NovaMed second-quarter total net revenue decreases to $38.16 million

NovaMed, Inc. (Nasdaq: NOVA), a leading operator of ambulatory surgery centers in partnership with physicians, today announced results for the second quarter ended June 30, 2010. Total net revenue was $38,164,000 compared to $38,879,000 in the prior year second quarter. Same-facility net revenue declined 1% for the quarter. Net income from continuing operations attributable to NovaMed in the second quarter of 2010 was $1,805,000, or $0.23 per diluted share, compared to $2,290,000, or $0.30 per diluted share, in the prior year second quarter. Net cash provided by operating activities in the second quarter of 2010 was $9,339,000 and distributions to noncontrolling interests, which are included in net cash used in financing activities, were $3,743,000. Net cash provided by operating activities less distributions to noncontrolling interests was $5,596,000, or $0.71 per diluted share.

“Although we saw a significant improvement in our same-facility revenue growth in the second quarter, we continue to be negatively impacted by the general economic conditions”

Interest expense in the second quarter of 2010 included non-cash, imputed interest of $1,137,000, or $0.09 per diluted share, compared to $1,041,000, or $0.08 per diluted share, in the second quarter of 2009. This interest expense is recorded in accordance with NovaMed's adoption of Accounting Standards Codification ("ASC") 470-20. The results for the second quarter of 2010 included a negative impact of $0.03 per diluted share from the increase in this non-cash imputed interest expense plus the higher interest expense relating to the amendment to NovaMed's credit agreement in August 2009.

"Although we saw a significant improvement in our same-facility revenue growth in the second quarter, we continue to be negatively impacted by the general economic conditions," commented Thomas S. Hall, Chairman, President and Chief Executive Officer of NovaMed, Inc. "We believe that high unemployment as well as a lack of consumer confidence is responsible for the softness in surgical procedure volumes in our industry as some patients postpone procedures recommended by their physicians. Despite these issues, we continue to generate strong cash flow with net cash from operating activities less distributions to noncontrolling interests of $5.6 million or 3.1 times net income from continuing operations attributable to NovaMed. With capital expenditures of $453,000 in the quarter, our free cash flow of $5.1 million continued to allow us to deleverage our balance sheet in the second quarter."

Highlights of second quarter continuing operations include:

• Total net revenue of $38,164,000
• Earnings per diluted share from continuing operations of $0.23
• Net cash from operating activities less distributions to noncontrolling interests of $5,596,000, or $0.71 per diluted share

For the six months ended June 30, 2010, total net revenue was $74,609,000 compared to $76,584,000 for the first six months last year. Same-facility net revenue declined 3% for the six month period. Net income from continuing operations attributable to NovaMed in the first six months of 2010 was $3,319,000, or $0.42 per diluted share, compared to $4,188,000, or $0.54 per diluted share, for the same period last year. Net cash provided by operating activities in the first six months of 2010 was $19,062,000 and distributions to noncontrolling interests, which are included in net cash used in financing activities, were $8,071,000. Net cash provided by operating activities less distributions to noncontrolling interests was $10,991,000, or $1.40 per diluted share. The results for the first six months of 2010 included a negative impact of $0.06 per diluted share from the increase in the non-cash imputed interest expense on our convertible debt plus the higher interest expense relating to the amendment to our credit agreement in August 2009.

"We continue to use our free cash flow to deleverage our balance sheet. In the first six months of 2010 we paid down more than $10 million in senior debt and over the last six quarters we have reduced our senior debt outstanding by over $30 million, or almost $4.00 per share," added Mr. Hall. "Because of the impact of the current economic conditions on our industry, we are taking a cautious and conservative approach to acquisitions. Until we identify the right opportunity, we believe the best use of our cash is to pay down debt."

Mr. Hall concluded, "Demographic trends clearly support long term growth for procedures performed in ASCs. While we are not happy with the current softness we are experiencing, it is important to remember ASCs serve a critical need in the health care system. We represent the lowest cost setting with the highest quality outcomes and are preferred by patients, payors and physicians. ASCs and NovaMed are part of the solution."

Impact of Adoption of ASC 470-20

Effective January 1, 2009, NovaMed adopted ASC 470-20, Debt with Conversion and Other Options. ASC 470-20 impacts the accounting treatment of our 1.0% convertible senior subordinated notes due June 15, 2012. As noted above, the adoption of ASC 470-20 added non-cash, imputed interest expense of $1,137,000 and $1,041,000 to the second quarters of 2010 and 2009, respectively, and $2,237,000 and $2,048,000 to the first six months of 2010 and 2009, respectively. We estimate that the adoption of ASC 470-20 will add approximately $4.6 million of imputed interest expense to our 2010 results of operations. However, the adoption of ASC 470-20 will not have an impact on our cash flows.

Discontinued Operations

As we disclosed in our Form 8-K, on June 18, 2010 a wholly owned subsidiary of NovaMed sold substantially all of the assets of our MDnetSolutions business. Effective with the second quarter of 2010 and for all prior periods presented, the results of this business are reported as discontinued operations. In the second quarter of 2010, we recorded an after tax loss on the disposal of this business of approximately $1.6 million.