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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, 2000
Commission File Number: 0-26625
NOVAMED EYECARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-4116193
(State or other jurisdiction (I.R.S. EmployerIdentification 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 18,265,135 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 15, 2001 was
$41,096,553.75. The number of shares outstanding of the registrant's Common
Stock, par value $.01, as of March 15, 2001 was 24,698,640.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement in connection with
the registrant's 2001 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 2001 and beyond to differ
materially from those expressed in, or implied by, such statements. These
risks and uncertainties include: our ability to acquire, develop and manage
profitable surgical facilities; 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 eye
surgical procedures, including vision correction surgery; reductions in prices
and reimbursement rates for surgical procedures, including prices for laser
vision correction procedures; proposed health care reforms; and the factors
set forth under "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors." You should not place undue
reliance on any forward-looking statements. We undertake no obligation to
update or revise any such forward-looking statements that may be made to
reflect events or circumstances after the date of this Form 10-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 and one of the nation's leading owners
and operators of practice-based, single-specialty ambulatory surgery centers
(ASCs). We own and operate 15 ASCs and operate 15 practice-based laser vision
correction centers (LVC centers) in six core U.S. regional markets, including:
Chicago, Illinois; Kansas City, Missouri; Louisville, Kentucky; Richmond,
Virginia; St. Louis, Missouri; and the Atlanta, Georgia and Chattanooga,
Tennessee metropolitan areas.
As of March 15, 2001, we own and operate:
. 15 practice-based, single-specialty ambulatory surgery centers where our
affiliated eye care professionals perform surgical procedures, primarily
cataract and refractive surgery (laser vision correction or LVC).
. an optical services and products organization that sells: eye care
products and accessories to eye care professionals; corrective lenses and
eyeglasses produced by our two wholesale optical laboratories; eyeglass
frames and contact lenses purchased from manufacturers by our optical
products purchasing organization; and marketing products and services.
. an eye-only research organization that provides clinical and other
research services to eye care device, product and pharmaceutical
manufacturers.
As of March 15, 2001, we also operate under service agreements 15 laser
vision correction centers, or LVC 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 15, 2001, we have affiliated with 120 eye care professionals.
Our affiliated eye care professionals provide a wide range of eye care services
to patients including basic eye examinations, the diagnosis and treatment of
complex eye conditions and eye surgery, primarily cataract and LVC surgery. Our
affiliated eye care professionals currently practice in 66 eye care clinics
which are leased and staffed by us. In addition, our affiliated eye care
professionals operate 33 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 five fixed-site laser services agreements in
Delaware, Illinois, Ohio and Oklahoma.
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.
Eye Care 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.
Ambulatory Surgery Center Market
The delivery of ambulatory surgery--procedures performed on a
nonhospitalized patient who is able to return home the same day--has changed
dramatically since the inception of outpatient surgery centers (ASCs) in the
early 1970s. Since then, the industry has grown, with almost 3,200 ASCs in
business as of June 2000, up 20% from 1998. The ASC market has capitalized on
new medical technologies, including improvements in surgical lasers,
anesthesiology, endoscopy and arthroscopic surgical instruments. An estimated
6.7 million surgeries were performed in ASCs in 2000, up 15% from 1998.
Ophthalmology is the largest single surgical area of outpatient surgery, with
approximately 1.76 million outpatient surgeries in 2000, representing
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approximately 26% of all outpatient surgeries. Outpatient surgical procedures
are forecasted to grow 7% annually through 2006, when approximately 9 million
procedures are expected.
Cataract Surgery. Cataract surgery is currently the most widely performed
surgical procedure in the U.S., with an estimated 2.7 million cataract
surgeries in 2000. Cataract procedures are forecast to grow 2.2% annually over
each of the next five years. 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. More than 63% of people over the age of 60 have some
degree of cataract formation. Cataract procedures are expected to continue to
increase for many 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. In the U.S., 34.7 million people are age 65 or older,
representing 12.6% of the population. By 2010, this group is expected to
increase 13.5% to 39.4 million and represent 13.2% of the population.
Vision Correction Surgery. Approximately 166 million people in the U.S.
require eyeglasses or contact lenses to correct refractive vision conditions
that 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
New surgical technologies and techniques have been developed over the years
to correct common vision conditions that result from the improper curvature of
the cornea. Laser In-Situ Keratomileusis, or LASIK, was introduced in 1996,
leading to a dramatic increase in the popularity of laser vision correction
surgery. The introduction of LASIK offered significant benefits to
ophthalmologists over preceding refractive surgical techniques such as Radial
Keratotomy, or RK, and the first vision correction surgery that used laser
technology, Photorefractive Keratectomy, or PRK. Relative to the earlier
refractive surgical techniques, the LASIK procedure provides significant
reductions in patient pain or discomfort, patient recovery times ranging from a
few hours after the procedure to two weeks, and reduced complication rates.
In the LASIK procedure, an ophthalmologist uses an automated microsurgical
instrument to peel back a thin layer of corneal tissue that 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 grown
rapidly since 1996, primarily as a result of the advantages of the LASIK
procedure. In 2000, eye care professionals performed an estimated 1.43 million
laser vision correction surgery procedures in the U.S., representing an
increase of approximately 50% over the approximately 950,000 procedures
performed in 1999. Volume is projected to grow to approximately 1.82 million
procedures in 2001. Despite this rapid growth, the number of vision correction
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surgery patients in 2000 represented approximately 0.4% of the 166 million
people with refractive vision conditions in the U.S. LVC procedures performed
in the U.S. from 1997 through 2000 represented cumulatively less than 1% of the
relevant market opportunity.
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. Medicare and
other third party payors generally reimburse the treatment of these eye and
vision conditions.
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. 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 ASCs, LVC 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 ASCs and LVC centers. We believe our business model provides us with
several advantages in assisting our affiliated eye care professionals,
including our ability to:
. establish and maintain long-term relationships with leading
ophthalmologists and optometrists through access to our ASCs and LVC
centers, and through a wide range of business, information technology,
administrative and financial services
. assist our affiliated eye care professionals in establishing regional
market leadership in eye care through our clinical research, information
technology and marketing know-how
. 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
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, including surgery.
We implement our business model by building around the following key
components:
Single-specialty, practice-based ASCs and LVC Centers
We own and operate 15 practice-based, single specialty ASCs, each of which
is a wholly-owned, state-licensed and Medicare-certified ambulatory surgical
center. Ophthalmologists perform cataract, laser vision correction and other
eye related surgical procedures in our ASCs. We also operate under service
agreements 15 LVC centers where our affiliated eye care professionals perform
laser vision correction surgery. We also have five fixed-site laser service
agreements pursuant to which we lease excimer lasers and provide various
services to eye care providers in Delaware, Illinois, Ohio and Oklahoma. As of
March 15, 2001, we have 30 excimer
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lasers in service. We plan to selectively deploy additional excimer lasers
during 2001, including replacing some currently installed lasers with newer
technology models.
Effective March 1, 2001, we entered into a new five-year supply agreement
with Alcon Laboratories, Inc. setting forth the terms upon which we can procure
and utilize excimer lasers manufactured by Alcon. This agreement amended and
superseded our previous agreement originally entered into with Summit
Technology, Inc., which was acquired by Alcon in 2000. The agreement sets forth
pricing terms for our existing APEX/Infinity lasers, as well as the procurement
and pricing terms for Alcon's most technologically advanced laser, the
LADARVision System. During the five-year term, we will pay Alcon monthly based
on the number of procedures performed on each laser, with minimum annual
procedure requirements for each LADARVision System procured under the
agreement. As of March 15, 2001, we have twenty-one Apex/Infinity lasers and
two LADARVision Systems covered by the agreement, and we have agreed to order
and take installation and delivery of additional LADARVision Systems by April
15, 2001. Alcon may terminate the agreement if we fail, after reasonable cure
periods, to comply with the material terms of the agreement. We may terminate
the agreement if the Food and Drug Administration, or FDA, withdraws or
materially restricts its approval of the use of any laser covered by the
agreement or if patent issues or changes render the lasers unusable.
Management Services
As of March 15, 2001, we have long-term service agreements in place with
professional entities covering 62 ophthalmologists and 58 optometrists, who
provide eye care services in one or more of our 66 eye care clinics. Generally,
we seek to cluster eye care clinics within regional markets that can support
one or more ASCs and one or more LVC 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, ASCs
and LVC 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, equipment and supplies
. 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
Optical Services and Products
We own and operate two full-service wholesale optical laboratories that
specialize in surfacing, finishing and distributing corrective lenses and
eyeglasses. Our laboratories have in excess of 500 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 750 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. Our marketing
services and products company provides eye care professionals with a range of
products and services including brochures, videos and advertising design.
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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 65 clinical studies involving up to approximately 1,300 potential
patients participating in clinical trials.
Our Growth Strategy
We are focused on the large and rapidly growing U.S. market for eye care,
particularly around the growth in eye surgeries which we believe will result in
additional procedures being performed in our surgical facilities. Our goal is
to be one of the leading owners and/or operators of single-specialty, practice-
based ASCs and LVC centers. We intend to achieve this goal by continuing to
acquire and develop ASCs and LVC centers, maintain and/or establish contractual
and other affiliations with leading eye care professionals and by continuing to
implement a growth strategy which includes the following specific components:
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:
. acquiring or developing ASCs and LVC centers
. continuing to affiliate with leading eye care professionals
. helping our affiliated eye care professionals grow and develop their
practices
Selectively Targeting and Entering New Markets. We believe our management
team's experience in acquiring, building and developing ASCs and LVC centers,
as well as helping affiliated professionals build successful eye care
businesses, will continue to enable us to effectively identify and enter new
markets. We intend to enter new markets through multiple avenues, including:
. acquiring existing or establishing new ASCs
. opening new LVC centers
. entering into contractual affiliations with leading ophthalmologists and
optometrists
Competition
Surgical Facilities. In acquiring and developing practice-based, single
specialty ASCs and LVC centers, we compete with both corporations and eye care
professionals. There are several publicly held and private companies actively
engaged in the acquisition, development and operation of ASCs and LVC centers.
Certain of these companies may acquire and develop multi-specialty ASCs,
practice-based ASCs focusing on varying specialties, or a combination of the
two. Moreover, some of these companies have the acquisition and development of
ASCs as their core business, while other competitors include larger publicly
held companies that have subsidiaries or divisions engaged in this business.
Other companies focus more exclusively on the development and operation of LVC
centers. Many of these competitors have greater resources than us.
The majority of practice-based, ophthalmic ASCs continue to be owned by eye
care professionals. Eye care professionals also own and operate LVC centers.
Our ASCs and LVC centers compete with these provider-owned centers. In
deploying excimer laser technology, eye care professionals either elect to
procure this technology on their own or enter into an arrangement with a
corporate entity that can provide the necessary capital. For the fourth quarter
2000, industry sources estimate that 46.6% of total laser vision correction
procedures in the U.S. were performed in corporate-owned facilities, and 43.3%
were performed in physician-owned centers. Laser vision correction and other
refractive surgery procedures also compete with more traditional non-surgical
treatments for refractive conditions, including eyeglasses and contact lenses.
Management Services. Our management services are provided to eye care
professionals through long-term affiliations. The market for these management
services is fragmented, and we do not face any single, dominant
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U.S. national competitor. Eye care professionals may seek a corporate partner
to assist them in the growth and development of their practices, as well as
with the day-to-day management and administration of their businesses. Factors
that may influence an eye care professional's decision to retain a corporate
partner to provide management services are the corporate partner's experience
and scope and quality of services offered, the eye care professional's need for
these services, and the price for such services.
Optical Products and Services. Our two wholesale optical laboratories face a
variety of national, regional and local competitors. We compete in the optical
laboratory market on the bases of quality of service, breadth of services,
reputation and price.
In the market for providing optical group purchasing services, we primarily
compete with national and regional buying groups, as well as large vendors.
Competition in this market is based upon service, price, and the strength of
the purchasing organization, including the ability to negotiate discounts.
Employees
As of March 15, 2001, we had approximately 1,175 employees, 959 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 eye care
professionals 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 or state 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 addition, several sets of regulations have
been recently adopted that may require substantial changes in the way health
care providers operate over the coming years. In response to new or revised
laws, regulations or interpretations, we could be required to revise the
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.
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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 plus up to three
times the amount of the underlying remuneration, 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, or DHHS, to develop
regulatory exceptions, known as safe harbors, to the Federal anti-kickback
statute's referral prohibitions. When possible, we have attempted to structure
our business operations and our relationships with our affiliated providers
within a safe harbor. However, some aspects of our business, the business of
our affiliated providers, and our relationships with our affiliated providers
either do not meet the prescribed safe harbor standards, or relate to practices
for which no safe harbor standards have been proposed. Because there is no
legal requirement that relationships fit within a safe harbor, a business
arrangement that does not comply with the relevant safe harbor, or for which a
safe harbor does not exist, does not necessarily violate the anti-kickback
statute.
Included among the safe harbors to the anti-kickback statute are certain
safe harbors for investment interests in general, and for investment interests
in ASCs. While we do not currently co-own ASCs with physicians, it is
foreseeable that we may do so in the future. If so, it is unlikely that our co-
ownership would meet all of the parameters of the general investment interest
safe harbors or the ASC investment interest safe harbors. However, as discussed
above, an arrangement that does not fit squarely within a safe harbor is not
per se unlawful under the anti-kickback statute. It is our intent to structure
all such co-ownership arrangements in a manner that complies with as many of
the safe harbor components as possible, that meets the objectives of the anti-
kickback statute, and that follows the other available regulatory guidance
regarding ASC co-ownership arrangements. By structuring the co-ownership
arrangements in this manner, we believe that they will be in compliance with
the anti-kickback 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.
On January 4, 2001, the Health Care Financing Administration published Phase
I of the final Stark regulations interpreting the provisions of the Stark Law.
These regulations will have an effective date of
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January 4, 2002. It is anticipated that Phase II will be issued later this year
and will focus on compensation issues and the statute's application to
Medicaid. While Phase I of the final rule still defines eyeglasses and contact
lenses to be prosthetic devices and A-scans and B-scans to be radiology
services, the final rule creates certain exemptions for referrals for these
services. Phase I also creates an exemption for referrals for eyeglasses and
contact lenses furnished to patients following cataract surgery and for
"designated health services" that are personally performed by the referring
doctor.
The Stark law does not prohibit physician ownership or investment interests
in ASCs to which they refer patients. HCFA clarified this in the Phase I
regulations by providing that services that would otherwise constitute a
"designated health service," but that are paid by Medicare as part of bundled
rate, will not be considered designated health services for purposes of the
Stark Law. Thus, when an intraocular lens, or IOL, used in cataract surgery is
included in an ASC bundled payment rate, the IOL will not be considered to be a
"designated health service."
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.
Health Insurance Portability and Accountability Act. In August of 1996,
Congress enacted the Health Insurance Portability and Accountability Act of
1996 (HIPAA). Included within HIPAA's health care reform provisions are its
"administrative simplification" provisions, which require that health care
transactions be conducted in a standardized format, and that the privacy and
security of certain individually identifiable health information be protected.
Proposed rules for many of the administrative simplification subject areas have
been published. Final rules covering "Standards for Electronic Transactions and
Code Sets" were published on August 17, 2000, and set forth the standardized
billing codes and formats that our affiliated eye care professionals and we
must use when conducting certain health care transactions and activities. The
effective date of these final rules was October 16, 2000, and we have until
October 16, 2002 to come into compliance with these rules. On December 28,
2000, the DHHS published final rules addressing "Standards for Privacy of
Individually Identifiable Health Information" under HIPAA's administrative
simplification provisions. Compliance with these rules is required by April 14,
2003, however, there have been recent efforts in Congress to overturn these
rules, so the status of the privacy rules under HIPAA is unclear. Regardless of
the final form of the rules implementing HIPAA's administrative simplification
provisions, it is likely that these rules will create substantial new
compliance issues for all "covered entities"--which include health care
providers, health plans, and health care clearinghouses--that engage in
regulated transactions and activities. The operations of our affiliated eye
care professionals and certain of our operations are covered by the final rules
enacted thus far, and, to the extent that the final privacy and other rules
resemble those that were published in December 2000, we believe these
operations will be covered by the final HIPAA rules enacted in the future.
Violations of HIPAA can result in civil penalties of up to $25,000 per person
per year for each violation and criminal penalties of up to $250,000 and/or up
to 10 years in prison per violation.
State Law
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 ASCs and LVC 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
9
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 ASC or the purchase of specified medical equipment in
excess of a dollar 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.
Anti-Kickback Laws. In addition to the Federal anti-kickback law, a number
of states have enacted laws that prohibit the payment for referrals and other
types of kickback arrangements. Some of these state laws apply to all patients
regardless of their source of payment, while others limit their scope to
patients whose care is paid for by particular payors.
Self-Referral Laws. In addition to the Federal Stark Law, a number of states
have enacted laws that 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 or
have common law that 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 medicine 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.
We believe 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.
10
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 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 ASCs and LVC centers, the
clinics of our affiliated eye care professionals and our optical services
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 12,824 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 ASCs, LVC centers, eye
care clinics and optical retail outlets are located in medical complexes,
office buildings or free-standing buildings. The square
11
footage of these offices range from 300 to 22,993 square feet, and the terms of
these leases have expiration dates ranging from April 30, 2001 to February 29,
2010. Any capacity constraints with our affiliated 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 ASCs in a similar manner may require state
regulatory approval.
The following tables list the locations of our surgical facilities:
Medicare-Certified and Licensed ASCs
Number of
Location Operating Rooms
-------- ---------------
Atlanta, GA.............. 2
Columbus, GA............. 3
Chicago, IL.............. 1
Maryville, IL............ 1
River Forest, IL......... 2
Hammond, IN.............. 2
Merrillville, IN......... 2
New Albany, IN........... 2
Overland Park, KS........ 3
Florissant, MO........... 1
Kansas City, MO.......... 2
St. Joseph, MO........... 1
Cincinnati, OH........... 2
Chattanooga, TN.......... 1
Richmond, VA............. 1
LVC Centers
Athens, GA Evansville, IN
Columbus, GA Overland Park, KS
Duluth, GA Wichita, KS
Kennesaw, GA Columbia, MO
Davenport, IA Kansas City, MO
Arlington Heights, IL St. Louis, MO
Naperville, IL Richmond, VA
Tinley Park, IL
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 2000.
12
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 our common stock
on the Nasdaq National Market:
High Low
------ -----
Fiscal year ending December 31, 2000:
First Quarter............................................. $18.25 $6.81
Second Quarter............................................ $14.38 $5.81
Third Quarter............................................. $10.00 $2.50
Fourth Quarter............................................ $ 2.75 $0.88
Fiscal year ending December 31, 1999:
Third Quarter (beginning August 18, 1999)................. $15.63 $7.88
Fourth Quarter............................................ $11.69 $4.81
On March 15, 2001, the last reported sale price of our common stock was
$2.25, and there were approximately 346 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.
13
Item 6. Selected Financial Data
The consolidated statement of operations data set forth below for the years
ended December 31, 2000, 1999, and 1998 and the balance sheet data at December
31, 2000 and 1999, 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 years ended
December 31, 1997 and 1996 and the consolidated balance sheet data at December
31, 1998, 1997 and 1996 are derived from our audited financial statements which
are not included in this Form 10-K.
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,
---------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- ------- -------
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Net revenue..................... $135,638 $101,143 $63,729 $42,408 $15,850
-------- -------- ------- ------- -------
Operating expenses.............. 125,070 92,086 58,986 40,387 16,679
Compensation expense related to
stock options (a).............. -- 2,690 -- -- --
-------- -------- ------- ------- -------
Income (loss) from operations... $ 10,568 $ 6,367 $ 4,743 $ 2,021 $ (829)
======== ======== ======= ======= =======
Net income (loss)............... $ 5,344 $ 874 $ 1,706 $ 105 $ (912)
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............ $ 5,344 $ (1,161) $ 967 $ 105 $ (912)
======== ======== ======= ======= =======
Diluted earnings (loss) per
common share................... $ 0.21 $ (0.06) $ 0.06 $ 0.01 $ (0.08)
======== ======== ======= ======= =======
Diluted weighted average common
shares outstanding............. 26,039 17,965 16,003 17,237 11,358
======== ======== ======= ======= =======
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
======== =======
2000 1999 1998 1997 1996
-------- -------- ------- ------- -------
Other Data:
EBITDA (b)...................... $ 18,150 $ 13,969 $ 8,076 $ 4,247 $ (23)
EBITDA as percent of net
revenue........................ 13.4% 13.8% 12.7% 10.0% --
Number of surgical facilities
operated as of the end of
period:
ASCs........................... 15 12 10 10 6
LVC centers.................... 15 5 -- -- --
Number of surgical procedures
performed:
LVC............................ 24,229 13,366 5,083 1,676 --
Cataracts...................... 17,252 15,877 13,681 10,816 5,308
Other eye surgery procedures... 13,128 10,843 8,845 6,464 1,337
As of December 31,
---------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- ------- -------
Consolidated Balance Sheet Data:
Working capital................. $ 23,728 $ 11,980 $ 9,220 $10,452 $ 7,887
Total assets.................... 120,913 88,252 62,679 52,734 27,694
Total debt, excluding current
portion........................ 26,187 196 20,427 15,838 6,378
Redeemable convertible preferred
stock.......................... -- -- 16,430 12,680 5,794
Total stockholders' equity...... 82,864 74,781 16,954 18,149 12,755
- --------
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
14
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.
(b) EBITDA represents the sum of income before income taxes, interest expense
and depreciation and amortization, and in 1999 noncash, stock-based
compensation. We understand that industry analysts generally consider
EBITDA to be one measure of the financial performance of a company that
investors find useful in analyzing the operating performance of a company
and its ability to service debt. EBITDA, however, is not a measure of
financial performance under generally accepted accounting principles and
should not be considered an alternative to net income as a measure of
operating performance or to cash flows from operating, investing or
financing activities as a measure of liquidity. Given that EBITDA is not a
measurement determined in accordance with generally accepted accounting
principles and is thus susceptible to varying calculations, EBITDA, as
presented, may not be comparable to other similarly titled measures of
other companies.
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 elsewhere herein. Our actual
results, performance and achievements in 2001 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
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999
Net Revenue. Net revenue increased 34.1% from $101.1 million to $135.6
million. Surgical facilities revenue increased 33.6% from $31.2 million to
$41.7 million, primarily as a result of owning and operating additional ASCs
and operating additional LVC centers, resulting in growth in the number of
surgical procedures performed. In 2000, total surgical procedures performed in
our surgical facilities increased 36% to 54,700. LVC procedures increased 81.3%
and cataract surgical procedures increased 8.7%, compared to 1999. Surgical
procedures in 2000 grew despite the adverse effects of particularly bad winter
weather in December 2000, when surgical procedures in ASCs we owned and
operated for one year or more declined 15% from December 1999. In those ASCs we
owned for a year or more, our ASCs averaged 3,924 surgical procedures for the
full year 2000, up from 3,860 in 1999. Management services revenue in 2000
increased 30.3% from $54.3 million to $70.8 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. Product sales revenue increased 48.5% from $15.6 million to
$23.2 million, primarily as a result of higher volumes at our optical products
purchasing organization, and to a lesser extent, the revenue associated with
our acquisition of a marketing products and services company in May 2000.
Salaries, Wages and Benefits. Salaries, wages and benefits expense increased
35.5% from $37.4 million to $50.7 million. As a percentage of revenue,
salaries, wages and benefits expense increased from 37.0% to 37.4%. The
absolute increase in salaries, wages and benefits expense primarily reflects
the additional payroll incurred as a result of new acquisitions and
affiliations. Also contributing to the increase was approximately $320,000 of
severance costs associated with the streamlining of our organizational
structure during the second half of the year.
Cost of Sales and Medical Supplies. Cost of sales and medical supplies
expense increased 30.7% from $26.3 million to $34.3 million. As a percentage of
revenue, cost of sales and medical supplies expense decreased from 26.0% to
25.3%. The absolute increase in cost of sales and medical supplies expense is
primarily a result of higher volumes at our optical products purchasing
organization. Higher supply costs associated with the increase in laser vision
correction procedures also contributed to the absolute increase during the
period. In general, our optical laboratories and purchasing organization have a
relatively higher cost of sales percentage to revenue than the optical retail
outlets of the Company's affiliated eye care professionals.
15
The decrease in cost of sales and medical supplies as a percentage of revenue
reflects efforts during the year to negotiate corporate contracts with selected
strategic suppliers.
Selling, General and Administrative. Selling, general and administrative
expense increased 38.2% from $23.5 million to $32.4 million. As a percentage of
revenue, selling, general and administrative expense increased from 23.2% to
23.9%. The absolute increase in selling, general and administrative expense was
the result of costs incurred at new acquisitions and affiliations, along with
increased marketing expenditures during the first half of 2000.
Depreciation and Amortization. Depreciation and amortization expense
increased 54.4% from $4.9 million to $7.6 million. Acquisitions and
affiliations, as well as increased capital expenditures, increased overall
depreciation and amortization expense.
Other Expense. Interest expense increased 26.6% from $1.5 million to $1.9
million, the result of higher interest rates and higher average outstanding
balances when compared with the prior year period.
Provision for Income Taxes. Our effective tax rate decreased to 39.2% from
44.8% (excluding the effect of the IPO-related items in 1999). 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 income before income
taxes in 2000 better covered these nondeductible expenses, resulting in a lower
overall effective tax rate.
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Net Revenue. Net revenue increased 58.7% from $63.7 million to $101.1
million. Surgical facilities revenue increased 55.1% from $20.1 million to
$31.2 million, primarily as a result of a 45% increase in procedures performed
in our facilities, compared to 1998. The 163% 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 16.1%
increase in the number of cataract surgical procedures, compared to 1998.
Management services revenue increased 50.7% from $36.1 million to $54.3
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. Product sales revenue
increased 106.7% from $7.5 million to $15.6 million, primarily as a result of
the revenue added through the acquisition of Midwest Uncuts, Inc., a wholesale
optical laboratory, in January 1999.
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 37.0%. 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
26.0%. 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 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.
Selling, General and Administrative. Selling, general and administrative
expense increased 60.4% from $14.6 million to $23.5 million. As a percentage of
revenue, selling, general and administrative expense
16
increased from 22.9% to 23.2%. 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. 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 and
affiliations, as well as increased capital expenditures, 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 noncash, pre-tax charge 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 initial public offering, which
occurred on August 18, 1999. In addition, $9.7 million of our subordinated
exchangeable promissory notes were exchanged for our common stock, based upon
the initial public offering 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 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 notes for common stock, discussed above
Accretion of Series C and Series D Convertible Preferred Stock. In
connection with our initial public offering, 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 initial public offering, 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 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 the initial price range established during the filing of our
registration statement on Form S-1 in May 1999. 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.
Liquidity and Capital Resources
We generated cash from operating activities for the year ended December 31,
2000 of $9.0 million. We used $33.3 million in our investing activities in
2000, which included ten acquisitions and/or affiliations, the purchase of
property and equipment and the issuance of certain notes receivable related to
the conversion of subordinated exchangeable promissory notes in connection with
our IPO. We used net bank borrowings of $23.0 million and net cash from
operating activities to fund our investing activities. As of December 31, 2000
and 1999, we had cash and cash equivalents of approximately $785,000 and $1.8
million, respectively, and working capital of approximately $23.7 million and
$12.0 million, respectively.
17
On June 28, 2000, we replaced our $35 million revolving credit agreement
with a new, three-year, $50 million revolving credit agreement. Interest on
borrowings under the new credit agreement is payable at an annual rate equal
to our lender's published base rate plus the applicable borrowing margin
ranging from 0 to 0.75% or LIBOR plus a range from 1.5% to 2.25%, varying upon
our ability to meet financial covenants. The weighted average interest rate on
credit line borrowings was 8.6% for the twelve months ended December 31, 2000.
The new credit agreement contains covenants that include limitations on
indebtedness, liens, capital expenditures, acquisitions and affiliations and
ratios that define borrowing availability and restrictions on the payment of
dividends. As of December 31, 2000, we were in compliance with all our credit
agreement covenants. At December 31, 2000, we had outstanding borrowings under
the new credit line of $26.2 million, the interest rate on which was 8.7%.
We expect our cash flow from operations and funds available under our
existing revolving credit facility will be sufficient to fund our operations
for at least 12 months. Our future capital requirements and the adequacy of
our available funds will depend on many factors, including the timing of our
acquisition activities, new affiliations with eye care professionals, capital
requirements associated with our surgical facilities, expansions and the
future cost of surgical equipment.
On June 15, 2000, we entered into an agreement to acquire two ASCs,
contingent upon the resolution of certain requirements associated with the
seller (the "Contingencies"). Certain of these Contingencies were satisfied in
2000 with respect to one of the ambulatory surgery centers, which we acquired
in December 2000. Upon the resolution of the Contingencies affecting the other
ambulatory surgery center and other conditions to closing, which could occur
as early as May 1, 2001, we will be required to purchase the other ambulatory
surgery center for approximately $9.3 million in cash consideration. We may
elect to fund up to approximately $2.3 million of this purchase price in the
form of our common stock. This transaction is excluded from the acquisition
limitations of the new Credit Agreement discussed above.
One of our affiliated eye care professionals has the option, exercisable
through November 1, 2002, to acquire up to a 25% interest in one of our ASCs.
Effective March 1, 2001, we entered into a new five-year supply agreement
with Alcon Laboratories, Inc. setting forth the terms upon which we can
procure and utilize excimer lasers manufactured by Alcon. This agreement
amended and superseded our previous agreement originally entered into with
Summit Technology, Inc., which was acquired by Alcon in 2000. During the five-
year term, we will pay Alcon monthly based on the number of procedures
performed on each of our APEX/Infinity lasers and LADARVision Systems. We are
required to pay for a minimum number of annual procedures on each LADARVision
System during the five-year term, whether or not these procedures are
performed. As of March 15, 2001, we have entered into commitments to pay Alcon
up to approximately $1.4 million annually during the five-year term.
Risk Factors
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:
.acquiring or developing additional ASCs and LVC centers
.affiliating with additional eye care professionals
.helping our affiliated eye care professionals grow and develop their
practices
Pursuing the acquisition and development of ASCs and LVC centers, as well
as affiliations with eye care professionals presents us with a variety of
challenges. We may not experience an increase in surgical procedures at our
existing ASCs or LVC 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
18
and financial services, required to sustain profitability in our existing and
future ASCs and LVC centers, or in the clinics of our affiliated eye care
professionals.
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.
Our failure to acquire or develop a sufficient number of profitable surgical
facilities could limit our profitability and revenue growth
Our success depends upon our ability to acquire or develop a sufficient
number of profitable ASCs and LVC centers in our existing and future markets.
We may not be able to identify suitable acquisition or development targets,
successfully negotiate the acquisition or development of these facilities on
satisfactory terms, or have the access to capital to finance these endeavors.
Newly acquired or developed facilities may generate losses or suffer lower
operating margins than our more established facilities, or they may not
generate returns that justify our investment. 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 using our ASCs
and LVC centers.
We may not compete effectively with other 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 ASC companies, refractive laser center companies,
hospitals, individual ophthalmologists and optometrists, other ASCs, LVC
centers, eye care clinics and providers of retail optical products.
Competitors with substantially greater resources may be more successful in
acquiring and developing surgical facilities and/or affiliating with eye care
professionals. 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 ASCs and LVC 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.
Reduced prices and reimbursement rates for surgical procedures as a result
of competition or Medicare and private third party payor cost containment
efforts could reduce our revenue, profitability and cash flow.
We estimate that for the year ended December 31, 2000, revenue from laser
vision correction procedures comprised 24% of our consolidated revenue. The
market for providing laser vision correction and other refractive surgery
procedures is becoming increasingly competitive. This competitiveness has
resulted in many of our competitors offering laser vision correction or other
refractive surgery services at lower prices than the prices charged by us and
our affiliated eye care professionals. If price competition continues,
however, we may choose to lower the prices we charge. If we lower prices, we
could experience reductions in our revenue, profitability and cash flow.
We estimate that for the year ended December 31, 2000, government sponsored
health care programs, directly or indirectly, accounted for approximately 26%
of our consolidated revenue. This includes facility fees we receive directly
for eye care professionals' use of our ASCs, as well as management fee revenue
from affiliated eye care professionals who receive payments from these
programs. This revenue does not include amounts derived from laser vision
correction, which is an elective procedure that patient-consumers pay for out-
of-pocket.
19
The health care industry is continuing to experience 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. For example, recent legislation requires that DHHS
implement a new Medicare reimbursement rate methodology for ASCs over a four-
year period beginning no earlier than January 1, 2002. These trends may result
in a reduction from historical levels in per patient revenue received by our
ASCs and affiliated eye care professionals. Changes in Medicare payment rates
have in the past 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 ASCs, LVC centers and affiliated eye care
professionals or other changes in reimbursement for eye care services could
reduce our revenue, profitability and cash flow.
If eye care professionals and the general population do not continue to
accept laser vision correction and other refractive surgical procedures as
alternatives to eyeglasses and contact lenses, an important source of our
historical and future revenue and earnings growth will be limited
Our profitability and growth will depend, in part, upon continued 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 continue to accept laser vision correction
surgery because of the cost of the procedure that, to date, has primarily been
paid directly by patients, and concerns about the safety and effectiveness of
laser vision correction. If eye care professionals and the general population
do not continue to accept laser vision correction and other refractive surgical
procedures, an important source of our historical and future revenue and
earnings growth will be limited.
Rapid technological advances may reduce our sources of revenue and our
profitability
Adoption of new technologies that may be comparable or superior to existing
technologies for excimer lasers and other surgical equipment could reduce the
amount of the facility fees we receive from eye care professionals who use our
surgical facilities and management fees we receive from affiliated professional
entities. 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 using our surgical facilities or affiliating with us.
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, in part, upon our ability to establish and maintain
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 surgical facilities. 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.
20
For the years ended December 31, 2000, 1999 and 1998, the management
services revenue of one of our affiliated professional entities accounted for
12.8%, 15.4% and 15.4% of our consolidated net revenue, respectively. Another
affiliated professional entity, created during 1999 from a combination of a
group of our affiliated practices, accounted for 11.5% and 8.6% of our
consolidated net revenue in the years ended December 31, 2000 and 1999,
respectively. If we fail to maintain our existing affiliations with these and
other affiliated professional entities, 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 and our ability to grow
our business. 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 area, 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.
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.
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 is not at a 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.
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
21
continue to be available at acceptable costs. A partially or completely
uninsured claim against us could reduce our earnings and working capital.
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, 2000, intangible assets represented approximately 51% of total
assets and 75% 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 an ASC, an
LVC 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
--privacy laws
. State:
--facility license requirements and certificates of need
--corporate practice of medicine restrictions
--fee-splitting laws
. 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:
. loss of use of, or a decline in the revenue and profitability of, our
ASCs and LVC centers
. our affiliated eye care professionals terminating their service
agreements or having these agreements rendered unenforceable
22
. 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 results could impair our sources of revenue and our
profitability and limit our ability to grow our business.
Becoming compliant with federal regulations enacted under the Health
Insurance Portability and Accountability Act could require us to expend
significant resources and capital, and could impair our profitability and
limit our ability to grow our business
Recently released federal regulations adopted under the Health Insurance
Portability and Accountability Act of 1996 (HIPAA) require that our affiliated
eye care professionals and we be capable of conducting certain standardized
health care transactions, including billing and other claims transactions, by
October 16, 2002. In addition, on December 28, 2000, HIPAA regulations
governing patient privacy were released, and compliance with those regulations
is required by April 15, 2003. Due to efforts in Congress to overturn these
privacy rules, their status is currently unclear. Regardless of Congress'
actions on these privacy rules, HIPAA requires that patient privacy regulations
must be enacted. Depending on their ultimate form, these privacy regulations
may require substantial compliance efforts on behalf of our affiliated eye care
professionals and us. Although difficult to predict at this time, the amount of
time, effort and expense associated with becoming compliant with existing and
expected HIPAA regulations could require us to divert time, attention and
resources from our business operations, and/or require us to spend substantial
sums that could impair our profitability. HIPAA violations could also expose us
to civil penalties of up to $25,000 per person per year for each violation and
criminal penalties with fines of up to $250,000 and/or up to 10 years in prison
per violation.
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
During 2000, the market price of our common stock has been volatile,
fluctuating from a high trading price of $18.25 to a low trading price of $0.88
per share. 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 surgical facilities 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:
. general economic conditions
. decreases in demand for non-emergency procedures due to severe weather
23
. 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 a
decline or volatility in our stock price.
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 March 15, 2001, our Rule 144 Affiliates and affiliated eye care
professionals owned approximately 53% 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 who were also
stockholders as of our initial public offering in August 1999 have entered into
lock-up agreements with our underwriters that subject any sale of common stock
through August 18, 2001, to volume limitations. 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.
50% 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 March 15, 2001, there were 24,698,640 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. Our affiliated eye care professionals who were also stockholders
as of our initial public offering in August 1999 have entered into lock-up
agreements with the Company's underwriters that restrict their ability to sell
our common stock. These lock-up agreements limit the volume of shares an
affiliated eye care professional can sell until August 19, 2001. Until August
19, 2001, an affiliated eye care professional cannot, without the written
consent of Credit Suisse First Boston, sell in any ninety-day period an amount
greater than the lesser of 40,000 shares or 10% of the amount of common stock
beneficially owned by such individual.
As of March 15, 2001, approximately 12.3 million shares of common stock held
in certificate form are subject to these lock-up agreements. There may be
additional shares of common stock owned by our affiliated eye care
professionals that are subject to these lock-up agreements that are held in
"street name."
24
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.
If our common stock is delisted from the Nasdaq National Market, the
liquidity, visibility and price of our common stock may decrease
Since our initial public offering our common stock has been listed on the
Nasdaq National Market (NNM). Shares of our common stock could be delisted from
the NNM if we fail to satisfy the continued listing requirements of the NNM,
including a minimum bid price of $1.00. If our common stock is delisted from
the NNM, we would be forced to list our common stock on the OTC Bulletin Board
or some other quotation medium, depending on our ability to meet the specific
listing requirements of those quotation systems. If this happens, an investor
might find it more difficult to buy and sell, or to obtain accurate price
quotations for, shares of our common stock. This lack of visibility and
liquidity could further decrease the price of our common stock. In addition,
delisting from the NNM might negatively impact our reputation and, as a
consequence, 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, 2000, we had $26.2
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 plus applicable borrowing margin ranging from 0 to 0.75% or LIBOR plus a
range from 1.5% to 2.25%, varying upon our ability to meet financial covenants.
We do not use any derivative financial instruments relating to the risk
associated with changes in interest rates.
Item 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.
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 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 2001 Annual Meeting
of Stockholders (the "2001 Proxy Statement").
Item 11. Executive Compensation
The information in response to this item is incorporated by reference from
the "Executive Compensation" section of the 2001 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 2001 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 2001 Proxy
Statement.
25
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 Amended and Restated 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
10.8++ $50,000,000 Credit Agreement dated as of June 28, 2000
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
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP
--------
+ Incorporated by reference to the corresponding Exhibit of the
Registrant's Registration Statement on Form S-1 (Reg.
No. 333-79271).
++ Incorporated by reference to the corresponding Exhibit of the
Registrant's Form 10-Q filed with the Securities and Exchange
Commission on August 14, 2000.
* 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 2000.
26
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, 2000 and 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2000. These
consolidated financial statements and the schedule referred to below 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
Our audits were 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 information has been subject to the auditing procedures applied in our
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 7, 2001
F-1
NOVAMED EYECARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, December 31,
ASSETS 2000 1999
------ ------------ ------------
Current assets:
Cash and cash equivalents.......................... $ 785 $ 1,828
Accounts receivable, net of allowances of $17,023
and $12,714, respectively......................... 23,287 14,501
Due from affiliated providers, net................. 878 1,931
Notes receivable from affiliated providers......... 3,225 342
Inventory.......................................... 3,651 3,427
Other current assets............................... 2,263 2,113
-------- -------
Total current assets............................. 34,089 24,142
Property and equipment, net.......................... 22,536 16,065
Intangible assets, net............................... 62,205 47,852
Other assets, net.................................... 2,083 193
-------- -------
Total assets..................................... $120,913 $88,252
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................... $ 5,432 $ 3,608
Accrued expenses................................... 4,680 4,662
Income taxes payable............................... -- 275
Current maturities of long-term debt............... 249 3,617
-------- -------
Total current liabilities........................ 10,361 12,162
-------- -------
Long-term debt, net of current maturities............ 26,187 196
-------- -------
Deferred income tax liability........................ 1,501 1,113
-------- -------
Commitments and contingencies
Stockholders' equity:
Series E Junior Participating Preferred Stock,
$0.01 par value, 1,912,000 shares authorized, none
outstanding at December 31, 2000 and 1999,
respectively...................................... -- --
Common stock, $0.01 par value, 81,761,465 shares
authorized, 24,679,357 and 24,159,199 shares
issued and outstanding at December 31, 2000 and
1999, respectively................................ 247 242
Additional paid-in-capital......................... 77,362 74,628
Retained earnings (deficit)........................ 5,255 (89)
-------- -------
Total stockholders' equity....................... 82,864 74,781
-------- -------
Total liabilities and stockholders' equity....... $120,913 $88,252
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
NOVAMED EYECARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
Years Ended December 31,
---------------------------
2000 1999 1998
-------- -------- -------
Net revenue:
Surgical facilities............................ $ 41,720 $ 31,223 $20,131
Management services............................ 70,759 54,321 36,053
Product sales and other........................ 23,159 15,599 7,545
-------- -------- -------
Total net revenue............................ 135,638 101,143 63,729
-------- -------- -------
Operating expenses:
Salaries, wages and benefits................... 50,733 37,437 25,266
Cost of sales and medical supplies............. 34,346 26,278 15,762
Selling, general and administrative............ 32,409 23,459 14,625
Depreciation and amortization.................. 7,582 4,912 3,333
Compensation expense related to stock options.. -- 2,690 --
-------- -------- -------
Total operating expenses..................... 125,070 94,776 58,986
-------- -------- -------
Income from operations....................... 10,568 6,367 4,743
-------- -------- -------
Other (income) expense:
Interest expense............................... 1,915 1,513 1,546
Interest income................................ (137) (214) (273)
Minority interests in earnings of consolidated
entities...................................... -- -- 132
Other.......................................... -- (39) (32)
Discount to initial public offering price upon
the exchange of subordinated notes for common
stock......................................... -- 2,425 --
-------- -------- -------
Total other expense.......................... 1,778 3,685 1,373
-------- -------- -------
Income before income taxes....................... 8,790 2,682 3,370
Provision for income taxes....................... 3,446 1,808 1,664
-------- -------- -------
Net income....................................... 5,344 874 1,706
Less--Accretion of Series C and Series D
convertible preferred stock..................... -- (2,035) (739)
-------- -------- -------
Income (loss) available