information technology, administrative and financial services to these practices in
exchange for a management fee. One practice is an optometric practice with an optical retail store located in the Chicago market. The other practice is
primarily an ophthalmology practice with multiple locations in Georgia.
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 our principal operating subsidiary. In May 1999, NovaMed Holdings Inc. reincorporated as a Delaware corporation
and changed its name to NovaMed Eyecare, Inc. In August 1999, we consummated our initial public offering of common stock. On March 26, 2004, we changed
our name to NovaMed, Inc. We also changed the name of one of our principal operating subsidiaries from NovaMed Eyecare Services, LLC to NovaMed
Management Services, LLC.
Information Available
Our corporate headquarters are located at 980 North
Michigan Avenue, Suite 1620, Chicago, Illinois 60611, and our website is www.novamed.com. We file annual, quarterly, and current reports, proxy
statements, and other documents with the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934 (the
“Exchange Act”). The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth
Street, NW, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding
issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at
http://www.sec.gov.
We also make available free of charge on or through
our Internet website (http://www.novamed.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and,
if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we
electronically file such materials with, or furnish them to, the SEC.
Discontinued Operations
In October 2001, we announced our intentions to
discontinue our management services business. In assessing our overall business, our Board of Directors determined that we should focus our business
strategy primarily on the acquisition, development and operation of surgical facilities. Our surgical facilities segment was historically more
efficient than our other business segments, requiring relatively lower operating costs and producing our highest operating margins. In reviewing our
management services business, our Board determined that, although the segment had been historically profitable, the returns did not justify the high
overhead and capital spending necessary to operate the business. Beginning in the third quarter of 2001, we reflected the management services business
as discontinued operations in our financial statements.
We completed our discontinued operations plan in
December 2003 when we divested our last physician practice remaining in discontinued operations. The only matters remaining in our discontinued
operations reserves on our consolidated financial statements relate to any ongoing commitments that we have with respect to these discontinued business
operations. These commitments primarily include ongoing office lease obligations (to the extent we have been unable thus far to negotiate subleases or
early lease terminations) and severance obligations. From December 2001 to December 2003, we negotiated and closed 19 divestiture transactions in which
we: (a) terminated or assigned the service agreement with our affiliated practices; (b) terminated or transferred all employees providing services at
these practice locations; (c) closed or relocated our regional business offices; (d) sold practice-based assets including fixed assets, equipment and
accounts receivable; and (e) terminated or transferred certain corporate employees who provided services primarily to the management services
business.
From the 19 divestiture transactions that we
completed, we have received in the aggregate as of March 15, 2004, approximately $18.2 million in cash proceeds, promissory notes under which
approximately $800,000 of principal remains payable to us in installments over periods ranging from one to five years, and approximately 2.7 million
shares of our common stock. In addition, certain of the buyers assumed various liabilities, including equipment and office leases. As part of these
transactions, we generally required our former affiliated physicians
4
to enter into multi-year restrictive covenants precluding them from owning and
operating ASCs and other licensed surgical facilities. In addition, depending on the particular characteristics of the affiliated practice, we entered
into multi-year optical products supply agreements and multi-year refractive service agreements. Under these agreements, we are continuing to provide
services to these practices from our continuing business segments. Under our refractive service agreements, we have contracted with these practices to
be their exclusive provider of current and future refractive technology. With our optical products supply agreements, our optical products purchasing
organization and optical laboratories are the primary providers of optical products and supplies to these entities.
In addition to our divestiture transactions, we also
sold minority equity interests in certain of our existing ASCs to various physician-owners of our former affiliated practices. During 2003, we sold
minority interests in four ASCs in exchange for approximately $1.9 million in cash and 261,000 shares. In early 2004, we sold minority interests in
another ASC to various physicians in the local marketplace. With these minority interest sales, we have now sold minority interests in 10 of our ASCs
since January 1, 2002. In return, we received in the aggregate approximately $4.9 million in cash proceeds and approximately one million shares of our
common stock.
Industry Overview
Ambulatory Surgery Center Industry
The term “ambulatory surgery” refers to
procedures performed on a nonhospitalized patient who is able to return home the same day. Since the inception of outpatient surgery centers in the
early 1970s, the ambulatory surgery center industry has grown consistently, with 3,644 ASCs in business in the United States as of February 2003
according to Verispan, L.L.C., an independent health care market research and information firm. Improved surgical techniques and technologies,
including improved anesthesia techniques, have contributed to the expansion of surgical procedures that can be performed in an ASC. According to
Verispan, L.L.C., an estimated 7.8 million surgeries were projected to be performed in the U.S. at ASCs in 2003, up an estimated 8.3% from 2002.
Ophthalmology is the largest single type of outpatient surgery performed in ASCs, representing approximately 27% of all ASC surgeries performed in
2002. Eye surgery is performed in approximately 50% of all ASCs.
We believe that the convenience and efficiencies
offered by an ASC setting have also contributed to the growth in ASC procedures. We believe that many physicians prefer an ASC to a hospital because of
greater scheduling flexibility, faster turnaround time between cases and more efficient nurse staffing. Patients prefer the experience of a surgical
facility dedicated to their specialized surgery that is free from disruptions or scheduling conflicts that often arise in hospitals due to emergency
procedures or more complex surgical procedures that run longer than expected. Moreover, we believe third party payors recognize the cost-effective
benefits of ASCs.
Cataract Surgery. Cataract surgery
is currently the most widely performed surgical procedure in the U.S., with an estimated 2.8 million cataract surgeries in 2003, an increase of
approximately 3% over 2002. 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. 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 vast majority of cataract surgery patients being over the age of 65, the Medicare program has been the primary source of
reimbursement for cataract surgery providers. According to the U.S. Department of Health and Human Services, approximately 36 million people in the
U.S. are age 65 or older. By 2010, this age group is expected to reach approximately 40 million.
Vision Correction
Surgery. According to the National Eye Institute, an estimated 150 million people in the U.S. use eyeglasses or contact lenses to
correct refractive errors. Refractive errors are optical defects that result in light not being properly focused on the eye’s retina. 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 errors are:
• |
|
myopia, commonly referred to as nearsightedness, which is caused
by a steepening of the cornea, resulting in the blurring of distant objects |
5
• |
|
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 some of these common refractive errors 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.
Although the number of laser vision correction procedures
performed in the U.S. grew rapidly between 1996 and 2000, the number of annual procedures has declined over the past three years. In 2003,
ophthalmologists performed an estimated 1.15 million laser vision correction surgery procedures in the U.S., representing a decrease of approximately
2% from 2002.
Optical Products and Services Industry
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 as described above. 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.
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. Eyeglass frames are typically sold
through retail optical outlets located in optometrist and ophthalmologist clinics, as well as through retail stores.
Our Business Model
With the divestiture of our management services
business behind us, we are now focused primarily on acquiring, developing and operating ASCs within new and existing markets. We believe that our
experience in operating ASCs, when coupled with our management services experience in working with doctors, will provide our physician-partners with an
efficient operating environment to maximize quality patient care.
Surgical Facilities
As of March 15, 2004, we own and operate 17 ASCs,
each of which is a state-licensed and Medicare-certified ASC focused primarily on eye care procedures. Ophthalmologists perform cataract, laser vision
correction and other eye related surgical procedures in our ASCs. We generally own and operate our surgical facilities through joint ownership
arrangements in which we own a majority interest in the facility and minority equity interests are held by physicians living in the ASC’s local
community. These arrangements are principally structured as limited liability companies with one of our subsidiaries serving as the manager of the
entity. In certain instances, we may own the facility through a limited partnership with one of our subsidiaries serving as the general partner.
Currently, we own majority equity interests in 14 of our ASCs. We wholly own the remaining three ASCs.
6
In addition to owning and operating ASCs, we also
are parties to laser services agreements pursuant to which we provide excimer lasers and various services to ophthalmologists for their use in
performing laser vision correction surgery. In response to the declining demand for laser vision correction surgery, during 2002 and 2003 we closed 10
laser vision correction centers and restructured the manner in which we provided this equipment and these services to minimize our fixed costs. Our
excimer lasers are either located in our ASCs or provided to physicians for use in their medical practices through these laser services
agreements.
We have a nonexclusive supply agreement with Alcon
Laboratories, Inc. pursuant to which we can procure and utilize excimer lasers and other equipment manufactured by Alcon. The agreement sets forth
pricing terms for our APEX/Infinity lasers, as well as the procurement and pricing terms for Alcon’s most technologically advanced laser, the
LADARVision System. During the term of this agreement, which expires December 31, 2006, 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, 2004, we
have eight LADARVision Systems covered by the agreement. 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 U.S. Food and Drug Administration (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.
Product Sales
We own and operate an optical laboratory business
that specializes in surfacing, finishing and distributing corrective eyeglass lenses. Our laboratories have in excess of 350 active
customers, including ophthalmologists, optometrists, opticians and optical retail chains. Our optical products purchasing organization allows eye care
professionals to purchase optical products through us from more than 100 suppliers. We process consolidated monthly billing for over 1,500 customers
that utilize our purchasing organization. Customers of these businesses include our former affiliated doctors who are a party to multi-year optical
supply agreements with us pursuant to which our group purchasing organization and optical laboratories are the primary providers of optical products
and supplies to these doctors. Generally, these supply agreements will expire between March 2007 and May 2009, and the product sales revenue generated
from these customers in 2003 constituted less than three percent of our total product sales revenue.
In addition, our marketing products and services
business provides eye care professionals with a range of products and services including brochures, videos, advertising and website design, education
and training programs, and consulting services.
We also have a long-term service agreement with an
optometric practice located in Illinois. The optometric practice also has a retail optical outlet that sells eyeglasses and other products to patients.
We provide all of the services, facilities and equipment necessary to operate this optometric practice under a 25-year service agreement. The services
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 in recruiting additional doctors |
• |
|
all administrative and support services |
• |
|
information technology services |
Other
We have a 40-year service agreement in place with an
ophthalmology practice with multiple locations in Georgia. This service agreement also covered a practice location in Tennessee during 2003; however,
we sold our practice operations in Tennessee effective as of February 1, 2004. We provide all of the services, facilities and
7
equipment necessary to operate this medical practice, including services identical
in nature to those described above with respect to our Illinois affiliated optometric practice. We also have a five-year administrative services
agreement with a former affiliated practice under which we provide limited administrative and financial services to the practice.
Our Growth Strategy
Surgical Facilities
We are focused on acquiring, developing and
operating ASCs. Currently, all of our ASCs provide primarily eye surgical services, but we have started to introduce other specialties such as pain
management and podiatry in some of our centers. Although we intend to continue to pursue the acquisition and development of eye care ASCs, we are also
pursuing the acquisition and development of ASCs in other specialties. The key elements of our growth strategy are:
• |
|
Acquiring majority equity interests in ASCs in partnership with
physician-owners; |
• |
|
Developing newly constructed ASCs through joint ownership
arrangements with physicians; and |
• |
|
Increasing the revenue and profitability of our existing
ASCs. |
Acquiring Majority Interests in
ASCs
We have a development staff that is responsible for
identifying, evaluating and negotiating the acquisition of majority interests in ASCs in new or existing markets. In certain instances, we may also
consider acquiring a minority, rather than a majority, equity interest. The acquisition of a well-established, single-specialty ASC is an attractive
means of entry into a new market, particularly in states that require a certificate of need, or CON, for development. In analyzing potential
transactions, the evaluation of our prospective doctor-partners is a critical factor. We recognize that the success of the targeted ASC is tied
directly to the success of our doctor-partners and their practices. We believe our management services experience greatly enhances our doctor
evaluation process.
We also assess the target facility’s potential
for future growth. We identify opportunities to add new doctors or surgical procedures, or to improve managed care participation. We also examine the
opportunities to reduce expenses through improved staff efficiency, better doctor scheduling and reduced supply costs. Our development staff and
operations personnel work closely to formulate a growth strategy for each newly acquired facility to maximize our return on
investment.
We currently intend to finance our future
acquisitions of equity interests in ASCs using our existing cash balance, cash generated from our operations and amounts borrowed under our credit
facility. We renegotiated our credit facility during 2003, and our new facility expires on June 30, 2006.
Developing Newly Constructed
ASCs
Our development staff is also responsible for
identifying potential opportunities to build new ASCs with physician partners. These projects involve partnering with one or more physicians in a local
community that is either underserved from a facility standpoint, or involve physicians who don’t have the resources, productivity or expertise to
construct a facility on their own and need a corporate partner to help finance, structure and oversee the project. Generally, development of a new ASC
can be an attractive alternative in states that do not require a CON to build a new center. During 2003, we opened a new ASC in Missouri that we
developed with one of our physician-partners. This ASC is licensed as a multi-specialty facility but is presently focused primarily on eye care
procedures. During 2003, we also began developing with two new physician partners an ASC specializing in pain management procedures. This center is
awaiting state licensure approval and has not yet opened as of March 15, 2004.
Increasing Revenue and Profitability of our
Existing ASCs
The revenue generated by our ASCs is driven by the
surgical procedures performed by physicians. Revenue growth in our existing ASCs will be derived from an increase in surgical procedures performed at
each facility, whether this increase is from the existing physicians or new physicians utilizing the facility. All of our ASCs currently have the
capacity to handle additional procedures. Given this capacity, we attempt to introduce the benefits
8
of our facilities to new doctors who may be using other less efficient and
convenient facilities. We believe the efficiency and convenience of an ASC, and the opportunity to work in facilities affiliated with a national ASC
operator with significant management expertise, are appealing to physicians and their patients and provides a more attractive setting than hospitals.
We also work with our physicians in identifying new procedures, technologies or equipment to integrate into our facilities and expanding the scope of
surgical services available in a cost-effective manner. Moreover, with a substantial portion of our ASC revenue derived from government and private
third party payors, we are continuously evaluating and attempting to increase the levels of our managed care panel participation.
With our existing centers that currently provide
predominantly eye-related surgical services, we are also exploring efficient ways to add new surgical specialties. During 2003, for example, we added
pain management procedures to one of our ASCs. We believe pain management and podiatry are attractive specialties that we can add to some of our
existing ASCs in an effort to increase capacity in a relatively cost-effective manner. We are often required to get state licensure approval to add
other specialties to our existing centers. The likelihood of our success in receiving these approvals will vary by state.
Eleven of our 17 ASCs are currently accredited by
the Accreditation Association for Ambulatory Health Care, or AAAHC. We believe that many managed care panels use AAAHC accreditation as a quality
benchmark. Because some managed care panels do not contract with a facility that is not accredited, we believe our emphasis on having our facilities
accredited in certain competitive managed care markets will maximize our managed care panel participation and also reflects our commitment to providing
high quality patient care.
Staffing and medical supply costs are generally an
ASC’s two largest expense categories. We analyze staffing schedules and work with physicians to schedule surgeries in a manner that maximizes
staff efficiency and optimizes staffing costs. We also have negotiated purchasing contracts with many of our largest vendors and we educate our doctors
on lower cost supply alternatives that still maintain high patient care standards.
Product Sales
We believe there are opportunities to grow our
optical products and services business by adding ophthalmologists and optometrists as customers, as well as offering a broader range of products and
services to our existing customer base.
Competition
Surgical Facilities
In acquiring and developing ASCs, we compete with
both corporations and physicians. There are several publicly held and private companies actively engaged in the acquisition, development and operation
of ASCs. Some 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 are larger,
publicly held companies that have subsidiaries or divisions engaged in this business. Many of these competitors have greater resources than us. Our
primary competitors in acquiring, owning and operating ASCs are AmSurg Corp., United Surgical Partners International, Inc., HealthSouth Corporation and
Symbion, Inc.
Product Sales
Our two 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 with suppliers.
9
Other
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 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.
Employees
As of March 15, 2004, we had approximately 341
employees, 244 of whom are full-time employees. We are not a party to any collective bargaining agreements and we consider our relations with our
employees to be good.
Many of our ASCs are located adjacent to a physician
practice. In a few instances, our ASCs may lease from the physician practice some or all of the individuals who provide services in the ASC on our
behalf. This is typically only done when the ASC may provide surgical services on a limited schedule. This leasing model allows us to staff these
centers in a more cost-effective manner.
Governmental Regulation
As a participant in the health care industry, our
operations 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.
We believe our business practices comply in all
material respects with applicable federal, state and local laws and regulations. If the legal compliance of any of our activities were challenged,
however, we might 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 might face a variety of adverse consequences including losing our ASC licenses,
losing our 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. 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 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, repurchase minority equity interests in our ASCs that are
owned by physicians, 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 could have a material adverse effect on our business, financial condition and results of
operations.
The following is a summary of some of the health
care regulatory issues affecting our operations and us.
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 or state programs including Medicare or Medicaid.
10
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 within a safe harbor. However, some aspects of our business either do not meet the
prescribed safe harbor standards, or relate to practices for which no safe harbor standards exist. 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, specifically. As of February 1, 2004 we
co-own 14 of our ASCs with one or more physicians, and we will likely co-own with physicians most of the ASCs that we will acquire in the future. We
will also likely be selling interests in our existing wholly-owned ASCs to physicians in the near- to intermediate-term. It is unlikely that our
co-ownership will meet all of the parameters of the general investment interest safe harbors or the ASC investment interest safe harbors. As discussed
above, however, 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 to the
greatest extent possible.
The applicable regulatory authorities have provided
limited guidance regarding ASC ownership arrangements that are permissible under the anti-kickback statute. Based on the guidance that is available, we
believe that our joint ownership complies with the anti-kickback law based on, among other things, the following factors: all of the jointly owned ASCs
are Medicare certified; patients referred to an ASC by an investor are informed of the referring physician’s investment interest in the ASC; the
terms on which an investment interest in the ASC is offered to an investor are not related to the previous or expected volume of referrals or services
by, or other business with, the investor; neither any of the investors (including us) nor the ASC entity will loan money to any investors or guarantee
debt of any investors incurred to purchase the investment interest; the return on investment in the ASC is directly proportional to the investors’
investment interests; the ASCs treat federal health program beneficiaries in a non-discriminatory manner; and Medicare-recognized surgical procedures
account for a significant portion of the investor-physicians’ medical practice income.
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. The term “designated
health service” does not include surgical services. Physicians do not currently refer to our ASCs for the provision of “designated health
services” that are not otherwise excepted or protected under the Stark Law.
The Stark law does not prohibit physician ownership
or investment interests in ASCs to which they refer patients. The Centers for Medicare and Medicaid Services clarified this in the Phase I regulations
interpreting the Stark law by providing that services that would otherwise constitute a “designated health service,” but that are paid by
Medicare as part of composite 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, or another service or item that would otherwise qualify as a “designated health service,” is included in an
ASC composite payment rate, the IOL (or other such item or service) will not be considered to be a “designated health
service.”
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.
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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 we must use when
conducting certain health care transactions and activities. The effective date of these final rules was October 16, 2000. Compliance with these rules
was required by October 16, 2002, but by filing an extension plan by October 16, 2002, we extended this compliance date to October 16, 2003 for our
ASCs. Notwithstanding these deadlines, CMS announced on September 23, 2003 that it would establish a contingency plan for accepting non-standard
transactions after October 16, 2003. This contingency plan remains in effect, however it was modified in February 2004 to state that providers
submitting non-standard Medicare claims as of July 2004 can be expected to wait an additional 13 days for payment of each such claim. Our ASCs are
utilizing standard transactions whenever possible and stand ready to convert to standard transactions with all payors as such payors become ready, or
to utilize paper claims in limited circumstances, all in compliance with HIPAA.
On December 28, 2000, as modified on May 31, 2002
and August 14, 2002, the DHHS published final rules addressing “Standards for Privacy of Individually Identifiable Health Information” under
HIPAA’s administrative simplification provisions. Compliance with these rules was required by April 14, 2003. These rules create substantial
compliance issues for all “covered entities” — which include health care providers, health plans, and health care clearinghouses —
that engage in regulated transactions and activities. Operations of our ASCs are covered by the final rules. We believe our ASCs are in substantial
compliance with these final rules.
Final rules addressing the “Security
Standards” under HIPAA’s administrative simplification provisions were published on February 20, 2003. Our ASCs must comply with these
regulations by April 21, 2005. We are still in the process of determining what impact these rules will have on our operations.
On January 23, 2004, DHHS published the final rule
on “Standard Unique Health Identifiers for Health Care Providers.” Under this final rule, all HIPAA covered entities — which includes
our ASCs — must apply for a National Provider Identifier (NPI) in order to be able to transmit any health information in electronic form.
Application may be made beginning on, but not earlier than, May 23, 2005. As this final rule was issued only recently, we do not yet know the time or
expense that we can expect when applying for NPIs.
Violations of HIPAA’s administrative
simplification provisions can result in civil penalties of up to $25,000 per person per year for each violation or 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 are required to obtain and maintain licenses from the state departments of health in states where we open, acquire
and operate ASCs. We believe that we have obtained and that we maintain the necessary licenses in states where licenses are required. With respect to
future expansion, we cannot assure you that we will be able to obtain the required licenses without unreasonable expense or delay. In addition, we
cannot assure you that we will be able to maintain licenses for all of our operating ASCs. We believe our ASCs are in compliance with all applicable
state licensure requirements, but we cannot guaranty that the state departments of health will continue to view our facilities as being in
compliance.
12
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 our future development of new ASCs or expansion of existing ASCs, 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 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 with which the providers have a compensation relationship. In some states, these
restrictions apply regardless of the patient’s source of payment.
State Privacy
Laws. Numerous states have enacted privacy laws that have similar objectives to the Federal HIPAA privacy regulations. These
laws, which vary from state to state, require that certain protective measures be taken in connection with the disclosure of a patient’s
identifying information.
Corporate Practice of
Medicine. A number of states have enacted laws that prohibit, or have common law that prohibits, 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. Application
of the corporate practice of medicine prohibition varies from state to state. Although we neither employ physicians nor provide professional medical
services, we continue to provide services to physicians in connection with their performance of surgical procedures through laser services agreements
and through our remaining management services agreements. 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, 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 these eye care professionals and there is a possibility that some provisions of our 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 only prohibit fee splitting in
return for referrals. To the extent any of our contractual arrangements are construed by a court or enforcement agency to violate the
jurisdiction’s fee-splitting laws, we may be required to redesign or reformulate our arrangements and there is a possibility that some provisions
of our agreements may not be enforceable.
Excimer Laser Regulation
Medical devices, including the excimer lasers used
in our ASCs, are subject to regulation by 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 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.
13
Government Regulation — Management Services
Our management services business and the operations
of our affiliated providers are also subject to extensive and continuing regulation by governmental entities at the federal, state and local levels.
The following is a summary of the health care regulatory issues affecting our management services business, both with respect to our affiliated
providers and us:
Federal Law
Anti-Kickback
Statute. As discussed above, there are safe harbor regulations to the federal anti-kickback statute. When possible, we have
attempted to structure our management services business and our relationships with our affiliated providers within a safe harbor. Some aspects of our
management services 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 exist. 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.
Self-Referral Law. Our
affiliated providers provide limited categories of designated health services, specifically, diagnostic radiology services, including A-scans and
B-scans, and prosthetic devices, including eyeglasses and contact lenses furnished to patients following cataract surgery. We believe the provision of
these designated health services meets with an exception to the Stark Law. In addition, compensation arrangements between our affiliated providers and
their employers have historically been structured to comply with the Stark Law.
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.
Health Insurance Portability and Accountability
Act. The operations of our affiliated providers are covered by HIPAA. We have taken actions to assist our remaining
affiliated providers with their HIPAA compliance efforts.
State Law
State Privacy
Laws. State health information privacy laws may also apply to the activities of our affiliated providers. There is very
little guidance regarding the application of these state privacy laws. We cannot be sure that the privacy measures taken by our affiliated providers
will be construed as complying with these laws. In the event the privacy measures taken by these professionals are deemed not to comply with a
particular state’s health privacy laws, we may need to incur significant time, effort and expense to establish compliance.
Corporate Practice of Medicine
Laws. Although we neither employ doctors nor provide professional medical services, to the extent any portion of the
comprehensive management services that we provide under our service agreements with our affiliated providers 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 providers and there is a
possibility that some provisions of our service agreements may not be enforceable.
Fee-Splitting Laws. We
believe our management fee arrangements with our affiliated providers 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.
14
Item 2. Properties
We do not own any real property. We lease space for
our corporate offices in Chicago, our ASCs and our optical services operations. As part of our management services business, we also continue to lease
the clinics of our affiliated providers. In some cases, these facilities are leased from related parties. See “Item 13 — Certain
Relationships and Related Transactions.” Our corporate offices in the Chicago metropolitan area currently consist of 8,150 square feet in downtown
Chicago, and 5,923 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 and eye care clinics are located in medical
complexes, office buildings or free-standing buildings. The square footage of these offices range from 500 square feet to approximately 15,000 square
feet, and the terms of these leases have expiration dates ranging from January 2005 to March 2012. Depending on state licensing and certificate of need
issues, expanding the space in any of our ASCs may require state regulatory approval.
The following tables list the locations of our
ASCs:
Location
|
|
|
|
Number of
Operating Rooms
|
|
Our Ownership
Percentage
|
Colorado
Springs, CO |
|
|
|
|
2 |
|
|
|
51 |
% |
Atlanta,
GA |
|
|
|
|
2 |
|
|
|
100 |
% |
Columbus,
GA |
|
|
|
|
3 |
|
|
|
100 |
% |
Chicago,
IL |
|
|
|
|
1 |
|
|
|
79.5 |
% |
Maryville,
IL |
|
|
|
|
1 |
|
|
|
80 |
% |
River Forest,
IL |
|
|
|
|
2 |
|
|
|
75 |
%(1) |
Merrillville,
IN |
|
|
|
|
2 |
|
|
|
51 |
%(1) |
New Albany,
IN |
|
|
|
|
2 |
|
|
|
80 |
%(1) |
Overland Park,
KS |
|
|
|
|
3 |
|
|
|
51 |
%(1) |
Thibodaux,
LA |
|
|
|
|
1 |
|
|
|
60 |
% |
Florissant,
MO |
|
|
|
|
1 |
|
|
|
100 |
%(1) |
Kansas City,
MO |
|
|
|
|
2 |
|
|
|
80 |
% |
Kansas City,
MO |
|
|
|
|
2 |
|
|
|
51 |
% |
St. Joseph,
MO |
|
|
|
|
1 |
|
|
|
80 |
% |
Chattanooga,
TN |
|
|
|
|
1 |
|
|
|
77.5 |
% |
Tyler,
TX |
|
|
|
|
2 |
|
|
|
60 |
% |
Richmond,
VA |
|
|
|
|
1 |
|
|
|
80 |
% |
(1) |
|
All or a portion of our existing ownership interests in these
facilities may potentially be sold to one or more physicians pursuant to option agreements if the physician(s) elect to exercise their option to
purchase, or in certain instances we elect to sell, the interests. See “Item 7 — Liquidity and Capital Resources.” |
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 2003.
15
PART II
| Item 5. |
|
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities |
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, 2003:
|
|
|
|
|
|
|
|
|
|
|
First
Quarter |
|
|
|
$ |
1.44 |
|
|
$ |
1.05 |
|
Second
Quarter |
|
|
|
$ |
1.52 |
|
|
$ |
0.97 |
|
Third
Quarter |
|
|
|
$ |
2.40 |
|
|
$ |
1.20 |
|
Fourth
Quarter |
|
|
|
$ |
4.09 |
|
|
$ |
1.91 |
|
|
Fiscal year
ending December 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
First
Quarter |
|
|
|
$ |
1.45 |
|
|
$ |
0.52 |
|
Second
Quarter |
|
|
|
$ |
1.13 |
|
|
$ |
0.67 |
|
Third
Quarter |
|
|
|
$ |
1.55 |
|
|
$ |
0.65 |
|
Fourth
Quarter |
|
|
|
$ |
1.75 |
|
|
$ |
1.11 |
|
On March 15, 2004, the last reported sale
price of our common stock was $4.529, and there were approximately 364 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. The quotations listed above do not reflect
retail mark-ups or commissions and may not necessarily represent actual transactions.
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.
16
Item 6. Selected Financial Data
The consolidated statement of operations data set
forth below for the years ended December 31, 2003, 2002 and 2001 and the balance sheet data at December 31, 2003 and 2002, 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, 2000 and 1999 and the consolidated balance sheet data at December 31, 2001, 2000 and 1999 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,
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
1999
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
(in thousands, except per share and other data)
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue |
|
|
|
$ |
55,506 |
|
|
$ |
53,773 |
|
|
$ |
53,440 |
|
|
$ |
50,987 |
|
|
$ |
36,541 |
|
Net income
(loss) from continuing operations (a) (b) |
|
|
|
$ |