
the ultimate deductibility of all these tax positions is highly certain but
there is uncertainty about the timing of such deductibility. No interest or
penalties have been accrued relative to these positions since we have either
a
tax loss or have utilized a net operating loss carryforward to offset any
taxable income in all subject years. Deferred tax assets have been recorded
to
recognize the future benefits of the positions reserved for in the FIN 48
liability. Because of the impact of deferred income tax accounting, the
temporary differences would not affect the annual effective tax
rate.
In
September 2006, the FASB issued SFAS No. 157, “Fair
Value Measurements.”
SFAS
No. 157 defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. SFAS No. 157
is effective for financial statements issued for fiscal years beginning after
November 15, 2007 and will become effective for us beginning with the first
quarter of 2008. We have not yet determined the impact of the adoption of SFAS
No. 157 on our financial statements and note disclosures.
In
February 2007, the FASB issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities.”
SFAS
No. 159 allows entities the option to measure eligible financial
instruments at fair value as of specified dates. Such election, which may be
applied on an instrument by instrument basis, is typically irrevocable once
elected. SFAS No. 159 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and will become effective
for us beginning with the first quarter of 2008. We have not yet determined
the
impact of the adoption of SFAS No. 159 on our financial statements and note
disclosures.
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 to differ materially from those
expressed in, or implied by, such statements. These
risks and uncertainties relate to our business, our industry and our common
stock and include: reduced prices and reimbursement rates for surgical
procedures; 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; our ability to manage our increasing
borrowing costs as we incur additional indebtedness to fund the acquisition
and
development of surgical facilities; our ability to access capital on a
cost-effective basis to continue to successfully implement our growth strategy;
our ability to maintain successful relationships with the physicians who use
our
surgical facilities; our operating margins and profitability could suffer if
we
are unable to grow and manage effectively our increasing number of surgical
facilities; competition from other companies in the acquisition, development
and
operation of surgical facilities; and 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.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
We
have
exposure to interest rate risk related to our financing, investing and cash
management activities. We have not held or issued derivative financial
instruments other than the use of variable-to-fixed interest rate swaps for
portions of our borrowings. We do not use derivative instruments for speculative
purposes. Our borrowings are primarily indexed to the prime rate or LIBOR and
have a mix of maturities. We entered into two swap agreements in 2006 as
follows: $12.0 million in principal amount outstanding under our credit facility
with a fixed rate of 5.34% from April 19, 2006 to April 19, 2009 and $12.0
million in principal amount outstanding under our credit facility with a fixed
rate of 5.75% from September 30, 2006 to September 30, 2008. In addition,
NovaMed Eye Surgery Center of New Albany, LLC, of which we own a 67.5% equity
interest, entered into a swap agreement in 2006 as follows: $4.0 million in
principal amount outstanding under a note with National City Bank with a fixed
rate of 5.51% from August 4, 2006 to August 1, 2011.
At
March
31, 2007, $66.0 million of our long-term debt was subject to variable rates
of
interest. Excluding the impact of our previously disclosed swap agreements,
a
hypothetical 100 basis point increase in market interest rates would result
in
additional annual interest expense of $0.7 million. The fair value of our
long-term debt approximated its carrying value at March 31, 2007.
Item
4. Controls and Procedures
Evaluation
of 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 Securities Exchange Act of 1934
(the “Exchange Act”), that are designed to ensure 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 Chairman and Chief Executive
Officer and Executive Vice President and Chief 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 Chairman and Chief Executive
Officer and Executive Vice President and Chief Financial Officer (its principal
executive officer and principal financial officer), of the effectiveness of
the
design and operation of our disclosure controls and procedures as of the end
of
the period covered by this report. Based on their evaluation, the Chairman
and
Chief Executive Officer and Executive Vice President and Chief Financial Officer
concluded that such disclosure controls and procedures were effective as of
the
end of the period covered by this report 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.
Changes
in Internal Control Over Financial Reporting
There
were no changes in the Company’s internal control over financial reporting (as
such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred
during the quarterly period ended March 31, 2007 that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
PART
II.
OTHER INFORMATION
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
C. Issuer
Repurchases of Equity Securities
The
following table contains information regarding repurchases by the Company of
shares of its outstanding equity securities during the quarter ended March
31.
2007:
Period
|
|
Total
Number
of Shares Purchased (1)
|
|
Average
Price
Paid
per
Share
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
|
Maximum
Number of Shares that May Yet Be Purchased Under the Plan or
Programs
|
|
|
|
|
|
|
|
|
|
|
|
1/01/2007
- 1/31/2007
|
|
|
84,019
|
|
$
|
7.62
|
|
|
None
|
|
|
None
|
|
2/01/2007
- 2/28/2007
|
|
|
2,013
|
|
$
|
7.40
|
|
|
None
|
|
|
None
|
|
3/01/2007
- 3/31/2007
|
|
|
2,518
|
|
$
|
6.37
|
|
|
None
|
|
|
None
|
|
(1)
Represents 6,544 shares of restricted stock delivered by employees to the
Company, upon vesting, to satisfy tax withholding requirements and 82,006 shares
of common stock tendered by a former senior executive to exercise stock
options.
Item
6. Exhibits
21 |
Subsidiaries
of the Registrant
|
31.1
|
Certification
by the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
31.2
|
Certification
by the CFO 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 requirements 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 |
|
|
May
10, 2007 |
Scott
T. Macomber |
|
|
Date |
Executive
Vice President and Chief
Financial Officer (on behalf of Registrant and as principal
financial officer) |
|
|
|
|
|
|
|
/s/ John
P. Hart |
|
|
May
10, 2007 |
John
P. Hart |
|
|
Date |
Vice
President, Corporate Controller (as principal accounting
officer) |
|
|
|