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 June 30, 2007
OR
o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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
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
August 03, 2007, there were outstanding 24,382,907 shares of the registrant's
common stock, par value $.01 per share.
NOVAMED,
INC.
FORM
10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 2007
INDEX
|
PART
OR ITEM
|
PAGE
|
Part
I.
|
FINANCIAL
STATEMENTS
|
3
|
Item
1.
|
Interim
Condensed Consolidated Financial Statements (unaudited)
|
|
|
Condensed
Consolidated Balance Sheets - June 30, 2007 and December 31,
2006
|
3
|
|
Condensed
Consolidated Statements of Operations - Three and six months ended
June
30, 2007 and 2006
|
4
|
|
Condensed
Consolidated Statement of Stockholders’ Equity - Six months ended June 30,
2007
|
5
|
|
Condensed
Consolidated Statements of Cash Flows - Six months ended June
30, 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
|
18
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
27
|
|
|
|
Item
4.
|
Controls
and Procedures
|
27
|
|
|
|
Part
II.
|
OTHER
INFORMATION
|
28
|
Item
1A.
|
Risk
factors
|
28
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
29
|
|
|
|
Item
6.
|
Exhibits
|
29
|
|
Signatures
|
30
|
Part
I. FINANCIAL
INFORMATION
Item
1. Interim Condensed
Consolidated Financial Statements (unaudited)
NOVAMED,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Dollars
in thousands, except per share data)
|
|
June
30,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,663
|
|
$
|
2,743
|
|
Accounts
receivable, net of allowances of $35,121
and
$32,282, respectively
|
|
|
20,604
|
|
|
17,278
|
|
Notes
and amounts due from related parties
|
|
|
505
|
|
|
505
|
|
Inventory
|
|
|
2,325
|
|
|
2,187
|
|
Prepaid
expenses and deposits
|
|
|
1,429
|
|
|
1,361
|
|
Current
tax assets
|
|
|
1,273
|
|
|
569
|
|
Total
current assets
|
|
|
28,799
|
|
|
24,643
|
|
Property
and equipment, net
|
|
|
16,475
|
|
|
15,066
|
|
Intangible
assets, net
|
|
|
152,006
|
|
|
119,828
|
|
Noncurrent
deferred tax assets, net
|
|
|
4,250
|
|
|
—
|
|
Other
assets, net
|
|
|
1,259
|
|
|
1,010
|
|
Total
assets
|
|
$
|
202,789
|
|
$
|
160,547
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
7,614
|
|
$
|
6,525
|
|
Accrued
expenses and income taxes payable
|
|
|
4,895
|
|
|
6,505
|
|
Current
maturities of long-term debt
|
|
|
1,291
|
|
|
1,373
|
|
Total
current liabilities
|
|
|
13,800
|
|
|
14,403
|
|
Long-term
debt, net of current maturities
|
|
|
28,848
|
|
|
61,227
|
|
Convertible
subordinated debt, net of debt issuance costs
|
|
|
72,389
|
|
|
—
|
|
Other
long-term liabilities
|
|
|
465
|
|
|
269
|
|
Deferred
income taxes
|
|
|
—
|
|
|
2,236
|
|
Minority
interests
|
|
|
15,517
|
|
|
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
June
30, 2007 and December 31, 2006, respectively
|
|
|
—
|
|
|
—
|
|
Common
stock, $0.01 par value, 81,761,465 shares
authorized,
29,199,458 and 28,533,676 shares issued
at
June 30, 2007 and December 31, 2006, respectively
|
|
|
291
|
|
|
285
|
|
Additional
paid-in-capital
|
|
|
90,906
|
|
|
89,653
|
|
Accumulated
deficit
|
|
|
(8,692
|
)
|
|
(11,656
|
)
|
Accumulated
other comprehensive income (loss)
|
|
|
(114
|
)
|
|
(254
|
)
|
Treasury
stock, at cost, 4,814,861 and 4,713,417 shares
at
June 30, 2007 and December 31, 2006, respectively
|
|
|
(10,621
|
)
|
|
(9,912
|
)
|
Total
stockholders’ equity
|
|
|
71,770
|
|
|
68,116
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
202,789
|
|
$
|
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
June
30,
|
|
Six
months ended
June
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surgical
facilities
|
|
$
|
26,894
|
|
$
|
21,105
|
|
$
|
51,989
|
|
$
|
38,970
|
|
Product
sales and other
|
|
|
5,588
|
|
|
5,937
|
|
|
11,879
|
|
|
11,988
|
|
Total
net revenue
|
|
|
32,482
|
|
|
27,042
|
|
|
63,868
|
|
|
50,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
wages and benefits
|
|
|
10,074
|
|
|
8,572
|
|
|
20,168
|
|
|
16,617
|
|
Cost
of sales and medical supplies
|
|
|
7,759
|
|
|
6,661
|
|
|
14,932
|
|
|
12,553
|
|
Selling,
general and administrative
|
|
|
6,064
|
|
|
4,983
|
|
|
12,068
|
|
|
9,486
|
|
Depreciation
and amortization
|
|
|
984
|
|
|
749
|
|
|
1,914
|
|
|
1,468
|
|
Total
operating expenses
|
|
|
24,881
|
|
|
20,965
|
|
|
49,082
|
|
|
40,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
7,601
|
|
|
6,077
|
|
|
14,786
|
|
|
10,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests in earnings of consolidated entities
|
|
|
3,746
|
|
|
2,825
|
|
|
7,267
|
|
|
5,042
|
|
Interest
(income) expense, net
|
|
|
1,457
|
|
|
574
|
|
|
2,785
|
|
|
950
|
|
Other
(income) expense, net
|
|
|
(16
|
)
|
|
(77
|
)
|
|
(125
|
)
|
|
(192
|
)
|
Income
before income taxes
|
|
|
2,414
|
|
|
2,755
|
|
|
4,859
|
|
|
5,034
|
|
Income
tax provision
|
|
|
941
|
|
|
1,102
|
|
|
1,895
|
|
|
2,014
|
|
Net
income from continuing operations
|
|
|
1,473
|
|
|
1,653
|
|
|
2,964
|
|
|
3,020
|
|
Net
income from discontinued operations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
income
|
|
$
|
1,473
|
|
$
|
1,653
|
|
$
|
2,964
|
|
$
|
3,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.06
|
|
$
|
0.07
|
|
$
|
0.12
|
|
$
|
0.13
|
|
Income
from discontinued operations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
income
|
|
$
|
0.06
|
|
$
|
0.07
|
|
$
|
0.12
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.06
|
|
$
|
0.07
|
|
$
|
0.12
|
|
$
|
0.12
|
|
Income
from discontinued operations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
income
|
|
$
|
0.06
|
|
$
|
0.07
|
|
$
|
0.12
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
24,109
|
|
|
23,241
|
|
|
24,004
|
|
|
23,035
|
|
Dilutive
effect of employee stock options and
restricted
stock
|
|
|
1,122
|
|
|
1,534
|
|
|
1,199
|
|
|
1,659
|
|
Diluted
weighted average common shares outstanding
|
|
|
25,231
|
|
|
24,775
|
|
|
25,203
|
|
|
24,694
|
|
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
|
|
Retained
Earnings
(Accumulated)
(Deficit)
|
|
Accumulated
Other
Comprehensive
Income (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
|
|
|
575
|
|
|
6
|
|
|
1,742
|
|
|
—
|
|
|
—
|
|
|
(82
|
)
|
|
(626
|
)
|
|
1,122
|
|
Shares
issued - employee stock purchase plan
|
|
|
16
|
|
|
—
|
|
|
86
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
86
|
|
Restricted
stock grants
|
|
|
75
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(20
|
)
|
|
(83
|
)
|
|
(83
|
)
|
Stock
compensation expense
|
|
|
—
|
|
|
—
|
|
|
1,265
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,265
|
|
Sale
of warrants
|
|
|
—
|
|
|
—
|
|
|
14,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,000
|
|
Convertible
note call options, net of $8,160 tax benefit
|
|
|
—
|
|
|
—
|
|
|
(15,840
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,840
|
)
|
Unrealized
loss on interest rate swaps
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
140
|
|
|
—
|
|
|
—
|
|
|
140
|
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,964
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,964
|
|
Balance,
June 30, 2007
|
|
|
29,200
|
|
$
|
291
|
|
$
|
90,906
|
|
$
|
(8,692
|
)
|
$
|
(114
|
)
|
|
(4,815
|
)
|
$
|
(10,621
|
)
|
$
|
71,770
|
|
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)
|
|
Six
months ended
June
30,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,964
|
|
$
|
3,020
|
|
Adjustments
to reconcile net income to net cash provided by
continuing
operations, net of effects of purchase transactions—
|
|
|
|
|
|
|
|
Net
earnings of discontinued operations
|
|
|
—
|
|
|
—
|
|
Depreciation
and amortization
|
|
|
1,914
|
|
|
1,468
|
|
Current
and deferred taxes
|
|
|
1,254
|
|
|
2,014
|
|
Stock-based
compensation
|
|
|
1,265
|
|
|
822
|
|
Loss
(earnings) of non-consolidated affiliate
|
|
|
34
|
|
|
(31
|
)
|
Gain
on sale of minority interests
|
|
|
(79
|
)
|
|
(9
|
)
|
Minority
interests
|
|
|
7,267
|
|
|
5,042
|
|
Distributions
to minority partners
|
|
|
(6,633
|
)
|
|
(4,194
|
)
|
Changes
in operating assets and liabilities—
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,839
|
)
|
|
(2,490
|
)
|
Inventory
|
|
|
38
|
|
|
(17
|
)
|
Other
current assets
|
|
|
42
|
|
|
(233
|
)
|
Accounts
payable and accrued expenses
|
|
|
(657
|
)
|
|
898
|
|
Other
noncurrent assets
|
|
|
78
|
|
|
39
|
|
Net
cash provided by operating activities
|
|
|
5,648
|
|
|
6,329
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Payments
for acquisitions, net
|
|
|
(32,721
|
)
|
|
(19,891
|
)
|
Proceeds
from sale of minority interests
|
|
|
273
|
|
|
60
|
|
Purchases
of property and equipment
|
|
|
(1,637
|
)
|
|
(1,379
|
)
|
Other
|
|
|
—
|
|
|
33
|
|
Net
cash used in investing activities
|
|
|
(34,085
|
)
|
|
(21,177
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Borrowings
under revolving line of credit
|
|
|
50,100
|
|
|
34,900
|
|
Payments
under revolving line of credit
|
|
|
(83,800
|
)
|
|
(19,600
|
)
|
Proceeds
from the issuance of convertible subordinated debt, net (Note
8)
|
|
|
62,375
|
|
|
—
|
|
Proceeds
from the issuance of common stock
|
|
|
702
|
|
|
232
|
|
Payments
of other debt, debt issuance fees and capital lease
obligations
|
|
|
(1,020
|
)
|
|
(648
|
)
|
Net
cash provided by financing activities
|
|
|
28,357
|
|
|
14,884
|
|
|
|
|
|
|
|
|
|
Cash
flows from discontinued operations:
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
—
|
|
|
(12
|
)
|
Investing
activities
|
|
|
—
|
|
|
—
|
|
Net
cash used in discontinued operations
|
|
|
—
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(80
|
)
|
|
24
|
|
Cash
and cash equivalents, beginning of period
|
|
|
2,743
|
|
|
1,690
|
|
Cash
and cash equivalents, end of period
|
|
$
|
2,663
|
|
$
|
1,714
|
|
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
June
30, 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 June 30, 2007 and
for
the three and six months ended June 30, 2007 and 2006, include all normal
recurring adjustments which management considers necessary for a fair
presentation. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. 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:
|
|
Six months ended June 30,
|
|
|
|
2007
|
|
2006
|
|
Interest
paid
|
|
$
|
3,163
|
|
$
|
820
|
|
Income
taxes paid
|
|
|
214
|
|
|
115
|
|
Income
tax refunds received
|
|
|
—
|
|
|
(38
|
)
|
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 $626 aggregate
exercise price. The Company added these tendered shares into treasury resulting
in an increase in treasury stock of $626.
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 six months of 2007 and 2006, the Company obtained medical equipment
by
entering into capital leases for $38 and $263, respectively.
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.
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
June
30, 2007
(Dollars
in thousands, except per share data; unaudited)
Balances
as of:
|
|
June
30,
2007
|
|
December 31,
2006
|
|
Surgical
supplies
|
|
$
|
1,313
|
|
$
|
1,136
|
|
Optical
products
|
|
|
905
|
|
|
912
|
|
Other
|
|
|
107
|
|
|
139
|
|
Total
inventory
|
|
$
|
2,325
|
|
$
|
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
|
|
|
32,162
|
|
|
—
|
|
|
—
|
|
|
32,162
|
|
|
—
|
|
Other
|
|
|
31
|
|
|
—
|
|
|
—
|
|
|
31
|
|
|
—
|
|
Amortization
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15
|
)
|
Balance
June 30, 2007
|
|
$
|
145,557
|
|
$
|
5,475
|
|
$
|
941
|
|
$
|
151,973
|
|
$
|
33
|
|
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 six months of 2007 the Company made the following acquisitions,
one of which was 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.
On
June
1, 2007, the Company acquired a 62.5% interest in the Surgery Center of
Kalamazoo (“Kalamazoo”), a multi-specialty ASC located in Portage, Michigan, for
$24,600, of which the Company allocated $24,717 to goodwill. In addition to
the
purchase price, the Company paid $21 of direct acquisition costs. The
acquisition was funded from the Company’s credit facility. The purchase price
for the 62.5% ownership interest in Kalamazoo was allocated to the tangible
and
intangible assets acquired and liabilities assumed based on their estimated
fair
values as of the acquisition date. Any excess of the purchase price over the
estimated fair value of the identifiable net assets acquired was recorded as
goodwill. The following table summarizes the initial purchase price allocation
and the Company expects the final allocation to be completed by September 30,
2007:
Fair
value of current assets:
|
|
$
|
866
|
|
Fair
value of long-term assets
|
|
|
1,067
|
|
Fair
value of current liabilities
|
|
|
(614
|
)
|
Fair
value of long-term liabilities
|
|
|
(1,472
|
)
|
Minority
partner share of net assets
|
|
|
57
|
|
Goodwill
|
|
|
24,717
|
|
Total
purchase price:
|
|
$
|
24,621
|
|
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
June
30, 2007
(Dollars
in thousands, except per share data; unaudited)
Supplemental
information on an unaudited pro forma basis for the three and six month periods
ended June 30, 2007 and 2006, as if the Kalamazoo acquisition had taken place
on
January 1, 2007 and 2006, is as follows:
|
|
Three
months ended
June
30,
|
|
Six
months ended
June
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
revenue
|
|
$
|
34,067
|
|
$
|
29,248
|
|
$
|
67,830
|
|
$
|
55,370
|
|
Net
income from continuing operations
|
|
$
|
1,546
|
|
$
|
1,755
|
|
$
|
3,146
|
|
$
|
3,224
|
|
Basic
earnings per common share
|
|
$
|
0.06
|
|
$
|
0.08
|
|
$
|
0.13
|
|
$
|
0.14
|
|
Diluted
earnings per common share
|
|
$
|
0.06
|
|
$
|
0.07
|
|
$
|
0.12
|
|
$
|
0.13
|
|
During
the first six months of 2006, the Company acquired a majority interest in three
ASCs for $19,720, of which the Company allocated $17,926 to
goodwill.
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 — June 30, 2007
|
|
$
|
344
|
|
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
June
30, 2007
(Dollars
in thousands, except per share data; unaudited)
7.
|
OTHER
(INCOME) EXPENSE
|
|
|
Three
months ended
June
30,
|
|
Six
months ended
June
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Loss
(earnings) of non-consolidated affiliate
|
|
$
|
18
|
|
$
|
(11
|
)
|
$
|
34
|
|
$
|
(31
|
)
|
(Gain)
loss on sale of minority interests
|
|
|
—
|
|
|
—
|
|
|
(79
|
)
|
|
(9
|
)
|
Other,
net
|
|
|
(34
|
)
|
|
(66
|
)
|
|
(80
|
)
|
|
(152
|
)
|
Other
(income) expense, net
|
|
$
|
(16
|
)
|
$
|
(77
|
)
|
$
|
(125
|
)
|
$
|
(192
|
)
|
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.
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.
|
CONVERTIBLE
SENIOR SUBORDINATED NOTES AND REVOLVING CREDIT
FACILITY
|
Convertible
Senior Subordinated Notes
On
June
27, 2007, the Company issued $75,000 aggregate principal amount of 1.0%
convertible senior subordinated notes due June 15, 2012 (the “Convertible
Notes”). Proceeds from the Convertible Notes were used to pay down $62,375 of
outstanding indebtedness on the Company’s revolving credit facility and to fund
the $10,000 net cost of the convertible note hedge and warrant transactions
described below. Interest on the Convertible Notes is payable semi-annually
in
arrears on June 15 and December 15 of each year, commencing December 15, 2007.
The Convertible Notes rank subordinate to all of the Company’s senior debt and
rank pari passu or senior to all of the Company’s other subordinated
indebtedness.
As
issued, the Convertible Notes include a net-share settlement feature that
requires the Company to settle conversion of the notes in cash up to the notes’
principal amount and settle any excess of the Convertible Notes’ conversion
value above their principal amount by delivering shares of the Company’s stock,
cash, or a combination of cash and common stock, at the Company’s option. As a
result of the net-share settlement feature, the Company will be able to
substantially reduce the number of shares issuable in the event of the
conversion of the Convertible Notes by repaying principal in cash instead of
issuing shares of common stock for that amount. Based on the provisions of
Emerging Issues Task Force No. 90-19, “Convertible Bonds with Issuer Option
to Settle for Cash upon Conversion” (“EITF 90-19”) and Emerging Issues Task
Force No. 00-19, “Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled In, a Company’s Own Stock” (“EITF 00-19”), the
net-settlement feature is accounted for as convertible debt and is not subject
to the provisions of Statement of Financial Accounting Standards No. 133,
“Accounting for Derivative Instruments and Hedging Activities” (“SFAS
No. 133”). Additionally, the Company will not be required to include the
underlying shares of common stock in the calculation of the Company’s diluted
weighted average shares outstanding for earnings per share until the Company’s
common stock price exceeds $6.371. During a public meeting held July 25, 2007,
the Financial Accounting Standards Board (“FASB”) indicated that it
would change the accounting for net-share settled convertible debt. The
proposed change will result in the Company recording interest expense on the
Convertible Notes in an amount greater than the current 1% coupon rate. The
FASB
will issue authoritative guidance regarding net-share settled convertible debt
through a FASB Staff Position (FSP). The proposed effective date is January
1,
2008 (for calendar year companies) with retrospective application for all
periods presented. Final adoption of the change is pending a public comment
period. The Company has not yet quantified the negative impact of this change
on
its earnings.
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
June
30, 2007
(Dollars
in thousands, except per share data; unaudited)
The
aggregate underwriting commissions and other debt issuance costs incurred
through June 30, 2007 with respect to the issuance of the Convertible Notes
were
$2,625, which have been recorded as debt issuance costs on the Company’s
consolidated condensed balance sheet and are being amortized using the effective
interest rate method over the term of the Convertible Notes.
The
Convertible Notes also contain a restricted convertibility feature that does
not
affect the conversion price of the Convertible Notes but, instead, places
restrictions on a holder’s ability to convert their Convertible Notes into
shares of the Company’s common stock. A holder may convert the Convertible Notes
prior to December 15, 2011 only if one or more of the following conditions
are
satisfied:
|
·
|
during
any calendar quarter commencing after the date of original issuance
of the
Convertible Notes, if the closing sale price of the Company’s common stock
for at least 20 trading days in the period of 30 consecutive trading
days
ending on the last trading day of the calendar quarter preceeding
the
quarter in which the conversion occurs is more than 120% of the conversion
price of the Convertible Notes in effect on the last trading
day;
|
|
·
|
during
the ten consecutive trading-day period following any five consecutive
trading-day period in which the trading price for the Convertible
Notes
for each such trading day was less than 97% of the closing sale price
of
the Company’s common stock on such date multiplied by the then current
conversion rate;
|
|
·
|
the
Company makes certain significant distributions to holders of the
Company’s common stock;
|
|
·
|
the
Company enters into specified corporate transactions;
or
|
|
·
|
the
Company’s common stock ceases to be approved for listing on the NASDAQ
Global Select Market and is not listed for trading on another U.S.
national securities exchange.
|
Holders
may also surrender their Convertible Notes for conversion anytime after December
15, 2011 at any time prior to the close of business on the business day
immediately prior to the stated maturity date regardless of whether any of
the
foregoing conditions have been satisfied. Upon the satisfaction of any of
the foregoing conditions as of the last day of a reporting period, or during
the
twelve months prior to the stated maturity date, the Company would write off
to
expense all remaining unamortized debt issuance costs in that period.
If
the
Convertible Notes are converted in connection with certain fundamental changes
that occur prior to December 15, 2011, the Company may be obligated to issue
additional shares upon conversion as a make-whole premium with respect to the
Convertible Notes.
Concurrent
with the sale of the Convertible Notes, the Company entered into a convertible
note hedge transaction with respect to the Company’s common stock (the
“purchased call option”) with Deutsche Bank AG London (the “counterparty”), an
affiliate of the underwriter. The purchased call option covers an aggregate
of
approximately 11,772 shares of the Company’s common stock at a strike price of
$6.371 per share. The cost of the call options totaled $24,000. The
Company also sold warrants to the counterparty to purchase from the Company
an
aggregate of approximately 11,772 shares of the Company’s common stock at an
exercise price of $8.31 per share. The Company received net proceeds from the
sale of these warrants of $14,000. Taken together, the call option and
warrant agreements have the effect of increasing the effective conversion price
of the Convertible Notes to $8.31 per share. The call options and warrants
must be settled in net shares, except in connection with certain termination
events, in which case they would be settled in cash based on the fair market
value of the instruments. On the date of settlement, if the market price per
share of the Company’s common stock is above $8.31 per share, the Company will
be required to deliver shares of its common stock representing the value of
the
warrants in excess of $8.31 per share.
The
warrants have a strike price of $8.31 and are generally exercisable at
anytime. The Company issued and sold the warrants in a transaction exempt
from the registration requirements of the Securities Act of 1933, as amended,
because the offer and sale did not involve a public offering. There were
no underwriting commissions or discounts in connection with the sale of the
warrants.
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
June
30, 2007
(Dollars
in thousands, except per share data; unaudited)
In
accordance with EITF No. 00-19 and Statement of Financial Accounting Standards
No. 150, “Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity,” the Company recorded the call options as a
reduction and the warrants as an increase in additional paid in capital as
of
June 30, 2007, and will not recognize subsequent changes in fair value of the
call options and warrants in its consolidated financial statements. For income
tax purposes, the Company has elected to apply the Integration Regulations
under
Treas. Reg. 1.275-6 to treat the Convertible Notes and the associated call
options as synthetic debt instruments and is accordingly deducting the option
premium paid for the call options as original issue discount over the five-year
term. A deferred tax asset of $8,160 has been recorded to additional paid in
capital to reflect the future cash benefit of the deduction over the term of
the
Convertible Notes. Also, pursuant to Internal Revenue Code Section 1032, the
Company will not recognize any gain or loss for tax purposes with respect to
the
exercise or lapse of the warrants.
Revolving
Credit Facility
Effective
June 20, 2007, the Company amended its credit facility to obtain lenders’
consent to the Convertible Notes offering and the related convertible note
hedge
and warrant transactions. The amendment also modified certain loan pricing,
financial covenants and various definitions. Under the terms of its credit
facility, the Company is required to obtain the consent of its lenders for
any
acquisition exceeding $20,000 individually under certain conditions. On May
31,
2007, the Company also amended its credit facility pursuant to which its lenders
consented to the acquisition of a 62.5% equity interest in Surgery Center of
Kalamazoo, LLC for a purchase price of $24,600. This amendment also contained
modifications to various definitions and financial covenants to enable the
purchased entity, as a new subsidiary of the Company, to continue to maintain
its existing bank debt of approximately $1,830 with a commercial lending
institution outside of the 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
1.25% to 2.50%, 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 June 30, 2007, the Company had $24,000
of
borrowings outstanding under its revolving credit facility with a weighted
average interest rate of 7.125% and was in compliance with all of its credit
agreement covenants. The weighted average interest rate on credit line
borrowings during the three and six months ended June 30, 2007 was 7.29% and
7.28%, respectively. In addition, the Company paid a fee ranging from .20%
to
.25% 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 $102 at June 30, 2007.
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
June
30, 2007
(Dollars
in thousands, except per share data; unaudited)
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 $4,000 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
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 $18 at June
30, 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.
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 $114 at June 30, 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 three and six months ended
June 30, 2007 was $1,644 and $3,104, respectively. The total comprehensive
income for the three and six months ended June 30, 2006 was $1,653 and $3,020,
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 six 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 six 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 $501 and $947 was recognized on existing stock options during the
three months and six months ended June 30, 2007, respectively. Stock
compensation expense of $313 and $617 was recognized on existing stock options
during the three months and six months ended June 30, 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 and six months ended
June
30, 2007 and 2006:
|
|
2007
|
|
2006
|
|
|
|
Three
months
|
|
Six
months
|
|
Three
months
|
|
Six
months
|
|
Expected
option life in years
|
|
|
6
|
|
|
6
|
|
|
6
|
|
|
6
|
|
Risk-free
interest rate
|
|
|
4.77
|
%
|
|
4.77
|
%
|
|
4.73
|
%
|
|
4.73
|
%
|
Dividend
yield
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Expected
volatility
|
|
|
48.1
|
%
|
|
48.1
|
%
|
|
51.3
|
%
|
|
51.3
|
%
|
Per
share fair value
|
|
$
|
3.77
|
|
$
|
3.77
|
|
$
|
3.77
|
|
$
|
3.77
|
|
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
June
30, 2007
(Dollars
in thousands, except per share data; unaudited)
The
expected option life used for 2007 and 2006 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 and 2006 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 six months ended June 30, 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
|
|
|
(575,006
|
)
|
$
|
2.30
|
|
|
|
|
|
|
|
Canceled
|
|
|
(129,794
|
)
|
$
|
8.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2007
|
|
|
4,548,768
|
|
$
|
4.68
|
|
|
6.4
|
|
$
|
8,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2007
|
|
|
3,017,363
|
|
$
|
3.65
|
|
|
5.1
|
|
$
|
8,624
|
|
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 six months of 2007
was $2,154. As a result of the stock options exercised, the Company recorded
common stock and additional paid-in-capital of $1,748, which includes $423
of
tax benefits recognized. During the first six months of 2007, cash received
from
stock options exercised was $702.
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 $626 aggregate
exercise price. The Company added these tendered shares into treasury resulting
in an increase in treasury stock of $626.
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
|
|
|
(252,400 |
) |
$
|
3.75
|
|
Canceled
|
|
|
(73,350 |
) |
$
|
3.41
|
|
|
|
|
|
|
|
|
|
Nonvested
at June 30, 2007
|
|
|
1,531,405 |
|
$
|
3.36
|
|
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
June
30, 2007
(Dollars
in thousands, except per share data; unaudited)
At
June
30, 2007, there was $5,138 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
six months of 2007. As of June 30, 2007, the total amount of unrecognized
compensation expense related to nonvested restricted stock awards was
approximately $1,703, which is expected to be recognized over a weighted-average
period of approximately 2.8 years. The Company recognized compensation expense
of $154 and $292 on existing restricted stock awards during the three and six
months ended June 30, 2007, respectively. The Company recognized compensation
expense of $101 and $205 on existing restricted stock awards during the three
and six months ended June 30, 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 six months ended June 30, 2007 and
2006, respectively. Under the provisions of SFAS 123(R), the Company recognized
compensation expense of $26 and $12 during the first six months of 2007 and
2006, respectively. At June 30, 2007, 72,900 shares were reserved for future
issuance under the ESPP.
In
July
2007, the Company exercised its option to sell its minority interest in the
Ft.
Lauderdale, Florida ASC to its physician-partner for the original price paid
by
the Company. The sale of this interest has not yet occurred.
In
July
2006, the Company acquired a 61% equity interest in an ASC located in Laredo,
Texas. The center has not performed at a level consistent with its historical
operations or the Company’s expectations. As a result, the Company recently made
a mediation demand in connection with this transaction alleging that the selling
physician breached the terms of the transaction documents and made certain
misrepresentations to the Company. Following mediation and effective as of
August 1, 2007, the Company settled this dispute with the selling physician.
Under the terms of the settlement agreement, the selling physician paid the
Company $1,500,000 and forfeited to the Company his thirty-five percent (35%)
interest in the ASC. The Company now owns 96% of this ASC. In addition, because
the selling physician is also the ASC’s landlord, the settlement terms included
a reduction in the ASC’s base rent by fifty percent over the next nine years.
During
a
public meeting held July 25, 2007, the Financial Accounting Standards Board
(“FASB”) indicated that it would change the accounting for net-share settled
convertible debt. The proposed change will result in the Company recording
interest expense on the Convertible Notes in an amount greater than the current
1% coupon rate. The FASB will issue authoritative guidance regarding net-share
settled convertible debt through a FASB Staff Position (FSP). The proposed
effective date is January 1, 2008 (for calendar year companies) with
retrospective application for all periods presented. Final adoption of the
change is pending a public comment period. The Company has not yet quantified
the negative impact of this change on its earnings.
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
June
30, 2007
(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 six months ended June 30, 2007 and 2006:
|
|
Surgical
Facilities
|
|
Product
Sales
|
|
Other
|
|
Corporate
|
|
Total
|
|
Three
months ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
26,894
|
|
$
|
3,704
|
|
$
|
1,878
|
|
$
|
6
|
|
$
|
32,482
|
|
Earnings
(loss) before taxes
|
|
|
4,023
|
|
|
863
|
|
|
224
|
|
|
(2,696
|
)
|
|
2,414
|
|
Depreciation
and amortization
|
|
|
832
|
|
|
60
|
|
|
34
|
|
|
58
|
|
|
984
|
|
Interest
income
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
28
|
|
Interest
expense
|
|
|
93
|
|
|
—
|
|
|
—
|
|
|
1,392
|
|
|
1,485
|
|
Capital
expenditures
|
|
|
494
|
|
|
92
|
|
|
35
|
|
|
4
|
|
|
625
|
|
Accounts
receivable
|
|
|
13,958
|
|
|
5,905
|
|
|
656
|
|
|
85
|
|
|
20,604
|
|
Identifiable
assets
|
|
|
176,464
|
|
|
13,055
|
|
|
2,456
|
|
|
10,814
|
|
|
202,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
21,105
|
|
$
|
4,152
|
|
$
|
1,771
|
|
$
|
14
|
|
$
|
27,042
|
|
Earnings
(loss) before taxes
|
|
|
3,732
|
|
|
1,180
|
|
|
69
|
|
|
(2,226
|
)
|
|
2,755
|
|
Depreciation
and amortization
|
|
|
627
|
|
|
56
|
|
|
18
|
|
|
48
|
|
|
749
|
|
Interest
income
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
21
|
|
Interest
expense
|
|
|
22
|
|
|
—
|
|
|
—
|
|
|
573
|
|
|
595
|
|
Capital
expenditures
|
|
|
825
|
|
|
41
|
|
|
1
|
|
|
38
|
|
|
905
|
|
Accounts
receivable
|
|
|
8,851
|
|
|
5,769
|
|
|
492
|
|
|
85
|
|
|
15,197
|
|
Identifiable
assets
|
|
|
102,979
|
|
|
12,938
|
|
|
1,660
|
|
|
5,123
|
|
|
122,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
51,989
|
|
$
|
8,084
|
|
$
|
3,780
|
|
$
|
15
|
|
$
|
63,868
|
|
Earnings
(loss) before taxes
|
|
|
7,761
|
|
|
2,285
|
|
|
381
|
|
|
(5,568
|
)
|
|
4,859
|
|
Depreciation
and amortization
|
|
|
1,614
|
|
|
119
|
|
|
72
|
|
|
109
|
|
|
1,914
|
|
Interest
income
|
|
|
56
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
64
|
|
Interest
expense
|
|
|
180
|
|
|
—
|
|
|
—
|
|
|
2,669
|
|
|
2,849
|
|
Capital
expenditures
|
|
|
1,119
|
|
|
143
|
|
|
121
|
|
|
254
|
|
|
1,637
|
|
Accounts
receivable
|
|
|
13,958
|
|
|
5,905
|
|
|
656
|
|
|
85
|
|
|
20,604
|
|
Identifiable
assets
|
|
|
176,464
|
|
|
13,055
|
|
|
2,456
|
|
|
10,814
|
|
|
202,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
38,970
|
|
$
|
8,136
|
|
$
|
3,816
|
|
$
|
36
|
|
$
|
50,958
|
|
Earnings
(loss) before taxes
|
|
|
6,607
|
|
|
2,164
|
|
|
353
|
|
|
(4,090
|
)
|
|
5,034
|
|
Depreciation
and amortization
|
|
|
1,209
|
|
|
110
|
|
|
39
|
|
|
110
|
|
|
1,468
|
|
Interest
income
|
|
|
25
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
38
|
|
Interest
expense
|
|
|
35
|
|
|
—
|
|
|
—
|
|
|
953
|
|
|
988
|
|
Capital
expenditures
|
|
|
1,119
|
|
|
132
|
|
|
19
|
|
|
109
|
|
|
1,379
|
|
Accounts
receivable
|
|
|
8,851
|
|
|
5,769
|
|
|
492
|
|
|
85
|
|
|
15,197
|
|
Identifiable
assets
|
|
|
102,979
|
|
|
12,938
|
|
|
1,660
|
|
|
5,123
|
|
|
122,700
|
|
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
June
30, 2007
(Dollars
in thousands, except per share data; unaudited)
13.
|
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 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.
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 June 30, 2007 and the results of operations for the three and six months
ended June 30, 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 26 of this
quarterly report.
Overview
We
consider our core business to be the ownership and operation of ambulatory
surgery centers (ASCs). As of June 30, 2007, we owned and operated 38 ASCs,
of
which 36 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
net revenue increased 25.3% to $63.9 million. Surgical facilities
net
revenue increased 33.4% to $52.0 million (same-facility surgical
net
revenue increased 9.7% to $37.9
million).
|
|
·
|
Operating
income increased 36.5% to $14.8
million.
|
|
·
|
Acquired
majority interests in two ASCs for $32.6
million.
|
|
·
|
Issued
$75 million convertible senior subordinated
notes.
|
|
·
|
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
June
30,
|
|
Six
months ended
June
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surgical
facilities
|
|
|
82.8
|
%
|
|
78.0
|
%
|
|
81.4
|
%
|
|
76.5
|
%
|
Product
sales and other
|
|
|
17.2
|
|
|
22.0
|
|
|
18.6
|
|
|
23.5
|
|
Total
net revenue
|
|
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
wages and benefits
|
|
|
31.0
|
|
|
31.7
|
|
|
31.6
|
|
|
32.6
|
|
Cost
of sales and medical supplies
|
|
|
23.9
|
|
|
24.6
|
|
|
23.4
|
|
|
24.6
|
|
Selling,
general and administrative
|
|
|
18.7
|
|
|
18.4
|
|
|
18.9
|
|
|
18.6
|
|
Depreciation
and amortization
|
|
|
3.0
|
|
|
2.8
|
|
|
3.0
|
|
|
2.9
|
|
Total
operating expenses
|
|
|
76.6
|
|
|
77.5
|
|
|
76.9
|
|
|
78.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
23.4
|
|
|
22.5
|
|
|
23.1
|
|
|
21.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests in earnings of consolidated entities
|
|
|
11.5
|
|
|
10.5
|
|
|
11.4
|
|
|
9.9
|
|
Other
(income) expense
|
|
|
4.5
|
|
|
1.8
|
|
|
4.1
|
|
|
1.5
|
|
Income
before income taxes
|
|
|
7.4
|
|
|
10.2
|
|
|
7.6
|
|
|
9.9
|
|
Income
tax provision
|
|
|
2.9
|
|
|
4.1
|
|
|
3.0
|
|
|
4.0
|
|
Net
income from continuing operations
|
|
|
4.5
|
|
|
6.1
|
|
|
4.6
|
|
|
5.9
|
|
Net
income from discontinued operations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
income
|
|
|
4.5
|
%
|
|
6.1
|
%
|
|
4.6
|
%
|
|
5.9
|
%
|
Three
Months Ended June 30, 2007 Compared to the Three Months Ended June 30,
2006
Net
Revenue
Consolidated.
Total
net revenue increased 20.1% from $27.0 million to $32.5 million. Net revenue
by
segment is discussed below.
Surgical
Facilities.
The
table below summarizes surgical facilities net revenue and procedures performed
for the second 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 27.4% from $21.1 million to $26.9 million. This increase was primarily
the result of $5.0 million of net revenue from ASCs acquired or developed
after
April 1, 2006 (“new ASCs”) and a $1.4 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 5.0% increase in the
number
of same-facility procedures performed and a 2.1% increase in the net revenue
per
procedure due to a change in procedure mix.
In
July
2007, the Centers
for Medicare & Medicaid Services (CMS) issued a final rule establishing the
policies for the revised payment system for services provided in ASCs. CMS
estimates that the 2008 ASC rates, which will be published and finalized
in
November 2007, will be approximately 65% of the hospital Outpatient Prospective
Payment System rates, as compared to 62% in the proposed rule announced on
August 8, 2006. In addition, the revised rates are scheduled to phase in
evenly
over four years beginning January 1, 2008 and in 2010 the rates will be adjusted
annually based on changes in the consumer price index for urban consumers.
We
previously disclosed that, based on our fourth quarter 2006 procedure mix,
payor
mix and volume, the proposed rule announced in August 2006 would negatively
impact our earnings per share between $0.01 and $0.02 in 2008 and $0.03 to
$0.04
in 2009. We now estimate that the impact of the final rule, based on our
current
procedure mix, payor mix and volume, will be neutral to earnings per share.
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 and located in Laredo, Texas has experienced
a
significant decline in the number of procedures performed. This ASC was dilutive
to our earnings by $0.2 million during the second quarter of 2007 when
considering the interest expense on the purchase price paid for the ASC.
|
|
Three
Months Ended June 30,
|
|
Increase
|
|
Dollars
in thousands
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
Surgical
Facilities:
|
|
|
|
|
|
|
|
|
|
|
Same-facility:
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
21,128
|
|
$
|
19,707
|
|
$
|
1,421
|
|
#
of procedures
|
|
|
24,960
|
|
|
23,772
|
|
|
1,188
|
|
|
|
|
|
|
|
|
|
|
|
|
New
ASCs:
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
5,758
|
|
$
|
805
|
|
$
|
4,953
|
|
#
of procedures
|
|
|
8,311
|
|
|
1,012
|
|
|
7,299
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
laser services agreement and ASC closures
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
8
|
|
$
|
593
|
|
$
|
(585
|
)
|
#
of procedures
|
|
|
—
|
|
|
797
|
|
|
(797
|
)
|
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 second quarter
decreased 5.9% from $5.9 million to $5.6 million primarily due to a decrease
in
revenue at our marketing products and services business. This decrease is
due to
a decline in sales of marketing products provided to medical device
manufacturers to promote their new refractive intraocular lens technology.
Net
revenue at our optical products and services business increased by $0.1 million
due to an increase in existing customer orders. Net revenue from our
ophthalmology practice increased by $0.1 million primarily due to an increase
in
the number of patient visits.
|
|
Three
Months Ended June 30,
|
|
Increase
|
|
Dollars
in thousands
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
Product
Sales:
|
|
|
|
|
|
|
|
|
|
|
Optical
laboratories
|
|
$
|
1,622
|
|
$
|
1,537
|
|
$
|
85
|
|
Optical
products purchasing organization
|
|
|
808
|
|
|
681
|
|
|
127
|
|
Marketing
products and services
|
|
|
800
|
|
|
1,427
|
|
|
(627
|
)
|
Optometric
practice/retail store
|
|
|
474
|
|
|
507
|
|
|
(33
|
)
|
|
|
|
3,704
|
|
|
4,152
|
|
|
(448
|
)
|
Other:
|
|
|
|
|
|
|
|
|
|
|
Ophthalmology
practice
|
|
|
1,878
|
|
|
1,771
|
|
|
107
|
|
Other
|
|
|
6
|
|
|
14
|
|
|
(8
|
)
|
|
|
|
1,884
|
|
|
1,785
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Net Product Sales and Other Revenue
|
|
$
|
5,588
|
|
$
|
5,937
|
|
$
|
(349
|
)
|
Salaries,
Wages and Benefits
Consolidated.
Salaries, wages and benefits expense increased 17.5% from $8.6 million to
$10.1
million. As a percentage of net revenue, salaries, wages and benefits expense
decreased slightly from 31.7% to 31.0%. Salaries, wages and benefits expense
by
segment is discussed below.
Surgical
Facilities.
Salaries, wages and benefits expense in our surgical facilities segment
increased 27.3% from $4.5 million to $5.7 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 15.4% from $2.0 million to $2.3 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 16.5% from $6.7 million to $7.8
million. As a percentage of net revenue, cost of sales and medical supplies
expense decreased from 24.6% 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
24.5% from $5.1 million to $6.3 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 8.3% from $1.6 million to $1.5 million primarily due to a decrease
in
revenue at our marketing products and services business.
Selling,
General and Administrative
Consolidated.
Selling,
general and administrative expense increased 21.7% from $5.0 million to $6.1
million. As a percentage of net revenue, selling, general and administrative
expense increased from 18.4% to 18.7%. Selling, general and administrative
expense by segment is discussed below.
Surgical
Facilities.
Selling,
general and administrative expense in our surgical facilities segment increased
30.3% from $4.1 million to $5.3 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 decreased from $26,000
to
a negative $95,000. This decrease 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 $0.2
million
due to higher professional fees, information technology and/consulting expenses.
Depreciation
and Amortization.
Depreciation and amortization expense increased 31.4% from $0.75 million
to $1.0
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 $3.7 million in 2007
as
compared to $2.8 million in 2006. Of this increase, 76.2% is attributable
to new
ASCs.
Interest
(Income) Expense, net.
Interest
(income) expense, net increased from $0.6 million to $1.5 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 was unchanged at 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.
Six
Months Ended June 30, 2007 Compared to the Six Months Ended June 30, 2006
Net
Revenue
Consolidated.
Total
net revenue increased 25.3% from $51.0 million to $63.9 million. Net revenue
by
segment is discussed below.
Surgical
Facilities.
The
table below summarizes surgical facilities net revenue and procedures performed
for the first six months 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 33.4% from $39.0 million to $52.0 million. This increase was primarily
the result of $10.9 million of net revenue from ASCs acquired or developed
after
January 1, 2006 (“new ASCs”) and a $3.3 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 6.2% increase in the
number
of same-facility procedures performed and a 3.3% increase in the net revenue
per
procedure due to a change in procedure mix.
In
July
2007, the Centers
for Medicare & Medicaid Services (CMS) issued a final rule establishing the
policies for the revised payment system for services provided in ASCs. CMS
estimates that the 2008 ASC rates, which will be published and finalized
in
November 2007, will be approximately 65% of the hospital Outpatient Prospective
Payment System rates, as compared to 62% in the proposed rule announced on
August 8, 2006. In addition, the revised rates are scheduled to phase in
evenly
over four years beginning January 1, 2008 and in 2010 the rates will be adjusted
annually based on changes in the consumer price index for urban consumers.
We
previously disclosed that, based on our fourth quarter 2006 procedure mix,
payor
mix and volume, the proposed rule announced in August 2006 would negatively
impact our earnings per share between $0.01 and $0.02 in 2008 and $0.03 to
$0.04
in 2009. We now estimate that the impact of the final rule, based on our
current
procedure mix, payor mix and volume, will be neutral to earnings per share.
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 and located in Laredo, Texas has experienced
a
significant decline in the number of procedures performed. This ASC was dilutive
to our earnings during the first six months of 2007 by $0.3 million when
considering the interest expense on the purchase price paid for the ASC.
|
|
Six
Months Ended June 30,
|
|
Increase
|
|
Dollars
in thousands
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
Surgical
Facilities:
|
|
|
|
|
|
|
|
|
|
|
Same-facility:
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
37,909
|
|
$
|
34,567
|
|
$
|
3,342
|
|
#
of procedures
|
|
|
45,239
|
|
|
42,591
|
|
|
2,648
|
|
|
|
|
|
|
|
|
|
|
|
|
New
ASCs:
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
14,046
|
|
$
|
3,160
|
|
$
|
10,886
|
|
#
of procedures
|
|
|
19,276
|
|
|
3,240
|
|
|
16,036
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
laser services agreement and ASC closures
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
34
|
|
$
|
1,243
|
|
$
|
(1,209
|
)
|
#
of procedures
|
|
|
—
|
|
|
2,125
|
|
|
(2,125
|
)
|
Product
Sales and Other.
The
table below summarizes net product sales and other revenue by significant
business component. Product sales and other revenue decreased 0.9% from $12.0
million to $11.9 million primarily due to a decrease in revenue at our marketing
products and services business. This decrease is due to a decline in sales
of
marketing products provided to medical device manufacturers to promote their
new
refractive intraocular lens technology. Net revenue at our optical products
and
services business increased by $0.2 million due to an increase in existing
customer orders. Net revenue at our optical laboratories business increased
$0.2
million due to an increase in existing customer orders and improved external
marketing.
|
|
Six
Months Ended June 30,
|
|
Increase
|
|
Dollars
in thousands
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
Sales:
|
|
|
|
|
|
|
|
|
|
|
Optical
laboratories
|
|
$
|
3,261
|
|
$
|
3,130
|
|
$
|
131
|
|
Optical
products purchasing organization
|
|
|
1,610
|
|
|
1,367
|
|
|
243
|
|
Marketing
products and services
|
|
|
2,261
|
|
|
2,687
|
|
|
(426
|
)
|
Optometric
practice/retail store
|
|
|
952
|
|
|
952
|
|
|
—
|
|
|
|
|
8,084
|
|
|
8,136
|
|
|
(52
|
)
|
Other:
|
|
|
|
|
|
|
|
|
|
|
Ophthalmology
practice
|
|
|
3,780
|
|
|
3,744
|
|
|
36
|
|
Other
|
|
|
15
|
|
|
108
|
|
|
(93
|
)
|
|
|
|
3,795
|
|
|
3,852
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
Net Product Sales and Other Revenue
|
|
$
|
11,879
|
|
$
|
11,988
|
|
$
|
(109
|
)
|
Salaries,
Wages and Benefits
Consolidated.
Salaries, wages and benefits expense increased 21.4% from $16.6 million to
$20.2
million. As a percentage of net revenue, salaries, wages and benefits expense
decreased from 32.6% to 31.6%. Salaries, wages and benefits expense by segment
is discussed below.
Surgical
Facilities.
Salaries, wages and benefits expense in our surgical facilities segment
increased 32.6% from $8.6 million to $11.4 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
remained flat at $4.2 million.
Corporate. Salaries,
wages and benefits expense increased 21.4% from $3.8 million to $4.6 million.
The increase was primarily due to higher stock-based compensation expense
of
$0.4 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 19.0% from $12.6 million to
$14.9
million. As a percentage of net revenue, cost of sales and medical supplies
expense decreased from 24.6% to 23.4%. 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
27.4% from $9.3 million to $11.8 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 4.8% from $3.3 million to $3.1 million primarily due to a decrease
in
revenue at our marketing products and services business.
Selling,
General and Administrative
Consolidated.
Selling,
general and administrative expense increased 27.2% from $9.5 million to $12.1
million. As a percentage of net revenue, selling, general and administrative
expense increased from 18.6% to 18.9%. Selling, general and administrative
expense by segment is discussed below.
Surgical
Facilities.
Selling,
general and administrative expense in our surgical facilities segment increased
36.0% from $7.7 million to $10.4 million. The increase is due to costs
associated with our new ASCs and an increase of $0.6 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
decreased by $56,000.
Corporate.
Corporate selling, general and administrative expense decreased from $36,000
to
a negative $81,000. This decrease consists of two components. Corporate selling,
general and administrative expenses decreased by $0.6 million due to an increase
of $0.6 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 $0.1
million
due to higher professional fees, information technology/consulting expenses
and
travel costs.
Depreciation
and Amortization.
Depreciation and amortization expense increased 30.4% from $1.5 million to
$1.9
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 $7.3 million in 2007
as
compared to $5.0 million in 2006. Of this increase, 69.2% is attributable
to new
ASCs.
Interest
(Income) Expense, net.
Interest
(income) expense, net increased from $1.0 million to $2.8 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 was unchanged at 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 six months of 2007 generated $5.6 million in
cash
flow from continuing operations compared to $6.3 million in the comparable
2006
period. Before considering changes in working capital, operating cash flow
from
continuing operations was flat compared to the first six months of 2006.
During
the first six months of 2007 and 2006, working capital consumed $2.3 million
and
$1.8 million in cash, respectively. The increased cash consumption in the
first
six months 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
six
months of 2006, and the timing of vendor payments.
Investing
activities during the first six months of 2007 resulted in negative cash
flow of
$34.1 million. Investing activities during the first six months of 2007 included
the acquisition of two ASCs for $32.6 million, the purchase of property and
equipment for $1.6 million and proceeds of $0.3 million relating to the sale
of
minority interests. Investing activities during the first six months of 2006
resulted in negative cash flow of $21.2 million which included the acquisition
of three ASC for $19.7 million, the purchase of property and equipment for
$1.4
million and proceeds of $0.1 million relating to the sale of minority
interests.
Cash
flows from financing activities during the first six months of 2007 included
proceeds of $0.7 million from the exercise of stock options and issuance
of
stock to employees as part of our employee stock purchase plan offset by
$33.7
million of net payments under our credit facility and $1.0 million of capital
lease and other debt obligation payments. On June 27, 2007, we received $62.4
million of net proceeds in connection with the issuance of convertible
subordinated notes (as described below and in Note 8) and immediately used
these
proceeds to pay down debt under our revolving credit facility. Cash flows
from
financing activities during the first six months of 2006 included $15.3 million
of net borrowings under our credit facility and $0.2 million from the exercise
of stock options and issuance of stock to employees as part of our employee
stock purchase plan, offset by $0.6 million of capital lease obligation
payments.
On
June
27, 2007, we issued $75 million aggregate principal amount of 1.0%
convertible senior subordinated notes due June 15, 2012 (the “Convertible
Notes”). Proceeds from the Convertible Notes were used to pay down $62.4 million
of outstanding indebtedness on our revolving credit facility and to fund
the
$10,000 net cost of the convertible note hedge and warrant transactions
described below. Interest on the Convertible Notes is payable semi-annually
in
arrears on June 15 and December 15 of each year, commencing December 15,
2007.
The Convertible Notes rank subordinate to our senior debt and rank pari passu
or
senior to all of our other subordinated indebtedness. The aggregate underwriting
commissions and other debt issuance costs incurred through June 30, 2007
with
respect to the issuance of the Convertible Notes were $2.6 million, which
have
been recorded as debt issuance costs on our consolidated condensed balance
sheet
and are being amortized using the effective interest rate method over the
term
of the Convertible Notes.
As
issued, the Convertible Notes include a net-share settlement feature that
requires us to settle conversion of the notes in cash up to the notes’ principal
amount and settle any excess of the Convertible Notes’ conversion value above
their principal amount by delivering shares of our common stock, cash, or
a
combination of cash and common stock, at our option. As a result of the
net-share settlement feature, we will be able to substantially reduce the
number
of shares issuable in the event of the conversion of the Convertible Notes
by
repaying principal in cash instead of issuing shares of common stock for
that
amount. Additionally, we will not be required to include the underlying shares
of common stock in the calculation of our diluted weighted average shares
outstanding for earnings per share until our common stock price exceeds $6.371.
During a public meeting held July 25, 2007, the Financial Accounting Standards
Board (“FASB”) indicated that it would change the accounting for net-share
settled convertible debt. The proposed change will result in the Company
recording interest expense on the Convertible Notes in an amount greater
than
the current 1% coupon rate. The FASB will issue authoritative guidance regarding
net-share settled convertible debt through a FASB Staff Position (FSP). The
proposed effective date is January 1, 2008 (for calendar year companies)
with
retrospective application for all periods presented. Final adoption of the
change is pending a public comment period. The Company has not yet quantified
the negative impact of this change on its earnings.
Concurrent
with the sale of the Convertible Notes, we entered into a convertible note
hedge
transaction with respect to our common stock (the “purchased call options”) with
Deutsche Bank AG London (the “counterparty), an affiliate of the underwriter.
The purchased call option covers an aggregate of approximately 11.8 million
shares of our common stock at a strike price of $6.371 per share. The cost
of
the call options totaled $24.0 million. In connection with the cost of the
call
options, we recorded a deferred tax asset of $8.2 million to additional paid
in
capital to reflect the future cash benefit of the deduction over the term
of the
Convertible Notes. We also sold warrants to the counterparty to purchase
from us an aggregate of approximately 11.8 million shares of our common stock
at
an exercise price of $8.31 per share and received net proceeds from the sale
of
these warrants of $14.0 million. Taken together, the call option and
warrant agreements have the effect of increasing the effective conversion
price
of the Convertible Notes to $8.31 per share. For a further discussion of
the
Convertible Notes and the related call options and warrants see Note 8 to
the
consolidated financial statements.
At
June
30, 2007, we had $24.0 million of borrowings outstanding under our revolving
credit facility and were in compliance with all of our credit agreement
covenants. Effective June 20, 2007, we amended our credit facility to obtain
lenders’ consent to the Convertible Notes offering and the related convertible
note hedge and warrant transactions. The amendment also modified certain
loan
pricing, financial covenants and various definitions. Under the terms of
our
credit facility, we are required to obtain the consent of our lenders for
any
acquisition exceeding $20.0 million individually under certain conditions.
On
May 31, 2007, we also amended our credit facility pursuant to which our lenders
consented to the acquisition of a 62.5% equity interest in Surgery Center
of
Kalamazoo, LLC for a purchase price of $24,600. This amendment also contained
modifications to various definitions and financial covenants to enable the
purchased entity, as a new subsidiary, to continue to maintain its existing
bank
debt of approximately $1,830 with a commercial lending institution outside
of
the credit facility. 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 1.25% to 2.50%,
varying depending upon our ratios and ability to meet other financial covenants.
In addition, a fee ranging from .20% to .25% 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 June 30, 2007 was
7.125%.
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
June 30, 2007, we had cash and cash equivalents of $2.7 million of which
$2.9
million was restricted pursuant to agreements with seven of our ASCs. As
of June
30, 2007, we had working capital of $15.0 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. On July 10, 2007, we exercised our option to sell our minority
interest to our physician-partner for the original price paid. The sale of
this
interest has not yet occurred.
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
June
30, 2007, $24.0 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 $0.2 million. The fair value of our
long-term debt approximated its carrying value at June 30, 2007.
Concurrent
with the sale of the Convertible Notes, we entered into a convertible note
hedge
transaction with respect to our common stock (the “purchased call options”) with
Deutsche Bank AG London (the “counterparty), an affiliate of the underwriter.
The purchased call option covers an aggregate of approximately 11.8 million
shares of our common stock at a strike price of $6.371 per share. The cost
of
the call options totaled $24.0 million. In connection with the cost of the
call
options, we recorded a deferred tax asset of $8.2 million to additional paid
in
capital to reflect the future cash benefit of the deduction over the term
of the
Convertible Notes. We also sold warrants to the counterparty to purchase
from us an aggregate of approximately 11.8 million shares of our common stock
at
an exercise price of $8.31 per share and received net proceeds from the sale
of
these warrants of $14.0 million. Taken together, the call option and
warrant agreements have the effect of increasing the effective conversion
price
of the Convertible Notes to $8.31 per share. For a further discussion of
the
Convertible Notes and the related call options and warrants see Note 8 to
the
consolidated financial statements.
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 President 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 President 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 President
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 June 30, 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
1A. Risk Factors
Future
sales of shares of our common stock could depress our stock
price.
After
giving effect to the convertible note hedge and warrant transactions that
we
entered into in connection with our convertible note offering, the conversion
of
some or all of our 1.0% convertible senior subordinated notes due June 15,
2012
(the “Convertible Notes”) may dilute the ownership interests of our existing
stockholders. With the net share settlement feature of the Convertible Notes,
upon conversion we will deliver cash instead of shares to repay the principal
amount of the Notes. At the time of conversion we may elect to finance all
or a
portion of this $75 million through the issuance of equity securities which
may
be dilutive to our current equity holders and could adversely affect the
market
price of our common stock. If at the time of conversion our share price exceeds
the conversion price of $6.371 per share then we have the option of funding
such
excess residual value with shares of our common stock or cash. Pursuant to
the
note hedge transaction, Deutsche Bank AG London is required to deliver to
us
those shares of our common stock necessary to cover the residual value of
any
excess over $6.371 per share. To the extent our share price exceeds $8.31
per share, then pursuant to the warrant transaction, we will be required
to
deliver shares of our common stock representing the value of the warrants
in
excess of $8.31 per share. In addition, if a “qualifying fundamental change”
occurs prior to maturity of the Convertible Notes, the conversion rate will
be
increased by an additional number of shares of common stock as provided for
in
the indenture governing the Convertible Notes. This additional issuance of
common stock pursuant to these warrants may also be dilutive to our current
equity holders and could adversely affect the prevailing market prices of
our
common stock. In addition, the existence of the Convertible Notes and the
related convertible note hedge and warrant transactions may encourage short
selling by market participants because the conversion of the Convertible
Notes
could depress the price of our common stock.
The
convertible note hedge and warrant transactions that we entered into in
connection with the sale of the Convertible Notes may affect the trading
price
of our common stock.
In
connection with the issuance of the Convertible Notes, we entered into a
privately negotiated convertible note hedge transaction with Deutsche Bank
AG
London, which is expected to reduce the potential dilution to our common
stock
upon any conversion of the Convertible Notes. We also entered into a warrant
transaction with Deutsche Bank AG London with respect to our common stock
pursuant to which we may issue shares of our common stock. In connection
with
hedging these transactions, Deutsche Bank AG London or its affiliates were
expected to enter into various over-the-counter derivative transactions with
respect to our common stock at, and possibly after, the pricing of the
Convertible Notes and may have purchased or may purchase shares of our common
stock in secondary market transactions following the pricing of the Convertible
Notes. These activities could have had, or could have, the effect of increasing
the price of our common stock. Deutsche Bank AG London or its affiliates
are
likely to modify their hedge positions from time to time prior to conversion
or
maturity of the Convertible Notes by purchasing and selling shares of our
common
stock, other of our securities or other instruments it may wish to use in
connection with such hedging. The effect, if any, of any of these transactions
and activities on the market price of our common stock or the Convertible
Notes
will depend in part on market conditions and cannot be ascertained at this
time,
but any of these activities could adversely affect the value of our common
stock
(including during any period used to determine the amount of consideration
deliverable upon conversion of the Convertible Notes).
The
fundamental change purchase feature of the Convertible Notes may delay or
prevent an otherwise beneficial attempt to take over our
company.
The
terms
of the Convertible Notes require us to purchase the Convertible Notes for
cash
in the event of a fundamental change. A takeover of our company would trigger
the requirement that we purchase the Convertible Notes. This may have the
effect
of delaying or preventing a takeover of our company that would otherwise
be
beneficial to investors.
We
will need cash to pay the principal portion of the conversion value of the
Convertible Notes, as required by the indenture governing the
notes.
Under
the
net share settlement feature of the Convertible Notes, we are required to
repay
the principal portion of the Convertible Notes in cash. Our business and
growth
strategy, including our ability to finance the acquisition and development
of
new ambulatory surgery centers, could be negatively impacted if we do not
have
sufficient financial resources, or are not able to arrange suitable financing,
to pay the required amounts upon conversion or tender of the Convertible
Notes.
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 June
30,
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
|
|
|
|
|
|
|
|
|
|
4/01/2007
- 4/30/2007
|
|
1,690
|
|
$
6.49
|
|
None
|
|
None
|
5/01/2007
- 5/31/2007
|
|
1,690
|
|
$
6.68
|
|
None
|
|
None
|
6/01/2006
- 6/30/2007
|
|
2,483
|
|
$
6.42
|
|
None
|
|
None
|
|
(1)
|
Represents
shares of restricted stock delivered by employees to the Company,
upon
vesting, to satisfy tax withholding
requirements.
|
Item
4. Submission of Matters to a Vote of Security Holders
We
held
our 2007 Annual Meeting of Stockholders on May 23, 2007 at which the
stockholders voted to elect two Class II Directors for a term of three years
expiring at our 2010 Annual Meeting of Stockholders. Results of the voting
were
as follows:
Directors
|
|
For
|
|
Authority
Withheld
|
|
|
|
|
|
Robert
J. Kelly
|
|
18,604,377
|
|
1,875,529
|
C.A.
Lance Piccolo
|
|
19,233,010
|
|
1,246,896
|
The
remaining directors, Thomas S. Hall, R. Judd Jessup, Scott H. Kirk, MD, and
Steven V. Napolitano all continued their terms of office as directors of
the
Company after the 2007 Annual Meeting of Stockholders.
Item
6. Exhibits
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.
|
|
|
Scott
T. Macomber
|
|
|
Executive
Vice President and
|
|
|
Chief
Financial Officer
|
|
|
(on
behalf of Registrant and as principal financial officer)
|
|
|
|
|
|
|
|
|
/s/
John P. Hart
John
P. Hart
|
|
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(as
principal accounting officer)
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