Table of Contents

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2009

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to         

 

COMMISSION FILE NUMBER: 0-26625

 

NOVAMED, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

36-4116193

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

980 North Michigan Avenue, Suite 1620, Chicago, Illinois 60611

(Address of principal executive offices)

 

Registrant’s telephone, including area code: (312) 664-4100

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o  No o.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  o

 

Accelerated filer  x

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  o  No x

 

As of August 3, 2009, there were outstanding 23,048,784 shares of the registrant’s common stock, par value $.01 per share.

 

 

 



Table of Contents

 

NOVAMED, INC.

FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 2009

INDEX

 

PART OR ITEM

 

PAGE

Part I.

FINANCIAL STATEMENTS

 

3

Item 1.

Interim Condensed Consolidated Financial Statements (unaudited)

 

 

 

Condensed Consolidated Balance Sheets — June 30, 2009 and December 31, 2008

 

3

 

Condensed Consolidated Statements of Operations — Three and six months ended June 30, 2009 and 2008

 

4

 

Condensed Consolidated Statement of Stockholders’ Equity — Six months ended June 30, 2009

 

5

 

Condensed Consolidated Statements of Cash Flows — Six months ended June 30, 2009 and 2008

 

6

 

Notes to the Interim Condensed Consolidated Financial Statements

 

7

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

16

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

24

 

 

 

 

Item 4.

Controls and Procedures

 

24

 

 

 

 

Part II.

OTHER INFORMATION

 

25

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

25

Item 4.

Submission of Matters to a Vote of Security Holders

 

25

 

 

 

 

Item 6.

Exhibits

 

25

 

Signatures

 

26

 

2



Table of Contents

 

Part I.  FINANCIAL INFORMATION

 

Item 1.  Interim Condensed Consolidated Financial Statements (unaudited)

 

NOVAMED, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

 

 

June 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

(unaudited)

 

(adjusted, Note 1)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents, including $2,331 and $3,100 of restricted cash, respectively

 

$

2,996

 

$

4,875

 

Accounts receivable, net of allowances of $42,271 and $43,784, respectively

 

21,794

 

20,329

 

Notes and amounts due from related parties

 

471

 

471

 

Inventory

 

2,363

 

2,355

 

Prepaid expenses and deposits

 

1,321

 

1,624

 

Current tax assets

 

2,515

 

2,154

 

Total current assets

 

31,460

 

31,808

 

Property and equipment, net

 

20,314

 

20,526

 

Intangible assets, net

 

197,829

 

198,414

 

Other assets, net

 

577

 

673

 

Total assets

 

$

250,180

 

$

251,421

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

10,273

 

$

9,684

 

Accrued expenses and income taxes payable

 

6,783

 

6,706

 

Current maturities of long-term debt

 

52,097

 

3,282

 

Total current liabilities

 

69,153

 

19,672

 

Long-term debt, net of current maturities

 

8,325

 

67,747

 

Convertible subordinated debt, net of debt discount

 

59,130

 

56,819

 

Other long-term liabilities

 

380

 

549

 

Deferred income taxes

 

11,164

 

8,876

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

NovaMed, Inc. stockholders’ equity:

 

 

 

 

 

Series E Junior Participating Preferred Stock, $0.01 par value, 1,912,000 shares authorized, none outstanding at June 30, 2009 and December 31, 2008, respectively

 

 

 

Common stock, $0.01 par value, 81,761,465 shares authorized, 30,190,987 and 29,746,349 shares issued at June 30, 2009 and December 31, 2008, respectively

 

297

 

296

 

Additional paid-in-capital

 

112,862

 

111,225

 

Accumulated deficit

 

(7,311

)

(11,162

)

Accumulated other comprehensive loss

 

(63

)

(218

)

Treasury stock, at cost, 7,160,013 and 6,785,880 shares at June 30, 2009 and December 31, 2008, respectively

 

(18,828

)

(17,665

)

Total NovaMed, Inc. stockholders’ equity

 

86,957

 

82,476

 

Noncontrolling interests

 

15,071

 

15,282

 

Total equity

 

102,028

 

97,758

 

Total liabilities and equity

 

$

250,180

 

$

251,421

 

 

The notes to the interim condensed consolidated financial statements are an integral part of these statements.

 

3



Table of Contents

 

NOVAMED, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data; unaudited)

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

(adjusted,
Note 1)

 

 

 

(adjusted,
Note 1)

 

Net revenue:

 

 

 

 

 

 

 

 

 

Surgical facilities

 

$

33,024

 

$

29,072

 

$

64,915

 

$

56,487

 

Product sales and other

 

6,548

 

6,108

 

12,951

 

12,506

 

Total net revenue

 

39,572

 

35,180

 

77,866

 

68,993

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

11,841

 

10,734

 

23,859

 

20,965

 

Cost of sales and medical supplies

 

8,910

 

8,197

 

17,484

 

16,182

 

Selling, general and administrative

 

7,226

 

6,036

 

14,170

 

12,324

 

Depreciation and amortization

 

1,499

 

1,026

 

2,924

 

2,047

 

Total operating expenses

 

29,476

 

25,993

 

58,437

 

51,518

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

10,096

 

9,187

 

19,429

 

17,475

 

 

 

 

 

 

 

 

 

 

 

Interest (income) expense, net

 

2,082

 

1,995

 

4,266

 

3,941

 

Other (income) expense, net

 

(11

)

(5

)

1

 

15

 

Income before income taxes

 

8,025

 

7,197

 

15,162

 

13,519

 

Income tax provision

 

1,356

 

1,154

 

2,462

 

2,160

 

Income from continuing operations

 

6,669

 

6,043

 

12,700

 

11,359

 

Loss from discontinued operations

 

 

(37

)

 

(89

)

Gain on disposal of discontinued operations

 

 

 

 

95

 

Net income

 

6,669

 

6,006

 

12,700

 

11,365

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interests

 

4,547

 

4,237

 

8,849

 

7,980

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to NovaMed, Inc.

 

$

2,122

 

$

1,769

 

$

3,851

 

$

3,385

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to NovaMed, Inc.:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

2,122

 

$

1,806

 

$

3,851

 

$

3,379

 

Income (loss) from discontinued operations

 

 

(37

)

 

6

 

Net income attributable to NovaMed, Inc.

 

$

2,122

 

$

1,769

 

$

3,851

 

$

3,385

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share attributable to NovaMed, Inc.:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.09

 

$

0.07

 

$

0.17

 

$

0.14

 

Income from discontinued operations

 

 

 

 

 

Net income

 

$

0.09

 

$

0.07

 

$

0.17

 

$

0.14

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share attributable to NovaMed, Inc.:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.09

 

$

0.07

 

$

0.17

 

$

0.13

 

Income from discontinued operations

 

 

 

 

 

Net income

 

$

0.09

 

$

0.07

 

$

0.17

 

$

0.13

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

22,608

 

24,567

 

22,584

 

24,481

 

Dilutive effect of stock options and restricted stock

 

650

 

624

 

557

 

646

 

Diluted weighted average common shares outstanding

 

23,258

 

25,191

 

23,141

 

25,127

 

 

The notes to the interim condensed consolidated financial statements are an integral part of these statements

 

4



Table of Contents

 

NOVAMED, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Dollars in thousands, unaudited)

 

 

 

Common
Stock

 

Additional
Paid-In
Capital

 

Retained
Earnings
(Accumulated
Deficit)

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Treasury
Stock

 

Total NovaMed,
Inc.
Stockholders’
Equity

 

Noncontrolling
Interests

 

Balance, December 31, 2008 (adjusted, Note 1)

 

$

296

 

$

111,225

 

$

(11,162

)

$

(218

)

$

(17,665

)

$

82,476

 

$

15,282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

3,851

 

 

 

3,851

 

8,849

 

Unrealized gain on interest rate swaps

 

 

 

 

155

 

 

155

 

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

4,006

 

8,849

 

Shares issued - employee stock purchase plan

 

 

50

 

 

 

 

50

 

 

Stock options exercised

 

1

 

432

 

 

 

 

433

 

 

Repurchases of common stock

 

 

 

 

 

(1,126

)

(1,126

)

 

Restricted stock grants

 

 

 

 

 

(37

)

(37

)

 

Stock compensation expense

 

 

1,112

 

 

 

 

1,112

 

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

(9,648

)

Other changes to noncontrolling interests

 

 

 

 

 

 

 

341

 

Sale of noncontrolling interest

 

 

43

 

 

 

 

43

 

247

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2009

 

$

297

 

$

112,862

 

$

(7,311

)

$

(63

)

$

(18,828

)

$

86,957

 

$

15,071

 

 

The notes to the interim condensed consolidated financial statements

are an integral part of these statements.

 

5



Table of Contents

 

NOVAMED, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands; unaudited)

 

 

 

Six months ended
June 30,

 

 

 

2009

 

2008

 

 

 

 

 

(adjusted, Note 1)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

12,700

 

$

11,365

 

Adjustments to reconcile net income to net cash provided by operations, net of effects of purchase transactions—

 

 

 

 

 

Depreciation and amortization

 

2,924

 

2,053

 

Deferred income taxes

 

2,292

 

1,738

 

Stock-based compensation

 

1,112

 

1,145

 

Amortization of subordinated debt fees

 

321

 

325

 

Non-cash subordinated debt interest

 

2,049

 

1,875

 

Gain on sale of ASC

 

 

(61

)

Distributions to noncontrolling interests

 

(9,648

)

(7,959

)

Asset impairment charge

 

 

(34

)

Changes in operating assets and liabilities—

 

 

 

 

 

Accounts receivable

 

(639

)

(2,653

)

Inventory

 

(8

)

60

 

Other current assets

 

303

 

188

 

Accounts payable and accrued expenses

 

576

 

2,612

 

Other noncurrent assets

 

110

 

148

 

Net cash provided by operating activities

 

12,092

 

10,802

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Payments for acquisitions, net

 

(12

)

(326

)

Proceeds from sale of noncontrolling interests

 

290

 

 

Proceeds from sale of ASC

 

 

226

 

Purchases of property and equipment

 

(2,560

)

(2,816

)

Other

 

16

 

(898

)

Net cash used in investing activities

 

(2,266

)

(3,814

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Borrowings under revolving line of credit

 

27,500

 

1,700

 

Payments under revolving line of credit

 

(36,600

)

(1,700

)

Other long-term borrowings

 

130

 

1,847

 

Repurchase of common stock

 

(1,126

)

 

Proceeds from the issuance of common stock

 

95

 

412

 

Payments of other debt, debt issuance fees and capital lease obligations

 

(1,704

)

(724

)

Net cash (used in) provided by financing activities

 

(11,705

)

1,535

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(1,879

)

8,523

 

Cash and cash equivalents, beginning of period

 

4,875

 

6,382

 

Cash and cash equivalents, end of period

 

$

2,996

 

$

14,905

 

 

The notes to the interim condensed consolidated financial statements are an integral part of these statements.

 

6



Table of Contents

 

NOVAMED, INC. AND SUBSIDIARIES

NOTES TO THE INTERIM

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

(Dollars in thousands, except per share data; unaudited)

 

1.               GENERAL

 

Basis of Presentation:

 

The information contained in the interim consolidated financial statements and notes is condensed from that which would appear in the annual consolidated financial statements. Accordingly, the interim condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2008, filed by NovaMed, Inc. with the Securities and Exchange Commission on Form 10-K.  The unaudited interim condensed consolidated financial statements as of June 30, 2009 and for the three and six months ended June 30, 2009 and 2008, include all normal recurring adjustments which management considers necessary for a fair presentation.  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the entire fiscal year.

 

Recently Adopted Accounting Pronouncements:

 

Effective January 1, 2009, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Staff Position APB 14-1 (“FSP APB 14-1”), “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).”  FSP APB 14-1 applies to convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, when the conversion option does not need to be bifurcated and accounted for separately as a derivative instrument in accordance with FAS 133.

 

FSP APB 14-1 requires that issuers of convertible debt instruments that, upon conversion, may be settled fully or partially in cash, must separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Additionally, debt issuance costs are required to be allocated in proportion to the allocation of the liability and equity components and accounted for as debt issuance costs and equity issuance costs, respectively. FSP APB 14-1 requires retrospective application and, accordingly, the prior periods’ financial statements included herein have been adjusted.

 

In accordance with the provisions of FSP APB 14-1, the Company determined that the fair value of its Convertible Notes at issuance in 2007 was approximately $52,131, and designated the residual value of approximately $22,869 as the equity component. Additionally, the Company allocated approximately $1,825 of the $2,625 original Convertible Notes issuance cost as debt issuance cost and the remaining $800 as equity issuance cost.

 

The balances of the liability and equity components as of each period presented are as follows:

 

 

 

June 30,
2009

 

December 31,
2008

 

 

 

 

 

 

 

Liability component – debt balance

 

$

60,221

 

$

58,093

 

 

 

 

 

 

 

Unamortized debt issuance costs

 

(1,091

)

(1,274

)

 

 

 

 

 

 

Liability component – net carrying amount

 

$

59,130

 

$

56,819

 

 

 

 

 

 

 

Equity component

 

$

22,069

 

$

22,069

 

 

The components of interest expense for the three and six months ended June 30, 2009 and 2008 related to the Convertible Notes was recognized as follows:

 

7



Table of Contents

 

NOVAMED, INC. AND SUBSIDIARIES

NOTES TO THE INTERIM

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

(Dollars in thousands, except per share data; unaudited)

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Interest expense - coupon rate

 

$

188

 

$

188

 

$

375

 

$

375

 

 

 

 

 

 

 

 

 

 

 

Pre-FSP APB 14-1 debt issuance cost amortization

 

131

 

131

 

262

 

262

 

 

 

 

 

 

 

 

 

 

 

Imputed interest expense per FSP APB 14-1

 

1,081

 

992

 

2,128

 

1,954

 

 

 

 

 

 

 

 

 

 

 

Debt issuance cost allocated to equity per FSP APB 14-1

 

(40

)

(40

)

(79

)

(79

)

 

 

 

 

 

 

 

 

 

 

Total interest expense on Convertible Notes

 

$

1,360

 

$

1,271

 

$

2,686

 

$

2,512

 

 

The following table details the retrospective application impact on previously reported amounts:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2008 (1)

 

2008

 

2008 (1)

 

2008

 

 

 

 

 

(as adjusted)

 

 

 

(as adjusted)

 

 

 

 

 

 

 

 

 

 

 

Interest (income) expense, net

 

$

1,043

 

$

1,995

 

$

2,066

 

$

3,941

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

$

8,149

 

$

7,197

 

$

15,394

 

$

13,519

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,587

 

$

6,006

 

$

12,509

 

$

11,365

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to NovaMed, Inc.

 

$

2,350

 

$

1,769

 

$

4,529

 

$

3,385

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.09

 

$

0.07

 

$

0.18

 

$

0.13

 

 


(1) Reflects previously reported amounts adjusted for the adoption of SFAS No. 160 as described below.

 

Effective January 1, 2009, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements.”  SFAS No. 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements” (“ARB 51”) and establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the accounting for future ownership changes with respect to those subsidiaries.  This standard defines a noncontrolling interest, previously called a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent.  SFAS No. 160 requires, among other items, that a noncontrolling interest be included in the consolidated balance sheet within equity separate from the parent’s equity; consolidated net income to be reported at amounts inclusive of both the parent’s and noncontrolling interest’s shares and, separately, the amounts of consolidated net income attributable to the parent and noncontrolling interest all on the consolidated statements of income; and if a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be measured at fair value and a gain or loss be recognized in net income based on such fair value.  The Company applied the provisions of SFAS No. 160 retrospectively.  As a result, noncontrolling interests of $15,282 were reclassified from the mezzanine section to equity in the December 31, 2008 balance sheet.  Certain reclassifications have been made to prior period amounts to conform to the presentation of the current period under SFAS No. 160.

 

8



Table of Contents

 

NOVAMED, INC. AND SUBSIDIARIES

NOTES TO THE INTERIM

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

(Dollars in thousands, except per share data; unaudited)

 

Effective January 1, 2009, the Company adopted SFAS No. 141(R), “Business Combinations.” SFAS No. 141(R) contains a number of major changes affecting the allocation of the value of acquired assets and liabilities including requiring an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being excess value over the net identifiable assets acquired. This standard also requires the fair value measurement of certain other assets and liabilities related to the acquisition such as contingencies and research and development. In addition, acquisition-related costs must be expensed as incurred. In April 2009, the FASB issued Staff Position No. 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP FAS 141(R)-1”). FSP FAS 141(R)-1 amends and clarifies SFAS No. 141(R) regarding the initial recognition and measurement, subsequent measurement, accounting and disclosure of assets and liabilities arising from contingencies in a business combination. The provisions of SFAS No. 141(R) and the related FSP FAS 141 (R)-1 apply only to acquisition transactions completed in fiscal years beginning after December 15, 2008. The adoption of SFAS 141(R) and FSP FAS 141(R)-1 did not have a material impact on the Company’s Condensed Consolidated Financial Statements.  The future impact of the adoption of SFAS 141(R) and FSP FAS 141(R)-1 will be dependent on future acquisitions that the Company may pursue.

 

Effective January 1, 2009, the Company adopted FASB Staff Position FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”) which amends SFAS No. 142 and provides guidance for determining the useful life of a recognized intangible asset and requires enhanced disclosures so that users of financial statements are able to assess the extent to which the expected future cash flows associated with the asset are affected by the Company’s intent and/or ability to renew or extend the agreement. The adoption of FSP FAS 142-3 did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

 

Effective January 1, 2009, the Company adopted SFAS No. 161, “Disclosure About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.”  SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. The adoption of SFAS No. 161 did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

 

In June 2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. EITF 07-5 is effective for fiscal years beginning after December 15, 2008.  EITF 07-5 did not have an impact on the Company’s consolidated results of operations or financial condition.

 

Effective January 1, 2009, the Company adopted FASB Staff Position No. EITF 03-6-1 (“FSP EITF 03-06-01”), “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” This pronouncement establishes that unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities and shall be included in the computation of earnings per share under the two-class method. The adoption of this FSP did not have a material effect on the Company’s Condensed Consolidated Financial Statements.

 

Effective January 1, 2009, the Company adopted FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), with the exception of a one-year deferral of implementation for non-financial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  The significant categories of assets and liabilities included in the Company’s deferred implementation of SFAS 157, as provided by SFAS 157-2, are non-financial assets and liabilities initially measured at fair value in a business combination and impairment assessments of long-lived assets, goodwill and intangible assets.  The adoption of SFAS 157-2 did not have a material impact on the Company’s consolidated financial statements.

 

Effective June 30, 2009, the Company adopted FASB Staff Position No. 157-4, “Determining Fair Value When The Volume and Level of Activity For The Asset or Liability Have Significantly Decreased and Identifying Transactions That are Not Orderly” (“FSP FAS 157-4”), which provides additional guidance for estimating fair value in accordance with SFAS No. 157, “Fair Value Measurements,” when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly.  This standard did not have a material impact on the Company’s results of operations or financial condition.

 

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Table of Contents

 

NOVAMED, INC. AND SUBSIDIARIES

NOTES TO THE INTERIM

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

(Dollars in thousands, except per share data; unaudited)

 

Effective June 30, 2009, the Company adopted FASB Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”), which requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements.  This standard did not have a material impact on the Company’s results of operations or financial condition.

 

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events.”  This Statement sets forth: 1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; 2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and 3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This Statement is effective for interim and annual periods ending after June 15, 2009. The company adopted this Statement in the quarter ended June 30, 2009. This Statement did not impact the consolidated financial results.  The Company evaluated subsequent events through August 7, 2009 which was the day prior to the date the accompanying financial statements were issued.

 

Recently Issued Accounting Pronouncements:

 

In June 2009, the FASB issued FAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting.”  This standard represents the last numbered standard issued by the FASB under the old (pre-Codification) numbering system, and amends the GAAP hierarchy.  On July 1, 2009, FASB launched FASB’s new Codification (i.e. the FASB Accounting standards Codification).  The Codification supersedes existing GAAP for nongovernmental entities.  The Company expects to revise its financial statement disclosure in compliance with the new codification system effective with its third quarter ended September 30, 2009.

 

2.               STATEMENT OF CASH FLOWS - SUPPLEMENTAL

 

Supplemental cash information:

 

 

 

Six months ended June 30,

 

 

 

2009

 

2008

 

Interest paid

 

$

2,044

 

$

1,660

 

Income taxes paid

 

460

 

211

 

 

Non cash investing and financing activities:

 

During the first six months of 2008, the Company obtained equipment by entering into capital leases for $449.

 

3.               INVENTORY

 

Inventory consists primarily of surgical supplies used in connection with the operation of the Company’s ambulatory surgery centers (ASCs) and optical products such as eyeglass frames, optical lenses and contact lenses.  Inventory is valued at the lower of cost or market, with cost determined using the first-in, first-out (FIFO) method.  The Company routinely reviews its inventory for obsolete, slow moving or otherwise impaired inventory and records a related expense in the period if such impairment is known and quantifiable.

 

Balances as of:

 

 

 

June 30,

 

December 31,

 

 

 

2009

 

2008

 

Surgical supplies

 

$

1,594

 

$

1,577

 

Optical products

 

694

 

690

 

Other

 

75

 

88

 

Total inventory

 

$

2,363

 

$

2,355

 

 

10



Table of Contents

 

NOVAMED, INC. AND SUBSIDIARIES

NOTES TO THE INTERIM

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

(Dollars in thousands, except per share data; unaudited)

 

4.               INTANGIBLE ASSETS

 

Goodwill balances by reportable segment are summarized in the table below:

 

 

 

Goodwill

 

 

 

 

 

Surgical
Facilities

 

Product
Sales

 

Other

 

Total

 

Other
Intangibles

 

Balance December 31, 2008

 

$

183,536

 

$

10,086

 

$

941

 

$

194,563

 

$

3,851

 

Acquisitions

 

 

 

 

 

 

Other

 

(409

)

 

 

(409

)

 

Amortization

 

 

 

 

 

(176

)

Balance June 30, 2009

 

$

183,127

 

$

10,086

 

$

941

 

$

194,154

 

$

3,675

 

 

5.               ACQUISITIONS AND DIVESTITURES

 

The Company generally acquires majority equity interests in ASCs through the purchase method of accounting.  The results of operations are included in the consolidated financial statements of the Company from the date of acquisition.  During the first six months of 2009 and 2008, the Company did not make any acquisitions.

 

During the first quarter of 2008, the Company recorded additional goodwill of $1,650 for one of its ASCs relating to the resolution of a contingency included in the original purchase agreement.  The Company paid cash of $907 during the first quarter of 2008 and recorded a liability for the remaining balance which was paid in July 2009.

 

In February 2008, the Company completed the sale of its 70% interest in the Thibodaux, Louisiana ASC.  The Company received proceeds of $226.  As a result, the Company adjusted its previously recorded loss on the sale of the ASC and recorded a pre-tax gain of $61 in the first quarter of 2008.

 

During the first six months of 2008, the Company paid additional purchase price and recorded additional goodwill of $350 relating to the acquisition of an optical products purchasing organization in December 2007.

 

6.               CONVERTIBLE SENIOR SUBORDINATED NOTES AND REVOLVING CREDIT FACILITY

 

Convertible Senior Subordinated Notes

 

In June 2007, the Company issued $75,000 aggregate principal amount of 1.0% convertible senior subordinated notes due June 15, 2012 (the “Convertible Notes”).  At June 30, 2009, the Company had $59,130 in convertible subordinated debt outstanding, net of debt discount.  As of June 30, 2009, the fair value of the $75,000 Convertible Notes was approximately $55,875, based on the level 2 valuation hierarchy under SFAS No. 157, “Fair Value Measurements.”  Effective January 1, 2009, the Company adopted the provisions of FSP APB 14-1 as further discussed in Note 1.  For further discussion about the Convertible Notes, see Note 11 in the Notes to Consolidated Financial Statements in the Company’s Annual Report filed on Form 10-K on March 16, 2009.

 

Revolving Credit Facility

 

At June 30, 2009, the Company had $48,000 of borrowings outstanding under its revolving credit facility with a weighted average interest rate of 2.6% and was in compliance with all of its covenants.  The Company’s credit facility expires in February 2010 and the Company is currently in discussion with its banks to extend the term. The maximum commitment available under the facility is the lesser of $125,000 or the maximum allowed under the calculated ratio limitations.  At June 30, 2009, the Company had approximately $76,100 of potential borrowing availability under its credit facility.  The credit agreement also includes an option allowing the Company to increase the maximum commitment available to $150,000 under certain conditions.  Interest on borrowings under the facility is payable at an annual rate equal to the Company’s lender’s published base rate plus the applicable borrowing margin ranging from 0.0% to 0.5% or LIBOR plus a range from 1.25% to 2.50%, varying depending upon the calculated ratios and the Company’s ability to meet other financial covenants.  In addition, a fee ranging from .20% to .25% is charged on the unused portion of the commitment.  The

 

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Table of Contents

 

NOVAMED, INC. AND SUBSIDIARIES

NOTES TO THE INTERIM

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

(Dollars in thousands, except per share data; unaudited)

 

maximum borrowing availability and applicable interest rates under the credit facility are calculated based on a ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization, all as more fully defined in the Company’s credit facility.   The credit agreement contains customary covenants that include limitations on indebtedness, liens, capital expenditures, acquisitions, investments and share repurchases, as well as restrictions on the payment of dividends.  Under the terms of the credit agreement, the Company is required to obtain the consent of its lenders for any acquisition exceeding $20,000 individually under certain conditions.  The weighted average interest rate on credit line borrowings during the three and six months ended June 30, 2009 was 3.0% and 3.4%, respectively.

 

During 2008, the Company’s Orlando (formerly Altamonte Springs), Florida ASC, of which it owns a 70% interest, entered into a $3,300 installment note which matures on December 31, 2015.  Interest is payable on the outstanding principal balance at the lender’s one month LIBOR rate, designated or published on the first day of each month, plus 2.5%.  This note financed the cost of relocating this ASC from Altamonte Springs, Florida to Orlando, Florida, which was completed in January 2009.  As of June 30, 2009, there was $3,064 outstanding under this note.

 

Effective August 1, 2006, NovaMed Eye Surgery Center of New Albany, LLC, of which the Company owns a 67.5% majority interest, entered into a $4,000 installment note which matures on August 1, 2013.  Interest is payable at the lender’s one month LIBOR rate, designated or published on the first of each month, plus 2.0%.  The ASC entered into a five-year interest rate swap agreement that effectively fixes the LIBOR rate on this debt at 5.51%.  The ASC has recognized the fair value of this interest rate swap as a long-term liability of approximately $94 at June 30, 2009.

 

The Company has two outstanding letters of credit issued to two of its optical products buying group vendors.  One letter of credit in the amount of $203 expires on September 30, 2009 and one letter of credit in the amount of $630 expires on March 31, 2010.  The outstanding letters of credit reduce the amount available under the credit facility.

 

7.               OTHER COMPREHENSIVE INCOME

 

The Company reports other comprehensive income as a measure of changes in stockholders’ equity that resulted from recognized transactions and other economic events of the period from non-owner sources.  Other comprehensive income of the Company results from adjustments due to the fluctuation of the value of the Company’s interest rate swaps accounted for under Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended.  One of the Company’s  67.5% owned subsidiaries entered into an interest rate swap during the third quarter of 2006.  The Company’s share of the negative value of the interest rate swaps was $63 at June 30, 2009 and is recorded as accumulated other comprehensive loss in the accompanying unaudited consolidated balance sheet.  See Note 6 for further discussion of the interest rate swaps.  The total comprehensive income for the three and six months ended June 30, 2009 was $2,164 and $4,006, respectively.  The total comprehensive income for the three and six months ended June 30, 2008 was $2,543 and $4,600, respectively.

 

8.               STOCK BASED COMPENSATION

 

The Company accounts for stock based compensation applying Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment” (“SFAS 123(R)”).  SFAS 123(R) applies to new awards and to awards that were outstanding as of December 31, 2005 that are subsequently vested, modified, repurchased or cancelled.  Compensation expense recognized during the first three and six months of 2009 and 2008 includes the portion vesting during the period for (1) all share-based payments granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and (2) all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated using the Black-Scholes option-pricing model.  During the first six months of 2009, the Company granted its directors and employees options to purchase 636,364 shares with an exercise price of $2.75 per share and options to purchase 10,000 shares with an exercise price of $3.30.  Stock compensation expense of $374 and $734 was recognized on existing stock options during the three and six months ended June 30, 2009, respectively.   Stock compensation expense of $394 and $835 was recognized on existing stock options during the three and six months ended June 30, 2008, respectively.

 

12



Table of Contents

 

NOVAMED, INC. AND SUBSIDIARIES

NOTES TO THE INTERIM

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

(Dollars in thousands, except per share data; unaudited)

 

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for stock options granted during the three and six months ended June 30, 2009 and 2008:

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Expected option life in years

 

 

 

6

 

 

Risk-free interest rate

 

 

 

3.53

%

 

Dividend yield

 

 

 

 

 

Expected volatility

 

 

 

43.3

%

 

Per share fair value

 

 

 

$

1.29

 

 

 

The expected option life used for 2009 grants was the weighted average of the vesting term assuming options are exercised as vested and the original contractual term of the option.  The risk free interest rate is based on the yield curve for U.S. Treasury zero-coupon issues with an equivalent remaining term.  The dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected life of the options.  The expected volatility in 2009 was based on the historical volatility of the Company’s stock.

 

A summary of stock based compensation activity within the Company’s stock-based compensation plans for the six months ended June 30, 2009 is as follows:

 

 

 

Number of
Shares

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual
Term
(Years)

 

Aggregate
Intrinsic
Value

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2008

 

3,584,472

 

$

4.72

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

646,364

 

$

2.76

 

 

 

 

 

Exercised

 

(100,000

)

$

0.83

 

 

 

 

 

Canceled

 

(104,876

)

$

6.93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2009

 

4,025,960

 

$

4.45

 

5.5

 

$

3,777

 

 

 

 

 

 

 

 

 

 

 

Exercisable at June 30, 2009

 

3,005,391

 

$

4.50

 

4.4

 

$

3,003

 

 

The aggregate intrinsic value for stock options outstanding and exercisable is defined as the difference between the market value of the Company’s stock as of the end of the period and the exercise price of in-the-money stock options.  The total intrinsic value of stock options exercised during the first six months of 2009 was $263.  As a result of stock options exercised, the Company recorded common stock and additional paid-in-capital of $433, which includes $350 of tax benefits recognized.  During the first six months of 2009, cash received from stock options exercised was $83.

 

13



Table of Contents

 

NOVAMED, INC. AND SUBSIDIARIES

NOTES TO THE INTERIM

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

(Dollars in thousands, except per share data; unaudited)

 

The following is a summary of nonvested stock option activity:

 

 

 

Number of
Shares

 

Weighted
Average
Grant-Date
Fair Value

 

 

 

 

 

 

 

Nonvested at December 31, 2008

 

574,919

 

$

3.45

 

Granted

 

646,364

 

$

1.29

 

Vested

 

(199,129

)

$

3.68

 

Canceled

 

(1,585

)

$

3.77

 

Nonvested at June 30, 2009

 

1,020,569

 

$

2.04

 

 

At June 30, 2009, there was $2,077 of total unrecognized compensation cost related to nonvested stock options.  This cost will be recognized over a weighted average period of 2.3 years.

 

The Company also grants restricted stock awards to certain employees.  Restricted stock awards are valued at the closing market value of the Company’s common stock on the day prior to the grant, and the total value of the award is recognized as expense ratably over the vesting period of the employees receiving the grants.  The Company granted 318,183 restricted stock awards during the first six months of 2009.  As of June 30, 2009, the total amount of unrecognized compensation expense related to nonvested restricted stock awards was approximately $1,168, which is expected to be recognized over a weighted-average period of approximately 3.1 years.  The Company recognized compensation expense of $196 and $363 on existing restricted stock awards during the three and six months ended June 30, 2009, respectively.  The Company recognized compensation expense of $149 and $295 on existing restricted stock awards during the three and six months ended June 30, 2008, respectively.

 

The Company has an employee stock purchase plan (“ESPP”) for all eligible employees.  Under the plan, shares of the Company’s common stock may be purchased at six-month intervals at 85% of the lower of the fair market value on the first or the last day of each six-month period.  Under this plan 26,455 and 19,565 shares were purchased during the six months ended June 30, 2009 and 2008, respectively.  Under the provisions of SFAS 123(R), the Company recognized compensation expense of $15 and $15 during the first six months of 2009 and 2008, respectively.  At June 30, 2009, 189,907 shares were reserved for future issuance under the ESPP.

 

9.               FAIR VALUE OF FINANCIAL INSTRUMENTS

 

On January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which establishes a framework for reporting fair value and expands disclosures required for fair value measurements for measuring the fair value of its financial assets and liabilities.  Although the adoption of SFAS No. 157 did not materially impact its financial condition, results of operations or cash flow, the Company is now required to provide additional disclosures as part of its financial statements.

 

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).  SFAS No. 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

As of June 30, 2009, the Company had an interest rate swap agreement that is required to be measured at fair value on a recurring basis.  The Company’s interest rate swap agreement had a fair value of $63 based on Level 2 inputs and is recorded as a liability as of June 30, 2009.

 

14



Table of Contents

 

NOVAMED, INC. AND SUBSIDIARIES

NOTES TO THE INTERIM

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

(Dollars in thousands, except per share data; unaudited)

 

10.         OPERATING SEGMENTS

 

The table below presents information about operating data and segment assets as of and for the three and six months ended June 30, 2009 and 2008:

 

 

 

Surgical
Facilities

 

Product
Sales

 

Other

 

Corporate

 

Total

 

Three months ended June 30, 2009

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

33,024

 

$

4,400

 

$

2,148

 

$

 

$

39,572

 

Earnings (loss) before taxes

 

9,519

 

664

 

277

 

(2,435

)

8,025

 

Depreciation and amortization

 

1,201

 

182

 

29

 

87

 

1,499

 

Interest income

 

1

 

 

 

 

1

 

Interest expense

 

182

 

6

 

 

1,895

 

2,083

 

Capital expenditures

 

600

 

271

 

1

 

204

 

1,076

 

Accounts receivable

 

12,303

 

8,881

 

563

 

47

 

21,794

 

Identifiable assets

 

215,207

 

25,125

 

2,174

 

7,674

 

250,180

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2008

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

29,072

 

$

4,307

 

$

1,801

 

$

 

$

35,180

 

Earnings (loss) before taxes

 

8,947

 

1,258

 

197

 

(3,205

)

7,197

 

Depreciation and amortization

 

827

 

103

 

30

 

66

 

1,026

 

Interest income

 

7

 

 

 

11

 

18

 

Interest expense

 

113

 

 

 

1,900

 

2,013

 

Capital expenditures

 

1,524

 

28

 

11

 

 

1,563

 

Accounts receivable

 

12,253

 

9,104

 

539

 

49

 

21,945

 

Identifiable assets

 

163,550

 

22,826

 

2,228

 

19,511

 

208,115

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2009

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

64,915

 

$

8,794

 

$

4,157

 

$

 

$

77,866

 

Earnings (loss) before taxes

 

18,295

 

1,389

 

454

 

(4,976

)

15,162

 

Depreciation and amortization

 

2,363

 

353

 

57

 

151

 

2,924

 

Interest income

 

2

 

 

 

 

2

 

Interest expense

 

376

 

13

 

 

3,879

 

4,268

 

Capital expenditures

 

1,757

 

332

 

1

 

470

 

2,560

 

Accounts receivable

 

12,303

 

8,881

 

563

 

47

 

21,794

 

Identifiable assets

 

215,207

 

25,125

 

2,174

 

7,674

 

250,180

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2008

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

56,487

 

$

8,869

 

$

3,637

 

$

 

$

68,993

 

Earnings (loss) before taxes

 

16,620

 

2,564

 

358

 

(6,023

)

13,519

 

Depreciation and amortization

 

1,623

 

228

 

60

 

136

 

2,047

 

Interest income

 

25

 

 

 

23

 

48

 

Interest expense

 

230

 

 

 

3,759

 

3,989

 

Capital expenditures

 

2,678

 

111

 

11

 

16

 

2,816

 

Accounts receivable

 

12,253

 

9,104

 

539

 

49

 

21,945

 

Identifiable assets

 

163,550

 

22,826

 

2,228

 

19,511

 

208,115

 

 

15



Table of Contents

 

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis presents our consolidated financial condition at June 30, 2009 and the results of operations for the three and six months ended June 30, 2009 and 2008.  You should read the following discussion together with our consolidated financial statements and the related notes contained elsewhere in this quarterly report.  In addition to the historical information provided below, we have made certain estimates and forward-looking statements that involve risks and uncertainties.  Our actual results could differ materially from those anticipated or implied by these estimates and forward-looking statements as a result of certain factors, including those discussed in the CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS on page 23 of this quarterly report.

 

Overview

 

We consider our core business to be the ownership and operation of ambulatory surgery centers (ASCs).  As of June 30, 2009, we owned and operated 37 ASCs, of which 35 were jointly owned with physician-partners.  We also own a 25% equity interest in an ASC that we plan to divest.  We also own other businesses including an optical laboratory, an optical products purchasing organization, and marketing products and services businesses.  In addition, we provide management services to two eye care practices.

 

Year-to-Date Financial Highlights:

 

·      Consolidated net revenue increased 12.9% to $77.9 million.  Surgical facilities net revenue increased 14.9% to $64.9 million (same-facility surgical net revenue decreased 2.8% to $54.9 million).

·      Operating income increased 11.2% to $19.4 million.

·      Income from continuing operations attributable to NovaMed, Inc. increased 14.0% to $3.9 million.

·      Cash flow from operations of $12.1 million.

 

Results of Operations

 

The following table summarizes our operating results as a percentage of net revenue:

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net Revenue:

 

 

 

 

 

 

 

 

 

Surgical facilities

 

83.5

%

82.6

%

83.4

%

81.9

%

Product sales and other

 

16.5

 

17.4

 

16.6

 

18.1

 

Total net revenue

 

100.0

 

100.0

 

100.0

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

29.9

 

30.5

 

30.6

 

30.4

 

Cost of sales and medical supplies

 

22.5

 

23.3

 

22.4

 

23.4

 

Selling, general and administrative

 

18.3

 

17.2

 

18.2

 

17.9

 

Depreciation and amortization

 

3.8

 

2.9

 

3.8

 

3.0

 

Total operating expenses

 

74.5

 

73.9

 

75.0

 

74.7

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

25.5

 

26.1

 

25.0

 

25.3

 

 

 

 

 

 

 

 

 

 

 

Interest expense (income), net

 

5.2

 

5.7

 

5.5

 

5.7

 

Other (income) expense, net

 

 

 

 

 

Income before income taxes

 

20.3

 

20.4

 

19.5

 

19.6

 

Income tax provision

 

3.4

 

3.3

 

3.2

 

3.1

 

Income from continuing operations

 

16.9

 

17.1

 

16.3

 

16.5

 

Income from discontinued operations

 

 

(0.1

)

 

 

Net income

 

16.9

 

17.0

 

16.3

 

16.5

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interests

 

11.5

 

12.0

 

11.4

 

11.6

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to NovaMed, Inc.

 

5.4

%

5.0

%

4.9

%

4.9

%

 

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Three Months Ended June 30, 2009 Compared to the Three Months Ended June 30, 2008
 

Net Revenue

 

Consolidated.  Total net revenue increased 12.5% from $35.2 million to $39.6 million.  Net revenue by segment is discussed below.

 

Surgical Facilities.  The table below summarizes surgical facilities net revenue and procedures performed for the second quarter of 2009 and 2008.  Revenues generated from surgical facilities are derived from the fees charged for the procedures performed in our ASCs and through our laser services agreements.  Our procedure volume is directly impacted by the number of ASCs we operate, the number of excimer lasers in service, and their respective utilization rates.  Net surgical facilities revenue increased 13.6% from $29.1 million to $33.0 million.  This increase was primarily the result of $5.1 million of net revenue from ASCs acquired or developed after April 1, 2008 (“new ASCs”) offset by a $1.1 million, or 3.8%, decrease from ASCs that we owned for the entire comparable reporting periods (“same-facility”).  The decrease in same-facility net revenue was primarily the result of a 4.9% decrease in the number of same-facility procedures performed offset by a 1.1% increase in the net revenue per procedure due to a change in procedure and payor mix.

 

 

 

Three Months Ended
June 30,

 

Increase

 

Dollars in thousands

 

2009

 

2008

 

(Decrease)

 

 

 

 

 

 

 

 

 

Surgical Facilities:

 

 

 

 

 

 

 

Same-facility:

 

 

 

 

 

 

 

Net revenue

 

$

27,956

 

$

29,072

 

$

(1,116

)

# of procedures

 

32,522

 

34,200

 

(1,678

)

 

 

 

 

 

 

 

 

New ASCs:

 

 

 

 

 

 

 

Net revenue

 

$

5,068

 

$

 

$

5,068

 

# of procedures

 

8,089

 

 

8,089

 

 

Product Sales and Other.  The table below summarizes net product sales and other revenue by significant business component.  Product sales and other revenue for the second quarter of 2009 increased 7.2% from $6.1 million to $6.5 million.  Net revenue at our optical products and services business decreased by $0.1 million due to a decrease in existing customer orders.  Net revenue from our marketing products and services businesses increased by $0.5 million primarily due the acquisition of a call center and marketing solutions business during the third quarter of 2008 partially offset by a reduction in sales of marketing products to medical device manufacturers.  Net revenue at our optical laboratory business decreased by $0.2 million due to a decrease in existing customer orders.  Net revenue at our ophthalmology practice increased by $0.3 million due to an increase in the number of patient visits.

 

 

 

Three Months Ended June 30,

 

Increase

 

Dollars in thousands

 

2009

 

2008

 

(Decrease)

 

 

 

 

 

 

 

 

 

Product Sales:

 

 

 

 

 

 

 

Optical laboratories

 

$

1,349

 

$

1,551

 

$

(202

)

Optical products purchasing organization

 

1,353

 

1,519

 

(166

)

Marketing products and services

 

1,258

 

756

 

502

 

Optometric practice/retail store

 

440

 

481

 

(41

)

 

 

4,400

 

4,307

 

93

 

Other:

 

 

 

 

 

 

 

Ophthalmology practice

 

2,148

 

1,801

 

347

 

 

 

 

 

 

 

 

 

Total Net Product Sales and Other Revenue

 

$

6,548

 

$

6,108

 

$

440

 

 

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Table of Contents

 

Salaries, Wages and Benefits

 

Consolidated.  Salaries, wages and benefits expense increased 10.3% from $10.7 million to $11.8 million.  As a percentage of net revenue, salaries, wages and benefits expense decreased from 30.5% to 29.9%.  Salaries, wages and benefits expense by segment is discussed below.

 

Surgical Facilities.  Salaries, wages and benefits expense in our surgical facilities segment increased 18.3% from $6.0 million to $7.1 million.  The increase was primarily the result of staff costs associated with new ASCs and a shift of some personnel from our Corporate segment to our Surgical Facilities segment.

 

Product Sales and Other.  Salaries, wages and benefits expense in our product sales and other segments increased 26.7% from $2.1 million to $2.7 million primarily due to our acquisition of a call center and marketing solutions business during the third quarter of 2008.

 

Corporate.  Salaries, wages and benefits expense decreased 22.0% from $2.6 million to $2.0 million.  The decrease was primarily due to a shift of some personnel from our Corporate segment to our Surgical Facilities segment and lower health benefit costs.

 

Cost of Sales and Medical Supplies

 

Consolidated.  Cost of sales and medical supplies expense increased 8.7% from $8.2 million to $8.9 million.  As a percentage of net revenue, cost of sales and medical supplies expense decreased from 23.3% to 22.5%.  Cost of sales and medical supplies expense by segment is discussed below.

 

Surgical Facilities.  Cost of sales and medical supplies expense in our surgical facilities segment increased 10.4% from $6.8 million to $7.5 million.  As a percentage of net revenue, cost of sales and medical supplies expense decreased from 23.3% to 22.6%.  The expense increase was primarily the result of costs associated with our new ASCs.

 

Product Sales and Other.  Cost of sales and medical supplies expense in our product sales and other segments remained flat at $1.4 million.

 

Selling, General and Administrative

 

Consolidated.  Selling, general and administrative expense increased 19.7% from $6.0 million to $7.2 million.  As a percentage of net revenue, selling, general and administrative expense increased from 17.2% to 18.3%.  Selling, general and administrative expense by segment is discussed below.

 

Surgical Facilities.  Selling, general and administrative expense in our surgical facilities segment increased 18.0% from $5.4 million to $6.4 million.  The increase is due to costs associated with our new ASCs and an increase of $0.3 million in management and billing/collections fees charged to the ASCs for services rendered by our corporate personnel.

 

Product Sales and Other.  Selling, general and administrative expense in our product sales and other segments increased 32.2% from $1.0 million to $1.3 million primarily due to our acquisition of a call center and marketing solutions business during the third quarter of 2008.

 

Corporate.  Corporate selling, general and administrative expense decreased by $0.1 million due to an increase in management and billing/collections fees charged to the operating segments for services rendered by certain corporate personnel.

 

Depreciation and Amortization. Depreciation and amortization expense increased 46.2% from $1.0 million to $1.5 million due to increases in depreciation associated with our new ASCs and amortization of intangible assets acquired in conjunction with our acquisition of a call center and marketing solutions business during the third quarter of 2008.

 

Interest (Income) Expense, net.  Interest (income) expense, net increased by $0.1 million due to increased borrowings under our revolving credit facility and our adoption of FASB Staff Position No. APB 14-1 (“FSP APB 14-1”), Accounting for Convertible Debt Instruments that May be settled in Cash Upon Conversion, on January 1, 2009.  FSP APB 14-1 requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be separately accounted for in a manner that reflects an issuer’s nonconvertible debt

 

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Table of Contents

 

borrowing rate.  The resulting debt discount is amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense.  As a result of the adoption of FSP APB 14-1, we recorded additional non-cash interest expense during the second quarter of 2009 and 2008 of $1.0 million.

 

Provision for Income Taxes. Our effective tax rate was unchanged at 39.0%.  Our effective tax rate is affected by expenses that are deducted from operations in arriving at pre-tax income that are not allowed as a deduction on our federal income tax return.

 

Net Income Attributable to Noncontrolling Interests.  Noncontrolling interests in the earnings of our ASCs were $4.5 million in the second quarter of 2009 as compared to $4.2 million in 2008.  All of this increase is attributable to new ASCs.

 

Six Months Ended June 30, 2009 Compared to the Six Months Ended June 30, 2008
 

Net Revenue

 

Consolidated.  Total net revenue increased 12.9% from $69.0 million to $77.9 million.  Net revenue by segment is discussed below.

 

Surgical Facilities.  The table below summarizes surgical facilities net revenue and procedures performed for the first six months of 2009 and 2008.  Net surgical facilities revenue increased 14.9% from $56.5 million to $64.9 million.  This increase was primarily the result of $10.0 million of net revenue from ASCs acquired or developed after January 1, 2008 (“new ASCs”) offset by a $1.6 million, or 2.8%, decrease from ASCs that we owned for the entire comparable reporting periods (“same-facility”).  The decrease in same-facility net revenue was primarily the result of a 5.2% decrease in the number of same-facility procedures performed offset by a 2.5% increase in the net revenue per procedure due to a change in procedure and payor mix.

 

 

 

Six Months Ended
June 30,

 

Increase

 

Dollars in thousands

 

2009

 

2008

 

(Decrease)

 

 

 

 

 

 

 

 

 

Surgical Facilities:

 

 

 

 

 

 

 

Same-facility:

 

 

 

 

 

 

 

Net revenue

 

$

54,922

 

$

56,487

 

$

(1,565

)

# of procedures

 

63,549

 

67,035

 

(3,486

)

 

 

 

 

 

 

 

 

New ASCs:

 

 

 

 

 

 

 

Net revenue

 

$

9,993

 

$

 

$

9,993

 

# of procedures

 

16,006

 

 

16,006

 

 

Product Sales and Other.  The table below summarizes net product sales and other revenue by significant business component.  Product sales and other revenue for the first six months of 2009 increased 3.6% from $12.5 million to $12.9 million compared to the first six months of 2008.  Net revenue at our optical products and services business decreased by $0.3 million due to a decrease in existing customer orders.  Net revenue from our marketing products and services businesses increased by $0.7 million primarily due to the acquisition of a call center and marketing solutions business during the third quarter of 2008 partially offset by a reduction in sales of marketing products to medical device manufacturers.  Net revenue at our optical laboratory business decreased by $0.4 million due to a decrease in existing customer orders.  Net revenue at our ophthalmology practice increased by $0.5 million due to an increase in the number of patient visits.

 

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Table of Contents

 

 

 

Six Months Ended June 30,

 

Increase

 

Dollars in thousands

 

2009

 

2008

 

(Decrease)

 

 

 

 

 

 

 

 

 

Product Sales:

 

 

 

 

 

 

 

Optical laboratories

 

$

2,716

 

$

3,155

 

$

(439

)

Optical products purchasing organization

 

2,742

 

3,037

 

(295

)

Marketing products and services

 

2,408

 

1,684

 

724

 

Optometric practice/retail store

 

928

 

993

 

(65

)

 

 

8,794

 

8,869

 

(75

)

Other:

 

 

 

 

 

 

 

Ophthalmology practice

 

4,157

 

3,637

 

520

 

 

 

 

 

 

 

 

 

Total Net Product Sales and Other Revenue

 

$

12,951

 

$

12,506

 

$

445

 

 

Salaries, Wages and Benefits

 

Consolidated.  Salaries, wages and benefits expense increased 13.8% from $21.0 million to $23.9 million.  As a percentage of net revenue, salaries, wages and benefits expense increased from 30.4% to 30.6%.  Salaries, wages and benefits expense by segment is discussed below.

 

Surgical Facilities.  Salaries, wages and benefits expense in our surgical facilities segment increased 17.6% from $12.1 million to $14.3 million.  The increase was primarily the result of staff costs associated with new ASCs and a shift of some personnel from our Corporate segment to our Surgical Facilities segment.

 

Product Sales and Other.  Salaries, wages and benefits expense in our product sales and other segments increased 23.7% from $4.4 million to $5.4 million primarily due to our acquisition of a call center and marketing solutions business during the third quarter of 2008.

 

Corporate.  Salaries, wages and benefits expense decreased 6.3% from $4.4 million to $4.2 million.  The decrease was primarily due to a shift of some personnel from our Corporate segment to our Surgical Facilities segment and lower health benefit costs.

 

Cost of Sales and Medical Supplies

 

Consolidated.  Cost of sales and medical supplies expense increased 8.0% from $16.2 million to $17.5 million.  As a percentage of net revenue, cost of sales and medical supplies expense decreased from 23.4% to 22.4%.  Cost of sales and medical supplies expense by segment is discussed below.

 

Surgical Facilities.  Cost of sales and medical supplies expense in our surgical facilities segment increased 10.9% from $13.2 million to $14.6 million.  As a percentage of net revenue, cost of sales and medical supplies expense decreased from 23.3% to 22.5%.  The expense increase was primarily the result of costs associated with our new ASCs.

 

Product Sales and Other.  Cost of sales and medical supplies expense in our product sales and other segments decreased 4.3% from $3.0 million to $2.9 million primarily due to decreased revenue at our optical laboratories business and marketing products and services businesses.

 

Selling, General and Administrative

 

Consolidated.  Selling, general and administrative expense increased 15.0% from $12.3 million to $14.2 million.  As a percentage of net revenue, selling, general and administrative expense increased from 17.9% to 18.2%.  Selling, general and administrative expense by segment is discussed below.

 

Surgical Facilities.  Selling, general and administrative expense in our surgical facilities segment increased 17.9% from $10.8 million to $12.7 million.  The increase is due to costs associated with our new ASCs and an increase of $0.5 million in management and billing/collections fees charged to the ASCs for services rendered by our corporate personnel.

 

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Table of Contents

 

Product Sales and Other.  Selling, general and administrative expense in our product sales and other segments increased 25.5% from $1.9 million to $2.4 million primarily due to our acquisition of a call center and marketing solutions business during the third quarter of 2008.

 

Corporate.  Corporate selling, general and administrative expense decreased by $0.6 million due to an increase in management and billing/collections fees charged to the operating segments for services rendered by certain corporate personnel.

 

Depreciation and Amortization. Depreciation and amortization expense increased 42.9% from $2.0 million to $2.9 million due to increases in depreciation associated with our new ASCs, the relocation of one of our ASCs and amortization of intangible assets acquired in conjunction with our acquisition of a call center and marketing solutions business during the third quarter of 2008.

 

Interest (Income) Expense, net.  Interest (income) expense, net increased by $0.3 million due to increased borrowings under our revolving credit facility and our adoption of FSP APB 14-1.  As a result of the adoption of FSP APB 14-1, we recorded additional non-cash interest expense during the first six months of 2009 and 2008 of $2.0 million and $1.9 million, respectively.

 

Provision for Income Taxes. Our effective tax rate was unchanged at 39.0%.  Our effective tax rate is affected by expenses that are deducted from operations in arriving at pre-tax income that are not allowed as a deduction on our federal income tax return.

 

Discontinued Operations.  As part of our discontinued operations plan announced in the fourth quarter of 2007, we completed the sale of our 70% interest in our Thibodaux, Louisiana ASC in February 2008.  We received proceeds of $0.2 million.  As a result, we adjusted our previously recorded loss on the sale of the ASC and recorded a pre-tax gain of $0.1 million in the first quarter of 2008.

 

Net Income Attributable to Noncontrolling Interests.  Noncontrolling interests in the earnings of our ASCs were $8.8 million in 2009 as compared to $8.0 million in 2008.  All of this increase is attributable to new ASCs.

 

Liquidity and Capital Resources

 

Operating activities during the first six months of 2009 generated $12.1 million in cash flow compared to $10.8 million in the comparable 2008 period.  The $1.3 million increase in cash flow from operating activities was due to higher net income after adding back the following non-cash items: depreciation and amortization, amortization of subordinated debt fees, stock-based compensation expense, gain on sale of ASC, deferred income taxes, asset impairment charge and non-cash subordinated debt interest.  Changes in operating assets and liabilities resulted in positive cash flow of $0.3 million during the first six months of 2009 and 2008.  Changes in accounts receivable resulted in positive cash flow of $2.0 million due to improvements in the collection of accounts receivable.  Changes in accounts payable and accrued expenses resulted in negative cash flow of $2.0 million due to incentive compensation payments and the timing of vendor payments.

 

Cash flows used in investing activities was $2.3 million during the first six months of 2009 compared to $3.8 million during the first six months of 2008.  Investing activities during the first six months of 2009 included the purchase of property and equipment for $2.6 million and proceeds of $0.3 million relating to the sale of noncontrolling interests in one of our ASCs.  Investing activities during the first six months of 2008 included the purchase of property and equipment for $2.8 million, the payment of additional purchase price consideration of $0.9 million for one of our ASCs, the payment of additional purchase price consideration of $0.3 million for our optical products purchasing organization and proceeds of $0.2 million relating to the sale of our Thibodaux, Louisiana ASC.

 

Cash flows from financing activities during the first six months of 2009 included net payments of $9.1 million under our credit facility, payments of $1.1 million relating to the repurchase of our common stock and $1.7 million of capital lease and other debt obligation payments.  Cash flows from financing activities during the first six months of 2008 included proceeds of $0.4 million from the exercise of stock options and issuance of stock to employees as part of our employee stock purchase plan and borrowings of $1.8 million relating to the development and relocation of an ASC.  These proceeds were offset by $0.7 million of capital lease and other debt obligation payments.

 

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Table of Contents

 

In June 2007, we issued $75.0 million aggregate principal amount of 1.0% convertible senior subordinated notes due June 15, 2012 (the “Convertible Notes”).  At June 30, 2009, we had $59.1 million in convertible subordinated debt outstanding, net of debt discount.  As of June 30, 2009, the fair value of the $75.0 million Convertible Notes was approximately $55.9 million, based on the level 2 valuation hierarchy under SFAS No. 157.  Effective January 1, 2009, we adopted FSP APB 14-1.  FSP APB 14-1 applies to convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, when the conversion option does not need to be bifurcated and accounted for separately as a derivative instrument in accordance with FAS 133.  FSP APB 14-1 requires that issuers of convertible debt instruments that, upon conversion, may be settled fully or partially in cash, must separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Additionally, debt issuance costs are required to be allocated in proportion to the allocation of the liability and equity components and accounted for as debt issuance costs and equity issuance costs, respectively. FSP APB 14-1 requires retrospective application and, accordingly, the prior periods’ financial statements included herein have been adjusted.  In accordance with the provisions of FSP APB 14-1, we determined that the fair value of our Convertible Notes at issuance in 2007 was approximately $52.1 million, and we designated the residual value of approximately $22.9 million as the equity component. Additionally, we allocated approximately $1.8 million of the $2.6 million original Convertible Notes issuance cost as debt issuance cost and the remaining $0.8 million as equity issuance cost.  For further discussion about the Convertible Notes, see Note 11 in the Notes to Consolidated Financial Statements in our Annual Report filed on Form 10-K on March 16, 2009.

 

At June 30, 2009, we had $48.0 million of borrowings outstanding under our revolving credit facility with a weighted average interest rate of 2.6% and were in compliance with all of our covenants.  Our credit facility expires in February 2010 and we are currently in discussion with our banks to extend the term. The maximum commitment available under the facility is the lesser of $125 million or the maximum allowed under the calculated ratio limitations.  At June 30, 2009, we had approximately $76.1 million of potential borrowing availability under our credit facility.  The credit agreement also includes an option allowing us to increase the maximum commitment available to $150 million under certain conditions.  Interest on borrowings under the facility is payable at an annual rate equal to our lender’s published base rate plus the applicable borrowing margin ranging from 0.0% to 0.5% or LIBOR plus a range from 1.25% to 2.50%, varying depending upon our ratios and ability to meet other financial covenants.  In addition, a fee ranging from .20% to .25% is charged on the unused portion of the commitment.  The maximum borrowing availability and applicable interest rates under the credit facility are calculated based on a ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization, all as more fully defined in our credit facility.  The credit agreement contains customary covenants that include limitations on indebtedness, liens, capital expenditures, acquisitions, investments and share repurchases, as well as restrictions on the payment of dividends.  Under the terms of the credit agreement, we are required to obtain the consent of our lenders for any acquisition exceeding $20.0 million individually under certain conditions.  The weighted average interest rate on credit line borrowings during the three and six months ended June 30, 2009 was 3.0% and 3.4%, respectively.

 

During 2006, we entered into two interest rate swap agreements.  The interest rate swaps protected us against certain interest rate fluctuations of the LIBOR rate on $24 million of our variable rate debt under our credit facility.  The date of the first interest rate swap was April 12, 2006, and it expired on April 19, 2009.  This interest rate swap effectively fixed our LIBOR rate on $12 million of variable rate debt at a rate of 5.34%.  The date of the second interest ra