SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For
the
quarterly period ended September 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
November 02, 2007, there were outstanding 24,492,833 shares of the registrant's
common stock, par value $.01 per share.
NOVAMED,
INC.
FORM
10-Q FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
INDEX
|
PART
OR ITEM
|
PAGE
|
Part
I.
|
FINANCIAL
STATEMENTS
|
3
|
Item
1.
|
Interim
Condensed Consolidated Financial Statements (unaudited)
|
|
|
Condensed
Consolidated Balance Sheets – September 30, 2007 and
December 31,
2006
|
3
|
|
Condensed
Consolidated Statements of Operations – Three and nine months ended
September 30, 2007 and 2006
|
4
|
|
Condensed
Consolidated Statement of Stockholders’ Equity – Nine months ended
September 30, 2007
|
5
|
|
Condensed
Consolidated Statements of Cash Flows – Nine months ended
September
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)
|
|
September
30,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
6,961
|
|
$
|
2,743
|
|
Accounts
receivable, net of allowances of $30,918 and $32,282,
respectively
|
|
|
20,278
|
|
|
17,278
|
|
Notes
and amounts due from related parties
|
|
|
505
|
|
|
505
|
|
Inventory
|
|
|
2,609
|
|
|
2,187
|
|
Prepaid
expenses and deposits
|
|
|
1,671
|
|
|
1,361
|
|
Current
tax assets
|
|
|
1,379
|
|
|
569
|
|
Total
current assets
|
|
|
33,403
|
|
|
24,643
|
|
Property
and equipment, net
|
|
|
15,918
|
|
|
15,066
|
|
Intangible
assets, net
|
|
|
151,771
|
|
|
119,828
|
|
Noncurrent
deferred tax assets, net
|
|
|
2,907
|
|
|
—
|
|
Other
assets, net
|
|
|
1,724
|
|
|
1,010
|
|
Total
assets
|
|
$
|
205,723
|
|
$
|
160,547
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
6,920
|
|
$
|
6,525
|
|
Accrued
expenses and income taxes payable
|
|
|
5,598
|
|
|
6,505
|
|
Current
maturities of long-term debt
|
|
|
1,255
|
|
|
1,373
|
|
Total
current liabilities
|
|
|
13,773
|
|
|
14,403
|
|
Long-term
debt, net of current maturities
|
|
|
28,838
|
|
|
61,227
|
|
Convertible
subordinated debt, net of debt issuance costs
|
|
|
72,708
|
|
|
—
|
|
Other
long-term liabilities
|
|
|
674
|
|
|
269
|
|
Deferred
income taxes
|
|
|
—
|
|
|
2,236
|
|
Minority
interests
|
|
|
15,414
|
|
|
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 September 30, 2007 and December
31, 2006,
respectively
|
|
|
—
|
|
|
—
|
|
Common
stock, $0.01 par value, 81,761,465 shares authorized, 29,314,936
and
28,533,676 shares issued at September 30, 2007 and December 31,
2006,
respectively
|
|
|
292
|
|
|
285
|
|
Additional
paid-in-capital
|
|
|
91,772
|
|
|
89,653
|
|
Accumulated
deficit
|
|
|
(6,778
|
)
|
|
(11,656
|
)
|
Accumulated
other comprehensive loss
|
|
|
(310
|
)
|
|
(254
|
)
|
Treasury
stock, at cost, 4,822,413 and 4,713,417 shares at September 30,
2007 and
December 31, 2006, respectively
|
|
|
(10,660
|
)
|
|
(9,912
|
)
|
Total
stockholders’ equity
|
|
|
74,316
|
|
|
68,116
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
205,723
|
|
$
|
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
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
revenue:
|
|
|
|
|
|
|
|
|
|
Surgical
facilities
|
|
$
|
27,626
|
|
$
|
22,249
|
|
$
|
79,615
|
|
$
|
61,219
|
|
Product
sales and other
|
|
|
5,764
|
|
|
5,525
|
|
|
17,644
|
|
|
17,512
|
|
Total
net revenue
|
|
|
33,390
|
|
|
27,774
|
|
|
97,259
|
|
|
78,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
wages and benefits
|
|
|
10,339
|
|
|
8,803
|
|
|
30,507
|
|
|
25,420
|
|
Cost
of sales and medical supplies
|
|
|
7,844
|
|
|
6,614
|
|
|
22,776
|
|
|
19,167
|
|
Selling,
general and administrative
|
|
|
6,247
|
|
|
5,394
|
|
|
18,316
|
|
|
14,879
|
|
Depreciation
and amortization
|
|
|
1,062
|
|
|
751
|
|
|
2,976
|
|
|
2,219
|
|
Total
operating expenses
|
|
|
25,492
|
|
|
21,562
|
|
|
74,575
|
|
|
61,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
7,898
|
|
|
6,212
|
|
|
22,684
|
|
|
17,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests in earnings of consolidated entities
|
|
|
3,820
|
|
|
3,124
|
|
|
11,087
|
|
|
8,167
|
|
Interest
(income) expense, net
|
|
|
1,009
|
|
|
838
|
|
|
3,794
|
|
|
1,788
|
|
Other
(income) expense, net
|
|
|
(69
|
)
|
|
(146
|
)
|
|
(194
|
)
|
|
(339
|
)
|
Income
before income taxes
|
|
|
3,138
|
|
|
2,396
|
|
|
7,997
|
|
|
7,430
|
|
Income
tax provision
|
|
|
1,224
|
|
|
958
|
|
|
3,119
|
|
|
2,972
|
|
Net
income from continuing operations
|
|
|
1,914
|
|
|
1,438
|
|
|
4,878
|
|
|
4,458
|
|
Net
income from discontinued operations
|
|
|
—
|
|
|
37
|
|
|
—
|
|
|
37
|
|
Net
income
|
|
$
|
1,914
|
|
$
|
1,475
|
|
$
|
4,878
|
|
$
|
4,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.08
|
|
$
|
0.06
|
|
$
|
0.20
|
|
$
|
0.19
|
|
Income
from discontinued operations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
income
|
|
$
|
0.08
|
|
$
|
0.06
|
|
$
|
0.20
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.08
|
|
$
|
0.06
|
|
$
|
0.19
|
|
$
|
0.18
|
|
Income
from discontinued operations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
income
|
|
$
|
0.08
|
|
$
|
0.06
|
|
$
|
0.19
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
24,154
|
|
|
23,370
|
|
|
24,055
|
|
|
23,148
|
|
Dilutive
effect of employee stock options and restricted stock
|
|
|
929
|
|
|
1,580
|
|
|
1,109
|
|
|
1,633
|
|
Diluted
weighted average common shares outstanding
|
|
|
25,083
|
|
|
24,950
|
|
|
25,164
|
|
|
24,781
|
|
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
|
|
|
669
|
|
|
7
|
|
|
1,853
|
|
|
—
|
|
|
—
|
|
|
(82
|
)
|
|
(626
|
)
|
|
1,234
|
|
Shares
issued - employee stock purchase plan
|
|
|
37
|
|
|
—
|
|
|
163
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
163
|
|
Restricted
stock grants
|
|
|
75
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(27
|
)
|
|
(122
|
)
|
|
(122
|
)
|
Stock
compensation expense
|
|
|
—
|
|
|
—
|
|
|
1,943
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,943
|
|
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
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(56
|
)
|
|
—
|
|
|
—
|
|
|
(56
|
)
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,878
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,878
|
|
Balance,
September 30, 2007
|
|
|
29,315
|
|
$
|
292
|
|
$
|
91,772
|
|
$
|
(6,778
|
)
|
$
|
(310
|
)
|
|
(4,822
|
)
|
$
|
(10,660
|
)
|
$
|
74,316
|
|
The
notes
to the interim condensed consolidated financial statements
are
an
integral part of these statements.
NOVAMED,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars
in thousands; unaudited)
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
4,878
|
|
$
|
4,495
|
|
Adjustments
to reconcile net income to net cash provided by
continuing
operations, net of effects of purchase transactions—
|
|
|
|
|
|
|
|
Net
earnings of discontinued operations
|
|
|
—
|
|
|
(37
|
)
|
Depreciation
and amortization
|
|
|
2,976
|
|
|
2,219
|
|
Current
and deferred taxes
|
|
|
2,499
|
|
|
2,972
|
|
Stock-based
compensation
|
|
|
1,943
|
|
|
1,357
|
|
Loss
(earnings) of non-consolidated affiliate
|
|
|
58
|
|
|
(22
|
)
|
Gain
on sale of minority interests
|
|
|
(79
|
)
|
|
(102
|
)
|
Minority
interests
|
|
|
11,087
|
|
|
8,167
|
|
Distributions
to minority partners
|
|
|
(10,693
|
)
|
|
(6,486
|
)
|
Changes
in operating assets and liabilities—
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,076
|
)
|
|
(3,674
|
)
|
Inventory
|
|
|
(246
|
)
|
|
3
|
|
Other
current assets
|
|
|
(128
|
)
|
|
(199
|
)
|
Accounts
payable and accrued expenses
|
|
|
(824
|
)
|
|
859
|
|
Other
noncurrent assets
|
|
|
483
|
|
|
(9
|
)
|
Net
cash provided by operating activities
|
|
|
10,878
|
|
|
9,543
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Payments
for acquisitions, net
|
|
|
(32,724
|
)
|
|
(40,157
|
)
|
Proceeds
from sale of minority interests
|
|
|
273
|
|
|
653
|
|
Purchases
of property and equipment
|
|
|
(1,878
|
)
|
|
(2,888
|
)
|
Other
|
|
|
—
|
|
|
377
|
|
Net
cash used in investing activities
|
|
|
(34,329
|
)
|
|
(42,015
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Borrowings
under revolving line of credit
|
|
|
54,500
|
|
|
59,600
|
|
Payments
under revolving line of credit
|
|
|
(88,200
|
)
|
|
(31,200
|
)
|
Other
long-term borrowings
|
|
|
37
|
|
|
4,000
|
|
Proceeds
from the issuance of convertible subordinated debt, net (Note
8)
|
|
|
62,375
|
|
|
—
|
|
Proceeds
from the issuance of common stock
|
|
|
918
|
|
|
718
|
|
Payments
of other debt, debt issuance fees and capital lease
obligations
|
|
|
(1,961
|
)
|
|
(916
|
)
|
Net
cash provided by financing activities
|
|
|
27,669
|
|
|
32,202
|
|
|
|
|
|
|
|
|
|
Cash
flows from discontinued operations:
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
—
|
|
|
(10
|
)
|
Investing
activities
|
|
|
—
|
|
|
—
|
|
Net
cash used in discontinued operations
|
|
|
—
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
4,218
|
|
|
(280
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
2,743
|
|
|
1,690
|
|
Cash
and cash equivalents, end of period
|
|
$
|
6,961
|
|
$
|
1,410
|
|
The
notes
to the interim condensed consolidated financial statements are an integral
part
of these statements.
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
September
30, 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 September 30, 2007
and
for the three and nine months ended September 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:
|
|
Nine months ended September 30,
|
|
|
|
2007
|
|
2006
|
|
Interest
paid
|
|
$
|
4,001
|
|
$
|
1,533
|
|
Income
taxes paid
|
|
|
519
|
|
|
245
|
|
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 nine months of 2007 and 2006, the Company obtained medical equipment
by entering into capital leases for $294 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)
September
30, 2007
(Dollars
in thousands, except per share data; unaudited)
Balances
as of:
|
|
September
30,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Surgical
supplies
|
|
$
|
1,589
|
|
$
|
1,136
|
|
Optical
products
|
|
|
918
|
|
|
912
|
|
Other
|
|
|
102
|
|
|
139
|
|
Total
inventory
|
|
$
|
2,609
|
|
$
|
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
|
|
|
32,123
|
|
|
—
|
|
|
—
|
|
|
32,123
|
|
|
—
|
|
Other
|
|
|
(158
|
)
|
|
—
|
|
|
—
|
|
|
(158
|
)
|
|
—
|
|
Amortization
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(22
|
)
|
Balance
September 30, 2007
|
|
$
|
145,329
|
|
$
|
5,475
|
|
$
|
941
|
|
$
|
151,745
|
|
$
|
26
|
|
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 nine 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 $7,389 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 $24,734 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 purchase price allocation:
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
|
|
|
(1,489
|
)
|
Minority
partner share of net assets
|
|
|
57
|
|
Goodwill
|
|
|
24,734
|
|
Total
purchase price
|
|
$
|
24,621
|
|
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2007
(Dollars
in thousands, except per share data; unaudited)
Supplemental
information on an unaudited pro forma basis for the three and nine month periods
ended September 30, 2007 and 2006, as if the Kalamazoo acquisition had taken
place on January 1, 2007 and 2006, is as follows:
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
revenue
|
|
$
|
33,390
|
|
$
|
29,980
|
|
$
|
101,221
|
|
$
|
85,349
|
|
Net
income from continuing operations
|
|
$
|
1,914
|
|
$
|
1,532
|
|
$
|
5,058
|
|
$
|
4,760
|
|
Basic
earnings per common share
|
|
$
|
0.08
|
|
$
|
0.07
|
|
$
|
0.21
|
|
$
|
0.21
|
|
Diluted
earnings per common share
|
|
$
|
0.08
|
|
$
|
0.06
|
|
$
|
0.20
|
|
$
|
0.19
|
|
During
the first nine months of 2006, the Company acquired a majority interest in
six
ASCs for $35,745, of which the Company allocated $33,768 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 was judged to be 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 — September 30, 2007
|
|
$
|
344
|
|
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2007
(Dollars
in thousands, except per share data; unaudited)
7.
|
OTHER
(INCOME) EXPENSE
|
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Loss
(earnings) of non-consolidated affiliate
|
|
$
|
24
|
|
$
|
9
|
|
$
|
58
|
|
$
|
(22
|
)
|
Gain
on sale of minority interests
|
|
|
—
|
|
|
(92
|
)
|
|
(79
|
)
|
|
(102
|
)
|
Other,
net
|
|
|
(93
|
)
|
|
(63
|
)
|
|
(173
|
)
|
|
(215
|
)
|
Other
(income) expense, net
|
|
$
|
(69
|
)
|
$
|
(146
|
)
|
$
|
(194
|
)
|
$
|
(339
|
)
|
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. During the third quarter of 2006
the Company sold a 2.5% minority interest in its New Albany, Indiana ASC to
one
of its existing partners, increasing minority ownership in this ASC to 32.5%.
This transaction resulted in a net gain on the sale of minority interest of
$90
in the third 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.
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 would
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.
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2007
(Dollars
in thousands, except per share data; unaudited)
The
aggregate underwriting commissions and other debt issuance costs incurred
through September 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 preceding
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 options cover 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 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.
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2007
(Dollars
in thousands, except per share data; unaudited)
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.
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
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 contains customary 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. On May 31, 2007, the Company
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 outside of the 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.
At
September 30, 2007, the Company had $24,000 of borrowings outstanding under
its
revolving credit facility with a weighted average interest rate of 7.562% and
was in compliance with all of its covenants. The weighted average interest
rate
on credit line borrowings during the three and nine months ended September
30,
2007 was 7.50% and 7.32%, respectively. In addition, the Company paid a fee
ranging from .20% to .25% on the unused portion of the commitment.
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2007
(Dollars
in thousands, except per share data; unaudited)
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 $270 at September 30, 2007.
Effective
August 1, 2006, NovaMed Eye Surgery Center of New Albany, LLC, of which the
Company owns a 67.5% majority interest, entered into a $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 $59 at
September 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 $310 at September 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 nine
months ended September 30, 2007 was $1,718 and $4,822, respectively. The total
comprehensive income for the three and nine months ended September 30, 2006
was
$1,165 and $4,185, 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 nine 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 nine 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
78,000 shares with an exercise price of $6.23 per share. Stock compensation
expense of $513 and $1,460 was recognized on existing stock options during
the
three months and nine months ended September 30, 2007, respectively. Stock
compensation expense of $369 and $986 was recognized on existing stock options
during the three months and nine months ended September 30, 2006, respectively.
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2007
(Dollars
in thousands, except per share data; unaudited)
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 nine months ended
September 30, 2007 and 2006:
|
|
2007
|
|
2006
|
|
|
|
Three months
|
|
Nine
months
|
|
Three months
|
|
Nine
months
|
|
Expected
option life in years
|
|
|
6
|
|
|
6
|
|
|
6
|
|
|
6
|
|
Risk-free
interest rate
|
|
|
4.72
|
%
|
|
4.77
|
%
|
|
4.70
|
%
|
|
4.73
|
%
|
Dividend
yield
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Expected
volatility
|
|
|
47.0
|
%
|
|
48.1
|
%
|
|
49.9
|
%
|
|
51.2
|
%
|
Per
share fair value
|
|
$
|
3.09
|
|
$
|
3.77
|
|
$
|
4.23
|
|
$
|
3.78
|
|
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 nine months ended September 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
|
|
|
652,500
|
|
$
|
7.22
|
|
|
|
|
|
|
|
Exercised
|
|
|
(669,489
|
)
|
$
|
2.24
|
|
|
|
|
|
|
|
Canceled
|
|
|
(149,941
|
)
|
$
|
8.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
4,437,138
|
|
$
|
4.73
|
|
|
6.1
|
|
$
|
4,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 30, 2007
|
|
|
3,122,661
|
|
$
|
3.88
|
|
|
5.0
|
|
$
|
4,821
|
|
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 in-the-money stock options.
The
total intrinsic value of stock options exercised during the first nine months
of
2007 was $3,239. As a result of the stock options exercised, the Company
recorded common stock and additional paid-in-capital of $1,860, which includes
$359 of tax benefits recognized. During the first nine months of 2007, cash
received from stock options exercised was $874.
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.
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2007
(Dollars
in thousands, except per share data; unaudited)
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
|
|
|
652,500
|
|
$
|
3.77
|
|
Vested
|
|
|
(454,159
|
)
|
$
|
3.17
|
|
Canceled
|
|
|
(91,519
|
)
|
$
|
3.50
|
|
|
|
|
|
|
|
|
|
Nonvested
at September 30, 2007
|
|
|
1,314,477
|
|
$
|
3.49
|
|
At
September 30, 2007, there was $4,582 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
nine months of 2007. As of September 30, 2007, the total amount of unrecognized
compensation expense related to nonvested restricted stock awards was
approximately $1,520, which is expected to be recognized over a weighted-average
period of approximately 2.6 years. The Company recognized compensation expense
of $154 and $446 on existing restricted stock awards during the three and nine
months ended September 30, 2007, respectively. The Company recognized
compensation expense of $125 and $330 on existing restricted stock awards during
the three and nine months ended September 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 36,800 and 22,700 shares
were purchased under this plan during the nine months ended September 30, 2007
and 2006, respectively. Under the provisions of SFAS 123(R), the Company
recognized compensation expense of $37 and $41 during the first nine months
of
2007 and 2006, respectively. At September 30, 2007, 52,000 shares were reserved
for future issuance under the ESPP.
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
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 nine months ended September 30, 2007 and 2006:
|
|
Surgical
Facilities
|
|
Product
Sales
|
|
Other
|
|
Corporate
|
|
Total
|
|
Three
months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
27,626
|
|
$
|
3,870
|
|
$
|
1,889
|
|
$
|
5
|
|
$
|
33,390
|
|
Earnings
(loss) before taxes
|
|
|
4,106
|
|
|
1,017
|
|
|
209
|
|
|
(2,194
|
)
|
|
3,138
|
|
Depreciation
and amortization
|
|
|
902
|
|
|
57
|
|
|
34
|
|
|
69
|
|
|
1,062
|
|
Interest
income
|
|
|
24
|
|
|
—
|
|
|
—
|
|
|
19
|
|
|
43
|
|
Interest
expense
|
|
|
106
|
|
|
—
|
|
|
—
|
|
|
946
|
|
|
1,052
|
|
Capital
expenditures
|
|
|
181
|
|
|
41
|
|
|
2
|
|
|
17
|
|
|
241
|
|
Accounts
receivable
|
|
|
13,469
|
|
|
6,017
|
|
|
690
|
|
|
102
|
|
|
20,278
|
|
Identifiable
assets
|
|
|
175,467
|
|
|
13,128
|
|
|
2,436
|
|
|
14,692
|
|
|
205,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
22,249
|
|
$
|
3,533
|
|
$
|
1,978
|
|
$
|
14
|
|
$
|
27,774
|
|
Earnings
(loss) before taxes
|
|
|
4,144
|
|
|
762
|
|
|
244
|
|
|
(2,754
|
)
|
|
2,396
|
|
Depreciation
and amortization
|
|
|
635
|
|
|
56
|
|
|
19
|
|
|
41
|
|
|
751
|
|
Interest
income
|
|
|
17
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
26
|
|
Interest
expense
|
|
|
76
|
|
|
—
|
|
|
—
|
|
|
788
|
|
|
864
|
|
Capital
expenditures
|
|
|
1,253
|
|
|
36
|
|
|
8
|
|
|
212
|
|
|
1,509
|
|
Accounts
receivable
|
|
|
11,587
|
|
|
4,786
|
|
|
608
|
|
|
55
|
|
|
17,036
|
|
Identifiable
assets
|
|
|
126,402
|
|
|
11,914
|
|
|
1,787
|
|
|
4,571
|
|
|
144,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
79,615
|
|
$
|
11,954
|
|
$
|
5,670
|
|
$
|
20
|
|
$
|
97,259
|
|
Earnings
(loss) before taxes
|
|
|
11,867
|
|
|
3,302
|
|
|
590
|
|
|
(7,762
|
)
|
|
7,997
|
|
Depreciation
and amortization
|
|
|
2,516
|
|
|
176
|
|
|
106
|
|
|
178
|
|
|
2,976
|
|
Interest
income
|
|
|
79
|
|
|
—
|
|
|
—
|
|
|
27
|
|
|
106
|
|
Interest
expense
|
|
|
285
|
|
|
—
|
|
|
—
|
|
|
3,615
|
|
|
3,900
|
|
Capital
expenditures
|
|
|
1,301
|
|
|
183
|
|
|
123
|
|
|
271
|
|
|
1,878
|
|
Accounts
receivable
|
|
|
13,469
|
|
|
6,017
|
|
|
690
|
|
|
102
|
|
|
20,278
|
|
Identifiable
assets
|
|
|
175,467
|
|
|
13,128
|
|
|
2,436
|
|
|
14,692
|
|
|
205,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
61,219
|
|
$
|
11,669
|
|
$
|
5,794
|
|
$
|
49
|
|
$
|
78,731
|
|
Earnings
(loss) before taxes
|
|
|
10,751
|
|
|
2,926
|
|
|
597
|
|
|
(6,844
|
)
|
|
7,430
|
|
Depreciation
and amortization
|
|
|
1,844
|
|
|
166
|
|
|
57
|
|
|
152
|
|
|
2,219
|
|
Interest
income
|
|
|
42
|
|
|
—
|
|
|
—
|
|
|
22
|
|
|
64
|
|
Interest
expense
|
|
|
111
|
|
|
—
|
|
|
—
|
|
|
1,741
|
|
|
1,852
|
|
Capital
expenditures
|
|
|
2,372
|
|
|
168
|
|
|
28
|
|
|
320
|
|
|
2,888
|
|
Accounts
receivable
|
|
|
11,587
|
|
|
4,786
|
|
|
608
|
|
|
55
|
|
|
17,036
|
|
Identifiable
assets
|
|
|
126,402
|
|
|
11,914
|
|
|
1,787
|
|
|
4,571
|
|
|
144,674
|
|
NOVAMED,
INC. AND SUBSIDIARIES
NOTES
TO THE INTERIM
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
September
30, 2007
(Dollars
in thousands, except per share data; unaudited)
12.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
The
Company adopted the provisions of FASB Interpretation No. 48 Accounting
for Uncertainty in Income Taxes
on
January 1, 2007 (“FIN 48”). As a result of the implementation of FIN 48, the
Company recognized a liability for unrecognized tax benefits of approximately
$416. No adjustment was made to the beginning retained earnings balance, as
the
ultimate deductibility of all these tax positions was judged to be 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.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis presents our consolidated financial condition
at September 30, 2007 and the results of operations for the three and nine
months ended September 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 September 30, 2007, we owned and operated 38
ASCs,
of which 35 were jointly owned with physician-partners. We also own other
businesses including an optical laboratory, an optical products purchasing
organization, and a marketing products and services company. In addition, we
provide management services to two eye care practices.
Year-to-Date Financial
Highlights:
|
·
|
Consolidated
net revenue increased 23.5% to $97.3 million. Surgical facilities
net
revenue increased 30.0% to $79.6 million (same-facility surgical
net
revenue increased 6.2% to $56.6
million).
|
|
·
|
Operating
income increased 33.1% to $22.7
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
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surgical
facilities
|
|
|
82.7
|
%
|
|
80.1
|
%
|
|
81.9
|
%
|
|
77.8
|
%
|
Product
sales and other
|
|
|
17.3
|
|
|
19.9
|
|
|
18.1
|
|
|
22.2
|
|
Total
net revenue
|
|
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
wages and benefits
|
|
|
31.0
|
|
|
31.7
|
|
|
31.4
|
|
|
32.3
|
|
Cost
of sales and medical supplies
|
|
|
23.5
|
|
|
23.8
|
|
|
23.4
|
|
|
24.3
|
|
Selling,
general and administrative
|
|
|
18.7
|
|
|
19.4
|
|
|
18.8
|
|
|
18.9
|
|
Depreciation
and amortization
|
|
|
3.2
|
|
|
2.7
|
|
|
3.1
|
|
|
2.8
|
|
Total
operating expenses
|
|
|
76.4
|
|
|
77.6
|
|
|
76.7
|
|
|
78.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
23.6
|
|
|
22.4
|
|
|
23.3
|
|
|
21.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests in earnings of consolidated entities
|
|
|
11.4
|
|
|
11.3
|
|
|
11.4
|
|
|
10.4
|
|
Other
(income) expense
|
|
|
2.8
|
|
|
2.5
|
|
|
3.7
|
|
|
1.8
|
|
Income
before income taxes
|
|
|
9.4
|
|
|
8.6
|
|
|
8.2
|
|
|
9.5
|
|
Income
tax provision
|
|
|
3.7
|
|
|
3.4
|
|
|
3.2
|
|
|
3.8
|
|
Net
income from continuing operations
|
|
|
5.7
|
|
|
5.2
|
|
|
5.0
|
|
|
5.7
|
|
Net
income from discontinued operations
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
Net
income
|
|
|
5.7
|
%
|
|
5.3
|
%
|
|
5.0
|
%
|
|
5.7
|
%
|
Three
Months Ended September 30, 2007 Compared to the Three Months Ended September
30,
2006
Net
Revenue
Consolidated.
Total
net revenue increased 20.2% from $27.8 million to $33.4 million. Net revenue
by
segment is discussed below.
Surgical
Facilities.
The
table below summarizes surgical facilities net revenue and procedures performed
for the third quarter of 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 24.2% from $22.2 million to $27.6 million. This increase was primarily
the result of $5.8 million of net revenue from ASCs acquired or developed after
July 1, 2006 (“new ASCs”). Net revenue and surgical procedures performed in ASCs
that we owned for the entire comparable reporting periods (“same-facility”) was
flat compared to the third quarter of 2006.
On
August
2, 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. The
2008
ASC rates, which were published on November 1, 2007, will be approximately
65%
of the hospital outpatient department payment 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 $0.1 million during the third quarter of 2007 when including
the interest expense on the purchase price paid for the ASC.
|
|
Three
Months Ended September
30,
|
|
Increase
|
|
Dollars
in thousands
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
Surgical
Facilities:
|
|
|
|
|
|
|
|
|
|
|
Same-facility:
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
21,307
|
|
$
|
21,324
|
|
$
|
(17
|
)
|
#
of procedures
|
|
|
25,385
|
|
|
25,390
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
New
ASCs:
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
6,316
|
|
$
|
543
|
|
$
|
5,773
|
|
#
of procedures
|
|
|
8,217
|
|
|
559
|
|
|
7,658
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
laser services agreement and ASC closures
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
3
|
|
$
|
382
|
|
$
|
(379
|
)
|
#
of procedures
|
|
|
—
|
|
|
454
|
|
|
(454
|
)
|
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 third quarter
increased 4.3% from $5.5 million to $5.8 million. Net revenue at our optical
laboratories business increased by $0.2 million due to an increase in existing
customer orders and improved external marketing. 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 decreased
by $0.1 million primarily due to a decrease in the number of patient visits.
|
|
Three
Months Ended
September
30,
|
|
Increase
|
|
Dollars
in thousands
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
Product
Sales:
|
|
|
|
|
|
|
|
|
|
|
Optical
laboratories
|
|
$
|
1,560
|
|
$
|
1,399
|
|
$
|
161
|
|
Optical
products purchasing organization
|
|
|
793
|
|
|
666
|
|
|
127
|
|
Marketing
products and services
|
|
|
1,023
|
|
|
961
|
|
|
62
|
|
Optometric
practice/retail store
|
|
|
494
|
|
|
507
|
|
|
(13
|
)
|
|
|
|
3,870
|
|
|
3,533
|
|
|
337
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
Ophthalmology
practice
|
|
|
1,889
|
|
|
1,978
|
|
|
(89
|
)
|
Other
|
|
|
5
|
|
|
14
|
|
|
(9
|
)
|
|
|
|
1,894
|
|
|
1,992
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
Net Product Sales and Other Revenue
|
|
$
|
5,764
|
|
$
|
5,525
|
|
$
|
239
|
|
Salaries,
Wages and Benefits
Consolidated.
Salaries, wages and benefits expense increased 17.4% from $8.8 million to $10.3
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 30.6% from $4.6 million to $6.1 million. The increase was primarily
the result of staff costs associated with new ASCs.
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 5.1% from $2.1 million to $2.2 million.
The
increase was primarily due to higher stock-based compensation expense of $0.2
million.
Cost
of Sales and Medical Supplies
Consolidated.
Cost of
sales and medical supplies expense increased 18.6% from $6.6 million to $7.8
million. As a percentage of net revenue, cost of sales and medical supplies
expense decreased from 23.8% to 23.5%. 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
22.1% from $5.2 million to $6.3 million. The expense increase was primarily
the
result of costs associated with our new ASCs.
Product
Sales and Other.
Cost of
sales and medical supplies expense in our product sales and other segments
increased 5.8% from $1.4 million to $1.5 million primarily due to an increase
in
revenue at our optical laboratories business.
Selling,
General and Administrative
Consolidated.
Selling,
general and administrative expense increased 15.8% from $5.4 million to $6.2
million. As a percentage of net revenue, selling, general and administrative
expense decreased from 19.4% 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
26.6% from $4.4 million to $5.6 million. The increase is due to costs associated
with our new ASCs and an increase of $0.3 million in 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 $0.1
million to a negative $0.2 million. 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
$0.1 million due to higher professional fees, information technology, and
consulting expenses.
Depreciation
and Amortization.
Depreciation and amortization expense increased 41.6% from $0.8 million to
$1.1
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 $3.8 million in 2007 as
compared to $3.1 million in 2006. All of this increase is attributable to new
ASCs.
Interest
(Income) Expense, net.
Interest
(income) expense, net increased from $0.8 million to $1.0 million due to our
increased borrowings to fund our ASC acquisitions.
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.
Nine
Months Ended September 30, 2007 Compared to the Nine Months Ended September
30,
2006
Net
Revenue
Consolidated.
Total
net revenue increased 23.5% from $78.7 million to $97.3 million. Net revenue
by
segment is discussed below.
Surgical
Facilities.
The
table below summarizes surgical facilities net revenue and procedures performed
for the first nine months of 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 30.0% from $61.2 million to $79.6 million. This increase was primarily
the result of $16.7 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 4.3% increase in the number
of same-facility procedures performed and a 1.8% increase in the net revenue
per
procedure due to a change in procedure mix.
On
August
2, 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. The
2008
ASC rates, which were published on November 1, 2007, will be approximately
65%
of the hospital outpatient department payment 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 nine months of 2007 by $0.4 million when
including the interest expense on the purchase price paid for the ASC.
|
|
Nine
Months Ended September
30,
|
|
Increase
|
|
Dollars
in thousands
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
Surgical
Facilities:
|
|
|
|
|
|
|
|
|
|
|
Same-facility:
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
56,580
|
|
$
|
53,301
|
|
$
|
3,279
|
|
#
of procedures
|
|
|
67,687
|
|
|
64,897
|
|
|
2,790
|
|
|
|
|
|
|
|
|
|
|
|
|
New
ASCs:
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
22,998
|
|
$
|
6,293
|
|
$
|
16,705
|
|
#
of procedures
|
|
|
30,430
|
|
|
6,883
|
|
|
23,547
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
laser services agreement and ASC closures
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
37
|
|
$
|
1,625
|
|
$
|
(1,588
|
)
|
#
of procedures
|
|
|
—
|
|
|
2,579
|
|
|
(2,579
|
)
|
Product
Sales and Other.
The
table below summarizes net product sales and other revenue by significant
business component. Product sales and other revenue increased 0.7% from $17.5
million to $17.6 million. Net revenue at our optical products and services
business increased $0.4 million due to an increase in existing customer orders.
Net revenue at our optical laboratories business increased $0.3 million due
to
an increase in existing customer orders and improved external marketing. Net
revenue at our marketing products and services business decreased $0.4 million
due to a decline in sales of marketing products provided to medical device
manufacturers to promote their new refractive intraocular lens technology.
|
|
Nine
Months Ended
September
30,
|
|
Increase
|
|
Dollars
in thousands
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
Product
Sales:
|
|
|
|
|
|
|
|
|
|
|
Optical
laboratories
|
|
$
|
4,821
|
|
$
|
4,528
|
|
$
|
293
|
|
Optical
products purchasing organization
|
|
|
2,404
|
|
|
2,034
|
|
|
370
|
|
Marketing
products and services
|
|
|
3,283
|
|
|
3,648
|
|
|
(365
|
)
|
Optometric
practice/retail store
|
|
|
1,447
|
|
|
1,459
|
|
|
(12
|
)
|
|
|
|
11,955
|
|
|
11,669
|
|
|
286
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
Ophthalmology
practice
|
|
|
5,669
|
|
|
5,723
|
|
|
(54
|
)
|
Other
|
|
|
20
|
|
|
120
|
|
|
(100
|
)
|
|
|
|
5,689
|
|
|
5,843
|
|
|
(154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
Net Product Sales and Other Revenue
|
|
$
|
17,644
|
|
$
|
17,512
|
|
$
|
132
|
|
Salaries,
Wages and Benefits
Consolidated.
Salaries, wages and benefits expense increased 20.0% from $25.4 million to
$30.5
million. As a percentage of net revenue, salaries, wages and benefits expense
decreased from 32.3% to 31.4%. Salaries, wages and benefits expense by segment
is discussed below.
Surgical
Facilities.
Salaries, wages and benefits expense in our surgical facilities segment
increased 31.9% from $13.2 million to $17.4 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
decreased $0.9% from $6.3 million to $6.2 million.
Corporate. Salaries,
wages and benefits expense increased 15.6% from $5.9 million to $6.9 million.
The increase was primarily due to higher stock-based compensation expense of
$0.6 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 18.8% from $19.2 million to $22.8
million. As a percentage of net revenue, cost of sales and medical supplies
expense decreased from 24.3% 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
25.5% from $14.4 million to $18.1 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
remained flat at $4.7 million.
Selling,
General and Administrative
Consolidated.
Selling,
general and administrative expense increased 23.1% from $14.9 million to $18.3
million. As a percentage of net revenue, selling, general and administrative
expense decreased from 18.9% to 18.8%. Selling, general and administrative
expense by segment is discussed below.
Surgical
Facilities.
Selling,
general and administrative expense in our surgical facilities segment increased
32.6% from $12.0 million to $16.0 million. The increase is due to costs
associated with our new ASCs and an increase of $0.9 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 4.7% from $2.7 million to $2.6 million.
Corporate.
Corporate selling, general and administrative expense decreased from $0.1
million to a negative $0.3 million. This decrease consists of two components.
Corporate selling, general and administrative expenses decreased by $0.9 million
due to an increase of $0.9 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
$0.6 million due to higher professional fees, information technology/consulting
expenses and travel costs.
Depreciation
and Amortization.
Depreciation and amortization expense increased 34.2% from $2.2 million to
$3.0
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 $11.1 million in 2007 as
compared to $8.2 million in 2006. Of this increase, 76.0% is attributable to
new
ASCs.
Interest
(Income) Expense, net.
Interest
(income) expense, net increased from $1.8 million to $3.8 million due to our
increased borrowings to fund our ASC acquisitions.
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 nine months of 2007 generated $10.9 million in
cash
flow from continuing operations compared to $9.5 million in the comparable
2006
period. Before considering changes in working capital, operating cash flow
from
continuing operations was relatively flat compared to the first nine months
of
2006. During the first nine months of 2007 and 2006, working capital consumed
$1.8 million and $3.0 million in cash, respectively. The higher cash consumption
during the first nine months of 2006 was due to a delay in receiving new
insurance provider numbers which delayed the billing and collection
process.
Investing
activities during the first nine months of 2007 resulted in negative cash flow
of $34.3 million. Investing activities during the first nine months of 2007
included the acquisition of two ASCs for $32.6 million, the purchase of property
and equipment for $1.9 million and proceeds of $0.3 million relating to the
sale
of minority interests. Investing activities during the first nine months of
2006
resulted in negative cash flow of $42.0 million which included the acquisition
of seven ASCs for $40.2 million, the purchase of property and equipment for
$2.9
million and proceeds of $0.7 million relating to the sale of minority
interests.
Cash
flows from financing activities during the first nine months of 2007 included
proceeds of $0.9 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 $2.0 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 nine months of 2006 included $28.4 million
of net borrowings under our credit facility and $0.7 million from the exercise
of stock options and issuance of stock to employees as part of our employee
stock purchase plan, offset by $0.9 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 September 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 $10.0
million 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 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.
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 would result in us 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.
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 options cover 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 proceeds 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
September 30, 2007, we had $24.0 million of borrowings outstanding under our
revolving credit facility and were in compliance with all of our covenants.
Effective February 7, 2007, we amended our credit facility, increasing the
maximum commitment available under the facility from $80 million to $125 million
and extending the expiration date to February 5, 2010. The maximum
commitment available under the facility is the lesser of $125 million or the
maximum allowed under the calculated ratio limitations. The amended credit
agreement also includes an option allowing us to increase the maximum commitment
available to $150 million under certain conditions. Maximum borrowing
availability and applicable interest rates under the facility are based on
a
ratio of our total indebtedness to our earnings before interest, taxes,
depreciation and amortization as defined in the credit agreement. The amended
credit agreement provides for temporary increases in this ratio through
September 30, 2008 for purposes of calculating our maximum borrowing
availability. Interest on borrowings under the facility is payable at an annual
rate equal to our lender’s published base rate plus the applicable borrowing
margin ranging from 0% to 0.5% or LIBOR plus a range from 1.25% 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 customary 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.
On May 31, 2007, we 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 $24.6 million. 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 $1.8 million outside of the credit facility.
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.
The
weighted average interest rate on credit line borrowings at September 30, 2007
was 7.32%.
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
September 30, 2007, we had cash and cash equivalents of $7.0 million of which
$2.5 million was restricted pursuant to agreements with seven of our ASCs.
As of
September 30, 2007, we had working capital of $19.6 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 size and timing of our acquisition and expansion
activities, capital requirements associated with our surgical facilities, and
the future cost of surgical equipment.
In
July
2006, we 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
our expectations. As a result, we 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 us. Following
mediation and effective as of August 1, 2007, we settled this dispute with
the
selling physician. Under the terms of the settlement agreement, the selling
physician paid us $1.5 million and forfeited to us his thirty-five percent
(35%)
interest in the ASC. We now own 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. The
$1.5 million cash payment was recorded in the Condensed Consolidated Statement
of Cash Flows in accounts payable and accrued expenses.
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. Because we did not exercise this option by July 2007, we have 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 was judged to be 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
September 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 September 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 options cover 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 proceeds 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 September 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 September
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
holders of the Convertible Notes have the option to require us to purchase
the
Convertible Notes for cash in the event of a fundamental change. A takeover
of
our company would trigger this option to require us to 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 September
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
|
|
|
|
|
|
|
|
|
|
|
|
7/01/2007 –
7/31/2007
|
|
|
1,690
|
|
$
|
6.00
|
|
|
None
|
|
|
None
|
|
8/01/2007 –
8/31/2007
|
|
|
3,379
|
|
$
|
5.08
|
|
|
None
|
|
|
None
|
|
9/01/2006 –
9/30/2007
|
|
|
2,483
|
|
$
|
4.71
|
|
|
None
|
|
|
None
|
|
|
(1)
|
Represents
shares of restricted stock delivered by employees to the Company,
upon
vesting, to satisfy tax withholding
requirements.
|
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.
/s/ Scott T. Macomber
|
|
November 09, 2007
|
|
Scott T. Macomber
|
Date
|
Executive Vice President and
|
|
Chief Financial Officer
|
|
(on behalf of Registrant and as principal financial officer)
|
|
/s/
John P. Hart
|
|
November
09, 2007
|
John
P. Hart
|
Date
|
Vice
President, Corporate Controller
|
|
(as
principal accounting officer)
|
|