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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number: 0-26625
NOVAMED EYECARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-4116193
(I.R.S. Employer
(State or other jurisdiction Identification No.)
of incorporation or organization)
980 North Michigan Avenue, Suite 1620, Chicago, Illinois 60611
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (312) 664-4100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the registrant's 14,256,560 shares of voting
stock held by non-affiliates of the registrant, based upon the last reported
sale price of the registrant's Common Stock on March 24, 2000 was $176,424,930.
The number of shares outstanding of the registrant's Common Stock, par value
$.01, as of March 24, 2000 was 24,398,584.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement in connection with
the registrant's 2000 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Report on Form 10-K.
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PART I
Item 1. Business
Because we want to provide investors with more meaningful and useful
information, this Annual Report on Form 10-K (the "Form 10-K") contains, and
incorporates by reference, certain "forward-looking statements" (as such term
is defined in Section 21E of the Securities Exchange Act of 1934, as amended)
that reflect our current expectations regarding our future results of
operations, performance and achievements. These forward-looking statements are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. We have tried, wherever possible, to identify
these forward-looking statements by using words such as "anticipates,"
"believes," "estimates," "expects," "plans," "intends" and similar expressions.
These statements reflect our current beliefs and are based on information
currently available to us. Accordingly, these statements are subject to certain
risks, uncertainties and contingencies which could cause our actual results,
performance or achievements in 2000 and beyond to differ materially from those
expressed in, or implied by, such statements. These risks and uncertainties
include: the acceptance of laser vision correction and other refractive
surgical procedures by eye care professionals and the general public; our
ability to establish and maintain profitable affiliations with eye care
professionals; the adoption of competing new technologies for vision correction
surgery; reductions in prices for laser vision correction procedures and other
reimbursement rates; proposed health care reforms; and the factors set forth
under "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors that Could Affect our Operations." We undertake
no obligation to update or revise any such forward-looking statements that may
be made to reflect events or circumstances after the date of this Form 10-K or
to reflect the occurrence of unanticipated events.
Unless the context requires otherwise, you should understand all references
to "we," "us" and "our" to include NovaMed Eyecare, Inc. and its consolidated
subsidiaries.
General
We are an eye care services company focused on laser vision correction. We
are currently conducting operations primarily in six core regional markets:
Chicago, Illinois; Kansas City, Missouri; Louisville, Kentucky; Richmond,
Virginia; St. Louis, Missouri; and the Atlanta, Georgia and Chattanooga,
Tennessee metropolitan areas.
We were originally organized as a Delaware limited liability company in
March 1995, under the name NovaMed Eyecare Management, LLC. In connection with
a capital infusion from venture capital investors, in November 1996, NovaMed
Holdings Inc., an Illinois corporation, was formed to serve as a holding
company, responsible for overall strategic planning, with NovaMed Eyecare
Management, LLC as an operating subsidiary. In May 1999, NovaMed Holdings Inc.
reincorporated as a Delaware corporation and changed its name to NovaMed
Eyecare, Inc. In June 1999, we changed the name of our principal operating
subsidiary to NovaMed Eyecare Services, LLC. In August 1999, we consummated our
initial public offering.
As of March 24, 2000, we own and operate:
. 12 eye surgery and laser centers where our affiliated eye care
professionals perform laser vision correction and other eye-related
surgical procedures
. an eye-only research organization with an emphasis on laser vision
correction that provides clinical and other research services to eye
care device, product and pharmaceutical manufacturers
. an optical services division that sells eye care products and
accessories to eye care professionals, including corrective lenses and
eyeglasses produced by our three wholesale optical laboratories, and
eyeglass frames and contact lenses purchased from manufacturers by our
optical products purchasing organization
As of March 24, 2000, we also operate under service agreements, seven laser
vision correction centers where our affiliated eye care professionals perform
laser vision correction surgery.
Generally, we enter into long-term business relationships, or affiliations,
with eye care professionals by:
. acquiring their non-medical assets including equipment, leasehold
interests and working capital
. hiring their non-medical personnel
. assuming their office leases
. entering into long-term service agreements with their professional
entities
Under these service agreements, we provide business, information
technology, administrative and financial services to our affiliated eye care
professionals and their optical retail outlets in exchange for a management
fee.
As of March 24, 2000, we have affiliated with 103 eye care professionals.
Our affiliated eye care professionals provide a wide range of eye care
services to patients including laser vision correction surgery, basic eye
examinations and the diagnosis and treatment of complex eye conditions. Our
affiliated eye care professionals currently practice in 56 eye care clinics
which are leased and staffed by us. In addition, our affiliated eye care
professionals operate 32 optical retail outlets, each of which is located
within one of our affiliated eye care clinics, where they sell eyeglasses,
contact lenses and other optical products and accessories to patient-
consumers. In addition, we have entered into three fixed-site laser agreements
in Delaware, Ohio and Illinois.
Industry
General
The eye care market consists of a large, diverse group of services and
products. The eye care services market includes routine eye examinations as
well as diagnostic and surgical procedures that address complex eye and vision
conditions. The most common conditions addressed by eye care professionals are
nearsightedness, farsightedness and astigmatism. Other frequently treated
conditions include cataracts, glaucoma, macular degeneration and diabetic
retinopathy. Eye and vision conditions are typically treated with surgery,
pharmaceuticals, prescription glasses, contact lenses or some combination of
these treatments. Additional services offered by eye care professionals
include research services for eye care devices or pharmaceuticals being
developed or tested in clinical trials. The optical products market consists
of the manufacture, distribution and sale of optical goods including
corrective lenses, eyeglasses, frames, contact lenses and other optical
products and accessories.
Eye care represents one of the largest health care service and product
markets in the U.S. Projected annual spending in 2001 for health care costs
associated with eye and vision conditions is expected to be $29 billion, while
annual spending on retail optical products is expected to be an additional $18
billion, representing a total market of approximately $47 billion.
Vision Correction Surgery
According to industry sources, over 161 million people in the U.S. require
eyeglasses or contact lenses to correct refractive vision conditions which
result from the improper curvature of the cornea. If the cornea's curvature is
not correct, the cornea cannot properly focus the light passing through it
onto the retina, and the person will see a blurred image. The three most
common refractive conditions are:
. myopia, commonly referred to as nearsightedness, which is caused by a
steepening of the cornea, resulting in the blurring of distant objects
. hyperopia, commonly referred to as farsightedness, which is caused by a
flattening of the cornea, resulting in the blurring of close objects
. astigmatism, in which images are not focused on any point due to the
varying curvature of the eye along different axes, which results in a
distorted view of images
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Recently, new surgical technologies and techniques have been introduced for
surgical correction of common vision conditions which result from the improper
curvature of the cornea. Radial Keratotomy, or RK, introduced in the U.S. in
the 1970s, was the first surgical technique approved for vision correction. RK
procedures require a delicate surgical technique and significant physician
training, and the procedure can result in the instability of the eye over a
period of months to years. Use of an excimer laser to alter the curvature of
the cornea has become the most common method of surgical vision correction.
Although not approved in the U.S. for general use until 1996, Photorefractive
Keratectomy, or PRK, was introduced abroad in 1988, as the first vision
correction surgery that used laser technology. PRK offers several advantages
over RK, including a shorter, simpler procedure, a less substantial training
requirement for ophthalmologists and fewer complications. However, the
procedure proved to be more painful and typically required three to six weeks
of recovery time before full visual acuity was restored, with the potential
that full benefit of the procedure would not be realized for up to six months.
Laser In-Situ Keratomileusis, or LASIK, was introduced in 1996, leading to a
dramatic increase in the popularity of laser vision correction surgery. LASIK
offers the ease-of-use benefits to ophthalmologists afforded by PRK, while
providing:
. significant reductions in patient pain or discomfort
. patient recovery times ranging from a few hours after the procedure to
two weeks
. reduced complication rates
In the LASIK procedure, an ophthalmologist uses an automated microsurgical
instrument to peel back a thin layer of corneal tissue which remains hinged to
the eye. A number of laser pulses are then applied to the cornea to remove
tissue and thereby correct the patient's vision by flattening the shape of the
cornea in nearsighted patients and steepening the shape of the cornea in
farsighted patients. After the surgeon replaces the layer of corneal tissue, no
bandages are required and most patients experience virtually no discomfort. A
LASIK procedure typically takes 10 to 15 minutes from set-up to completion,
with the length of time of the actual laser treatment lasting 15 to 90 seconds,
depending on the degree of correction required. LASIK is performed in an
outpatient setting, with only topical anesthesia. Only ophthalmologists are
licensed to perform LASIK, although optometrists are actively involved in
identifying appropriate candidates for the procedure and in providing pre- and
post-operative care.
The number of vision correction procedures performed in the U.S. has
expanded rapidly since 1996, primarily as a result of the advantages of the
LASIK procedure. In 1999, eye care professionals performed an estimated 1
million laser vision correction surgery procedures in the U.S., representing an
increase of 113% over the approximately 470,000 procedures performed in 1998,
with volume projected to grow to approximately 2 million procedures in 2001.
Industry forecasts estimate 1.5 million laser vision correction surgery
procedures being performed in 2000. Despite this rapid growth, the number of
vision correction surgery patients in 1999 represented 0.3% of the 161 million
people with refractive vision conditions in the U.S.
Other Eye Care Services
Cataract Surgery. Cataract surgery is currently the most widely performed
surgical procedure in the U.S. A cataract occurs when the normally transparent
lens of the eye becomes cloudy as part of the aging process. In cataract
surgery, the ophthalmologist removes the clouded natural lens and replaces it
with a synthetic intraocular lens. Cataract surgery is typically performed on
an outpatient basis using local anesthesia, and the procedure time is typically
less than 30 minutes. According to the American Society of Cataract and
Refractive Surgery, more than 60% of people over the age of 60 have some degree
of cataract formation. Cataract procedures are expected to continue to increase
for the next several years, driven primarily by the aging of the population and
the introduction of improved technologies and surgical techniques. With the
preponderance of cataract surgery patients being over the age of 65, the
Medicare program has been the primary source of reimbursement for cataract
surgery providers.
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Other Eye Disorders. Other common eye disorders include glaucoma, macular
degeneration and diabetic retinopathy. Glaucoma is one of the leading causes of
preventable blindness in the U.S. and the single most common cause of blindness
among African-Americans. By 2030, industry sources project that the number of
glaucoma cases diagnosed will double, primarily as a result of the aging of the
general population and an increase in the average life span. Age-related
macular degeneration is the leading cause of visual impairment for persons age
75 and older, and it is the most common cause of new cases of visual impairment
among those over age 65. Diabetic retinopathy is a leading cause of vision loss
and blindness. More than 40% of patients with diabetes for 15 years or more
have some degree of blood vessel damage that may result in diabetic
retinopathy. Incidence of this disease is expected to increase dramatically as
a result of a growing number of patients diagnosed with diabetes. Treatment of
these eye and vision conditions is generally reimbursed by Medicare and other
third party payors.
Optical Services and Products
While the number of patient options for vision correction has increased with
improved surgical vision correction technologies and techniques, the market for
basic optical goods including corrective lenses, eyeglass frames, contact
lenses and other optical products and accessories, remains a significant
market. According to industry sources, projected 2001 consumer spending is
expected to be approximately $18 billion on eyewear. Eyeglass frames are
typically sold through retail optical outlets located in optometrist and
ophthalmologist clinics, as well as through retail stores.
Our Business Model
We have focused on building regional clusters of eye surgery and laser
centers and affiliated eye care professionals. We structure these regional
clusters to achieve a hub and spoke configuration of affiliated eye care
professionals around our eye surgery and laser centers. We believe our business
model provides us with several advantages in assisting our affiliated eye care
professionals in developing a laser vision correction practice. These
advantages include our ability to:
. establish and maintain long-term relationships with leading
ophthalmologists and optometrists through access to our eye surgery and
laser centers, clinical research capability and range of business,
information technology, administrative and financial services
. assist our affiliated eye care professionals in establishing regional
market leadership in laser vision correction through our clinical
research, information technology and marketing know-how
. provide our affiliated eye care professionals with the benefits of
regional brand recognition
. create multiple sources of revenue through the range of business,
information technology, administrative and financial services and eye
care products that we offer
We work with our affiliated eye care professionals to develop a patient-
consumer approach that we believe benefits not only the growth of their laser
vision correction practices, but all aspects of their continuum of eye care
services, ranging from basic eye examinations to the treatment of complex eye
and vision conditions.
We have fully implemented our business model in five of our six existing
regional markets. We are currently implementing our model in our sixth regional
market, the Atlanta, Georgia and Chattanooga, Tennessee metropolitan areas,
which we entered through affiliations with eye care professionals beginning in
December 1999. We implement our business model by building around the following
key components:
Eye Surgery and Laser Centers and Laser Vision Correction Centers
We operate 12 eye surgery and laser centers, each of which is a wholly-
owned, licensed ambulatory surgical center. Eye care professionals perform
laser vision correction, cataract and other eye related surgical procedures at
our eye surgery and laser centers. We also operate under service agreements
seven laser vision correction centers where our affiliated eye care
professionals perform laser vision correction surgery. We also
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have three fixed-site laser agreements pursuant to which we lease excimer
lasers and provide various services to eye care providers in Delaware, Ohio and
Illinois. As of March 24, 2000, we have 20 excimer lasers in service and an
additional three lasers dedicated to conducting clinical trials. We plan to
deploy additional excimer lasers during the remainder of 2000.
Eighteen of our current FDA-approved lasers are subject to a supply
agreement with Summit Technology, Inc. This supply agreement is nonexclusive
and we are free to obtain lasers from other laser manufacturers. Under this
agreement, we have the right to utilize Summit-manufactured lasers for periods
ranging from 36 to 42 months. During these periods, we pay Summit monthly based
on the number of procedures performed with each laser. We are required to pay
for a minimum number of procedures on each laser during the commitment period,
whether or not these procedures are actually performed. Summit may terminate
the agreement with respect to any particular laser if we fail, after reasonable
cure periods, to comply with the terms of the agreement relating to the
particular laser or to pay Summit the required monthly payments. We may
terminate the agreement with respect to any particular laser if we satisfy the
minimum payment obligations required to be paid to Summit during the term or if
the FDA withdraws or materially restricts its approval of the use of Summit's
excimer laser. In October 1999, the Food and Drug Administration approved
Summit's Apex Plus excimer laser for the treatment of myopia and high myopia
with or without astigmatism using LASIK.
Management Services
We have long-term service agreements in place with professional entities
covering 53 ophthalmologists and 50 optometrists, who provide eye care services
in one or more of our 56 eye care clinics. Generally, we seek to cluster eye
care clinics within regional markets that can support one or more eye surgery
and laser centers. Our strategy involves affiliating with leading eye care
professionals within a regional market until we have achieved a cluster of eye
care clinics, affiliated eye care professionals and eye surgery and laser
centers in a hub and spoke configuration throughout the regional market.
We provide services, facilities and equipment to our affiliated eye care
professionals under long-term service agreements. These service agreements are
generally for a 40-year term and require us to provide all of the business,
administrative and financial services necessary to operate the eye care clinics
and optical retail outlets. These services typically include:
. billing, collection and cash management services
. procuring and maintaining all office space, office and medical supplies,
medical and nonmedical equipment, information systems, and furniture and
furnishings
. subject to federal and state law, recruiting, employing, supervising and
training all non-professional personnel
. assisting our affiliated eye care professionals in recruiting additional
ophthalmologists and optometrists
. all administrative and support services
. information technology services
. marketing services
. assisting our affiliated eye care professionals with the establishment
and implementation of quality assurance, risk management and utilization
review programs
. assisting our affiliated eye care professionals in obtaining and
maintaining federal, state and local licenses and permits
. negotiating managed care contracts on behalf of our affiliated eye care
professionals
In addition to affiliating with eye care professionals through the
acquisition of their nonmedical assets and employees, we are also pursuing
application service provider (ASP) contractual relationships with eye care
professionals focusing on the deployment of our information technology and
laser vision correction capabilities.
5
Under these alternative arrangements, we intend to provide a core set of
services to eye care professionals on a fee-for-service basis. Contrary to our
more traditional affiliation model, we do not anticipate under these
arrangements acquiring the nonmedical assets or hiring the nonmedical personnel
of the eye care professionals. Rather, we will enter into multi-year service
agreements pursuant to which we will be the sole and exclusive provider of
information technology services and other services integral to the eye care
professionals' growth and development of their laser vision correction
business. Under these agreements, the eye care professionals will retain
control over their day-to-day business operations. The exclusive services that
we intend to provide under these agreements include:
. installation, maintenance and support of our information technology
systems
. installation, maintenance and support of excimer lasers and other
equipment used to perform laser vision correction surgery
. sales and marketing services designed to assist the eye care
professionals in growing their laser vision correction business
. patient financing and credit card services for laser vision correction
patients
Although we are currently negotiating several transactions, we have not yet
entered into any of these ASP contractual relationships with any eye care
professionals. We anticipate pursuing our traditional contractual affiliation
model as well as our new ASP-based model in 2000.
Optical Services and Products
We own and operate three full-service wholesale optical laboratories that
specialize in surfacing, finishing and distributing corrective lenses and
eyeglasses. Our laboratories have in excess of 350 active customers, including
affiliated and non-affiliated ophthalmologists, optometrists, opticians and
optical retail chains.
Our optical products purchasing organization allows affiliated and non-
affiliated eye care professionals to purchase optical products through us at
volume discounts. We have in excess of 700 customers that utilize our optical
products purchasing organization. We also provide monthly reports to our
customers that allow them to identify purchasing trends and manage their
optical product inventories more efficiently. We intend to expand the scope of
services offered to our customers by including eye care equipment used in our
affiliated and non-affiliated eye care professionals' offices and optical
laboratories.
Research
We own and operate an eye-only research organization that conducts Phase
II--IV clinical trials on eye care devices and pharmaceuticals, with an
emphasis on laser vision correction. Our research organization is based in
Kansas City, Missouri, and currently has research sponsor agreements relating
to approximately 50 clinical studies involving over 500 subjects participating
in clinical trials. Our research organization staff has a combined 80 years of
research experience, and we have recently hired an individual with over twenty
years experience in the research industry to serve as President of the
organization.
Our Growth Strategy
We are focused on the rapidly growing U.S. market for laser vision
correction surgery and our goal is to become the leading laser vision
correction services and facilities company in each of our existing and future
regional markets. We intend to achieve this goal by continuing to establish
contractual affiliations with leading eye care professionals and by
implementing a growth strategy which includes the following specific
components:
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Expanding our presence in existing regional markets. We believe that there
are significant growth opportunities in our existing regional markets. These
growth opportunities will be driven largely by:
. continuing to affiliate with leading eye care professionals
. acquiring or establishing eye surgery and laser centers and laser vision
correction centers
. expanding our sales and marketing programs to increase demand for laser
vision correction surgery
. integrating our affiliated eye care professionals into strong,
regionally branded entities
. continued development and implementation of our business, information
technology, administrative and financial services.
Selectively Targeting and Entering New Markets. We believe our management
team's experience in building and developing successful eye care businesses
will enable us to effectively identify new markets. We intend to enter new
markets through multiple avenues, including:
. acquiring existing or establishing new eye surgery and laser centers
. acquiring existing or establishing new laser vision correction centers
. entering into contractual affiliations with leading ophthalmologists and
optometrists, including our application service provider (ASP)
contractual relationships
. developing and implementing our business, administrative and financial
services in each new region
Strengthening the consumer-patient marketing support that we provide our
affiliated eye care professionals. We continue to expand our sales and
marketing programs, which currently include:
. regional branding
. direct to patient-consumer advertising
. patient seminars on laser vision correction
. centralized toll-free call centers
. corporate and group sales
In addition, we will continue to pursue new and emerging growth
opportunities. These opportunities may involve acquisitions, joint ventures and
partnerships that build from our core businesses. Others may involve extensions
of our existing capabilities and technologies, including our ASP capabilities.
Competition
The market for laser vision correction and other refractive surgery is
subject to intense competition. In offering laser vision correction services
and access to related equipment, we and our affiliated eye care professionals
compete with other entities, including:
. individual ophthalmologists
. refractive laser center companies
. other surgery and laser centers
. manufacturers of excimer laser equipment
. hospitals
In addition, the laser vision correction and other refractive surgery
procedures performed by affiliated eye care professionals at our eye surgery
and laser centers compete with more traditional non-surgical treatments for
refractive conditions, including eyeglasses and contact lenses.
Eye care professionals interested in deploying excimer laser technology have
formed commercial enterprises in order to support the capital requirements for
acquiring the lasers and other necessary equipment. The industry today remains
highly fragmented, with most procedures performed by independent physician
groups. Several refractive laser center companies are developing national
operations. In addition, several eye care companies are featuring access to
laser vision correction and other refractive surgery services as a component of
their eye care practice development activities.
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Our eye surgery and laser centers and affiliated eye care professionals
generally compete on the bases of:
. quality of patient care
. reputation
. price
We compete in fragmented geographic markets and do not face any single,
dominant U.S. national competitor. Our competitors in every market are
individual doctors, who may practice alone or in groups. Some of these doctors
may perform laser vision correction procedures on behalf of competitors who
provide services and facilities related to laser vision correction. These
corporate providers include TLC The Laser Center, Inc., Laser Vision Centers,
Inc., ClearVision Laser Centers, Ltd., LCA-Vision Inc. and ARIS Vision, Inc.
In the market for providing business, information technology,
administrative and financial services to eye care professionals, we primarily
compete with VisionAmerica, Inc. and Vision Twenty-One, Inc. The bases for
competition in this market include:
. service
. pricing
. strength of delivery network
. strength of operational systems
. the degree of cost efficiencies
. access to surgery facilities
. marketing strength
. information technology systems
. managed care expertise
. patient access
. quality assessment programs
Although there are competitors in some of our markets who charge less for
the products and services we provide, we believe that our integrated eye care
model and alliances with recognized industry leaders afford us a competitive
advantage. Similarly, there are competitors of our affiliated eye care
professionals who charge less for laser vision correction. However, we believe
that industry experience to date suggests that price generally has not been
the driving factor in the patient decision regarding laser vision correction.
Our application service provider (ASP) services will be comprised largely
of information technology services and systems, and related business services.
The market for information technology systems and services is highly
competitive and rapidly changing. Our principal competitors in this area will
be software companies that provide practice management software and
information technology consulting firms.
Suppliers of eyeglasses and contact lenses, including, for example,
optometric chains, may also compete with us and our affiliated eye care
professionals, either by marketing alternatives to laser vision correction or
other refractive surgery procedures or by purchasing excimer lasers and
offering refractive surgery to their customers.
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We compete in the optical laboratory market on the bases of:
. quality of service
. breadth of services
. reputation
. price
Our three wholesale optical laboratories face a variety of national,
regional and local competitors.
In the market for providing optical group purchasing services, we primarily
compete with C&E Vision Group, Block Vision, Vision West and Buyer's Edge.
Competition in this market is based upon:
. service
. price
. strength of the purchasing organization, including the ability to
negotiate discounts
Although there are competitors in some of our markets that charge less for
optical laboratory and optical products purchasing services, we believe that
our expertise in providing custom surfacing and finishing in our laboratory and
the purchasing services from our optical products purchasing organization
afford us a competitive advantage in each of these markets.
Employees
As of March 1, 2000, we had approximately 1,132 employees, 922 of whom are
full-time employees. We are not a party to any collective bargaining
agreements.
Trademarks
We have registered the name, NovaMed Eyecare Management, as a U.S. Service
mark.
Governmental Regulation
As a participant in the health care industry, our operations and the
operations of our affiliated ophthalmologists and optometrists are subject to
extensive and increasing regulation by governmental entities at the Federal,
state and local levels. Many of these laws and regulations are subject to
varying interpretations, and we believe courts and regulatory authorities
generally have provided little clarification. Moreover, state and local laws
and interpretations vary from jurisdiction to jurisdiction. As a result, we may
not always be able to accurately predict interpretations of applicable law, and
some of our activities, or the activities of our affiliated eye care
professionals, could be challenged.
We cannot assure you that Federal or state regulatory authorities would not
challenge any of our business operations and arrangements with our affiliated
eye care professionals. If any of our activities are challenged, we may have to
divert substantial time, attention and resources from running our business to
defend against these challenges regardless of their merit. If we do not
successfully defend these challenges, we and our affiliated providers may face
a variety of adverse consequences including service agreements being terminated
or rendered unenforceable, third party payor agreements being terminated,
affiliated providers losing their eligibility to participate in Medicare,
Medicaid or other Federal health care programs, or losing other contracting
privileges and, in some instances, civil or criminal fines. Under some
circumstances, we may be able to redesign or reformulate our relationships or
arrangements to address these challenges. Any of these consequences could have
a material adverse effect on our business, financial condition and results of
operations.
The regulatory environment in which we and our affiliated eye care
professionals operate may change significantly in the future. Numerous
legislative proposals have been introduced in the U.S. Congress and in various
state legislatures over the past several years that could cause major reforms
of the U.S. health care system. In response to new or revised laws, regulations
or interpretations, we could be required to revise the
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structure of our legal arrangements or the structure of our fees, incur
substantial legal fees, fines or other costs, or curtail our business
activities, reducing the potential profit to us of some of our legal
arrangements, any of which may have a material adverse effect on our business,
financial condition and results of operations.
The following is a summary of some of the health care regulatory issues
affecting us, our affiliated eye care providers and our respective operations.
Federal Law
Anti-Kickback Statute. The Federal anti-kickback statute prohibits the
knowing and willful solicitation, receipt, offer or payment of any direct or
indirect remuneration in return for the referral of patients or the ordering or
purchasing of items or services payable under Medicare, Medicaid or other
Federal health care programs. Violations of this statute may result in criminal
penalties, including imprisonment or criminal fines of up to $25,000 per
violation, civil penalties of up to $50,000 per violation, and exclusion from
Federal programs including Medicare or Medicaid.
The Federal anti-kickback statute contains a number of exceptions. In order
to address the problems created by the broad language of the statute, Congress
directed the Department of Health and Human Services to develop regulatory
exceptions, known as safe harbors, to the Federal anti-kickback statute.
However, relationships for which there is no safe harbor protection and
relationships that do not meet the prescribed safe harbor standards do not
necessarily violate the statute.
Self-Referral Law. Subject to limited exceptions, the Federal self-referral
law, known as the "Stark Law," prohibits physicians and optometrists from
referring their Medicare or Medicaid patients for the provision of "designated
health services" to any entity with which they or their immediate family
members have a financial relationship. "Financial relationships" include both
compensation and ownership relationships. "Designated health services" include
clinical laboratory services, radiology and ultrasound services, durable
medical equipment and supplies, and prosthetics, orthotics and prosthetic
devices, as well as seven other categories of services. We do not provide
"designated health services." Our affiliated providers, however, do provide
limited categories of designated health services, specifically, ultrasound
services, including A-scans and B-scans, and prosthetic devices, including
eyeglasses and contact lenses furnished to patients following cataract surgery.
Violating the Stark Law may result in denial of payment for the designated
health services performed, civil fines of up to $15,000 for each service
provided pursuant to a prohibited referral, a fine of up to $100,000 for
participation in a circumvention scheme, and exclusion from the Medicare,
Medicaid and other Federal health care programs. The Stark Law is a strict
liability statute. Any referral made where a financial relationship exists that
fails to meet an exception constitutes a violation of the law.
In January 1998, the government promulgated proposed rules interpreting
provisions of the Stark Law. Because the proposed rules leave many ambiguities,
it is likely that the final regulations will differ somewhat from the proposal.
We cannot predict whether our affiliated professional entities will be affected
once final regulations pursuant to the Stark Law are published.
Civil False Claims Act. The Federal Civil False Claims Act prohibits
knowingly presenting or causing to be presented any false or fraudulent claim
for payment by the government, or using any false or fraudulent record in order
to have a false or fraudulent claim paid. Violations of the law may result in
repayment of three times the damages suffered by the government and penalties
from $5,000 to $10,000 per false claim. Collateral consequences of a violation
of the False Claims Act include administrative penalties and possible exclusion
from participation in Medicare, Medicaid and other Federal health care
programs.
State Law
Anti-Kickback Laws. In addition to the Federal anti-kickback law, a number
of states have enacted laws which prohibit the payment for referrals and other
types of anti-kickback arrangements. These state laws typically apply to all
patients regardless of their source of payment.
10
Self-Referral Laws. In addition to the Federal Stark Law, a number of states
have enacted laws which require disclosure of or prohibit referrals by health
care providers to entities in which the providers have an investment interest
or compensation relationship. In some states, these restrictions apply
regardless of the patient's source of payment.
Corporate Practice of Medicine Laws. A number of states have enacted laws
which prohibit the corporate practice of medicine. These laws are designed to
prevent interference in the medical decision-making process by anyone who is
not a licensed physician. Many states have similar restrictions in connection
with the practice of optometry. Application of the corporate practice of
medicine prohibition varies from state to state. Because the corporate practice
of medicine doctrine has been seldom enforced or litigated in the states where
we do business, the precise parameters of the doctrine have not been defined,
particularly in terms of the management responsibilities that may be delegated
to a company that provides management services. Because of this, although we
neither employ doctors nor provide medical services, to the extent any act or
service to be performed by us is construed by a court or enforcement agency to
constitute the practice of medicine, our service agreements provide that our
obligations to perform the act or service is waived. We cannot be sure that a
particular state court or enforcement agency may not construe our arrangements
as violating that jurisdiction's corporate practice of medical doctrine. In
such an event, we may be required to redesign or reformulate our relationships
with our affiliated eye care professionals and there is a possibility that some
provisions of our service agreements may not be enforceable.
Fee-Splitting Laws. The laws of some states prohibit providers from dividing
with anyone, other than providers who are part of the same group practice, any
fee, commission, rebate or other form of compensation for any services not
actually and personally rendered. Penalties for violating these fee-splitting
statutes or regulations may include revocation, suspension or probation of a
provider's license, or other disciplinary action. In addition, courts have
refused to enforce contracts found to violate state fee-splitting prohibitions.
The precise language and judicial interpretation of fee-splitting prohibitions
varies from state to state. Courts in some states have interpreted fee-
splitting statutes to prohibit all percentage of gross revenue and percentage
of net profit management fee arrangements. Other state statutes apply only to
prohibit fee splitting in return for referrals.
Our management fee arrangements differ from those invalidated as unlawful
fee splits because they establish a flat monthly fee that is subject to
adjustment based on the degree to which actual practice revenues or expenses
vary from budget. However, there is some risk that our arrangements could be
construed by a state court or enforcement agency to run afoul of state fee-
splitting prohibitions. Accordingly, all of our service agreements contain
either a reformation provision or a mechanism establishing an alternative fee
structure, or both.
Facility Licensure and Certificate of Need. We may be required to obtain
licenses from the state departments of health in states where we open or
acquire eye surgery and laser centers. We believe that we have obtained the
necessary licenses in states where licenses are required. However, we believe
courts and state regulatory authorities generally have provided little
clarification as to some of the regulations governing licensure requirements.
It is possible that a state regulatory authority could challenge our position.
With respect to future expansion, we cannot assure you that we will be able to
obtain the required licenses. However, we have no reason to believe that, in
states requiring facility licenses, we will not be able to obtain this license
without unreasonable expense or delay.
Some states require a Certificate of Need, or CON, prior to the construction
or modification of an ambulatory surgery center, including, for example, our
eye surgery and laser centers, or the purchase of specified medical equipment
in excess of an amount set by the state. We believe that we have obtained the
necessary CONs in states where a CON is required. However, we believe courts
and state regulatory authorities generally have provided little clarification
as to some of the regulations governing the need for CONs. It is possible that
a state regulatory authority could challenge our determination. With respect to
future expansion, we cannot assure you that we will be able to acquire a CON in
all states where a CON is required.
11
Insurance Provisions. Many states also regulate the establishment of various
health care provider networks. These laws do not typically affect providers of
business and administrative services to professional entities. We are aware,
however, of some state insurance regulations requiring organizations involved
in specified types of contracting arrangements to register with the state
department of insurance and purchase surety bonds. It also is possible that a
state could require our licensure as a provider network or organization, health
maintenance organization or insurer. However, as long as another entity in the
chain of contracts is licensed by the state department of insurance, we believe
that we are unlikely to be viewed by any state where we do business as
requiring a license from the department. Because we do not enter into any
capitated or other risk-sharing contract without an HMO or other licensed
entity in the chain of contracts, we believe that we are not required to be
licensed under the insurance provisions of any states in which we currently
operate. However, we believe courts and state regulatory authorities generally
have provided little clarification as to some of the regulations governing the
need for licensure. It is possible that a state regulatory authority could
challenge our determination. We cannot assure you that we will be able to
acquire an insurance license in all states where licensure is required.
However, we have no reason to believe that in those states that require an
insurance or other license, we will not be able to obtain one.
Excimer Laser Regulation
Medical devices, including the excimer lasers used in our eye surgery and
laser centers, are subject to regulation by the U.S. Food and Drug
Administration, referred to as the FDA. Medical devices may not be marketed for
commercial sale in the U.S. until the FDA grants pre-market approval for the
device.
Failure to comply with applicable FDA requirements could subject us, our
affiliated providers or laser manufacturers to enforcement action, product
seizures, recalls, withdrawal of approvals and civil and criminal penalties.
Further, failure to comply with regulatory requirements, or any adverse
regulatory action, could result in a limitation on or prohibition of our use of
excimer lasers.
Regulation of Laser Vision Correction Marketing
The marketing and promotion of laser vision correction and other vision
correction surgery procedures in the U.S. are subject to regulation by the FDA
and the Federal Trade Commission, referred to as the FTC. The FDA and FTC have
released a joint communique on the requirements for marketing these procedures
in compliance with the laws administered by both agencies. The FTC staff also
issued more detailed staff guidance on the marketing and promotion of these
procedures and has been monitoring marketing activities in this area through a
non-public inquiry to identify areas that may require further FTC attention.
The FDA has traditionally taken the position that the promotion and advertising
of lasers by manufacturers and physicians should be limited to the uses
approved by the FDA.
Item 2. Properties
We do not own any real property. We lease space for our corporate
headquarters in Chicago, our regional offices, our surgery and laser centers,
the clinics of our affiliated eye care professionals and our optical services
manufacturing and warehouse operations. In some cases, these facilities are
leased from our affiliated eye care professionals and other related parties.
See "Item 13--Certain Relationships and Related Transactions." Our corporate
offices in the Chicago metropolitan area consist of 8,150 square feet in
downtown Chicago, and 10,499 square feet in Des Plaines, Illinois.
The terms and conditions of our real property leases vary. The forms of
lease range from "modified triple net" to "gross" leases, with terms generally
ranging from month-to-month to ten years, with certain leases having multiple
five-year renewal terms at our option. Generally, our eye surgery and laser
centers, eye care clinics and optical retail outlets are located in medical
complexes, office buildings or free-standing buildings. The square footage of
these offices range from 300 to 22,993 square feet, and the terms of these
leases have expiration dates ranging from June 30, 2000 to February 29, 2010.
Any capacity constraints with our affiliated
12
eye care clinics and optical retail outlets can generally be resolved either
through a build-out of adjacent space or the leasing of additional office space
in other proximate locations. Depending on state licensing and Certificate of
Need issues, addressing capacity constraints in any of our eye surgery and
laser centers in a similar manner may require state regulatory approval.
Item 3. Legal Proceedings
We are not a party to any lawsuits or administrative actions pending, or to
our knowledge, threatened, which we would expect to have a material adverse
effect upon our business, financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matter to a vote of our security holders during the
fourth quarter of 1999.
13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Stock
Since August 18, 1999, our Common Stock has been traded on the Nasdaq
National Market under the symbol NOVA. The following table sets forth, for the
periods indicated, the range of high and low sale prices for the Common Stock
on the Nasdaq National Market:
High Low
------ -----
Fiscal year ending December 31, 1999:
Third Quarter (beginning August 18, 1999).................... $15.63 $7.88
Fourth Quarter............................................... 11.69 4.81
On March 24, 1999, the last reported sale price of our common stock was
$12.38, and there were approximately 383 holders of record of our common stock.
This figure does not consider the number of individual holders of securities
that are held in the "street name" of a securities dealer.
Dividends
We have never paid a cash dividend on our common stock. We plan to retain
all future earnings to finance the development and growth of our business.
Therefore, we do not currently anticipate paying any cash dividends on our
common stock. Any future determination as to the payment of dividends will be
at our board of directors' discretion and will depend on our results of
operations, financial condition, capital requirements and other factors our
board of directors considers relevant. Moreover, our credit agreement prohibits
the payment of dividends on our common stock.
Sales of Unregistered Securities
January 1, 1999 through June 30, 1999
On January 1, 1999, we issued 250,000 shares of our Series A convertible
preferred stock, par value $0.01 per share, to two individual investors in
exchange for all of the capital stock of Midwest Uncuts, Inc.
On January 8, 1999, we issued 80,000 shares of Series A convertible
preferred stock to an individual investor in exchange for 25% of the membership
interests in a limited liability company that owns and operates an ambulatory
surgery center. As a result of the transaction, we own 100% of the entity.
On January 15, 1999, we issued 20,000 shares of Series A convertible
preferred stock to an affiliated eye care professional in exchange for the eye
care professional's shares of the capital stock of an eye care practice.
On January 22, 1999, we issued 80,000 shares of Series A convertible
preferred stock to two corporate investors in exchange for 25% of the
membership interests in a limited liability company that owns and operates an
ambulatory surgery center. As a result of the transaction, we own 100% of the
entity.
On July 16, 1999, we issued 75,000 shares of common stock to an affiliated
professional entity in connection with the acquisition of our clinical research
business.
During the period from January 1, 1999 through June 30, 1999, we issued
100,000 shares of Series A convertible preferred stock and 95,750 shares of
common stock upon the exercise of options under our stock incentive plan.
July 1, 1999 through September 30, 1999
The information regarding the sale of unregistered securities during the
1999 third quarter is incorporated by reference from Part II, Item 2 of our
Form 10-Q as filed with the Securities and Exchange Commission on November 15,
1999.
14
October 1, 1999 through December 31, 1999
On December 31, 1999, we issued 49,485 shares of common stock to an
affiliated professional entity in connection with the acquisition of an eye
surgery and laser center and substantially all of the nonmedical assets of the
affiliated professional entity.
No underwriters were engaged in connection with the issuance of the
foregoing securities. Moreover, the issuance of these securities was made in
reliance upon the exemptions from registration in Section 4(2) of the
Securities Act of 1933 for transactions not involving a public offering. The
foregoing issuances of shares upon exercise of options were made under Rule 701
promulgated under the Securities Act of 1933.
15
Item 6. Selected Financial Data
The consolidated statement of operations data set forth below for the years
ended December 31, 1999, 1998, and 1997, and the balance sheet data at December
31, 1999 and 1998, are derived from our respective audited consolidated
financial statements which are included elsewhere herein. The consolidated
statement of operations data set forth below with respect to the year ended
December 31, 1996, and the consolidated balance sheet data at December 31, 1997
and 1996, are derived from our audited financial statements which are not
included in this Form 10-K. The financial data for the year ended December 31,
1995, are derived from our unaudited consolidated financial statements and
include, in the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the data for the
period presented.
The data set forth below should be read in conjunction with the consolidated
financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein.
Year Ended December 31,
------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- ------
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Net revenue........................ $102,588 $63,729 $42,408 $15,850 $ 568
-------- ------- ------- ------- ------
Recurring operating expenses....... 93,531 58,986 40,387 16,679 1,396
Compensation expense related to
stock options (a)................. 2,690 -- -- -- --
-------- ------- ------- ------- ------
Income (loss) from operations...... 6,367 4,743 2,021 (829) (828)
-------- ------- ------- ------- ------
Discount to initial public offering
price upon the exchange of
subordinated notes for common
stock (a)......................... (2,425) -- -- -- --
-------- ------- ------- ------- ------
Net income (loss).................. 874 1,706 105 (912) (807)
Accretion of Series C and Series D
convertible preferred stock (a)... (2,035) (739) -- -- --
-------- ------- ------- ------- ------
Income (loss) available to Series A
and Series B convertible preferred
and common stockholders........... $ (1,161) $ 967 $ 105 $ (912) $ (807)
======== ======= ======= ======= ======
Diluted earnings (loss) per common
share............................. $ (0.06) $ 0.06 $ 0.01 $ (0.08) $(0.46)
-------- ------- ------- ------- ------
Diluted weighted average common
shares outstanding................ 17,965 16,003 17,237 11,358 1,747
======== ======= ======= ======= ======
Pro forma net income (a)........... $ 4,523 $ 2,111
======== =======
Pro forma diluted earnings per
common share...................... $ 0.20 $ 0.10
======== =======
Pro forma weighted average number
of common shares outstanding...... 22,476 21,649
======== =======
As of December 31,
------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- ------
Consolidated Balance Sheet Data:
Cash and cash equivalents.......... $ 1,828 $ 1,875 $ 4,009 $ 5,951 $ 642
Total assets....................... 88,252 62,679 52,734 27,694 2,034
Total debt, excluding current
portion........................... 196 20,427 15,838 6,378 --
Redeemable convertible preferred
stock............................. -- 16,430 12,680 5,794 --
Total stockholders' equity......... 74,781 16,954 18,149 12,755 1,786
- --------
Notes:
(a) In connection with our initial public offering consummated on August 18,
1999 (IPO), we recorded noncash, nonrecurring charges for compensation
expense related to stock options and a discount to the IPO offering price
upon the exchange of subordinated notes for common stock in 1999 and 1998.
In addition, we recorded accretion of Series C and Series D convertible
preferred stock to increase the carrying value of such stock to its
potentially redeemable value. The pro forma net income gives effect to
these noncash, nonrecurring charges, as well as the pro forma elimination
of the interest expense related to the subordinated notes which were
exchanged at the IPO. Please see the notes to consolidated financial
statements included elsewhere in this Form 10-K for more discussion.
16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion along with our consolidated
financial statements and related notes included herein. Our actual results,
performance and achievements in 2000 and beyond may differ materially from
those expressed in or implied by forward-looking statements contained in this
discussion. Such forward-looking statements are made within the meaning of the
Private Securities Litigation Reform Act of 1995.
Results of Operations
Unaudited Pro Forma Information. In connection with our initial public
offering consummated on August 18, 1999 ("IPO"), certain noncash, nonrecurring
charges were recorded in our 1999 and 1998 consolidated statements of
operations. The following unaudited pro forma summary presents the results of
operations as if the events described more fully in the notes below had
occurred at the beginning of the periods presented (amounts in thousands,
except per share data):
Years Ended
December 31,
---------------
1999 1998
------- ------
Income (loss) available to Series A and Series B
convertible preferred and common stockholders............. $(1,161) $ 967
Eliminate compensation expense related to stock options
(a)....................................................... 2,690 --
Eliminate discount to initial public offering price upon
the exchange of subordinated notes for common stock (b)... 2,425 --
Eliminate preferred stock accretion upon conversion to
common stock (c).......................................... 2,035 739
Eliminate interest expense upon debt conversion to common
stock (d)................................................. 400 800
Related income tax benefit................................. (1,866) (395)
------- ------
Pro forma net income....................................... $ 4,523 $2,111
======= ======
Pro forma earnings per diluted common share................ $ 0.20 $ 0.10
======= ======
Pro forma weighted average diluted shares outstanding...... 22,476 21,649
======= ======
- --------
Notes:
(a) Represents the pro forma elimination of the compensation expense
associated with the IPO-related vesting of certain stock options granted
in 1999.
(b) Represents the pro forma elimination of the additional interest expense
which resulted from the exchange of subordinated exchangeable promissory
notes into common stock at a discount to the IPO price per share.
(c) Represents the pro forma elimination of the accretion of the Series C and
Series D convertible preferred stock through the IPO to its estimated fair
market value. Upon the completion of the IPO, the Series C and Series D
convertible preferred stock converted into common stock.
(d) Represents the pro forma elimination of the interest expense from the
subordinated exchangeable promissory notes which were converted to common
stock at the time of the IPO.
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Net Revenue. Net revenue increased 61.0% from $63.7 million to $102.6
million. Management services revenue increased 53.6% from $36.1 million to
$55.4 million. The increase in management services revenue was primarily a
result of overall increases in laser vision correction, cataract and other
ophthalmic surgery procedures performed by our affiliated eye care
professionals as well as new affiliations with eye care professionals. Surgery
and laser center revenue increased 57.0% from $20.1 million to $31.6 million,
primarily as a result of a 165.2% increase in laser vision correction
procedures, compared to 1998. The increase in laser vision correction
procedures was a result of both an increase in the overall demand for the
procedure as well as an increase in the number of our affiliated eye care
professionals performing the procedure. We also experienced a 13.4% increase in
the number of cataract and other eye related surgical procedures, compared to
1998. Product sales revenue increased 106.7% from $7.5 million to $15.6
million, primarily as a result of the acquisition of Midwest Uncuts, Inc., a
wholesale optical laboratory, in January 1999.
17
Salaries, Wages and Benefits. Salaries, wages and benefits expense increased
48.2% from $25.3 million to $37.4 million. As a percentage of revenue,
salaries, wages and benefits expense decreased from 39.6% to 36.5%. The
absolute increase in salaries, wages and benefits expense primarily reflects
the additional payroll incurred as a result of new acquisitions and
affiliations. The decrease in salaries, wages and benefits expense as a
percentage of net revenue was a result of better utilization of staff due
primarily to the increased volume of laser vision correction, cataract and
other eye-related surgical procedures.
Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased 66.7% from $15.8 million to $26.3 million. As a percentage of
revenue, cost of sales and medical supplies expense increased from 24.7% to
25.6%. The absolute increase in cost of sales and medical supplies expense is
primarily a result of the January 1, 1999, acquisition of Midwest Uncuts, Inc.
and of higher volumes at the NovaMed Alliance, our optical products purchasing
organization. The increase in laser vision correction procedures and the
related supply costs also contributed to the absolute increase during the
period. In general, the optical laboratories and the NovaMed Alliance have
higher cost of sales as a percentage of revenue than the optical retail outlets
of our affiliated eye care professionals.
Selling, General and Administrative. Selling, general and administrative
expense increased 70.3% from $14.6 million to $24.9 million. As a percentage of
revenue, selling, general and administrative expense increased from 22.9% to
24.3%. The absolute increase in selling, general and administrative
expenditures related primarily to the expansion of sales and marketing efforts
in connection with our laser vision correction business, which includes the
continued investment in regional brands. In addition, we increased our
information technology expenditures related to our enterprise-wide information
systems and other programs supporting our laser vision correction business.
Depreciation and Amortization. Depreciation and amortization expense
increased 47.4% from $3.3 million to $4.9 million. Acquisitions, affiliations
and increased capital expenditures have increased overall depreciation and
amortization expense.
Compensation Expense Related to Stock Options. During July 1999, we fully
vested all options granted from February 1, 1999 through July 23, 1999. We
issued options to acquire 1,050,800 shares of our common stock during this time
period, which were granted with exercise prices below the fair market value.
Accordingly, we recorded a pre-tax expense of $2.7 million as compensation
expense related to those options, which became fully vested on the completion
of our initial public offering.
Other Expense. Other expense decreased 8.2% from $1.4 million to $1.3
million. The decrease in other expense was primarily related to the reduction
of interest expense as a result of the reduction of outstanding indebtedness
from the application of the proceeds of our IPO. In addition, $9.7 million of
our subordinated exchangeable promissory notes were exchanged for our common
stock, based upon the IPO price for each $0.80 worth of outstanding principal
on the notes. We recorded the difference between the value of common stock and
the notes as a nonrecurring, noncash interest expense of $2.4 million.
Provision for Income Taxes. Our effective tax rate increased to 67.4% from
49.4%. Our effective tax rate is affected by expenses that are deducted from
operations in arriving at pre-tax income that are not allowed as a deduction on
our Federal income tax return, primarily goodwill amortization and the
nondeductible portion of the additional interest expense resulting from the
exchange of the subordinated exchangeable promissory notes for common stock, as
discussed above.
Accretion of Series C and Series D Convertible Preferred Stock. In
connection with our IPO, approximately 16.3 million shares of Series A, Series
B, Series C and Series D preferred stock, which represented all of the issued
and outstanding shares of preferred stock, converted into shares of our common
stock. Prior to the IPO, however, the holders of the Series C and Series D
convertible preferred stock had the right to tender their stock for redemption
in 2004 and 2005 at the greater of the amount originally paid for the preferred
stock or its fair market value. Because the redemption right was outside of our
control, generally
18
accepted accounting principles require that until the redemption date, we
increased the value of the preferred stock to its ultimate redemption value, a
principle known as accretion. This accretion is deducted from net income in the
accompanying consolidated statements of operations to arrive at the income
available for common stockholders. Although we did not have an independent
appraisal, we estimated the potential future redemption value based upon
various transactions with third parties, through comparison to similar public
companies and, ultimately, on our IPO price. Based upon these estimates, we
recorded accretion of $2.0 million up to the effective date of the IPO on
August 18, 1999, and $739,000 for the twelve months ended December 31, 1998.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Net Revenue. Net revenue increased 50.3% from $42.4 million to $63.7
million. Management services revenue increased 47.8% from $24.4 million to
$36.1 million. The increase in management services revenue was primarily
related to new affiliations with eye care professionals as well as overall
increases in laser vision correction, cataract and other eye related surgical
procedures performed by our affiliated eye care professionals. These new
affiliations included a number of optical retail outlets that also contributed
to the increase in management services revenue. Surgery and laser center
revenue increased 39.0% from $14.5 million to $20.1 million primarily due to
better utilization of our surgery and laser centers and a 503.5% increase in
laser vision correction procedures, compared to the year ended December 31,
1997. In addition, we experienced a 24.1% increase in the number of cataract
and other eye related surgical procedures, compared to the year ended December
31, 1997. Product sales revenue increased 114.2% from $3.5 million to $7.5
million, primarily as a result of higher volumes at the NovaMed Alliance.
Salaries, Wages and Benefits. Salaries, wages and benefits expense increased
39.4% from $18.1 million to $25.3 million. As a percentage of revenue,
salaries, wages and benefits expense decreased from 42.7% to 39.6%.
Approximately half of the absolute increase in salaries, wages and benefits
expense was a result of acquisitions and affiliations. We also invested in
additional personnel, including sales, marketing and information technology
personnel, in the second half of 1998 as part of our growth strategy relating
to laser vision correction.
Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased approximately 80.7% from $8.7 million to $15.8 million. As a
percentage of revenue, cost of sales and medical supplies expense increased
from 20.6% to 24.7%. The absolute increase in these expenses during 1998 was
primarily related to the increased volume of laser vision correction, cataract
and other eye related surgical procedures performed in our eye surgery and
laser centers as well as the increased costs associated with increased sales at
the NovaMed Alliance. The increase in the cost of sales and medical supplies
expense as a percentage of revenue was primarily due to increased sales at the
NovaMed Alliance, which generally sells products with a higher cost of sales as
a percentage of revenue than our other sources of revenue.
Selling, General and Administrative. Selling, general and administrative
expense increased approximately 29.3% from $11.3 million to $14.6 million. As a
percentage of revenue, selling, general and administrative expense decreased
from 26.7% to 22.9%. The absolute increase in selling, general and
administrative expenditures related primarily to investments in information
technology and marketing to support our growth related to laser vision
correction. Our selling, general and administrative expense as a percentage of
revenue declined as a result of spreading fixed operating costs over an
increased revenue base.
Depreciation and Amortization. Depreciation and amortization expense
increased 49.7% from $2.2 million to $3.3 million. Increased capital spending,
acquisitions and a change in the estimated useful life of intangible assets
caused this increase. Effective January 1, 1998, we decreased our useful life
of intangible assets related to service agreements entered into, on or before
January 1, 1998, from 32 to 25 years, which added $250,000 to amortization
expense in 1998.
Other Expense. Other expense decreased 19.7% from $1.7 million to $1.4
million. Other expense was primarily related to interest expense, resulting
from additional borrowings used primarily to fund acquisitions
19
and capital expenditures. In addition, in 1997 we recorded a one-time expense
of $589,000 for the disposition of fixed assets.
Provision for Income Taxes. Our effective tax rate declined from 66.2% to
49.4%. Our effective tax rate is affected by expenses that are deducted from
operations in arriving at pre-tax income that are not allowed as a deduction on
our Federal income tax return, primarily goodwill amortization. The increase in
pre-tax income over the amount of non-deductible expenses caused our effective
tax rate to decline.
Liquidity and Capital Resources
We generated cash from operating activities for 1999 of $1.0 million. We
used $18.6 million in our investing activities in 1999, which included nine
acquisitions and/or affiliations and the purchase of property and equipment. We
used net bank borrowings of $5.3 million, the net proceeds from the issuance of
stock of $25.7 million, and net cash from operating activities to fund our
investing activities and to retire subordinated debt and other debt
obligations. As of December 31, 1999 and 1998, we had cash and cash equivalents
of approximately $1.8 million and $1.9 million, respectively, and working
capital of approximately $12.0 million and $9.2 million, respectively.
In May 1999, we increased our revolving credit facility to $35 million.
Advances under the credit facility are secured by substantially all of our
assets. The credit agreement expires in July 2000. Accordingly, the amount
outstanding as of December 31, 1999, has been classified as a current liability
in our consolidated balance sheets. Interest is payable at an annual rate equal
to our lender's published base rate minus .50% or LIBOR plus a range from 1.5%
to 2.0%, varying upon our ability to meet financial covenants. As of December
31, 1999, the annual rate was approximately 8.0%. Our credit agreement includes
a commitment fee of .375% for the unused portion during the commitment period.
Our credit agreement contains covenants that include limitations on
indebtedness, liens, capital expenditures, ratios that define borrowing
availability and restrictions on the payment of dividends. As of December 31,
1999, we were in compliance with all of our credit agreement covenants except
for the capital expenditure limitation for which we received a waiver. We had
$31.8 million available on our line of credit as of December 31, 1999.
We expect our funds from operations and our existing revolving credit
facility will be sufficient to fund our operations and capital expenditures for
at least 12 months. We are currently in the process of renegotiating our
revolving credit facility to expand our borrowing capacity and to extend the
facility beyond July 2000. Our future capital requirements and the adequacy of
our available funds will depend on many factors, including the timing of our
acquisition activities, new affiliations with eye care professionals, capital
requirements associated with our laser vision correction services and
facilities, expansions and the future cost of surgical equipment.
Most of our current FDA-approved lasers are subject to a supply agreement
with Summit Technology, Inc. Under this agreement, we utilize Summit-
manufactured lasers for periods ranging from 36 to 42 months. During these
periods, we pay Summit monthly based on the number of procedures performed with
each laser. We are required to pay for a minimum number of procedures on each
laser during the commitment period, whether or not these procedures are
actually performed. As of December 31, 1999, we have entered into commitments
to pay Summit approximately $7.4 million during the term of these commitments,
with $4.7 million remaining to be paid.
In connection with the exchange of $9.7 million of our subordinated
exchangeable promissory notes, we have agreed to lend each of these noteholders
on April 1, 2000, an amount equal to the Federal and state income taxes payable
by the holder as a result of the exchange of the notes, but only for those
shares of our common stock received in the exchange which they still own on
April 1, 2000. We estimate the aggregate amount of these tax loans will not
exceed $4 million. Each of the tax loans will be noninterest bearing,
nonrecourse to the debtor and secured by a number of shares of our common stock
held by the debtor having a value, based on the offering price, equal to two
times the loan amount. Upon the sale by a debtor after April 1, 2000, of any
shares of our common stock issued in exchange for a note, the debtor will be
required to repay a
20
fraction of the debtor's initial tax loan amount equal to the number of shares
sold divided by the total number of shares of our common stock previously
issued in exchange for a note and owned by the debtor on April 1, 2000. The tax
loans also will be payable by the debtors upon our demand for payment.
Currently, we intend to allow the debtors to repay these loans as they dispose
of their shares of our common stock. We also have agreed to reimburse these
debtors, on a grossed-up basis, for any Federal or state taxes that they
recognize as a result of imputed interest on the tax loans.
Effect of Year 2000
Based upon our preparation and readiness, we did not experience any
significant negative effects of the potential year 2000 date change as it
related to computer systems. We did increase our inventory of certain essential
products used in our operations in the event of any year 2000-related delays in
shipments. We have been able to utilize the increased inventory of products in
the ordinary course of our business and do not have any excess inventory
related concerns.
In addition, other than the previously announced delay in payments from
Medicare, which resumed in mid-January 2000, there were no disruptions in
payments from third-party payers.
Factors that Could Affect our Operations
Investors should consider the following risks in connection with an
investment in us.
Risks Relating to Our Business
Our failure to grow, or to manage our growth, could reduce our ability to
continue to achieve or sustain profitability
Our growth strategy is focused on our existing and future regional markets
and involves:
. affiliating with additional eye care professionals through long-term
service agreements
. entering into application service provider (ASP) agreements with eye
care professionals
. establishing or acquiring additional eye surgery and laser centers
. assisting our affiliated eye care professionals in opening new eye care
clinics and in offering a broader range of services and products
Pursuing new eye surgery and laser centers and affiliations with eye care
professionals presents us with a variety of challenges. We may not experience
an increase in surgical procedures at our existing eye surgery and laser
centers or management fees from our affiliated eye care professionals. We may
not be able to achieve the economies of scale and patient base, or provide the
business, administrative and financial services, required to sustain
profitability in our existing and future eye surgery and laser centers or in
the clinics of our affiliated eye care professionals.
We have only recently begun pursuing application service provider (ASP)
contractual relationships with eye care professionals. Our ASP agreements focus
principally on providing eye care professionals with information technology and
related e-services, together with laser vision correction services. The market
for information technology systems and services is highly competitive and
rapidly changing. Our ability to compete in this market will depend in part on
our ability to enter into, and successfully provide services under, these ASP
agreements.
If we are unable to successfully implement our growth strategy or manage our
growth effectively, our business, financial condition and results of
operations, including our ability to achieve and sustain profitability, could
be adversely affected.
21
Our limited operating history and our dependence on laser vision correction
and other refractive surgical procedures make it difficult to predict our
future results of operations
There is limited financial data upon which you can evaluate our future
results of operations and our growth prospects. This evaluation should take
into account the risks and difficulties frequently encountered by companies
early in their development, particularly companies in new and rapidly evolving
markets, including the laser vision correction market. We may not be able to
successfully address these risks and uncertainties, in which case, our recent
results and growth rate may not be indicative of our future results of
operations and growth rate.
If eye care professionals and the general population do not broadly accept
laser vision correction and other refractive surgical procedures as
alternatives to eyeglasses and contact lenses, a significant source of our
historical and future revenue and earnings growth will be limited
Our profitability and growth will depend upon broad acceptance by eye care
professionals and the general population of laser vision correction and other
refractive surgical procedures in the U.S. Eye care professionals and the
general population might not broadly accept laser vision correction surgery
because of:
. the cost of the procedure that, to date, has primarily been paid
directly by patients
. concerns about the safety and effectiveness of laser vision correction,
which are partially attributable to some reports of:
--an increase in the light scattering properties of the cornea during
healing
--undesirable visual sensations produced by bright lights
--decreases in contrast sensitivity
--unintended over- or under-corrections
--decline in corrective effect
--disorders of corneal healing, corneal scars and corneal ulcers
--induced astigmatism
--lack of sufficient long-term follow-up data
--adverse patient reactions or negative publicity involving patient
outcomes availability of alternative methods for correcting vision
conditions
If eye care professionals and the general population do not widely accept
laser vision correction and other refractive surgical procedures, a significant
source of our historical and future revenue and earnings growth will be
limited.
We may not compete effectively with other eye care services companies that
have more resources and experience than us
Competitors with substantially greater financial, technical, managerial,
marketing and other resources and experience may compete more effectively than
us. We and our affiliated eye care professionals compete with other businesses,
including other refractive laser center companies, hospitals, individual
ophthalmologists and optometrists, other surgery and laser centers, eye care
clinics and providers of retail optical products. Our wholesale optical
laboratories and optical products purchasing organization also face competition
on national, regional and local levels. Companies in other health care industry
segments, including managers of hospital-based medical specialties or large
group medical practices, may become competitors in providing surgery and laser
centers as well as competitive eye care related services. Competition for
retaining the services of highly qualified ophthalmologists and optometrists
and medical, technical and managerial personnel is significant, and we may not
be able to help our affiliated eye care professionals identify, hire, train,
retain and affiliate with these types of individuals in the future.
22
If we find it necessary to reduce prices in response to competition, we
could experience reductions in profitability and revenue growth
The market for providing laser vision correction and other refractive
surgery procedures is becoming increasingly competitive. Several eye care
companies feature these services as a component of their activities. As laser
vision correction and other refractive surgery becomes more prevalent, we
expect a greater number of independent ophthalmologists to develop laser vision
correction and other refractive surgery practices.
In the event our competitors offer laser vision correction or other
refractive surgery services at lower prices than we and our affiliated eye care
professionals do, we may have to lower the prices we charge. If we lower
prices, we could experience reductions in our profitability and revenue growth.
Rapid technological advances may reduce our sources of revenue and our
profitability
Adoption of new technologies that may be comparable or superior to the
excimer laser could reduce the amount of the management fees we receive from
affiliated professional entities and facility fees we receive from eye care
professionals who use our eye surgery and laser centers. Reduction of these
sources of revenue could decrease our profitability. In this case, we might
have to expend significant capital resources to deploy new technology and
related equipment to remain competitive. Our inability to provide access to new
and improving technology could deter eye care professionals from affiliating
with us or from using our eye surgery and laser centers.
Our failure to maintain or establish profitable affiliations with a
sufficient number of eye care professionals could limit our profitability
and revenue growth
Our success depends upon our ability to establish affiliations with eye care
professionals in our existing and future markets. We may not be able to enter
into contractual arrangements with ophthalmologists or optometrists on
satisfactory terms, and these affiliations may not be profitable for us. In
addition, if vision correction technology becomes available to ophthalmologists
that is less expensive than the medical equipment currently required for laser
vision correction, eye care professionals might have less interest in our
services and our eye surgery and laser centers. If we fail to establish or
maintain profitable affiliations with a sufficient number of qualified
ophthalmologists and optometrists, we could experience reductions in our
profitability and revenue growth.
Loss of the services of ophthalmologists or optometrists could impair our
sources of revenue and our ability to grow our business
Our success depends, in part, on the services of the ophthalmologists and
optometrists with whom we affiliate. Our inability to attract and retain eye
care professionals could limit our sources of revenue, our ability to grow our
business and our ability to expand our research operations. Generally, our
affiliated ophthalmologists enter into five-year employment agreements with our
affiliated professional entities. These agreements generally contain noncompete
and nonsolicitation covenants and often require the ophthalmologist to pay
liquidated damages that are generally in excess of $500,000 in the event that
he or she quits prior to the end of the initial term. Our affiliated
optometrists enter into employment contracts with our affiliated professional
entities which also contain noncompete and nonsolicitation covenants. The
noncompete and nonsolicitation covenants generally preclude the ophthalmologist
or optometrist from competing with his or her employer within a specified
geographic range, or soliciting the employer's patients or employees, during
the employment term and for a one-year period following termination. The
damages provisions and restrictive covenants may not effectively deter
affiliated eye care professionals from quitting if they elect to pay the
liquidated damages or establish a practice outside the geographic scope of the
noncompete covenant.
The enforceability of restrictive covenants of these types will depend upon
a variety of equitable factors, including public policy concerns regarding
broad restrictions that might limit the availability of medical care. If a
court deems the scope or duration of the restrictive covenants or liquidated
damages provisions excessive, they may not be enforceable.
23
Loss of the services of key management personnel could adversely affect our
business
Our success depends, in part, on the services of key management personnel,
including Stephen J. Winjum, our Chairman of the Board, President and Chief
Executive Officer; Ronald G. Eidell, our Executive Vice President and Chief
Financial Officer; and E. Michele Vickery, our Executive Vice President of
Operations. We do not know of any reason why we might be likely to lose the
services of any of these officers. However, in light of the role that each of
these officers has played in our growth to date, if we lost the services of any
of these officers, we believe that our business could be adversely affected.
The nature of our business could subject us to potential malpractice,
product liability and other claims
The provision of eye care services entails the potentially significant risk
of physical injury to patients and an inherent risk of potential malpractice,
product liability and other similar claims. Our insurance may not be adequate
to satisfy claims or protect us or our affiliated eye care professionals and
this coverage may not continue to be available at acceptable costs. A partially
or completely uninsured claim against us could reduce our earnings and working
capital.
Lack of adequate financing could limit our growth
Successful implementation of our growth strategy will require continued
access to capital. If we do not have sufficient cash resources, our growth
could be limited unless we are able to obtain capital through additional equity
or debt financings. We intend to finance future acquisitions, affiliations and
our other strategic initiatives by using a combination of cash, debt and
capital stock. However, if our stock does not maintain sufficient value, or is
not deemed to be an acceptable form of consideration, we may be required to use
more of our cash resources or obtain other financing. Capital may not be
available to us for acquisitions, affiliations or other needs. Further, if
financing is available, it may not be on terms that are favorable to us or
sufficient for our needs.
If a change in events or circumstances causes us to write-off a large
portion of intangible assets, our total assets would be reduced
significantly and we could incur a substantial charge to earnings
Our assets include substantial intangible assets in the form of service
agreements with our affiliated eye care professionals and goodwill. At December
31, 1999, intangible assets represented approximately 54% of total assets and
64% of stockholders' equity. The intangible asset value represents the excess
of cost over the fair value of the separately identifiable net assets acquired
in connection with rights we receive under our service agreements. The value of
these assets may not be realized. We regularly evaluate whether events and
circumstances have occurred that indicate all or a portion of the carrying
amount of the asset may no longer be recoverable, in which case an additional
charge to earnings may become necessary. If, during our evaluation, we
determine that the undiscounted cash flow from a surgery and laser center or an
affiliated practice is not sufficient to recover the unamortized intangible
asset, we will reduce the unamortized balance to its realizable amount and
incur a corresponding charge to earnings. To date, we have not written off a
significant portion of unamortized intangible assets attributable to service
agreements or goodwill. If, in the future, we determine that our unamortized
intangible assets have suffered an impairment which requires us to write off a
large portion of unamortized intangible assets due to a change in events or
circumstances, this write off would significantly reduce our total assets and
we could incur a substantial charge to earnings.
Risks Relating to Our Industry
Application of existing or proposed government regulation could impair our
sources of revenue and limit our ability to grow our business
We are subject to extensive government regulation and supervision,
including:
. Federal and State:
--anti-kickback statutes
--self-referral laws
--civil false claims acts
24
. State:
--corporate practice of medicine restrictions
--fee-splitting laws
--facility license requirements and certificates of need
. Food and Drug Administration regulation of medical devices, including
laser vision correction and other refractive surgery equipment, and
pharmaceuticals and related clinical trials
. Federal Trade Commission guidelines for marketing and promoting laser
vision correction and other refractive surgery procedures
Many of these laws and regulations are subject to varying interpretations,
and courts and regulatory authorities generally have provided little
clarification. Moreover, state and local laws and interpretations vary from
jurisdiction to jurisdiction. As a result, we may not always be able to
accurately predict interpretations of applicable law, and Federal and state
authorities could challenge some of our activities. If any of our activities
are challenged, we may have to divert substantial time, attention and resources
from running our business to defend our activities against these challenges,
regardless of their merit. If we do not successfully defend these challenges,
we may face a variety of adverse consequences, including:
. our affiliated eye care professionals terminating their service
agreements or having these agreements rendered unenforceable
. third party payors terminating their agreements with our affiliated eye
care professionals
. our affiliated eye care professionals losing their eligibility to
participate in Medicare or losing other contracting privileges
. in some instances, civil or criminal fines
Any of these consequences could reduce our revenue and earnings growth.
Any of these results could impair our sources of revenue and our
profitability and limit our ability to grow our business.
Shortages in supplies of lasers and other surgery-related products and
equipment may impair our ability to provide our affiliated eye care
professionals with necessary equipment
There are a limited number of manufacturers of laser vision correction and
refractive surgery-related products and equipment. These products and equipment
may not be available in the quantities or time frames we require. Any shortages
in our supplies of these products may limit our affiliated eye care
professionals' ability to sustain or increase their volume of laser vision
correction and other refractive surgeries and our ability to open or operate
eye surgery and laser centers. This could adversely affect our relationships
with our affiliated eye care professionals and result in a reduction of our
revenue from management fees and in the utilization levels at our eye surgery
and laser centers.
Litigation in the medical device industry may impair our ability to provide
our affiliated eye care professionals with necessary equipment
The medical device industry, including the eye-related laser equipment
sector, has experienced substantial litigation in the U.S. regarding patents
and proprietary rights. Any future litigation that relates to equipment we use
at our eye surgery and laser centers may impair our ability to provide access
to this equipment. Our inability to provide our affiliated eye care
professionals with access to this equipment would impair their ability to
sustain or increase their volume of laser vision correction or other refractive
surgery procedures. This could adversely affect our relationships with our
affiliated eye care professionals and result in a reduction of our revenue from
management fees and in the utilization levels at our eye surgery and laser
centers.
25
Medicare and private third-party payor cost containment efforts and
reductions in reimbursement rates could reduce our revenue and our cash
flow
We estimate that for the year ended December 31, 1999, government sponsored
health care programs, directly or indirectly, accounted for approximately 38%
of our total revenue. This includes management fee revenue from affiliated eye
care professionals who receive payments from these programs, as well as
facility fees we receive directly for eye care professionals' use of our eye
surgery and laser centers. This revenue does not include amounts derived from
laser vision correction, which is an elective procedure that patient-consumers
pay for out-of-pocket.
The health care industry is experiencing a trend toward cost containment as
government and private third-party payors seek to impose lower reimbursement
and utilization rates and to negotiate reduced payment schedules with health
care providers. These trends may result in a reduction from historical levels
in per patient revenue received by our eye surgery and laser centers and
affiliated eye care professionals. Changes in Medicare payment rates have
reduced payments to ophthalmologists and optometrists. Private insurance
payments also could be affected to the extent that these insurance companies
use payment methodologies based on Medicare rates.
Reductions in payments to our eye surgery and laser centers and affiliated
eye care professionals or other changes in reimbursement for eye care services
could reduce our revenue and our cash flow.
Risks Relating to our Common Stock
Any return on your investment in our stock will depend on your ability to
sell our stock at a profit
Some investors favor companies that pay dividends. We have never declared or
paid any dividends and our credit agreement prohibits payment of dividends on
our common stock. We anticipate that we will not declare dividends at any time
in the foreseeable future. Instead we will retain earnings for use in our
business. As a result, your return on an investment in our stock likely will
depend on your ability to sell our stock at a profit.
In addition, the stock market has, from time to time, experienced extreme
price and volume fluctuations. These broad market fluctuations may adversely
affect the market price of our common stock.
Fluctuations in our quarterly operating results may make it difficult to
predict our future results of operations and may cause volatility in our
stock price
Our results of operations have varied and may continue to fluctuate from
quarter to quarter. We have a high level of fixed operating costs, including
compensation costs and minimum usage commitments on our excimer lasers. As a
result, our profitability depends to a large degree on the volume of surgical
procedures performed in, and on our ability to utilize the capacity of, our eye
surgery and laser centers and on the volume of patients treated in the clinics
of our affiliated eye care professionals.
We experience some seasonality in our operating results during the first
calendar quarter. The timing and degree of fluctuations in our operating
results will depend on several factors, including:
. decreases in demand for non-emergency procedures due to severe weather
. availability or sudden loss of the services of our affiliated eye care
professionals
. availability or shortages of laser and other vision correction surgery-
related products and equipment
. the timing and relative size of acquisitions and affiliations with eye
care professionals
These kinds of fluctuations in quarterly operating results may make it
difficult for you to assess our future results of operations and may cause
volatility in our stock price.
26
Provisions of our charter and bylaws, Delaware law and our Rights Agreement
could deter takeover attempts
Provisions of our Restated Certificate of Incorporation, our Bylaws,
Delaware law and our Rights Agreement may have the effect of delaying,
deterring or preventing a change in control, even if a change in control would
be beneficial to you. Members of our board of directors may have interests in a
change of control that differ from you. These interests could cause them to
resist a change in control that would help you better realize the value of your
investment.
Our existing stockholders will have the ability to control our affairs and
to deter a change in control and their interests in a change in control may
differ from your interests
As of February 29, 2000, our Rule 144 Affiliates and affiliated eye care
professionals owned approximately 68% of the outstanding shares of our stock.
As a result, if these persons act together, they will have the ability to
exercise substantial control over our affairs and to elect a sufficient number
of directors to control our board of directors. Because of their relationships
with us, many of these persons may have interests in a change in control that
differ from your interests.
For example, our affiliated eye care professionals may have an interest in
the quality and nature of management services to be rendered following a change
in control. This interest could cause them to resist a change in control that
they perceive will result in new, different or less desirable management
services being offered to them.
In addition, our affiliated eye care professionals have agreed not to sell
their shares of our stock, subject to some exceptions, prior to August 19,
2000, without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation. They also have agreed to specified volume limitations
on sales of our stock during the period from August 19, 2000 through August 18,
2001. Consequently, the ownership position of our Rule 144 Affiliates and
affiliated eye care professionals, as well as the contractual restrictions
agreed to by our affiliated eye care professionals, may also have the effect of
delaying, deterring or preventing a change in control, even if a change in
control would be beneficial to you.
52% of our total outstanding shares are restricted from resale but may be
sold into the market in the future, which could cause our stock price to
drop significantly
As of February 29, 2000, there were 24,291,796 shares of our common stock
outstanding. This includes the 4,600,000 shares sold in our initial public
offering in August 1999, which can be resold in the public market immediately
unless acquired by our affiliates, as that term is defined under the Securities
Act of 1933. As of February 29, 2000, our affiliated eye care professionals
owned 12,682,303 shares of our common stock which are subject to lock-up
agreements restricting their sale until August 19, 2000. For a one-year period
thereafter, our affiliated eye care professionals will then be subject to
volume and manner of sale limitations.
As restrictions on resale end, our stock price could drop significantly if
the holders of these restricted shares sell them or if the market perceives
that these holders intend to sell shares. This could occur without regard to
the performance of our business.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to interest rate risk relates primarily to our debt obligations
and temporary cash investments. Interest rate risk is managed through variable
rate borrowings under our credit facility. On December 31, 1999, we had $3.2
million of debt outstanding under our credit facility. Our revolving line of
credit bears interest at an annual rate equal to our lender's published base
rate minus 0.50% or LIBOR plus a range from 1.5% to 2.0%, varying upon our
ability to meet financial covenants.
We do not use any derivative financial instruments relating to the risk
associated with changes in interest rates.
27
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and financial statement schedules,
with the report of independent public accountants, listed in Item 14 are
included in this Form 10-K.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
28
PART III
Item 10. Directors and Executive Officers of the Registrant
The information in response to this item is incorporated by reference from
the "Proposal No. 1--Election of Directors," "Other Directors" and "Executive
Officers" sections of the Definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with our 2000 Annual Meeting
of Stockholders (the "2000 Proxy Statement").
Item 11. Executive Compensation
The information in response to this item is incorporated by reference from
the "Executive Compensation" section of the 2000 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information in response to this item is incorporated by reference from
the "Security Ownership of Certain Beneficial Owners and Management" section of
the 2000 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information in response to this item is incorporated by reference from
the "Certain Relationships and Related Transactions" section of the 2000 Proxy
Statement.
29
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Form 10-K:
1. The following consolidated financial statements of the Company, with
the report of independent public accountants, are filed as part of
this Form 10-K:
. Report of Independent Public Accountants
. Consolidated Balance Sheets
. Consolidated Statements of Operations
. Consolidated Statements of Stockholders' Equity
. Consolidated Statements of Cash Flows
. Notes to Consolidated Financial Statements
2. The following consolidated financial statement schedules of the
Company are filed as part of this Form 10-K:
Schedule I--Rule 12-09 Valuation Reserves
3. The following exhibits are filed with this Form 10-K or incorporated
by reference as set forth below.
Exhibit
Number Exhibit
------- -------
3.1+ Amended and Restated Certificate of Incorporation of the Registrant
3.2+ Bylaws of the Registrant
4.1+ Specimen stock certificate representing Common Stock
4.2+ Registrant's Rights Agreement
10.1+ Registrant's Amended and Restated Stock Incentive Plan
10.2+ Registrant's Amended and Restated 1999 Stock Purchase Plan
10.3+ Indemnification Agreement
10.4+ Registration Rights Agreement
10.5+ Subordinated Registration Rights Agreement
10.6+ Employment Agreement
10.7+* Summit Technology, Inc. Agreement
10.8+ Second Amendment and Consent to the Amended and Restated Credit
Agreement
10.12+* Management Services Agreement (SureVision Eye Centers, L.L.C.)
10.13+* Management Services Agreement (Hunkeler Eye Centers. P.C.)
10.15+ Registrant's 401(k) Plan
10.16* First Amendment to the Amended and Restated Summit Technology, Inc.
Agreement and Second Amendment to the Amended and Restated Summit
Technology, Inc. Agreement
21 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
- --------
+ Incorporated by reference to the corresponding Exhibit of the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-79271).
* Portions of this Exhibit have been omitted based upon a request for
confidential treatment of this document; omitted portions have been
separately filed with the Commission.
(b) Reports on Form 8-K:
We did not file any reports on Form 8-K during 1999.
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board Directors of
NovaMed Eyecare, Inc.:
We have audited the accompanying consolidated balance sheets of NOVAMED
EYECARE, INC. AND SUBSIDIARIES as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NovaMed Eyecare, Inc. and
Subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Rule 12-09 Valuation Reserve
Schedule is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subject to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
February 8, 2000
F-1
NOVAMED EYECARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, December 31,
1999 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 1,828 $ 1,875
Accounts receivable, net of allowances of $12,714
and $10,347, respectively......................... 14,501 11,278
Due from affiliated providers, net................. 1,931 110
Notes receivable from affiliated providers......... 342 393
Inventory.......................................... 3,427 1,490
Other current assets............................... 2,113 1,240
------- -------
Total current assets............................. 24,142 16,386
Property and equipment, net.......................... 16,065 9,893
Notes receivable from related party.................. -- 400
Intangible assets, net............................... 47,852 35,660
Other assets, net.................................... 193 340
------- -------
Total assets..................................... $88,252 $62,679
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 3,608 $ 3,142
Accrued expenses................................... 4,662 3,297
Income taxes payable............................... 275 427
Current maturities of long-term debt............... 3,617 300
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Total current liabilities........................ 12,162 7,166
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Long-term debt, net of current maturities............ 196 20,427
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Deferred income tax liability........................ 1,113 1,702
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Commitments and contingencies
Redeemable convertible preferred stock:
Series C convertible preferred stock, $.01 par
value, none and 2,400,000 shares authorized, none
and 2,000,000 issued and outstanding at December
31, 1999 and 1998, respectively................... -- 6,350
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Series D convertible preferred stock, $.01 par
value, none and 3,000,000 shares authorized; none
and 2,323,837 issued and outstanding at December
31, 1999 and 1998, respectively................... -- 10,080
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Stockholders' equity:
Series A convertible preferred stock, $.01 par
value, none and 13,112,000 shares authorized, none
and 11,740,055 shares issued and none and
11,072,698 shares outstanding at December 31, 1999
and 1998, respectively............................ -- 117
Series B convertible preferred stock, $.01 par
value, none and 455,000 shares authorized, none
and 400,000 issued and outstanding at December 31,
1999 and 1998, respectively....................... -- 4
Series E junior participating preferred stock, $.01
par value, 1,912,000 shares authorized, none
outstanding at December 31, 1999 and 1998,
respectively...................................... -- --
Common stock, $.01 par value, 81,761,465 shares
authorized, 24,159,199 and 2,751,254 shares issued
outstanding at Decembe