1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 1998
Commission File Number 000-22217
AMSURG CORP.
(Exact Name of Registrant as Specified in its Charter)
TENNESSEE 62-1493316
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
ONE BURTON HILLS BOULEVARD
SUITE 350
NASHVILLE, TN 37215
(Address of principal executive offices) (Zip code)
(615) 665-1283
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
As of May 14, 1998, there were outstanding 5,148,966 shares of the
Registrant's Class A Common Stock, no par value and 4,787,131 shares of the
Registrant's Class B Common Stock, no par value.
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PART I.
ITEM 1. FINANCIAL STATEMENTS
AMSURG CORP.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1998 1997
--------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ....................................................... $ 3,772,047 $ 3,406,787
Accounts receivable, net ........................................................ 10,344,915 8,220,616
Supplies inventory .............................................................. 990,749 905,992
Deferred income taxes ........................................................... 390,000 390,000
Prepaid and other current assets ................................................ 940,345 1,020,835
------------ ------------
Total current assets ................................................... 16,438,056 13,944,230
Long-term receivables and deposits ................................................... 880,902 479,012
Property and equipment, net .......................................................... 20,655,711 19,248,464
Intangible assets, net ............................................................... 44,783,750 41,566,684
------------ ------------
Total assets ........................................................... $ 82,758,419 $ 75,238,390
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ............................................... $ 1,446,506 $ 1,330,595
Accounts payable ................................................................ 1,293,033 922,188
Accrued salaries and benefits ................................................... 1,148,161 1,018,844
Other accrued liabilities ....................................................... 835,400 1,235,626
Current income taxes payable .................................................... 553,394 125,396
------------ ------------
Total current liabilities .............................................. 5,276,494 4,632,649
Long-term debt ....................................................................... 30,060,171 24,969,718
Deferred income taxes ................................................................ 1,185,000 1,185,000
Minority interest .................................................................... 10,215,884 9,191,896
Preferred stock, no par value, 5,000,000 shares authorized, 416,666 and 916,666
shares outstanding, respectively .................................................. 3,207,767 5,267,672
Shareholders' equity:
Common stock:
Class A, no par value, 20,000,000 shares authorized 5,145,966 and
4,758,091 shares outstanding, respectively ................................ 16,723,980 14,636,331
Class B, no par value, 4,800,000 shares authorized, 4,787,131
shares outstanding ........................................................ 13,528,981 13,528,981
Retained earnings ............................................................... 2,799,315 2,099,491
Deferred compensation on restricted stock ....................................... (239,173) (273,348)
------------ ------------
Total shareholders' equity ............................................. 32,813,103 29,991,455
------------ ------------
Total liabilities and shareholders' equity ............................. $ 82,758,419 $ 75,238,390
============ ============
See accompanying notes to the consolidated financial statements.
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AMSURG CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1998 1997
------------ -------------
Revenues ............................................................................. $ 17,828,648 $ 12,591,148
Operating expenses:
Salaries and benefits ........................................................... 5,367,341 3,971,664
Other operating expenses ........................................................ 6,383,712 4,450,793
Depreciation and amortization ................................................... 1,568,407 1,087,263
Net loss on sale of assets ...................................................... 42,914 2,321,168
------------ ------------
Total operating expenses .................................................... 13,362,374 11,830,888
------------ ------------
Operating income ............................................................ 4,466,274 760,260
Minority interest .................................................................... 2,807,075 1,947,911
Other (income) and expenses:
Interest expense, net of interest income ........................................ 492,825 308,179
------------ ------------
Earnings (loss) before income taxes ......................................... 1,166,374 (1,495,830)
Income tax expense ................................................................... 466,550 329,000
------------ ------------
Net earnings (loss) ......................................................... 699,824 (1,824,830)
Accretion of preferred stock discount ................................................ -- 67,565
------------ ------------
Net earnings (loss) available to common shareholders ........................ $ 699,824 $ (1,892,395)
============ ============
Earnings (loss) per common share:
Basic ........................................................................... $ 0.07 $ (0.20)
Diluted ......................................................................... $ 0.07 $ (0.20)
Weighted average number of shares and share equivalents outstanding:
Basic ........................................................................... 9,673,447 9,360,240
Diluted ......................................................................... 10,347,306 9,360,240
See accompanying notes to the consolidated financial statements.
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AMSURG CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
----------------------------------
1998 1997
----------- ------------
Cash flows from operating activities:
Net earnings (loss) ................................................... $ 699,824 $(1,824,830)
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities:
Minority interest ................................................. 2,807,075 1,947,911
Distributions to minority partners ................................ (2,825,098) (1,719,822)
Depreciation and amortization ..................................... 1,568,407 1,087,263
Amortization of deferred compensation on restricted stock ......... 34,175 -
Net loss on sale of assets ........................................ 42,914 2,321,168
Increase (decrease) in cash, net of effects of acquisitions, due to
changes in:
Accounts receivable, net ..................................... (1,594,191) (611,293)
Supplies inventory ........................................... (24,403) 35,045
Prepaid and other current assets ............................. 59,812 (183,703)
Other assets ................................................. (58,096) (101,424)
Accounts payable ............................................. 370,395 541,402
Accrued expenses and other liabilities ....................... 47,539 66,826
Other, net ................................................... (43,737) 12,555
----------- -----------
Net cash flows provided by operating activities .............. 1,084,616 1,571,098
Cash flows from investing activities:
Acquisition of interest in surgery centers ............................ (4,562,773) (6,030,569)
Acquisition of property and equipment ................................. (2,420,369) (1,943,151)
Proceeds from sale of assets .......................................... 641,078 -
Decrease in long-term receivables ..................................... 14,557 5,085
----------- -----------
Net cash flows used in investing activities .................. (6,327,507) (7,968,635)
Cash flows from financing activities:
Proceeds from long-term borrowings .................................... 5,172,850 6,176,000
Repayment on long-term borrowings ..................................... (385,640) (825,267)
Net proceeds from issuance of common stock ............................ 18,481 133,776
Proceeds from capital contributions by minority partners .............. 804,431 184,506
Financing cost incurred ............................................... (1,971) (10,051)
----------- -----------
Net cash flows provided by financing activities .............. 5,608,151 5,658,964
----------- -----------
Net increase (decrease) in cash and cash equivalents ....................... 365,260 (738,573)
Cash and cash equivalents, beginning of period ............................. 3,406,787 3,192,408
----------- -----------
Cash and cash equivalents, end of period ................................... $ 3,772,047 $ 2,453,835
=========== ===========
See accompanying notes to the consolidated financial statements.
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AMSURG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of AmSurg
Corp. and subsidiaries ("the Company") have been prepared in accordance with
generally accepted accounting principles for interim financial reporting and in
accordance with Rule 10-01 of Regulation S-X.
In the opinion of management, the unaudited interim financial
statements contained in this report reflect all adjustments, consisting of only
normal recurring accruals which are necessary for a fair presentation of the
financial position and the results of operations for the interim periods
presented. The results of operations for any interim period are not necessarily
indicative of results for the full year.
The accompanying consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 1997 Annual Report on Form 10-K.
(2) ACQUISITIONS AND DISPOSITIONS
In the three months ended March 31, 1998, the Company, through wholly
owned subsidiaries and in separate transactions, acquired majority interests in
two physician practice-based surgery centers. The aggregate purchase price and
related cost for the acquisitions was $4,572,036, consisting primarily of cash,
of which the Company assigned approximately $3,870,000 to excess cost over net
assets of purchased operations.
Also in the three months ended March 31, 1998, a partnership in which
the Company, through a wholly owned subsidiary, owned a 51% interest, sold
certain assets comprising a surgery center developed in 1995 for approximately
$640,000 and incurred a net loss of $42,914.
Subsequent to March 31, 1998, the Company, through a wholly owned
subsidiary acquired a 60% interest in a physician practice-based surgery center
for approximately $5,400,000.
(3) PREFERRED STOCK
During the three months ended March 31, 1998, the holders of the Series
A Redeemable Preferred Stock converted their preferred shares into 380,952
shares of Class A Common Stock using a conversion ratio based on market price of
the Class A Common Stock pursuant to the provisions of the Company's Charter.
(4) RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" and No. 131 "Disclosures about Segments of an Enterprise
and Related Information" become effective for the Company for the year ended
December 31, 1998. The Company is still evaluating the effects of adopting these
two statements, but does not expect the adoption of either pronouncement to have
a material effect on the Company's consolidated financial statements.
Statement of Position ("SOP") No. 98-5 "Reporting on the Costs of
Start-Up Activities" becomes effective for the Company for the year ended
December 31, 1999. SOP No. 98-5 requires that start-up costs be expensed as
incurred and that upon adoption, all deferred start-up costs be expensed as a
cumulative effect of a change in accounting principle. The Company does not
anticipate that the adoption of SOP No. 98-5 will have a material effect on the
Company's financial position or ongoing results of operations.
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AMSURG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(5) SUBSEQUENT EVENTS
In May 1998, the Company's Board of Director's approved a plan to
dispose of the Company's interests in the two specialty physician practices in
which it owns a majority interest as part of an overall strategy to exit the
practice management business and focus solely on the development, acquisition
and operation of ambulatory surgery centers and specialty networks. While the
Company's past strategy for network development included the ownership of
related physician practices, the Company's experience in specialty network
development has made it clear that physician practice ownership is not necessary
for the successful development of these networks. Because of this change in
strategy and the fact that the ownership of physician practices is management
intensive and produces lower profit margins, the Company believes that its
capital and management resources are better allocated to the development and
acquisition of surgery centers and networks. In addition, the Company believes
that the ownership of only two physician practices does not allow for the
economies of scale and growth opportunities needed to be successful in the
physician practice management business.
In conjunction with the plan of disposal of these practices, the
Company will reduce the carrying value of the long-lived assets held for sale by
approximately $5,400,000 in the second quarter of 1998, based on the estimated
sales proceeds less estimated costs to sell. The Company will recognize a
deferred income tax benefit of approximately $1,800,000 associated with the
estimated loss. The remaining carrying value of the net assets of the practices
is approximately $1,700,000.
The Company expects to dispose of these practice interests through a
sale. Although the Company is currently in negotiations regarding the possible
sale of one of the two practices, there are no definitive agreements or
arrangements with regard thereto. There can be no assurance that the Company
will sell these operations but the Company believes that the estimated disposal
loss will be adequate in the sale of the practices.
A summary of the information about the operations of the physician
practices for the three months ended March 31, 1998 and 1997 and for the years
ended December 31, 1997 and 1996 is as follows:
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
------------------------------- -----------------------------
1998 1997 1997 1996
----------- ----------- ---------- ---------
Revenues....................................... $2,242,916 $2,216,891 $8,814,724 $5,155,148
Operating expenses............................. 1,917,911 1,976,238 7,956,189 4,979,142
Minority interest.............................. 73,444 71,074 327,287 -
Interest expense............................... 14,834 29,801 101,797 90,912
---------- ---------- ---------- ----------
Contribution margin....................... $ 236,727 $ 139,778 $ 429,451 $ 85,094
========== ========== ========== =========
Concurrent with the Company's decision to exit the physician practice
management business, one of the Company's physician practices received
notification from a payer with which it has a capitated contract for
gastroenterology services covering approximately 120,000 lives that the contract
would not be renewed beyond the June 30, 1998 anniversary date of the contract.
The payer has advised the Company that it plans to renegotiate the terms and
coverage of the contract. At this time, the Company cannot project the ultimate
outcome of these negotiations. However, an unfavorable outcome in these
negotiations may have an adverse impact on the financial operations of the
Company during the period this practice is held prior to disposal.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" contains forward-looking statements. These statements, which have
been included in reliance on the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, involve risks and uncertainties. The
Company's actual operations and results may differ materially from the results
discussed in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, the Company's ability to enter into
partnership or operating agreements for new practice-based ambulatory surgery
centers and new specialty physician networks; its ability to identify suitable
acquisition candidates and negotiate and close acquisition transactions; its
ability to obtain the necessary financing or capital on terms satisfactory to
the Company in order to execute its expansion strategy; its ability to manage
growth; its ability to contract with managed care payers on terms satisfactory
to the Company for its existing centers and its centers that are currently under
development; its ability to obtain and retain appropriate licensing approvals
for its existing centers and centers currently under development; its ability to
minimize start-up losses of its development centers; its ability to maintain
favorable relations with its physician partners; and its ability to sell the two
physician practices.
OVERVIEW
The Company develops, acquires and operates practice-based ambulatory
surgery centers in partnership with physician practice groups through
partnerships and limited liability companies. As of March 31, 1998, the Company
owned a majority interest (51% or greater) in 41 surgery centers, owned a
minority interest in one surgery center, owned a majority interest (60% or
greater) in two physician practices and had established and was the majority
owner (51%) of five start-up specialty physician networks.
The Company operated as a majority-owned subsidiary of American
Healthcorp, Inc. ("AHC") from 1992 until December 3, 1997 when AHC distributed
to its stockholders all of its holdings of AmSurg common stock (the
"Distribution"). Prior to the Distribution, the Company effected a
recapitalization pursuant to which every three shares of the Company's then
outstanding common stock were converted into one share of Class A Common Stock.
Immediately following the Recapitalization, AHC exchanged a portion of its
shares of Class A Common Stock for shares of Class B Common Stock. The principal
purpose of the Distribution was to enable the Company to have access to debt and
equity capital markets as an independent, publicly traded company. Upon the
Distribution, the Company became a publicly traded company.
The following table presents the changes in the number of surgery centers
in operation and centers under development for the three months ended March 31,
1998 and 1997. A center is deemed to be under development when a partnership or
limited liability company has been formed with the physician group partner to
develop the center.
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
---- ----
Centers in operation, beginning of period ......................................... 39 27
New center acquisitions placed in operation ....................................... 2 2
New development centers placed in operation ....................................... 2 --
Centers sold ...................................................................... (1) --
--- ---
Centers in operation, end of period ............................................... 42 29
=== ===
Centers under development, end of period .......................................... 8 17
=== ===
Thirty-two of the surgery centers in operation as of March 31, 1998,
perform gastrointestinal endoscopy procedures, eight centers perform
ophthalmology surgery procedures, one center performs orthopedic procedures and
one center performs ophthalmology, urology, general surgery and otolaryngology
procedures. The other partner or member in each partnership or limited liability
company is in each case an entity owned by physicians who perform procedures at
the center.
In addition, the Company has a majority interest in two physician
practices which were acquired in January 1996 and January 1997, the other
partners of which are entities owned by the principal physicians who provide
professional medical services to patients of the practices. In May 1998, the
Company's Board of Directors approved a plan to dispose of the Company's
interests in these two specialty physician practices as part of an overall
strategy to exit the practice management business and focus solely on the
development, acquisition and operation of ambulatory surgery centers and
specialty networks. Accordingly, the Company will record a charge of $3.6
million, net of income tax benefit of $1.8 million, in the second quarter of
1998 for the estimated loss on the disposal of these assets (see Note 5 of the
Consolidated Financial Statements).
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The start-up specialty physician networks are owned through limited
partnerships and limited liability companies in which the Company owns a
majority interest. The other partners or members are individual physicians who
will provide the medical services to the patient population covered by the
contracts the network will seek to enter into with managed care payers. The
Company does not expect that the specialty physician networks alone will be a
significant source of income for the Company. These networks were and will be
formed in selected markets primarily as a contracting vehicle for certain
managed care arrangements to generate revenues for the Company's practice-based
surgery centers and physician practices. As of March 31, 1998, one network had
secured a managed care contract and was operational.
The Company intends to expand through the development and acquisition of
additional surgery centers in targeted surgical specialties. In addition, the
Company believes that its surgery centers, combined with its relationships with
specialty physician practices in the surgery centers' markets, will provide the
Company with other opportunities for growth from specialty network development.
By using its surgery centers as a base to develop specialty physician networks
that are designed to serve large numbers of covered lives, the Company believes
that it will strengthen its market position in contracting with managed care
organizations.
While the Company generally owns 51% to 70% of the entities that own the
surgery center or physician group practice, the Company's consolidated
statements of operations include 100% of the results of operations of the
entities, reduced by the minority partners' share of the net income or loss of
the surgery center/practice entities.
SOURCES OF REVENUES
The Company's principal source of revenues is a facility fee charged
for surgical procedures performed in its surgery centers. This fee varies
depending on the procedure, but usually includes all charges for operating room
usage, special equipment usage, supplies, recovery room usage, nursing staff and
medications. Facility fees do not include the charges of the patient's surgeon,
anesthesiologist or other attending physicians, which are billed directly to
third-party payers by such physicians. The Company's other significant source of
revenues is the fee for physician services performed by the two physician group
practices in which the Company owns a majority interest.
Practice-based ambulatory surgery centers and physician practices such
as those in which the Company owns a majority interest depend upon third-party
reimbursement programs, including governmental and private insurance programs,
to pay for services rendered to patients. The Company derived approximately 40%
and 34% of its net revenues from governmental healthcare programs, including
Medicare and Medicaid, in the three months ended March 31, 1998 and 1997,
respectively. The Medicare program currently pays ambulatory surgery centers and
physicians in accordance with fee schedules which are prospectively determined.
Approximately 9% and 12% of the Company's revenues for the three months
ended March 31, 1998 and 1997, respectively, were generated by capitated payment
contracts with HMOs. These revenues generally were attributable to contracts
held by physician practices and a surgery center in which the Company holds a
majority interest. These contracts require the practices to provide specialty
physician and certain outpatient surgery services for the HMO members on an
exclusive basis. These contracts do not require the practices to provide or to
be at risk for hospital or other ancillary services such as laboratory or
imaging services. The services required by these contracts are provided almost
solely by surgery centers and the physician practices in which the Company owns
a majority interest. Because the Company is only at risk for the cost of
providing relatively limited healthcare services to these HMO members, the
Company's risk of overutilization by HMO members is limited to the cost of the
physician's time and the supply, drug and nursing staff expense required for
outpatient surgery. In May 1998 the Company received notification from a payer
with which it has a capitated contract for gastroenterology services covering
approximately 120,000 lives, that the contract would not be renewed beyond the
June 30, 1998 anniversary date of the contract. The payer has advised the
Company that it plans to renegotiate the terms and coverage of the contract. At
this time, the Company cannot project the results of these negotiations.
However, an unfavorable outcome in these negotiations may have an adverse impact
on the financial operations of the Company. This contract contributed $617,000,
or 3%, and $676,000, or 5%, to the Company's consolidated revenues in the three
months ended March 31, 1998 and 1997, respectively (see Note 5 of the
Consolidated Financial Statements).
The Company's sources of revenues as a percentage of total revenues for
the three months ended March 31, 1998 and 1997 are as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
---- ----
Surgery centers ............................................. 87% 80%
Physician practices ......................................... 12 17
Other ....................................................... 1 3
--- ---
Total ................................................... 100% 100%
=== ===
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RESULTS OF OPERATIONS
The following table shows certain statement of operations items expressed as a
percentage of revenues for the three months ended March 31, 1998 and 1997:
THREE MONTHS ENDED
MARCH 31,
1998 1997
---- ----
Revenues ............................................... 100.0% 100.0%
Operating expenses:
Salaries and benefits ................................ 30.1 31.6
Other operating expenses ............................. 35.8 35.4
Depreciation and amortization ........................ 8.8 8.6
Net loss on sale of assets ........................... 0.2 18.4
----- -----
Total operating expenses ........................... 74.9 94.0
----- -----
Operating income ................................... 25.1 6.0
Minority interest ...................................... 15.8 15.5
Other (income) and expenses:
Interest expense, net of interest income ............. 2.8 2.4
----- -----
Earnings (loss) before income taxes ................ 6.5 (11.9)
Income tax expense ..................................... 2.6 2.6
----- -----
Net earnings (loss) ................................ 3.9 (14.5)
Accretion of preferred stock discount .................. -- 0.5
----- -----
Net earnings (loss) available to common shareholders 3.9% (15.0)%
===== =====
Revenues were $17.8 million in the three months ended March 31, 1998,
an increase of $5.2 million, or 42%, over revenues in the comparable 1997
period. The increase is primarily attributable to additional centers in
operation in the three months ended March 31, 1998. Same-center revenues in the
three months ended March 31, 1998, increased by 14%. Same-center growth resulted
primarily from increased procedure volume. The Company anticipates further
revenue growth during 1998 as a result of additional start-up and acquired
centers expected to be placed in operation and from same-center revenue growth,
net of a revenue reduction due to the expected disposition of the physician
practices and any possible adverse impact of the renegotiated capitated
contract, as discussed above.
Salaries and benefits expense was $5.4 million in the three months
ended March 31, 1998, an increase of $1.4 million, or 35%, over salaries and
benefits expense in the comparable 1997 period. Other operating expenses were
$6.4 million in the three months ended March 31, 1998, an increase of $1.9
million, or 43%, over other operating expenses in the comparable 1997 period.
These increases resulted primarily from additional centers in operation, from an
increase in corporate staff primarily to support growth in the number of centers
in operation and anticipated future growth and additional corporate cost
associated with being a publicly traded company.
The Company anticipates further increases in operating expenses in
1998, primarily due to additional start-up centers and acquired centers expected
to be placed in operation, offset by the expected elimination of physician
practices' operating expenses upon the planned disposal of these practices.
Typically, a start-up center will incur start-up losses during its initial
months of operation and will experience lower revenues and operating margins
than an established center until its case load increases to a more optimal
operating level, which generally is expected to occur within 12 months after a
center opens.
Depreciation and amortization expense increased $481,000, or 44%, in
the three months ended March 31, 1998, over the comparable 1997 period,
primarily due to 13 additional surgery centers in operation in the three months
ended March 31, 1998 compared to the comparable 1997 period.
The Company incurred a net loss of $43,000 during the three months
ended March 31, 1998, related to the sale of a surgery center to an unaffiliated
third party. The Company does not believe that this sale will have a significant
impact on the Company's future ongoing results of operations. During the
comparable 1997 period, the Company recorded an impairment loss of $2.3 million
in connection with one partnership which operated two surgery centers which
ultimately resulted in a net loss of $2.0 million.
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The minority interest in earnings in the three months ending March 31,
1998, increased by $860,000, or 44%, over the comparable 1997 period primarily
as a result of minority partners' interest in earnings at surgery centers
recently added to operations and from increased same-center profitability.
Interest expense increased $185,000, or 60%, in the three months ending
March 31, 1998, over the comparable 1997 period due to debt assumed or incurred
in connection with additional acquisitions of interests in surgery centers,
together with the interest expense associated with newly opened start-up surgery
centers financed partially with bank debt.
The Company recognized income tax expense of $467,000 the three months
ending March 31, 1998, compared to $329,000 in the comparable 1997 period. In
the three months ended March 31, 1997, the Company recognized no tax benefit
associated with the net loss on sale of assets. The Company's effective tax rate
in both periods was 40% of earnings prior to the impact of the net loss on sale
of assets and differed from the federal statutory income tax rate of 34%
primarily due to the impact of state income taxes.
Accretion of preferred stock discount in the three months ended March
31, 1997, resulted from the issuance during November 1996 of redeemable
preferred stock with a redemption amount of $3.0 million. The preferred stock
was recorded at its fair market value, net of issuance costs. From the time of
issuance, the Series A Redeemable Preferred Stock has been accreted toward its
redemption value, including potential dividends, over the redemption term.
During the three months ended March 31, 1998, the holders of this preferred
stock elected to convert their preferred shares into 380,952 shares of Class A
Common Stock pursuant to the provisions of the Company's Charter using a
conversion ratio based on the market price of the Company's Class A Common
Stock. Accordingly, the Company will no longer record accretion of preferred
stock discount.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had working capital of $11.2 million
compared to $9.3 million in the comparable 1997 period. Operating activities for
the three months ended March 31, 1998, generated $1.1 million in cash flow from
operations compared to $1.6 million in the comparable 1997 period. Cash and cash
equivalents at March 31, 1998, and 1997 were $3.8 million and $3.4 million,
respectively.
During the three months ended March 31, 1998, the Company used $4.6
million to acquire interests in two additional practice-based ambulatory surgery
centers. In addition, the Company made capital expenditures primarily for new
start-up surgery centers and for new or replacement property at existing centers
which totaled $2.4 million in the three months ended March 31, 1998, of which
$804,000 was funded from the capital contributions of the Company's minority
partners. The Company used its cash flow from operations and net borrowings on
long-term debt of $4.8 million to fund its acquisition and development
obligations.
The Company received cash proceeds of $641,000 from the sale of a
surgery center. In addition, the Company received proceeds of $18,000 from the
issuance of common stock.
At March 31, 1998, the Company's partnerships and limited liability
companies had unfunded construction and equipment purchase commitments for
centers under development of approximately $2.0 million, of which the Company
expects that approximately $943,000 will be borrowed under the Loan Agreement
(and guaranteed on a pro rata basis by the physicians), and that the remaining
amount will be provided by the Company and the physician partners in proportion
to their respective ownership interests in the partnerships and limited
liability companies. The Company intends to fund its portion out of future cash
flows from operations.
At March 31, 1998, borrowings under the Company's revolving credit
facility were $27.6 million, are due in January 2001 and are guaranteed by the
wholly owned subsidiaries of the Company, and in some instances, the underlying
assets of certain developed centers. The credit facility permits the Company to
borrow up to $35.0 million to finance the Company's acquisition and development
projects at a rate equal to the prime rate or 1.75% above LIBOR or a combination
thereof at the Company's option, provides for a fee of 0.35% on unused
commitments, prohibits the payment of dividends and contains covenants relating
to the ratio of debt to net worth, operating performance and minimum net. The
Company expects to increase the amount available for borrowing to $50.0 million
during the second quarter of 1998. The Company was in compliance with all
covenants at March 31, 1998.
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On November 20, 1996, the Company issued shares of its Series A
Preferred Stock and Series B Preferred Stock to certain unaffiliated
institutional investors for net cash proceeds of approximately $5.0 million. The
purpose of the offering was to fund the acquisition and development of surgery
centers and to provide other working capital as needed prior to being in
position to access capital markets as an independent public company. The Series
A Preferred Stock, which had a liquidation value of $3.0 million and was subject
to redemption at any time at the option of the Company, upon the occurrence of
certain events and in 2002 at the option of the holders, was converted during
the three months ended March 31, 1998, by its holders into 380,952 shares of
Class A Common Stock using a conversion ratio based on market price of the Class
A Common Stock pursuant to the provisions of the Company's Charter. Upon the
occurrence of certain events, including an Initial Public Offering (as that term
is defined in the Company's Charter), the Series B Preferred Stock will
automatically convert into a number of shares of Class A Common Stock that
approximates 6% of the equity of the Company determined as of November 20, 1996,
with that percentage being ratably increased to 8% of the equity of the Company
if a triggering event has not occurred by November 20, 2000. The offering
discussed below, if consummated, will constitute such a triggering event, and
the Series B Preferred Stock will convert into approximately 607,500 shares of
Class A Common Stock. If a triggering event does not occur by November 20, 2002,
the holders of the Series B Preferred Stock will have the right to sell such
preferred stock to the Company on an as-if-converted basis at the current market
price of the underlying Class A Common Stock.
Historically the Company depended on AHC for the majority of its equity
financing. A principal purpose of the Distribution was to permit the Company to
have access to public debt and equity capital markets as an independent public
company. While the Company anticipates that its operating activities will
continue to provide increased revenues and cash flows, the Company will require
additional financing in order to fund its development and acquisition plans and
to achieve its long-term strategic growth plans. This additional financing could
take the form of a private or public offering of debt or equity securities or
additional bank financing. No assurances can be given that the necessary
financing will be obtainable on terms satisfactory to the Company. The failure
to raise the funds necessary to finance its future cash requirements could
adversely affect the Company's ability to pursue its strategy and could
adversely affect its results of operations for future periods.
On April 23, 1998, the Company filed a registration statement on Form
S-1 with the Securities and Exchange Commission relating to an underwritten
offering of 3,700,000 shares of Class A Common Stock. The Company intends to use
the net proceeds from the sale of the shares by the Company for the repayment of
indebtedness, working capital and general corporate purposes, including the
acquisition and development of surgery centers.
YEAR 2000
The Company is evaluating the Year 2000 issues and the impact upon
information systems and computer technologies. While certain applications in
system software critical to processing financial and operational information are
Year 2000 compliant, the Company expects to incur some costs in testing and
implementing updates to such software. The Company is also evaluating the impact
of the Year 2000 on other computer technologies and software. All costs to
evaluate and make modifications will be expensed as incurred and are not
expected to have a significant impact on the Company's ongoing results of
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" and No. 131 "Disclosures about Segments of an Enterprise
and Related Information" become effective for the Company for the year ended
December 31, 1998. The Company is still evaluating the effects of adopting these
two statements, but does not expect the adoption of either pronouncement to have
a material effect on the Company's consolidated financial statements.
Statement of Position ("SOP") No. 98-5 "Reporting on the Costs of
Start-Up Activities" becomes effective for the Company for the year ended
December 31, 1999. SOP No. 98-5 requires that start-up costs be expensed as
incurred and that upon adoption, all deferred start-up costs be expensed as a
cumulative effect of a change in accounting principle. The Company does not
anticipate that the adoption of SOP No. 98-5 will have a material effect on the
Company's financial position or ongoing results of operations.
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PART II
ITEM 1. LEGAL PROCEEDINGS.
Not Applicable.
ITEM 2. CHANGES IN SECURITIES.
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
The Company filed one report on Form 8-K dated January 30,
1998 during the quarter ended March 31, 1998 to report the
acquisition of an undivided 51% interest in the assets of Arizona
Ophthalmic Outpatient Surgery, LLC.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMSURG CORP.
Date: May 15, 1998 By: /s/ Claire M. Gulmi
-------------------------------------------------
CLAIRE M. GULMI
Senior Vice President and Chief Financial Officer
(Principal Financial and Duly Authorized Officer)
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