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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, NO PAR VALUE
----------------------------------
(Title of class)
CLASS B COMMON STOCK, NO PAR VALUE
----------------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filer pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
As of March 22, 1999, 9,539,049 shares of the Registrant's Class A
Common Stock and 4,787,131 shares of the Registrant's Class B Common Stock were
outstanding. The aggregate market value of the shares of Common Stock (based
upon the closing sale price of these shares as reported on the Nasdaq National
Market on March 22, 1999) of the Registrant held by nonaffiliates on March 22,
1999 was approximately $90,600,000. This calculation assumes that all shares of
Common Stock beneficially held by executive officers and members of the Board of
Directors of the Registrant are owned by "affiliates," a status which each of
the officers and directors individually disclaims.
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held May 21, 1999 are incorporated by reference into Part III
of this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
AmSurg Corp. (the "Company" or "AmSurg") was formed in April 1992 for
the purpose of developing, acquiring and operating practice-based ambulatory
surgery centers, in partnerships with physician practice groups, throughout the
United States. An AmSurg surgery center is typically located adjacent to or in
the immediate vicinity of the specialty medical practice of a physician group
partner's office. Each of the surgery centers provides a narrow range of high
volume, lower-risk surgical procedures, generally in a single specialty, and has
been designed with a cost structure that enables the Company to charge fees
which management believes are generally less than those charged by hospitals and
freestanding outpatient surgery centers for similar services performed on an
outpatient basis. As of December 31, 1998, the Company owned a majority interest
in 52 surgery centers in 21 states and the District of Columbia. As of December
31, 1998, the Company also had five centers under development and had executed
letters of intent to acquire or develop eight additional centers. The Company is
utilizing its surgery centers in selected markets as a base to develop specialty
physician networks that are designed to serve large numbers of covered lives and
thus strengthen the Company's position in dealing with managed care
organizations. As of December 31, 1998, the Company had established seven
specialty physician networks, located in Alabama, Florida, Kansas, Ohio,
Tennessee and Texas.
AmSurg Corp. was organized as a Tennessee corporation in 1992. The
Company's principal executive offices are located at One Burton Hills Boulevard,
Suite 350, Nashville, Tennessee 37215, and its telephone number is 615-665-1283.
INDUSTRY OVERVIEW
In recent years, government programs, private insurance companies,
managed care organizations and self-insured employers have implemented various
cost-containment measures to limit the growth of healthcare expenditures. These
cost-containment measures, together with technological advances, have resulted
in a significant shift in the delivery of healthcare services away from
traditional inpatient hospitals to more cost-effective alternate sites,
including ambulatory surgery centers.
According to SMG Marketing Group Inc.'s Freestanding Outpatient Surgery
Center Directory (June 1998), an industry publication, outpatient surgical
procedures represented approximately 73% of all surgical procedures performed in
the United States in 1997 and the number of outpatient surgery cases increased
71% from 3.1 million in 1993 to 5.3 million in 1997. As of December 31, 1997,
there were 2,634 freestanding ambulatory surgery centers in the U.S., of which
155 were owned by hospitals and 704 were owned by corporate entities. The
remaining 1,775 centers were independently owned, primarily by physicians.
The Company believes that the following factors have contributed to the
growth of ambulatory surgery:
Cost-Effective Alternative. Ambulatory surgery is generally less
expensive than hospital inpatient surgery. In addition, the Company believes
that surgery performed at a practice-based ambulatory surgery center is
generally less expensive than hospital-based ambulatory surgery for a number of
reasons, including lower facility development costs, more efficient staffing and
space utilization and a specialized operating environment focused on cost
containment. Interest in ambulatory surgery centers has grown as managed care
organizations have continued to seek a cost-effective alternative to inpatient
services.
Physician and Patient Preference. The Company believes that many
physicians prefer practice-based ambulatory surgery centers. The Company
believes that such centers enhance physicians' productivity by providing them
with greater scheduling flexibility, more consistent nurse staffing and faster
turnaround time between cases, allowing them to perform more surgeries in a
defined period of time. In contrast, hospitals and freestanding multi-specialty
ambulatory surgery centers generally serve a broader group of physicians,
including those involved with emergency procedures, resulting in postponed or
delayed surgeries. Additionally, many physicians choose to perform surgery in a
practice-based ambulatory surgery center because their patients prefer the
simplified admissions and discharge procedures and the less institutional
atmosphere.
New Technology. New technology and advances in anesthesia, which have
been increasingly accepted by physicians, have significantly expanded the types
of surgical procedures that are being performed in ambulatory surgery centers.
Lasers, enhanced endoscopic techniques and fiber optics have reduced the trauma
and recovery time associated with many surgical procedures. Improved anesthesia
has shortened recovery time by minimizing post-operative side effects such as
nausea and drowsiness, thereby avoiding, in some cases, overnight
hospitalization.
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STRATEGY
The Company believes it is a leader in the development, acquisition and
operation of practice-based ambulatory surgery centers. The key components of
the Company's strategy are:
Develop and Acquire Practice-Based Ambulatory Surgery Centers. The
Company has grown and expects to continue to grow through a combination of
acquisitions and development of single specialty centers throughout the United
States.
Achieve Growth in Surgery Center Revenues and Profitability. The
Company enhances physician productivity and promotes increased same-center
revenues and profitability by creating operating efficiencies, including
improved scheduling, group purchasing programs and the clinical efficiencies
associated with operating a single specialty surgery center. In addition, the
Company's operations are designed to attract additional managed care contracts
by emphasizing convenience, a single specialty focus, lower cost procedures and
the ability to contract for large numbers of covered lives.
Develop Specialty Networks. Utilizing single specialty ambulatory
surgery centers to provide a cost advantage, the Company's strategy has evolved
to include the development and ownership of specialty physician networks which
offer specialty physician services, as well as outpatient surgery procedures
with wide geographic coverage to managed care payers. These specialty networks
will be developed in selected markets to provide broad geographic patient access
points in the market through the network participation of high quality and
strategically located practices.
As part of this strategy, the Company has established and is the
majority owner of seven specialty physician networks. By establishing these
networks, the Company believes it will be able to obtain additional contracts
with managed care payers and increase the profitability of its surgery centers.
ACQUISITION AND DEVELOPMENT OF SURGERY CENTERS
Practice-based ambulatory surgery centers are licensed outpatient
surgery centers generally equipped and staffed for a single medical specialty
and are typically located in or adjacent to a physician group practice. The
Company has targeted ownership in centers that perform gastrointestinal
endoscopy, ophthalmology, urology, orthopaedics or otolaryngology procedures.
These specialties perform many high volume, lower-risk procedures that are
appropriate for the practice-based setting. The focus at each center on only the
procedures in a single specialty results in these centers generally having
significantly lower capital and operating costs than the costs of hospital and
freestanding ambulatory surgery center alternatives that are designed to provide
more intensive services in a broader array of surgical specialties. In addition,
the practice-based surgery center, which is located in or adjacent to the group
practice, provides a more convenient setting for the patient and for the
physician performing the procedure. Improvements in technology are also enabling
additional types of procedures to be performed in the practice-based setting.
The Company's development staff identifies existing centers that are
potential acquisition candidates and identifies physician practices that are
potential partners for new center development in the medical specialties which
the Company has targeted for development. These candidates are then evaluated
against the Company's project criteria which include several factors such as
number of procedures currently being performed by the practice, competition from
and the fees being charged by other surgical providers, relative competitive
market position of the physician practice under consideration, ability to
contract with payers in the market and state certificate of need ("CON")
requirements for development of a new center.
In presenting the advantages to physicians of developing a new
practice-based ambulatory surgery center in partnership with the Company, the
Company's development staff emphasizes the proximity of a practice-based surgery
center to a physician's office, the simplified administrative procedures, the
ability to schedule consecutive cases without preemption by inpatient or
emergency procedures, the rapid turnaround time between cases, the high
technical competency of the center's clinical staff that performs only a limited
number of specialized procedures, and state-of-the-art surgical equipment. The
Company also focuses on its expertise in developing and operating centers. In
addition, as part of the Company's role as the general partner or manager of the
surgery center partnerships and limited liability companies, the Company markets
the centers to third party payers.
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In a development project, AmSurg, among other things, provides the
following services:
- Financial feasibility pro forma analysis;
- Assistance in state CON approval process;
- Site selection;
- Assistance in space analysis and schematic floor plan design;
- Analysis of local, state, and federal building codes;
- Negotiation of equipment financing with lenders;
- Equipment budgeting, specification, bidding, and purchasing;
- Construction financing;
- Architectural oversight;
- Contractor bidding;
- Construction management; and
- Assistance with licensing, Medicare certification and third party
payer contracts.
The Company's ownership interests in practice-based ambulatory surgery
centers generally are structured through limited and general partnerships or
limited liability companies. The Company generally owns 51% to 70% of the
partnerships or limited liability companies and acts as the general partner in
each limited partnership. In development transactions, capital contributed by
the physicians and the Company plus bank financing provides the partnership or
limited liability company with the funds necessary to construct and equip a new
surgery center and to provide initial working capital.
As part of each development and acquisition transaction, the Company
enters into a partnership agreement or, in the case of a limited liability
company, an operating agreement with its physician group partner. Under these
agreements, the Company receives a percentage of the net income and cash
distributions of the entity equal to its percentage interest in the entity and
has the right to the same percentage of the proceeds of a sale or liquidation of
the entity. As sole general partner, the Company is generally liable for the
debts of the partnership.
These agreements generally provide that the Company will oversee the
business and administrative operations of the surgery center, and that the
physician group partner will provide the center with a medical director, and
with certain specified services such as billing and collections, transcription,
and accounts payable processing. In connection with the Company's management of
the business operations at each center, the Company historically received a
management fee paid by the partnership or limited liability company. The
partnership or limited liability company also paid a physician group partner a
medical director fee and a fee for providing certain administrative services to
the center. Because the management fee usually approximates the value of
services provided to the center by the physician practice, on an ongoing basis,
the Company has structured its agreements so that the Company generally no
longer provides for any of such fees in its partnerships or limited liability
companies and instead the respective parties are required to provide the
services pursuant to the terms of the partnership or operating agreement. For
centers under development, the partnership or limited liability company
generally pays a fee to the Company for management of the planning, construction
and opening of the center.
In addition, these agreements typically provide that the limited
partnership or limited liability company will lease certain non-physician
personnel from the physician practice, who will provide services at the center.
The cost of the salary and benefits of these personnel are reimbursed to the
practice by the limited partnership or limited liability company. Certain
significant aspects of the limited partnership's or limited liability company's
governance are overseen by an operating board, which is comprised of equal
representation by the Company and the physician partners.
The partnership and operating agreements provide that if certain
regulatory changes take place the Company will be obligated to purchase some or
all of the minority interests of the physicians affiliated with the Company in
the partnerships or limited liability companies that own and operate the
Company's surgery centers. The regulatory changes that could trigger such an
obligation include changes that: (i) make the referral of Medicare and other
patients to the Company's surgery centers by physicians affiliated with the
Company illegal; (ii) create the substantial likelihood that cash distributions
from the partnership or limited liability company to the physicians associated
therewith will be illegal; or (iii) cause the ownership by the physicians of
interests in the partnerships or limited liability companies to be illegal.
There can be no assurance that the Company's existing capital resources would be
sufficient for it to meet the obligation, if it arises, to purchase minority
interests held by physicians in the partnerships or limited liability companies
which own and operate the Company's surgery centers. The determination of
whether a triggering event has occurred is made by the concurrence of counsel
for the Company and the physician partners or, in the absence of such
concurrence, by independent counsel having an expertise in healthcare law and
who is chosen by both parties. Such determination is therefore not within the
control of the Company. While the Company has structured the purchase
obligations to be as favorable as possible to the Company, the triggering of
these obligations could have a material adverse effect on the financial
condition and results of operations of the Company. See "--Government
Regulation."
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SURGERY CENTER LOCATIONS
The following table sets forth certain information relating to centers
in operation as of December 31, 1998:
YEAR OR DATE OPERATING OR
SPECIALTY ORIGINALLY ACQUISITION PROCEDURE
LOCATION PRACTICE OPENED DATE ROOMS
-------- -------- ------ ---- -----
ACQUIRED CENTERS:
Knoxville, Tennessee............... Gastroenterology 1987 November 1992 7
Topeka, Kansas..................... Gastroenterology 1990 November 1992 4
Nashville, Tennessee............... Gastroenterology 1989 November 1992 3
Nashville, Tennessee............... Gastroenterology 1988 December 1992 3
Washington, D.C.................... Gastroenterology 1990 November 1993 3
Melbourne, Florida................. Ophthalmology 1986 November 1993 3
Torrance, California............... Gastroenterology 1990 February 1994 2
Sebastopol, California............. Ophthalmology 1988 April 1994 2
Maryville, Tennessee............... Gastroenterology 1992 January 1995 3
Miami, Florida..................... Gastroenterology 1995 April 1995 7
Panama City, Florida............... Gastroenterology 1993 July 1996 3
Ocala, Florida..................... Gastroenterology 1993 August 1996 3
Columbia, South Carolina........... Gastroenterology 1988 October 1996 3
Wichita, Kansas.................... Orthopaedics 1991 November 1996 3
Minneapolis, Minnesota............. Gastroenterology 1993 November 1996 2
Crystal River, Florida............. Gastroenterology 1994 January 1997 3
Abilene, Texas..................... Ophthalmology 1987 March 1997 2
Fayetteville, Arkansas ............ Gastroenterology 1992 May 1997 2
Independence, Missouri............. Gastroenterology 1994 September 1997 2
Kansas City, Missouri.............. Gastroenterology 1995 September 1997 2
Phoenix, Arizona................... Ophthalmology 1995 February 1998 2
Denver, Colorado................... Gastroenterology 1995 April 1998 3
Sun City, Arizona.................. Ophthalmology 1984 May 1998 4
Westlake, California............... Ophthalmology 1985 August 1998 1
Baltimore, Maryland ............... Gastroenterology 1995 November 1998 2
Naples, Florida.................... Gastroenterology 1992 November 1998 2
Boca Raton, Florida................ Ophthalmology 1998 December 1998 2
DEVELOPED CENTERS:
Santa Fe, New Mexico............... Gastroenterology May 1994 - 3
Tarzana, California................ Gastroenterology July 1994 - 3
Beaumont, Texas.................... Gastroenterology October 1994 - 3
Abilene, Texas..................... Gastroenterology December 1994 - 3
Knoxville, Tennessee............... Ophthalmology June 1996 - 2
West Monroe, Louisiana............. Gastroenterology June 1996 - 2
Miami, Florida..................... Gastroenterology September 1996 - 3
Sidney, Ohio....................... Ophthalmology, December 1996 - 3
Urology
General Surgery
Otolaryngology
Montgomery, Alabama................ Ophthalmology May 1997 - 2
Willoughby, Ohio................... Gastroenterology July 1997 - 2
Milwaukee, Wisconsin............... Gastroenterology July 1997 - 2
Chevy Chase, Maryland.............. Gastroenterology July 1997 - 2
Melbourne, Florida................. Gastroenterology August 1997 - 2
Lorain, Ohio....................... Gastroenterology August 1997 - 2
Hillmont, Pennsylvania............. Gastroenterology October 1997 - 2
Minneapolis, Minnesota............. Gastroenterology November 1997 - 2
Hialeah, Florida................... Gastroenterology December 1997 - 3
Cleveland, Ohio.................... Ophthalmology December 1997 - 2
Cincinnati, Ohio................... Gastroenterology January 1998 - 3
Evansville, Indiana................ Ophthalmology February 1998 - 2
Shawnee, Kansas.................... Gastroenterology April 1998 - 2
Salt Lake City, Utah............... Gastroenterology April 1998 - 2
Oklahoma City, Oklahoma............ Gastroenterology May 1998 - 2
El Paso, Texas..................... Gastroenterology December 1998 - 3
Toledo, Ohio....................... Gastroenterology December 1998 - 3
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The Company's partnerships and limited liability companies generally
lease certain of the real property in which its centers operate and the
equipment used in certain of its centers, either from the physician partners or
from unaffiliated parties. Two centers in operation at December 31, 1998 are
located in buildings owned indirectly by the Company.
SURGERY CENTER OPERATIONS
The Company generally designs, builds, staffs and equips each of its
facilities to meet the specific needs of a single specialty physician practice
group. The Company's typical ambulatory surgery center averages 3,000 square
feet and is located adjacent to or in the immediate vicinity of the specialty
physicians' offices. Each center developed by the Company typically has two to
three operating or procedure rooms with areas for reception, preparation,
recovery and administration. Each surgery center is developed to perform an
average of 2,500 procedures per year. As of December 31, 1998, 38 of the
Company's centers in operation performed gastrointestinal endoscopy procedures,
12 centers performed ophthalmology procedures, one center performed orthopaedic
procedures and one center performed ophthalmology, urology, general surgery and
otolaryngology procedures. The procedures performed at the Company's centers
generally do not require an extended recovery period following the procedures.
The Company's centers are typically staffed with three to five clinical
professionals and administrative personnel, some of whom may be shared with the
physician practice group. The clinical staff includes nurses and surgical
technicians.
The types of procedures performed at each center depend on the
specialty of the practicing physicians. The typical procedures performed or to
be performed most commonly at AmSurg centers in operation or under development
within each specialty are:
- Gastroenterology--colonoscopy and endoscopy procedures
- Ophthalmology--cataracts and retinal laser surgery
- Orthopaedics--knee arthroscopy and carpal tunnel repair
- Urology--cystoscopy and biopsy
- Otolaryngology--myringotomy and tonsillectomy
The Company markets its surgery centers and networks directly to
third-party payers, including health maintenance organizations ("HMOs"),
preferred provider organizations ("PPOs"), other managed care organizations and
employers. Payer-group marketing activities conducted by the Company's
management and center administrators emphasize the high quality of care, cost
advantages and convenience of the Company's surgery centers and are focused on
making each center an approved provider under local managed care plans. In
addition, the Company is pursuing relationships with selected physician groups
in its markets in order to market a comprehensive specialty physician network
that includes its surgery centers to managed care payers.
JCAHO ACCREDITATION
Thirty-two of the Company's surgery centers are currently accredited by
the Joint Commission for the Accreditation of Healthcare Organizations ("JCAHO")
and 14 surgery centers are scheduled for initial or renewal accreditation
surveys during 1999. Of the accredited centers, all have received three-year
certification. The Company believes that JCAHO accreditation is the quality
benchmark for managed care organizations. Many managed care organizations will
not contract with a facility until it is JCAHO accredited. The Company believes
that its historical performance in the accreditation process reflects the
Company's commitment to providing high quality care in its surgery centers.
SPECIALTY PHYSICIAN NETWORKS
Managed care organizations with significant numbers of covered lives
are seeking to direct large numbers of patients to high-quality, low-cost
providers and provider groups. The Company believes that specialty physician
networks that include its practice-based surgery centers are attractive to
managed care organizations because of the geographic coverage of the network,
the lower costs associated with treatment, the availability of the complete
delivery system for a specific specialty and high levels of patient
satisfaction. As a result, the Company believes the development of such networks
will position the Company to capture an increased volume of managed care
contracts, including capitated contracts, and will increase the market share and
profitability of the Company's surgery centers.
It is not expected that the specialty physician networks in themselves
will be a significant source of income for the Company. These networks were and
will be formed primarily as a contracting vehicle to generate revenues for the
Company's practice-based surgery centers.
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As of December 31, 1998, the Company had established and was the
majority owner and operator of seven specialty physician networks consisting of
two gastroenterology networks in Miami, Florida and Kansas City, Kansas and five
ophthalmology/eye care networks in Knoxville, Tennessee, Montgomery, Alabama,
Cleveland, Ohio, Abilene, Texas and Melbourne, Florida. As of December 31, 1998,
three networks had secured managed care contracts and were operational. Each
specialty physician network is formed as either a limited partnership or limited
liability company in which the Company owns a majority interest. Individual
physicians who practice in the medical specialty on which the network is focused
own the minority interests in the network. These minority physician owners, who
may or may not be affiliated with a Company surgery center, will provide the
medical services to the patient population covered by the contracts the network
will enter into with managed care payers. Following the establishment of a
network, the Company will provide management services and marketing services to
the network in an effort to secure patient service contracts with managed care
payers. Fees paid by these networks to the Company are nominal and generally are
intended to cover the Company's cost in providing such services.
In addition, as part of its network development strategy, in January
1996 and January 1997 the Company acquired a majority interest in the assets of
two physician practices in Miami, Florida. As a result of the Company's
experience in developing specialty physician networks, the Company concluded
that ownership of physician practices is required in order to establish a
specialty physician network. In May 1998, the Board of Directors approved a plan
for the Company to dispose of its physician practice interests 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. Both practices were sold in 1998.
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 source of revenues
historically has been fees for physician services performed by the two physician
group practices in which the Company owned a majority interest, but which were
disposed of in the second and fourth quarters of 1998.
Practice-based ambulatory surgery centers 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 41% of its net revenues
from governmental healthcare programs, including Medicare and Medicaid, in 1998.
The Medicare program currently pays ambulatory surgery centers and physicians in
accordance with fee schedules which are prospectively determined.
On June 12, 1998, HCFA published a proposed rule that would update the
ratesetting methodology, payment rates, payment policies and the list of covered
surgical procedures for ambulatory surgery centers. The proposed rule is subject
to a comment period that has been extended until June 30, 1999, and provides for
an implementation date that has been extended to a date no earlier than January
2000. The proposed rule reduces the rates paid for certain ambulatory surgery
center procedures reimbursed by Medicare, including a number of endoscopy and
ophthalmological procedures performed at the Company's centers.
The Company believes that the proposed rule if adopted in its current
form would adversely affect the Company's annual revenues by approximately 4% at
that time. However, if the proposed rule were adopted in its current form, the
Company expects that the earnings impact will be offset by certain actions taken
by the Company or that the Company intends to take, including actions to effect
certain cost efficiencies in center operations, reduce corporate overhead costs
and provide for contingent purchase price adjustments for future acquisitions.
There can be no assurance that the Company will be able to implement
successfully these actions or that if implemented the actions will offset fully
the adverse impact of the rule, as finally adopted, on the earnings of the
Company. There also can be no assurance that HCFA will not modify the proposed
rule, before it is enacted in final form, in a manner that would adversely
impact the Company's financial condition, results of operation and business
prospects.
In addition to payment from governmental programs, ambulatory surgery
centers derive a significant portion of their net revenues from private
healthcare reimbursement plans. These plans include both standard indemnity
insurance programs as well as managed care structures such as PPOs, HMOs and
other similar structures. The strengthening of managed care systems nationally
has resulted in substantial competition among providers of services, including
providers of surgery center services with greater financial resources and market
penetration than the Company, to contract with these systems. The Company
believes that all payers, both governmental and private, will continue their
efforts over the next several years to reduce healthcare costs and that their
efforts will generally result in a less stable market for healthcare services.
While no assurances can be given concerning the ultimate success of the
Company's efforts to contract with healthcare payers, the Company believes that
its position as a low-cost alternative for certain surgical procedures should
enable the Company's centers to compete effectively in the evolving healthcare
marketplace.
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Approximately 6% of the Company's revenues during 1998 were generated
by capitated payment contracts with HMOs. These revenues generally were
attributable to contracts held by the physician practices and a surgery center
in which the Company held a majority interest. Approximately 60% of the revenue
associated with these contracts in 1998 were a part of the operations of the
disposed practices. The other contracts require the surgery centers to provide
certain outpatient surgery services for the HMO members on an exclusive basis.
The services required by these contracts are provided almost solely by surgery
centers 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 supplies, drugs and nursing staff expense required
for outpatient surgery.
COMPETITION
The Company encounters competition in two separate areas: competition
with other companies for its physician partnership relationships, and
competition with other providers for patients and for contracting with managed
care payers in each of its markets.
Competition for Partnership Relationships. The Company believes that it
does not have a direct competitor in the development of practice-based
ambulatory surgery centers across the specialties of gastroenterology,
ophthalmology, otolaryngology, urology, and orthopaedic surgery. There are,
however, several large, publicly held companies, or divisions or subsidiaries of
large publicly held companies, that develop freestanding multi-specialty surgery
centers, and these companies may compete with the Company in the development of
centers.
Many physician groups develop surgery centers without a corporate
partner. It is generally difficult, however, in the rapidly evolving healthcare
industry, for a single practice to create effectively the efficient operations
and marketing programs necessary to compete with other provider networks and
companies. Because of this, as well as the financial investment necessary to
develop surgery centers, physician groups are attracted to corporate partners,
such as AmSurg. Other factors that may influence the physicians' decisions
concerning the choice of a corporate partner are the potential corporate
partner's experience, reputation and access to capital.
There are several companies, many in niche markets, that acquire
existing practice-based ambulatory surgery centers and specialty physician
practices. Many of these competitors have greater resources than the Company.
Most of the Company's competitors acquire centers through the acquisition of the
related physician practice. The principal competitive factors that affect the
ability of the Company and its competitors to acquire surgery centers are price,
experience and reputation, access to capital and willingness to acquire a
surgery center without acquiring the physician practice.
While there are a few national networking companies that specialize in
the establishment and operation of single specialty networks similar to the
Company's networks, most networks are either multi-specialty or primary care
based. The competitive factors the Company primarily experiences in the
development of specialty networks include the ability to attract physician
practice groups to the network and to achieve market penetration and geographic
coverage.
Competition for Patients and Managed Care Contracts. The Company
believes that its surgery centers can provide lower-cost, high quality surgery
in a more comfortable environment for the patient in comparison to hospitals and
to freestanding surgery centers with which the Company competes for managed care
contracts. In addition, the existence of the Company's specialty physician
networks provides the geographic access that managed care companies desire.
Competition for managed care contracts with other providers is focused on
pricing of services, quality of services, and affiliation with key physician
groups in a particular market.
GOVERNMENT REGULATION
The healthcare industry is subject to extensive regulation by a number
of governmental entities at the federal, state and local level. Regulatory
activities affect the business activities of the Company, by controlling the
Company's growth, requiring licensure and certification for its facilities,
regulating the use of the Company's properties, and controlling reimbursement to
the Company for the services it provides.
CONs and State Licensing. CON regulations control the development of
ambulatory surgery centers in certain states. CONs generally provide that prior
to the expansion of existing centers, the construction of new centers, the
acquisition of major items of equipment or the introduction of certain new
services, approval must be obtained from the designated state health planning
agency. State CON statutes generally provide that, prior to the construction of
new facilities or the introduction of new services, a designated state health
planning agency must determine that a need exists for those facilities or
services. The Company's development of ambulatory surgery centers generally
focuses on states that do not require CONs. However, acquisitions of existing
surgery centers, even in states that require CONs for new centers, generally do
not require CON regulatory approval.
8
9
State licensing of ambulatory surgery centers is generally a
prerequisite to the operation of each center and to participation in federally
funded programs, such as Medicare and Medicaid. Once a center becomes licensed
and operational, it must continue to comply with federal, state and local
licensing and certification requirements in addition to local building and life
safety codes. In addition, every state imposes licensing requirements on
individual physicians, and facilities and services operated and owned by
physicians. Physician practices are also subject to federal, state and local
laws dealing with issues such as occupational safety, employment, medical leave,
insurance regulations, civil rights and discrimination, and medical waste and
other environmental issues.
Corporate Practice of Medicine. The Company is not required to obtain a
license to practice medicine in any jurisdiction in which it owns and operates
an ambulatory surgery center, because the surgery centers are not engaged in the
practice of medicine. The physicians who perform procedures at the surgery
centers are licensed to practice medicine through their group practices which
are not affiliated with the Company other than through the physicians' ownership
in the partnerships and limited liability companies that own the surgery
centers.
Insurance Laws. Laws in all states regulate the business of insurance
and the operation of HMOs. Many states also regulate the establishment and
operation of networks of healthcare providers. The Company believes that its
operations are in compliance with these laws in the states in which it currently
does business. The National Association of Insurance Commissioners (the "NAIC")
recently endorsed a policy proposing the state regulation of risk assumption by
healthcare providers. The policy proposes prohibiting providers from entering
into capitated payment or other risk sharing contracts except through HMOs or
insurance companies. Several states have adopted regulations implementing the
NAIC policy in some form. In states where such regulations have been adopted,
healthcare providers will be precluded from entering into capitated contracts
directly with employers and benefit plans other than HMOs and insurance
companies.
The Company and its affiliated groups may in the future enter into
contracts with managed care organizations, such as HMOs, whereby the Company and
its affiliated groups would assume risk in connection with providing healthcare
services under capitation arrangements. If the Company or its affiliated groups
are considered to be in the business of insurance as a result of entering into
such risk sharing arrangements, they could become subject to a variety of
regulatory and licensing requirements applicable to insurance companies or HMOs,
which could have a material adverse effect upon the Company's ability to enter
into such contracts.
With respect to managed care contracts that do not involve capitated
payments or some other form of financial risk sharing, federal and state
antitrust laws restrict the ability of healthcare provider networks such as the
Company's specialty physician networks to negotiate payments on a collective
basis.
Reimbursement. The Company depends upon third-party programs, including
governmental and private health insurance programs, to reimburse it for services
rendered to patients in its ambulatory surgery centers. In order to receive
Medicare reimbursement, each ambulatory surgery center must meet the applicable
conditions of participation set forth by the Department of Health and Human
Services ("DHHS") relating to the type of facility, its equipment, personnel and
standard of medical care, as well as compliance with state and local laws and
regulations, all of which are subject to change from time to time. Ambulatory
surgery centers undergo periodic on-site Medicare certification surveys. Each of
the existing AmSurg centers is certified as a Medicare provider. Although the
Company intends for its centers to participate in Medicare and other government
reimbursement programs, there can be no assurance that these centers will
continue to qualify for participation.
Medicare-Medicaid Illegal Remuneration Provisions. The anti-kickback
statute makes unlawful knowingly and willfully soliciting, receiving, offering
or paying any remuneration (including any kickback, bribe, or rebate) directly
or indirectly to induce or in return for referring an individual to a person for
the furnishing or arranging for the furnishing of any item or service for which
payment may be made in whole or in part under Medicare or Medicaid. Violation is
a felony punishable by a fine of up to $25,000 or imprisonment for up to five
years, or both. The Medicare and Medicaid Patient Program Protection Act of 1987
(the "1987 Act") provides administrative penalties for healthcare practices
which encourage overutilization or illegal remuneration when the costs of
services are reimbursed under the Medicare program. Loss of Medicare
certification and severe financial penalties are included among the 1987 Act's
sanctions. The 1987 Act, which adds to the criminal penalties under preexisting
law, also directs the Inspector General of the DHHS to investigate practices
which may constitute overutilization, including investments by healthcare
providers in medical diagnostic facilities and to promulgate regulations
establishing exemptions or "safe harbors" for investments by medical service
providers in legitimate business ventures that will be deemed not to violate the
law even though those providers may also refer patients to such a venture.
Regulations identifying safe harbors were published in final form in July 1991
(the "Regulations").
The Regulations set forth two specific exemptions or "safe harbors"
related to "investment interests": the first concerning investment interests in
large publicly traded companies ($50,000,000 in net tangible assets) and the
second for investments in smaller entities. The partnerships and limited
liability companies that own the AmSurg centers do not meet all of the criteria
of either existing "investment interests" safe harbor as announced in the
Regulations.
9
10
While several federal court decisions have aggressively applied the
restrictions of the anti-kickback statute, they provide little guidance as to
the application of the anti-kickback statute to the Company's partnerships and
limited liability companies. The Company believes that it is in compliance with
the current requirements of applicable federal and state law because among other
factors:
i. the partnerships and limited liability companies exist to
effect legitimate business purposes, including the ownership, operation
and continued improvement of quality, cost effective and efficient
services to their patients;
ii. the partnerships and limited liability companies function
as an extension of the group practices of physicians who are affiliated
with the surgery centers and the surgical procedures are performed
personally by these physicians without referring the patients outside
of their practice;
iii. the physician partners have a substantial investment at
risk in the partnership or limited liability company;
iv. terms of the investment do not take into account volume
of the physician partner's past or anticipated future services provided
to patients of the centers;
v. the physician partners are not required or encouraged as a
condition of the investment to treat Medicare or Medicaid patients at
the centers or to influence others to refer such patients to the
centers for treatment;
vi. the partnership, limited liability company, the AmSurg
subsidiary and their affiliates generally will not loan any funds to or
guarantee any debt on behalf of the physician partners; and
vii. distributions by the partnerships and limited liability
companies are allocated uniformly in proportion to ownership interests.
The Regulations also set forth a safe harbor for personal services and
management contracts. Certain of the Company's partnerships and limited
liability companies have entered into ancillary services agreements with their
physician partners' group practice pursuant to which the practice provides the
center with billing and collections, transcription, payables processing and
payroll services. The consideration payable by the partnership or limited
liability company for these services is based on the volume of services provided
by the practice which is measured by the partnership or limited liability
company's revenues. Although these relationships do not meet all of the criteria
of the personal services and management contracts safe harbor, the Company
believes that the ancillary services agreements are in compliance with the
current requirements of applicable federal and state law because, among other
factors, the fees payable to the physician practice approximate the practice's
cost of providing the services thereunder.
Notwithstanding the Company's belief that the relationship of physician
partners to the AmSurg surgery centers should not constitute illegal
remuneration under the anti-kickback statute, no assurances can be given that a
federal or state agency charged with enforcement of the anti-kickback statute
and similar laws might not assert a contrary position or that new federal or
state laws might not be enacted that would cause the physician partners'
ownership interest in the AmSurg centers to become illegal, or result in the
imposition of penalties on the Company or certain of its facilities. Even the
assertion of a violation could have a material adverse effect upon the Company.
Prohibition on Physician Ownership of Healthcare Facilities. The
so-called "Stark II" provisions of the Omnibus Budget Reconciliation Act of 1993
("OBRA 93") amend the federal Medicare statute to prohibit a referral by a
physician for "designated health services" to an entity in which the physician
has an investment interest or other financial relationship, subject to certain
exceptions. A referral under Stark II that does not fall within an exception is
strictly prohibited. This prohibition took effect on January 1, 1995. Sanctions
for violating Stark II can include civil monetary penalties and exclusion from
Medicare and Medicaid.
Ambulatory surgery is not identified as a "designated health service",
and the Company, therefore, does not believe that ambulatory surgery is
otherwise subject to the restrictions set forth in Stark II. Proposed
regulations pursuant to Stark II that were published on January 9, 1998
specifically provide that services provided in any ambulatory surgery center and
reimbursed under the composite payment rate are not designated health services.
However, unfavorable final Stark II regulations or subsequent adverse court
interpretations concerning similar provisions found in recently enacted state
statutes could prohibit reimbursement for treatment provided by the physicians
affiliated with the Company's centers to their patients. The Company cannot
predict whether other regulatory or statutory provisions will be enacted by
federal or state authorities which would prohibit or otherwise regulate
relationships which the Company has established or may establish with other
healthcare providers or the possibility of material adverse effects on its
business or revenues arising from such future actions. The Company believes,
however, that it will be able to adjust its operations so as to be in compliance
with any regulatory or statutory provision, as may be applicable.
10
11
The Company is subject to state and federal laws that govern the
submission of claims for reimbursement. These laws generally prohibit an
individual or entity from knowingly and willfully presenting a claim (or causing
a claim to be presented) for payment from Medicare, Medicaid or other third
party payers that is false or fraudulent. The standard for "knowing and willful"
often includes conduct that amounts to a reckless disregard for whether accurate
information is presented by claims processors. Penalties under these statutes
include substantial civil and criminal fines, exclusion from the Medicare
program, and imprisonment. One of the most prominent of these laws is the
federal False Claims Act, which may be enforced by the federal government
directly, or by a qui tam plaintiff on the government's behalf. Under the False
Claims Act, both the government and the private plaintiff, if successful, are
permitted to recover substantial monetary penalties, as well as an amount equal
to three times actual damages. In recent cases, some qui tam plaintiffs have
taken the position that violations of the anti-kickback statute and Stark II
should also be prosecuted as violations of the federal False Claims Act. The
Company believes that it has procedures in place to ensure the accurate
completion of claims forms and requests for payment. However, the laws and
regulations defining the proper parameters of proper Medicare or Medicaid
billing are frequently unclear and have not been subjected to extensive judicial
or agency interpretation. Billing errors can occur despite the Company's best
efforts to prevent or correct them, and no assurances can be given that the
government will regard such errors as inadvertent and not in violation of the
False Claims Act or related statutes.
Under its agreements with its physician partners, the Company is
obligated to purchase the interests of the physicians at the greater of the
physicians' capital account or a multiple of earnings in the event that their
continued ownership of interests in the partnerships and limited liability
companies becomes prohibited by the statutes or regulations described above. The
determination of such a prohibition is required to be made by counsel of the
Company in concurrence with counsel of the physician partners, or if they cannot
concur, by a nationally recognized law firm with an expertise in healthcare law
jointly selected by the Company and the physician partners. The interest
required to be purchased by the Company will not exceed the minimum interest
required as a result of the change in the statute or regulation causing such
prohibition.
EMPLOYEES
As of December 31, 1998, the Company and its affiliated entities
employed approximately 300 persons, 200 of whom were full-time employees and 100
of whom were part-time employees. Of the above, 68 were employed at the
Company's headquarters in Nashville, Tennessee. In addition, approximately 210
employees are leased on a full-time basis and 140 are leased on a part-time
basis from the associated physician practices. None of these employees are
represented by a union. The Company believes its relationship with its employees
to be excellent.
LEGAL PROCEEDINGS AND INSURANCE
From time to time, the Company may be named a party to legal claims and
proceedings in the ordinary course of business. Management is not aware of any
claims or proceedings against it, its partnerships or limited liability
companies that might have a material financial impact on the Company.
Each of the Company's surgery centers and physician practices maintains
separate medical malpractice insurance in amounts it deems adequate for its
business.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Nashville,
Tennessee and contain an aggregate of approximately 15,000 square feet of office
space, which the Company subleases from American Healthcorp, Inc. ("AHC")
pursuant to an agreement that expires in December 1999. AmSurg partnerships and
limited liability companies generally lease space for their surgery centers.
Fifty of the centers in operation at December 31, 1998 lease space ranging from
1,200 to 13,400 square feet with remaining lease terms ranging from two to
eighteen years. Two centers in operation at December 31, 1998 are located in
buildings owned indirectly by the Company.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
11
12
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding executive
officers of the Company as of December 31, 1998. Executive officers of the
Company serve at the pleasure of the Board of Directors.
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Ken P. McDonald 58 Chief Executive Officer since December 1997; President and a
director since July 1996; Executive Vice President from
December 1994 through July 1996 and Chief Operating Officer
from December 1994 until December 1997.
Claire M. Gulmi 45 Chief Financial Officer since September 1994; Senior Vice
President since March 1997; Secretary since December 1997;
Vice President from September 1994 through March 1997.
Royce D. Harrell 53 Senior Vice President of Operations since October 1992.
Rodney H. Lunn 49 Senior Vice President of Center Development since 1992;
director from 1992 until February 1997.
David L. Manning 49 Senior Vice President of Development and Assistant Secretary
of the Company since April 1992.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Class A Common Stock and Class B Common Stock began
trading on December 4, 1997 on the Nasdaq Stock Market's National Market under
the symbols "AMSGA" and "AMSGB", respectively.
The following table sets forth the high and low sales prices per share
of each class of common stock as reported on the Nasdaq National Market from
December 4, 1997 through December 31, 1997 and each of the quarters in 1998.
HIGH LOW
---- ---
December 4, 1997 through December 31, 1997:
AMSGA....................................... $ 9.50 $7.50
AMSGB....................................... $ 9.25 $7.38
Quarter ended March 31, 1998:
AMSGA....................................... $10.25 $6.75
AMSGB....................................... $10.00 $6.63
Quarter ended June 30, 1998:
AMSGA....................................... $11.25 $7.25
AMSGB....................................... $11.00 $6.00
Quarter ended September 30, 1998:
AMSGA....................................... $ 7.81 $6.00
AMSGB....................................... $ 7.38 $5.00
Quarter ended December 31, 1998:
AMSGA....................................... $ 7.88 $6.50
AMSGB....................................... $ 7.56 $6.00
12
13
At March 22, 1999 there were approximately 2,100 holders of the Class A
Common Stock, including 167 shareholders of record, and 1,600 holders of the
Class B Common Stock, including 98 shareholders of record.
The Company has never declared or paid a cash dividend on its common
stock. The Company intends to retain its earnings to finance the growth and
development of its business and does not expect to declare or pay any cash
dividends in the foreseeable future. The declaration of dividends is within the
discretion of the Company's Board of Directors, which will review this dividend
policy from time to time. Presently, the declaration of dividends would violate
certain covenants associated with the Company's credit facility with lending
institutions.
On September 24, 1997, the Company issued 1,500 shares of Class A
Common Stock at a range of $3.09 to $4.68 per share upon the exercise of stock
options pursuant to the exemptions from registration afforded by Section 4(2) of
the Securities Act of 1933, as amended (the "Securities Act") and Regulation D
of the Securities Act.
At various times during the period beginning May 12, 1997 and ending
December 31, 1997, the Company sold an aggregate of 175,882 shares of Class A
Common Stock to physician practices and individual physicians as partial
consideration in connection with the acquisition of surgery centers and in
private placements to physician partners in connection with the development of
surgery centers. The per share price of these sales ranged from $6.15 to $8.70.
The shares described above were issued without registration under the Securities
Act in reliance upon the exemptions from registration afforded by Section 4(2)
of the Securities Act and Regulation D of the Securities Act.
On December 3, 1997, the Company issued shares of Class A Common Stock
and Class B Common Stock in the 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 (the "Recapitalization"), and in the exchange in
which AHC exchanged a portion of its shares of Class A Common Stock for shares
of newly issued Class B Common Stock (the "Exchange"). The shares issued in the
Recapitalization and the Exchange were issued without registration under the
Securities Act in reliance upon the exemption from registration afforded by
Section 3(a)(9) of the Securities Act.
On November 20, 1996, the Company issued shares of its Series A
Redeemable Preferred Stock and Series B Convertible 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. On March
2, 1998, the Series A Preferred Stock was converted by its holders into 380,952
shares of Class A Common Stock using a conversion ratio based on the market
price of the Class A Common Stock pursuant to the provisions of the Company's
Charter. On June 17, 1998, the Series B Preferred Stock was converted into
605,998 shares of Class A Common Stock as determined by a conversion ratio
providing for the issuance of that number of shares which approximated 6% of the
equity of the Company determined as of November 20, 1996.
On June 11, 1998, the Company's registration statement on Form S-1
(Registration No. 333-50813) for the registration and offering of 3,700,000
shares of Class A Common Stock became effective, and on June 17, 1998, the
Company commenced and completed its sale of such registered shares at an
offering price of $8.00 per share. J.C. Bradford & Co., Piper Jaffrey Inc. and
Morgan Keegan & Company, Inc. underwrote the offering. The gross proceeds of the
offering aggregated $29,600,000, and expenses incurred by the Company in
connection with the offering totaled approximately $2,000,000. Net proceeds of
approximately $27,600,000 were used to repay borrowings under the Company's
revolving credit facility.
At various times during 1998, the Company issued an aggregate of 56,366
shares of Class A Common Stock to physicians as partial consideration in
connection with the acquisition of surgery centers. The per share price of these
issuances ranged from $6.64 to $9.00. The shares described above were issued
without registration under the Securities Act in reliance upon the exemptions
from registration afforded by Section 4(2) of the Securities Act and Regulation
D of the Securities Act.
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ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues .............................. $ 80,322 $ 57,414 $34,898 $22,389 $13,784
Operating expenses:
Salaries and benefits ............ 22,947 17,363 11,613 6,243 4,092
Other operating expenses ......... 28,393 20,352 11,547 7,558 5,091
Depreciation and amortization .... 6,568 4,944 3,000 2,397 1,309
Net loss on sale of assets ....... 5,462(1) 1,425(2) 31 -- --
-------- -------- ------- ------- -------
Total operating expenses ....... 63,370 44,084 26,191 16,198 10,492
-------- -------- ------- ------- -------
Operating income ................. 16,952 13,330 8,707 6,191 3,292
Minority interest ..................... 13,645 9,084 5,433 3,938 2,464
Other expenses:
Interest expense, net ............ 1,499 1,554 808 627 151
Distribution cost ................ -- 842(3) -- -- --
-------- -------- ------- ------- -------
Earnings before income taxes ..... 1,808 1,850 2,466 1,626 677
Income tax expense .................... 1,047 1,774 985 578 26
-------- -------- ------- ------- -------
Net earnings ................... 761 76 1,481 1,048 651
Accretion of preferred stock discount.. -- 286 22 -- --
-------- -------- ------- ------- -------
Net earnings (loss) available to common
shareholders ..................... $ 761 $ (210) $ 1,459 $ 1,048 $ 651
======== ======== ======= ======= =======
Earnings (loss) per common share:
Basic ............................ $ 0.06 $ (0.02) $ 0.17 $ 0.13 $ 0.09
Diluted .......................... $ 0.06 $ (0.02) $ 0.16 $ 0.12 $ 0.09
Weighted average number of shares and
share equivalents outstanding:
Basic ............................ 12,247 9,453 8,689 8,174 6,999
Diluted .......................... 12,834 9,453 9,083 8,581 7,313
AT DECEMBER 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands except center data)
BALANCE SHEET DATA:
Cash and cash equivalents ............. $ 6,070 $ 3,407 $ 3,192 $ 3,470 $ 1,750
Working capital ....................... 12,954 9,312 4,732 2,931 2,557
Total assets .......................... 98,421 75,238 54,653 35,106 27,065
Long-term debt ........................ 12,483 24,970 9,218 4,786 3,520
Minority interest ..................... 11,794 9,192 5,674 3,010 2,019
Preferred stock ....................... -- 5,268 4,982 -- --
Shareholders' equity .................. 64,369 29,991 28,374 22,479 19,558
CENTER DATA:
Procedures ............................ 156,521 101,819 71,323 55,344 30,922
Centers at end of year ................ 52 39 27 18 14
- ----------------------
(1) Includes a loss attributable to the sale of two partnership interests in
two physician practices, which had an impact after taxes of reducing basic
and diluted net earnings per share by $0.29 and $0.28, respectively, for
the year ended December 31, 1998. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Notes to the
Consolidated Financial Statements - Note 3(c)."
(2) Includes a loss attributable to the sale of a partnership interest, net of
a gain on the sale of a surgery center building and equipment, which had an
impact after taxes of reducing basic and diluted net earnings per share by
$0.16 for the year ended December 31, 1997. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Notes
to the Consolidated Financial Statements - Note 3(c)."
(3) Reflects cost incurred related to the distribution of the Company's common
stock held by AHC to AHC's stockholders, which had an impact of reducing
basic and diluted earnings per share by $0.09. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
14
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, acquires and operates practice-based ambulatory
surgery centers in partnership with physician practice groups. As of December
31, 1998, the Company owned a majority interest (51% or greater) in 52 surgery
centers and had established and was the majority owner (51%) of seven specialty
physician networks.
"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 any such 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; the
implementation of the proposed rule issued by the Health Care Financing
Administration ("HCFA") which would update the ratesetting methodology, payment
rates, payment policies and the list of covered surgical procedures for
ambulatory surgery centers; and risks relating to the Company's technological
systems, including becoming Year 2000 compliant.
The Company operated as a majority owned subsidiary of AHC from 1992
until December 3, 1997 when AHC distributed to its stockholders all of its
holdings in 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 components of changes in the number of
surgery centers in operation and centers under development for the years ended
December 31, 1998, 1997 and 1996. 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.
1998 1997 1996
---- ---- ----
Centers in operation, beginning of year........... 39 27 18
New center acquisitions placed in operation....... 7 5 6
New development centers placed in operation....... 7 10 3
Centers sold...................................... (1) (3) --
---- ---- ----
Centers in operation, end of year................. 52 39 27
==== ==== ===
Centers under development, end of year........... 5 10 20
==== ==== ===
Thirty-nine of the surgery centers in operation as of December 31, 1998
perform gastrointestinal endoscopy procedures; eleven centers perform
ophthalmology procedures; one center performs orthopaedic 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.
The 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. It is not expected that the
specialty physician networks in themselves 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. As of
December 31, 1998, three networks had secured managed care contracts and were
operational.
15
16
During 1998, the Company had a majority interest in two specialty
physician practices which were acquired in January 1996 and January 1997, the
other partners of which were 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 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 recorded 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, and on June 26, 1998 and October 1, 1998, the
Company completed the disposition of each of these practices (see Consolidated
Financial Statements - Note 3(c)).
The Company intends to expand primarily through the development and
acquisition of additional practice-based ambulatory 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 centers, 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 earnings 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. Historically, the Company's other
significant source of revenues has been the fees for physician services
performed by the two physician group practices in which the Company owned a
majority interest. However, as a result of the disposition of these practices,
the Company will no longer earn such revenue.
Practice-based ambulatory surgery centers and physician practices such
as those in which the Company owns or has owned 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 41%, 37% and 36% of its revenues in the years ended December 31,
1998, 1997 and 1996, respectively, from governmental healthcare programs
including Medicare and Medicaid. The Medicare program currently pays ambulatory
surgery centers and physicians in accordance with fee schedules which are
prospectively determined.
The Company's sources of revenues as a percentage of total revenues for
the years ended December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996
---- ---- ----
Surgery centers......................... 94% 83% 83%
Physician practices..................... 6 15 15
Other................................... -- 2 2
---- ---- ----
Total............................... 100% 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 years ended December 31, 1998,
1997 and 1996:
1998 1997 1996
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Operating expenses:
Salaries and benefits ................... 28.6 30.2 33.3
Other operating expenses ................ 35.3 35.5 33.1
Depreciation and amortization ........... 8.2 8.6 8.6
Net loss on sale of assets .............. 6.8 2.5 --
----- ----- -----
Total operating expenses .............. 78.9 76.8 75.0
----- ----- -----
Operating income ...................... 21.1 23.2 25.0
Minority interest ......................... 17.0 15.8 15.6
Other expenses:
Interest expense, net of interest income 1.9 2.7 2.3
Distribution cost ....................... -- 1.5 --
----- ----- -----
Earnings before income taxes .......... 2.2 3.2 7.1
Income tax expense ........................ 1.3 3.1 2.9
----- ----- -----
Net earnings .......................... 0.9 0.1 4.2
Accretion of preferred stock discount ..... -- 0.5 --
----- ----- -----
Net earnings (loss) available to common
shareholders ........................ 0.9% (0.4)% 4.2%
===== ===== =====
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues were $80.3 million in 1998, an increase of $22.9 million, or
40%, over revenues in 1997. The increase is primarily attributable to additional
centers in operation in 1998 and same-center revenue growth of 12%. Same-center
growth is primarily attributable to additional procedure volume. The Company
anticipates further revenue growth during 1999 as a result of additional
start-up and acquired centers expected to be placed in operation and from
same-center revenue growth.
Salaries and benefits expense was $22.9 million in 1998, an increase of
$5.6 million, or 32%, over salaries and benefits expense in 1997. This increase
resulted primarily from additional centers in operation and from an increase in
corporate staff primarily to support growth in the number of centers in
operation and anticipated future growth. Salaries and benefits expense as a
percentage of revenue decreased in 1998 due to the absence of physician salaries
of the practice disposed of in June 1998.
Other operating expenses were $28.4 million in 1998, an increase of
$8.0 million, or 40%, over other operating expenses in 1997. This increase
resulted primarily from additional centers in operation. This increase was
offset by a reduction in physician practice expenses of the practices disposed
of in 1998.
The Company anticipates further increases in operating expenses in 1999
primarily due to additional start-up centers and acquired centers expected to be
placed in operation. Typically a start-up center will incur start-up losses
while under development and during its initial months of operations and will
experience lower revenues and operating margins than an established center until
its case load grows to a more optimal operating level, which generally is
expected to occur within 12 months after a center opens.
Depreciation and amortization expense increased $1.6 million, or 33%,
in 1998 over 1997, primarily due to 13 additional surgery centers in operation
in 1998 compared to 1997.
Net loss on sale of assets in 1998 primarily resulted from the
Company's decision to exit the physician practice management business. In the
second quarter of 1998, the Company reduced the carrying value of the long-lived
assets of the practices held for sale by approximately $5.4 million based on the
estimated sales proceeds less estimated costs to sell. The ultimate disposition
of the practices, which occurred later in 1998, resulted in no significant
change from the estimate originally recorded in the second quarter of 1998.
17
18
The Company's minority interest in earnings in 1998 increased by $4.6
million, or 50%, over 1997 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 decreased $54,000, or 3%, in 1998 over 1997 due to the
repayment of long-term debt from the proceeds of the public offering in June
1998 (see "Liquidity and Capital Resources") and a decrease in the Company's
borrowing rate due to a decrease in borrowing levels. The reduction in interest
expense was partially offset by an increase in 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.
Distribution cost in 1997 represents costs incurred by the Company
related to effecting the Distribution.
The Company recognized income tax expense of $1.0 million in 1998,
compared to $1.8 million in 1997. The Company's effective tax rate in both years
was 40% of earnings prior to the impact of net loss on sale of assets and
distribution cost 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 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 was accreted toward its redemption value, including potential
dividends, over the redemption term. During the first quarter of 1998, the
holders of this series of 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 recorded no accretion
in 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues were $57.4 million in 1997, an increase of $22.5 million, or
65%, over revenues in 1996. The increase is primarily attributable to additional
centers in operation in 1997 and the acquisition of a urology physician practice
on January 1, 1997. Excluding the three centers which were disposed as described
below, same-center revenues in 1997 increased by 6%. Same-center growth resulted
from increased case volume and increases in fees.
Salaries and benefits expense was $17.4 million in 1997, an increase of
$5.7 million, or 50%, over salaries and benefits expense in 1996. Other
operating expenses were $20.4 million in 1997, an increase of $8.8 million, or
76%, over other operating expenses in 1996. This increase resulted primarily
from additional centers in operation, the acquisition of the interest in the
urology physician practice and from an increase in corporate staff primarily to
support growth in the number of centers in operation and anticipated future
growth. Salaries and benefits expense and other operating expenses in the
aggregate as a percentage of revenues remained comparable at 66% in 1997 and
1996. However, salaries and benefits expense as a percentage of revenues
decreased in 1997 while other operating expenses as a percentage of revenues
increased proportionately in 1997 compared to 1996, primarily due to the
addition of contracted physician service expense for the physician practice
acquired in January 1997 within other operating expenses.
Depreciation and amortization expense increased $1.9 million, or 65%,
in 1997 over 1996, primarily due to 12 additional surgery centers and one
physician practice in operation in 1997 compared to 1996.
Included in net loss on sale of assets in 1997 is a loss of
approximately $2.0 million from the disposition of the Company's investment in a
partnership that owned two surgery centers acquired in 1994. Various
disagreements with the sole physician partner over the operation of these
centers had adversely impacted the operations of these centers. After a series
of discussions and attempts to resolve these differences, the Company determined
that the partners could not resolve their disagreements and that as a result the
carrying value of the assets associated with this partnership would not likely
be fully recovered. The Company projected the undiscounted cash flows from these
centers and determined these cash flows to be less than the carrying value of
the long-lived assets attributable to this partnership. Accordingly, an
impairment loss equal to the excess of the carrying value of the long-lived
assets over the present value of the estimated future cash flows was recorded in
the first quarter of 1997 in accordance with Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of." In September 1997, the Company sold its
interest in the partnership assets to its physician partner and recognized a
partial loss recovery. Management believes it has good relationships with its
other physician partners and that the loss attributable to the partnership
discussed above resulted from a unique set of circumstances.
In addition, net loss on sale of assets includes a pretax gain of
approximately $460,000 from the sale in July 1997 of a surgery center building
and equipment which the Company had leased to a gastrointestinal physician
practice. Concurrent with the sale, the Company terminated its management
agreement with the physician practice for the surgery center in which the
Company had no ownership interest but had managed since 1994.
18
19
The Company's minority interest in earnings in 1997 increased by $3.7
million, or 67%, over 1996 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 $745,000, or 92%, in 1997 over 1996 due to
debt assumed or incurred in connection with additional acquisitions of interests
in surgery centers and a physician practice, together with the interest expense
associated with newly opened start-up surgery centers financed partially with
bank debt.
Distribution cost in 1997 represents costs incurred by the Company
related to effecting the Distribution.
The Company recognized income tax expense of $1.8 million in 1997,
compared to $1.0 million in 1996. The Company has recognized no tax benefit
associated with distribution cost and net loss on sale of assets, while certain
tax aspects of the gain transaction recorded in July 1997 resulted in income tax
expense of approximately $100,000. The Company's effective tax rate in both
periods was 40% of earnings prior to the impact of distribution cost and 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 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 had been accreted toward its redemption value, including potential
dividends, over the redemption term.
QUARTERLY STATEMENT OF OPERATIONS DATA
The following table presents certain quarterly statement of operations
data for the years ended December 31, 1998 and 1997. The quarterly statement of
operations data set forth below was derived from unaudited financial statements
of the Company and includes all adjustments, consisting of normal recurring
adjustments, which the Company considers necessary for a fair presentation
thereof. Results of operations for any particular quarter are not necessarily
indicative of results of operations for a full year or predictive of future
periods.
1997 1998
---------------------------------------- -----------------------------------------
Q1(1) Q2 Q3(2)(3) Q4(3) Q1 Q2(4) Q3 Q4
--- ---- --- --- ---- --- ---- ----
(In thousands, except per share data)
Revenues .............. $ 12,591 $13,890 $14,566 $16,367 $17,829 $ 20,120 $20,125 $22,248
Earning (loss) before
income taxes ........ (1,496) 1,014 1,478 854 1,166 (3,877) 1,981 2,538
Net earnings (loss)
available to common
shareholders ........ (1,892) 537 862 283 700 (2,650) 1,188 1,523
Diluted earnings (loss)
per common share .... (0.20) 0.06 0.09 0.03 0.07 (0.25) 0.08 0.10
- ------------
(1) Includes an impairment loss of $2.3 million, or $0.24 per share, on a
partnership interest.
(2) Includes a gain on sale of assets of $727,000, net of income taxes,
or $0.08 per share, attributable to a loss recovery on the sale of a
partnership interest and gain on sale of a surgery center building and
equipment.
(3) Includes distribution cost of $458,000 and $384,000, or $0.05 and
$0.04 per share, respectively, incurred in the third and fourth
quarters of 1997, respectively.
(4) Includes a loss from sale of assets of $3.6 million, net of income
taxes, or $0.33 per share, on two partnership interests.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had working capital of $13.0 million
compared to $9.3 million in 1997. Operating activities for 1998 generated $11.3
million in cash flow from operations compared to $4.0 million in 1997. Cash and
cash equivalents at December 31, 1998 and 1997 were $6.1 million and $3.4
million, respectively.
During 1998 the Company used approximately $18.6 million to acquire
interests in seven 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 $7.0 million in 1998, of which $1.2 million 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 $19.9 million to fund
its acquisition and development obligations.
19
20
On June 17, 1998, the Company completed a public offering of 3,700,000
shares of Class A Common Stock, for net proceeds of $27.6 million. The net
proceeds, along with cash flow from operations, were used to repay $32.8 million
in borrowings under the Company's revolving credit facility (the "Loan
Agreement") and other long-term debt during 1998. The Company also received cash
proceeds of $650,000 from the sale of a surgery center during 1998.
At December 31, 1998, borrowings under the Company's revolving credit
facility were $8.8 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 Loan Agreement permits the Company to
borrow up to $50.0 million to finance the Company's acquisition and development
projects at a rate equal to, at the Company's option, the prime rate or LIBOR
plus a spread of 1.0% to 2.25%, depending upon borrowing levels. The Loan
Agreement also provides for a fee ranging between 0.15% and 0.40% of unused
commitments based on borrowing levels. The Loan Agreement also prohibits the
payment of dividends and contains covenants relating to the ratio of debt to net
worth, operating performance and minimum net worth. The Company was in
compliance with all covenants at December 31, 1998.
On November 20, 1996, the Company issued shares of its Series A
Redeemable Preferred Stock and Series B Convertible 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 first quarter of fiscal 1998 by its holders into 380,952
shares of Class A Common Stock using a conversion ratio based on the market
price of the Class A Common Stock pursuant to the provisions of the Company's
Charter. Upon the public offering completed on June 17, 1998, the Series B
Preferred Stock automatically converted into 605,998 shares of Class A Common
Stock as determined by a conversion ratio providing for the issuance of that
number of shares which approximated 6% of the equity of the Company determined
as of November 20, 1996.
On June 12, 1998, HCFA published a proposed rule that would update the
ratesetting methodology, payment rates, payment policies and the list of covered
surgical procedures for ambulatory surgery centers. The proposed rule is subject
to a comment period that has been extended until June 30, 1999, and provides for
an implementation date that has been extended to a date no earlier than January
2000. The proposed rule reduces the rates paid for certain ambulatory surgery
center procedures reimbursed by Medicare, including a number of endoscopy and
ophthalmological procedures performed at the Company's centers.
The Company believes that the proposed rule if adopted in its current
form would adversely affect the Company's annual revenues by approximately 4% at
that time. However, if the proposed rule were adopted in its current form, the
Company expects that the earnings impact will be offset by certain actions taken
by the Company or that the Company intends to take, including actions to effect
certain cost efficiencies in center operations, reduce corporate overhead costs
and provide for contingent purchase price adjustments for future acquisitions.
There can be no assurance that the Company will be able to implement
successfully these actions or that if implemented the actions will offset fully
the adverse impact of the rule, as finally adopted, on the earnings of the
Company. There also can be no assurance that HCFA will not modify the proposed
rule, before it is enacted in final form, in a manner that would adversely
impact the Company's financial condition, results of operation and business
prospects.
YEAR 2000
The Company has evaluated its risks associated with software and
hardware components which may fail due to the millennium change and has
determined these risks include but are not limited to (i) risk that surgical
equipment critical to the patient's care may fail, (ii) risk that billing and
administration software will not support timely billing and collection efforts
and (iii) risk that third party payers will not be able to provide timely
reimbursement for services performed.
In order to address these risks, the Company has designed and
implemented a Year 2000 assessment and action plan. Because the Company
generally has no internally designed software systems or hardware components nor
does the Company market or support any software or hardware products, the
Company has focused its efforts on ensuring that its systems are Year 2000
compliant by implementing a plan designed to evaluate all critical systems
purchased from third parties at each of its operating surgery centers and its
corporate offices. The assessment plan involves (i) identifying all potential
Year 2000 hardware and software components, including but not limited to
surgical equipment, office machinery, financial software and general service
equipment and components, (ii) contracting with a third party consultant to
measure surgical equipment products against their Year 2000 compliance database,
(iii) obtaining verification from third parties whether their products are Year
2000 compliant and, if not, the third parties' ability to make the appropriate
modifications and (iv) testing systems in a controlled environment to determine
their ability to function accurately beyond 1999. In addition, the Company has
begun to contact all significant suppliers and third party payers to determine
if they are Year 2000 compliant and if they will be able to continue to provide
products, services or reimbursement in 2000. This assessment plan was initiated
in the third quarter of 1998 and is expected to continue throughout 1999. Nearly
all of the Company's surgery centers have completed their identification of
medical hardware and software and have measured the items' Year 2000 compliance
against the third party consultants' database. Most non-medical equipment has
also been identified and testing and/or communication with vendors is in
process. Based on the ongoing findings of the assessment plan, the Company has
begun the remediation process to replace or modify those systems not found to be
Year 2000 compliant.
20
21
Although a complete cost assessment will not be determinable until all
operating locations have been fully assessed, the Company currently estimates
that the Company and the surgery centers in the aggregate may incur total
capitalizable and non-capitalizable costs ranging from $200,000 to $400,000 in
1999 to ensure that all centers and the corporate offices are Year 2000
compliant. However, until the assessment and remediation processes are
completed, the Company is unable to estimate with certainty the total costs to
make the Company Year 2000 compliant. No significant costs have been incurred to
date associated with Year 2000 compliance. All costs to evaluate and make
modifications will be expensed as incurred, will generally be shared by the
Company's physician partners in proportion to their ownership interest and are
not expected to have a significant impact on the Company's financial position or
ongoing results of operations.
The Company has yet to establish a contingency plan, but intends to
formulate one to address its significant risks by the second quarter of 1999.
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" are effective for the Company for the year ended
December 31, 1998. These standards had no effect on the Company's presentation
of financial statement information.
Statement of Position ("SOP") No. 98-5 "Reporting on the Costs of
Start-Up Activities" becomes effective for the Company for the year ending
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 estimates
approximately $126,000, net of minority interest and income taxes, will be
expensed as of January 1, 1999 as a cumulative effect of a change in accounting
principle.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
AmSurg Corp.
Nashville, Tennessee
We have audited the accompanying consolidated balance sheets of AmSurg
Corp. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of AmSurg Corp. and
subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
February 15, 1999
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AMSURG CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
1998 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 6,069,767 $ 3,406,787
Accounts receivable, net of allowance of $1,937,765 and
$1,436,468, respectively .......................................... 12,122,277 8,220,616
Supplies inventory .................................................. 1,250,487 905,992
Deferred income taxes (note 10) ..................................... 507,000 390,000
Prepaid and other current assets .................................... 951,638 1,020,835
----------- -----------
Total current assets ....................................... 20,901,169 13,944,230
Long-term receivables and deposits (note 3) .............................. 2,045,474 479,012
Property and equipment, net (notes 4, 6 and 7) ........................... 23,139,495 19,248,464
Intangible assets, net (notes 3 and 5) ................................... 52,334,975 41,566,684
----------- -----------
Total assets ............................................... $98,421,113 $75,238,390
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable (note 3) .............................................. $ 2,385,150 $ --
Current portion of long-term debt (note 6) .......................... 1,378,270 1,330,595
Accounts payable .................................................... 1,195,305 922,188
Accrued salaries and benefits ....................................... 1,724,419 1,018,844
Other accrued liabilities ........................................... 887,985 1,235,626
Current income taxes payable ........................................ 376,092 125,396
----------- -----------
Total current liabilities .................................. 7,947,221 4,632,649
Long-term debt (note 6) .................................................. 12,483,458 24,969,718
Deferred income taxes (note 10) .......................................... 1,827,000 1,185,000
Minority interest ........................................................ 11,794,389 9,191,896
Preferred stock, no par value, 5,000,000 shares authorized, 0 and
916,666 shares outstanding (note 8) ................................... -- 5,267,672
Shareholders' equity (notes 9 and 11):
Common stock:
Class A, no par value, 20,000,000 shares authorized 9,533,486 and
4,758,091 shares outstanding, respectively .................... 48,115,915 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 ................................................... 2,860,796 2,099,491
Deferred compensation on restricted stock (note 11) ................. (136,647) (273,348)
----------- -----------
Total shareholders' equity ................................. 64,369,045 29,991,455
----------- -----------
Commitments and contingencies (notes 4, 7, 11 and 12)
Total liabilities and shareholders' equity ................. $98,421,113 $75,238,390
=========== ===========
See accompanying notes to the consolidated financial statements.
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AMSURG CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
---- ---- ----
Revenues (note 2) ........................................... $80,322,270 $ 57,413,812 $34,898,496
Operating expenses:
Salaries and benefits (note 11) ........................ 22,946,600 17,363,440 11,613,504
Other operating expenses (note 11) ..................... 28,392,926 20,352,442 11,546,562
Depreciation and amortization .......................... 6,568,436 4,944,483 3,000,183
Net loss on sale of assets (note 3) .................... 5,461,720 1,424,690 30,811
----------- ------------ -----------
Total operating expenses ........................... 63,369,682 44,085,055 26,191,060
----------- ------------ -----------
Operating income ................................... 16,952,588 13,328,757 8,707,436
Minority interest ........................................... 13,644,544 9,084,132 5,433,588
Other expenses:
Interest expense, net of interest income of $124,748,
$69,088 and $139,531, respectively ................. 1,499,316 1,553,508 808,332
Distribution cost (note 9) ............................. -- 841,801 --
----------- ------------ -----------
Earnings before income taxes ....................... 1,808,728 1,849,316 2,465,516
Income tax expense (note 10) ................................ 1,047,423 1,774,000 985,000
----------- ------------ -----------
Net earnings ....................................... 761,305 75,316 1,480,516
Accretion of preferred stock discount (note 8) .............. -- 285,615 22,057
----------- ------------ -----------
Net earnings (loss) available to common shareholders $ 761,305 $ (210,299) $ 1,458,459
=========== ============ ===========
Earnings (loss) per common share (note 9):
Basic .................................................. $ 0.06 $ (0.02) $ 0.17
Diluted ................................................ $ 0.06 $ (0.02) $ 0.16
=========== ============ ===========
Weighted average number of shares and share equivalents
outstanding (note 9):
Basic .................................................. 12,247,389 9,453,205 8,689,480
Diluted ................................................ 12,834,030 9,453,205 9,082,535
=========== ============ ===========
See accompanying notes to the consolidated financial statements.
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AMSURG CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
DEFERRED
COMMON STOCK COMPENSATION
----------------------- RETAINED ON RESTRICTED
SHARES AMOUNT EARNINGS STOCK TOTAL
------ ------ -------- ----- -----
Balance December 31, 1995 ................... 8,302,477 $21,627,861 $ 851,331 $ -- $22,479,192
Issuance of common stock ................ 512,239 2,366,262 -- -- 2,366,262
Issuance of common stock in
conjunction with acquisitions ......... 384,809 2,069,962 -- -- 2,069,962
Net earnings available to common
shareholders .......................... -- -- 1,458,459 -- 1,458,459
----------- ----------- ---------- --------- -----------
Balance December 31, 1996 ................... 9,199,525 26,064,085 2,309,790 -- 28,373,875
Issuance of common stock ................ 146,087 934,273 -- (273,348) 660,925
Issuance of common stock in
conjunction with acquisitions ......... 300,863 1,847,376 -- -- 1,847,376
Acquisition of stock .................... (101,253) (680,422) -- -- (680,422)
Net loss available to common shareholders -- -- (210,299) -- (210,299)
----------- ----------- ---------- --------- -----------
Balance December 31, 1997 ................... 9,545,222 28,165,312 2,099,491 (273,348) 29,991,455
Issuance of common stock, net of
offering cost ......................... 3,705,928 27,635,439 -- -- 27,635,439
Issuance of common stock in
conjunction with acquisitions ......... 56,366 450,689 -- -- 450,689
Stock options exercised, net of related
tax benefit ........................... 26,151 125,784 -- -- 125,784
Conversion of preferred stock ........... 986,950 5,267,672 -- -- 5,267,672
Net earnings ............................ -- -- 761,305 -- 761,305
Amortization of deferred compensation
on restricted stock ................... -- -- -- 136,701 136,701
----------- ----------- ---------- --------- -----------
Balance December 31, 1998 ................... 14,320,617 $61,644,896 $2,860,796 $(136,647) $64,369,045
=========== =========== ========== ========= ===========
See accompanying notes to the consolidated financial statements.
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26
AMSURG CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net earnings .................................................. $ 761,305 $ 75,316 $ 1,480,516
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Minority interest ......................................... 13,644,544 9,084,132 5,433,588
Distributions to minority partners ........................ (13,479,940) (8,907,875) (5,084,294)
Depreciation and amortization ............................. 6,568,436 4,944,483 3,000,183
Deferred income taxes ..................................... 525,000 333,000 249,000
Amortization of deferred compensation on restricted stock . 136,701 -- --
Net (gain) loss on sale of assets ......................... 5,461,720 1,424,690 (30,811)
Increase (decrease) in cash, net of effects of acquisitions
and dispositions, due to changes in:
Accounts receivable, net ............................. (2,560,418) (1,620,141) (1,353,365)
Supplies inventory ................................... (76,924) (212,403) (128,248)
Prepaid and other current assets ..................... 42,489 (572,455) (213,838)
Other assets ......................................... (325,416) (803,022) (266,801)
Accounts payable ..................................... 123,442 (384,881) 648,292
Accrued expenses and other liabilities ............... 518,413 322,870 (43,734)
Other, net ........................................... (797) 273,593 156,001
------------ ------------ ------------
Net cash flows provided by operating activities ...... 11,338,555 3,957,307 3,846,489
Cash flows from investing activities:
Acquisition of interest in surgery centers .................... (18,565,082) (12,643,331) (12,669,794)
Acquisition of property and equipment ......................... (6,967,297) (10,578,551) (3,863,052)
Proceeds from sale of assets .................................. 669,000 1,978,462 --
Net proceeds from long-term receivables ....................... 335,529 57,504 137,582
------------ ------------ ------------
Net cash flows used in investing activities .......... (24,527,850) (21,185,916) (16,395,264)
Cash flows from financing activities:
Proceeds from long-term borrowings ............................ 19,874,094 17,629,000 10,544,700
Repayment on long-term borrowings ............................. (32,787,189) (3,524,641) (7,261,534)
Net proceeds from issuance of preferred stock ................. -- -- 4,960,000
Net proceeds from issuance of common stock .................... 27,658,696 524,216 2,366,262
Proceeds from capital contributions by minority partners ...... 1,166,810 2,952,507 1,681,324
Financing cost incurred ....................................... (60,136) (138,094) (19,230)
------------ ------------ ------------
Net cash flows provided by financing activities ...... 15,852,275 17,442,988 12,271,522
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents .............. 2,662,980 214,379 (277,253)
Cash and cash equivalents, beginning of year ...................... 3,406,787 3,192,408 3,469,661
------------ ------------ ------------
Cash and cash equivalents, end of year ............................ $ 6,069,767 $ 3,406,787 $ 3,192,408
============ ============ ============
See accompanying notes to the consolidated financial statements.
26
27
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION
AmSurg Corp. (the "Company"), through its wholly owned subsidiaries,
owns majority interests primarily between 51% and 70% in limited partnerships
and limited liability companies ("LLCs") which own and operate practice-based
ambulatory surgery centers ("Centers"). The Company also has majority ownership
interests in other partnerships and LLCs formed to develop additional centers.
The consolidated financial statements include the accounts of the Company and
its subsidiaries and the majority owned limited partnerships and LLCs in which
the Company is the general partner or member. Consolidation of such partnerships
and LLCs is necessary as the Company has 51% or more of the financial interest,
is the general partner or majority member with all the duties, rights and
responsibilities thereof and is responsible for the day-to-day management of the
partnership or LLC. The limited partner or minority member responsibilities are
to supervise the delivery of medical services with their rights being restricted
to those which protect their financial interests, such as approval of the
acquisition of significant assets or incurring debt which they, as physician
limited partners or members, are required to guarantee on a pro rata basis based
upon their respective ownership interests. All material intercompany profits,
transactions and balances have been eliminated. All subsidiaries and minority
owners are herein referred to as partnerships and partners, respectively.
B. CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised principally of demand deposits
at banks and other highly liquid short-term investments with maturities less
than three months when purchased.
C. PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets are comprised of prepaid expenses and
other receivables.
D. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment held under capital
leases is stated at the present value of minimum lease payments at the inception
of the related leases. Depreciation for buildings and improvements is recognized
under the straight-line method over 20 years, or for leasehold improvements,
over the remaining term of the lease plus renewal options. Depreciation for
moveable equipment is recognized over useful lives of five to ten years.
E. INTANGIBLE ASSETS
EXCESS OF COST OVER NET ASSETS OF PURCHASED OPERATIONS
Excess of cost over net assets of purchased operations is amortized
over 25 years. The Company has consistently assessed impairment of the excess of
cost over net assets of purchased operations and other long-lived assets in
accordance with criteria consistent with the provisions of Statement of
Financial Accounting Standard ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Whenever events
or changes in circumstances indicate that the carrying amount of long-term
assets may not be recoverable, management assesses whether or not an impairment
loss should be recorded by comparing estimated undiscounted future cash flows
with the assets' carrying amount at the partnership level. If the assets'
carrying amount is in excess of the estimated undiscounted future cash flows, an
impairment loss is recognized as the excess of the carrying amount over
estimated future cash flows discounted at an applicable rate.
DEFERRED PRE-OPENING COSTS
Deferred pre-opening costs consist of costs incurred for surgery
centers while under development. Deferred pre-opening costs are amortized over
one year, starting upon the commencement date of operations. Beginning in 1999,
the Company will adopt Statement of Position ("SOP") No. 98-5 "Reporting on the
Costs of Start-Up Activities," which requires that pre-opening costs be expensed
as incurred and that upon adoption all deferred pre-opening costs be expensed as
a cumulative effect of a change in accounting principle. The Company estimates
approximately $126,000, net of minority interest and income taxes, will be
expensed as of January 1, 1999 as a cumulative effect of a change in accounting
principle.
27
28
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
OTHER INTANGIBLE ASSETS
Other intangible assets consist primarily of deferred financing costs
of the Company and the entities included in the Company's consolidated financial
statements and are amortized over the term of the related debt.
F. INCOME TAXES
The Company files a consolidated federal income tax return. Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
G. EARNINGS PER SHARE
Basic earnings (loss) per share is computed by dividing net earnings
(loss) available to common shareholders by the combined weighted average number
of Class A and Class B common shares while diluted earnings (loss) per share is
computed by dividing net earnings (loss) available to common shareholders by the
weighted average number of such common shares and dilutive share equivalents.
H. STOCK OPTION PLAN
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25 "Accounting for
Stock Issued to Employees," and related interpretations. Compensation expense is
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. The Company also provides disclosure in
accordance with SFAS No. 123 "Accounting for Stock-Based Compensation," to
reflect pro forma earnings per share as if the fair value of all stock-based
awards on the date of grant are recognized over the vesting period.
I. FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, receivables and payables are reflected in
the financial statements at cost which approximates fair value. Management
believes that the carrying amounts of long-term debt approximate market value,
because it believes the terms of its borrowings approximate terms which it would
incur currently.
J. USE OF ESTIMATES
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
K. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
1998 presentation.
L. 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" are effective for the Company for the year ended
December 31, 1998. These standards had no effect on the Company's presentation
of financial statement information.
28
29
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. REVENUE RECOGNITION
Revenues for the years ended December 31, 1998, 1997 and 1996 are
comprised of the following:
1998 1997 1996
---- ---- ----
Surgery centers .............. $75,334,903 $47,803,933 $28,950,498
Physician practices........... 4,785,678 8,677,522 5,155,148
Other ........................ 201,689 932,357 792,850
----------- ----------- -----------
Revenues ................. $80,322,270 $57,413,812 $34,898,496
=========== =========== ===========
Surgery center revenues consist of the billing for the use of the
Centers' facilities (the "usage fee") directly to the patient or third party
payer. The usage fee excludes any amounts billed for physicians' services which
are billed separately by the physicians to the patient or third party payer.
Physician practice revenues consist of the billing for physician
services of the Company's two majority owned physician practices acquired in
1997 and 1996 and disposed of in 1998. The billings were made by the practice
directly to the patient or third party payer.
Revenues from surgery centers and physician practices are recognized on
the date of service, net of estimated contractual allowances from third party
medical service payers including Medicare and Medicaid. During the years ended
December 31, 1998, 1997 and 1996 approximately 41%, 37% and 36%, respectively,
of the Company's revenues were derived from the provision of services to
patients covered under Medicare and Medicaid. Concentration of credit risk with
respect to other payers is limited due to the large number of such payers.
3. ACQUISITIONS AND DISPOSITIONS
A. ACQUISITIONS
The Company, through wholly owned subsidiaries and in separate
transactions, acquired a majority interest in seven, five and four
practice-based surgery centers during 1998, 1997 and 1996, respectively. In
addition, the Company acquired through wholly owned subsidiaries one physician
practice and related entities in each of 1997 and 1996. Consideration paid for
the acquired interests consisted of cash and common stock. In addition, notes
payable for $2,385,150 at rates ranging from 7.75% to 8.25%, maturing through
February 1999, were issued in conjunction with two acquisitions. Total
consideration paid in 1998, 1997 and 1996 for all acquisitions was $21,172,207,
$14,471,503 and $13,561,661, respectively, of which the Company assigned
$19,504,205, $13,738,220 and $12,289,386, respectively, to excess of cost over
net assets of purchased operations. In conjunction with four acquisitions in
1998, the Company is obligated to pay an additional $1,025,000 ratably over each
six month interval from 2000 to 2004 in which proposed surgery center
reimbursement rates by the Health Care Financing Administration are not
effective. The Company will be released from any outstanding purchase price
commitments upon the final implementation of proposed reimbursement rates. All
acquisitions were accounted for as purchases, and the accompanying consolidated
financial statements include the results of their operations from the dates of
acquisition.
B. PRO FORMA INFORMATION
The unaudited consolidated pro forma results for the years ended
December 31, 1998 and 1997, assuming all 1998 and 1997 acquisitions had been
consummated on January 1, 1997, are as follows:
1998 1997
---- ----
Revenues ............................................... $86,914,000 $73,344,000
Net earnings available to common shareholders .......... 1,229,000 609,000
Earnings per common share:
Basic .............................................. 0.10 0.06
Diluted ............................................ 0.10 0.06
Weighted average number of shares and share equivalents:
Basic .............................................. 12,262,000 9,612,000
Diluted ............................................ 12,849,000 9,948,000
29
30
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
C. DISPOSITIONS
In three separate transactions in 1998, the Company sold certain assets
comprising a surgery center developed in 1995 and its interest in two separate
partnerships that owned two physician practices. The net loss associated with
these transactions was $5,442,914. The Company recognized an income tax benefit
of approximately $1,850,000 associated with these losses. In conjunction with
the sale of the interest in one physician practice, the Company received a note
for $1,945,000 which is to be paid through 2010. The note bears interest at
6.5%, is secured by the assets of the physician practice and certain personal
guarantees by the owners of the physician practice.
In two separate transactions in 1997, the Company sold its investment
in a partnership that owned two surgery centers acquired in 1994 and a surgery
center building and equipment which the Company leased to a physician entity. In
conjunction with the sale of the surgery center building and equipment, the
Company also terminated its management agreement with the physician entity for
the surgery center in which it had no ownership interest but had managed since
1994. The net loss associated with these transactions was $1,494,000.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1997 are as follows:
1998 1997
---- ----
Land and improvements ........................... $ 98,540 $ 98,540
Building and improvements ....................... 13,543,836 10,264,481
Moveable equipment .............................. 18,468,265 13,820,039
Construction in progress ........................ 45,971 1,180,250
------------ ------------
32,156,612 25,363,310
Less accumulated depreciation and amortization... (9,017,117) (6,114,846)
------------ ------------
Property and equipment, net ................. $ 23,139,495 $ 19,248,464
============ ============
At December 31, 1998, the Company and its partnerships had unfunded
construction and equipment purchase commitments for centers under development of
approximately $49,000 in order to complete construction in progress.
5. INTANGIBLE ASSETS
Intangible assets at December 31, 1998 and 1997 consist of the
following:
1998 1997
---- ----
Excess of cost over net assets of purchased operations,
net of accumulated amortization of $5,586,616 and
$4,123,482, respectively .................................. $51,765,355 $40,636,399
Deferred pre-opening cost, net of accumulated amortization
of $273,191 and $336,091, respectively ..................... 346,240 614,944
Other intangible assets, net of accumulated amortization of
$408,497 and $388,108, respectively ........................ 223,380 315,341
----------- -----------
Intangible assets, net ................................... $52,334,975 $41,566,684
=========== ===========
30
31
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997 is comprised of the
following:
1998 1997
---- ----
$50,000,000 credit agreement at prime or LIBOR plus a
spread of 1.0% to 2.25% (average rate of 6.6% at
December 31, 1998), due January 10, 2001 .......... $ 8,800,000 $22,399,935
Other debt at an average rate of 8.3%, due through
September 23, 2003 ................................ 4,045,584 2,847,048
Capitalized lease arrangements at an average rate of
8.6%, due through December 1, 2002 (see note 7) ... 1,016,144 1,053,330
----------- -----------
13,861,728 26,300,313
Less current portion ................................ (1,378,270) (1,330,595)
----------- -----------
Long-term debt .................................. $12,483,458 $24,969,718
=========== ===========
The borrowings under the credit facility are guaranteed by the wholly
owned subsidiaries of the Company, and in some instances, the underlying assets
of certain developed centers. The credit agreement, as most recently amended on
May 19, 1998, permits the Company to borrow up to $50,000,000 to finance the
Company's acquisition and development projects at prime rate or LIBOR plus a
spread of 1.0% to 2.25% or a combination thereof, provides for a fee ranging
between 0.15% and 0.40% of unused commitments based on borrowing levels,
prohibits the payment of dividends and contains covenants relating to the ratio
of debt to net worth, operating performance and minimum net worth. The Company
was in compliance with all covenants at December 31, 1998.
Certain partnerships and LLCs included in the Company's consolidated
financial statements have loans with local lending institutions which are
collateralized by certain assets of the centers with a book value of
approximately $7,500,000. The Company and the partners or members have
guaranteed payment of the loans.
Principal payments required on long-term debt in the six years
subsequent to December 31, 1998 are $1,378,270, $1,286,257, $9,891,360,
$586,420, $499,858 and $219,563.
7. LEASES
The Company has entered into various building and equipment operating
leases and equipment capital leases for its surgery centers in operation and
under development and for office space, expiring at various dates through 2014.
Future minimum lease payments at December 31, 1998 are as follows:
CAPITALIZED
YEAR ENDED EQUIPMENT OPERATING
DECEMBER 31, LEASES LEASES
------------ ------ ------
1999.................................. $ 557,029 $ 4,104,712
2000.................................. 386,203 3,985,895
2001.................................. 175,236 3,626,444
2002.................................. 20,746 3,055,161
2003.................................. -- 2,649,142
Thereafter............................ -- 6,589,688
---------- -----------
Total minimum rentals 1,139,214 $24,011,042
===========
Less amounts representing interest at rates
ranging from 6.5% to 13.5% (123,070)
----------
Capital lease obligations $1,016,144
==========
At December 31, 1998, equipment with a cost of approximately $1,785,000
and accumulated amortization of approximately $665,000 was held under capital
lease. The Company and its limited partners have guaranteed payment of the
leases. Rental expense for operating leases for the years ended December 31,
1998, 1997 and 1996 was approximately $4,167,000, $3,093,000 and $1,775,000 (see
note 11).
31
32
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. PREFERRED STOCK
Preferred stock, net of issuance costs, at December 31, 1998 and 1997
is comprised of the following:
1998 1997
---- ----
Series A Redeemable Preferred Stock, 0 and
500,000 shares outstanding ........................... $ -- $2,059,905
Series B Convertible Preferred Stock, 0 and
416,666 shares outstanding............................ -- 3,207,767
-------- ----------
$ -- $5,267,672
======== ==========
On November 20, 1996, the Company issued to unaffiliated institutional
investors a combination of redeemable and convertible preferred stock for net
proceeds of $4,960,000. The preferred stock was recorded at its fair value, net
of issuance costs. The Series A Redeemable Preferred Stock, which had a stated
amount of $3,000,000, was to pay a cumulative dividend of 8% commencing November
21, 1998, 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 in 1998 by its holders into 380,952 shares of Class A Common Stock
using a conversion ratio based on the market price of the Class A Common Stock
pursuant to the provisions of the Company's Charter. Upon a public offering of
common stock completed on June 17, 1998 (see note 9), the Series B Convertible
Preferred Stock, which had a stated amount of $2,500,000, automatically
converted into 605,998 shares of Class A Common Stock as determined by a
conversion ratio providing for the issuance of that number of shares which
approximated 6% of the equity of the Company determined as of November 20, 1996.
From the time of issuance, the Series A Redeemable Preferred Stock had been
accreted toward its stated amount, including potential dividends, over the
redemption term. The Series B Convertible Preferred Stock was not accreted
because management expected its conversion.
9. SHAREHOLDERS' EQUITY
A. COMMON STOCK
The Company operated as a majority owned subsidiary of American
Healthcorp, Inc. ("AHC") from 1992 until the distribution by AHC to its
stockholders of the shares of the AmSurg common stock owned by it (the
"Distribution") on December 3, 1997. 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.
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 which differs from Class A Common Stock in
that it has ten votes per share in the election and removal of directors of the
Company, while the Class A Common Stock has one vote per share. Other than the
election and removal of directors of the Company, the Class A Common Stock and
the Class B Common Stock have equal voting and other rights. The Company does
not have the right to issue additional Class B Common Stock. All shares and
earnings per share data included herein have been adjusted to reflect the
recapitalization. Expenses incurred in connection with the Distribution are
reflected as distribution cost in the consolidated statement of operations for
the year ended December 31, 1997.
From the time of the Company's inception, the Company has sold Class A
Common Stock to AHC, partners and members of certain of its partnerships and
LLCs and other private investors at fair value. In addition, the Company has
issued shares of Class A Common Stock in connection with acquisitions of surgery
center assets. On June 17, 1998, the Company completed a public offering of
3,700,000 shares of Class A Common Stock, for net proceeds of approximately
$27,600,000. Net proceeds from the offering were used to repay borrowings under
the Company's revolving credit facility.
32
33
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
B. EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominators of
basic and diluted earnings per share:
EARNINGS (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
For the year ended December 31, 1998:
Basic earnings per share:
Net earnings ............................... $ 761,305 12,247,389 $ 0.06
Effect of dilutive convertible preferred stock -- 191,683
Effect of dilutive securities options ........... -- 394,958
----------- ----------
Diluted earnings per share:
Net earnings ............................... $ 761,305 12,834,030 $ 0.06
========== ==========
For the year ended December 31, 1997:
Net earnings .................................... $ 75,316
Less accretion of preferred stock ............... (285,615)
----------
Basic and diluted loss per share:
Loss available to common shareholders ...... $ (210,299) 9,453,205 $(0.02)
========== =========
For the year ended December 31, 1996:
Net earnings .................................... $1,480,516
Less accretion of preferred stock ............... (22,057)
----------
Basic earnings per share:
Earnings available to common shareholders 1,458,459 8,689,480 $ 0.17
Effect of dilutive securities options ........... -- 393,055
---------- ----------
Diluted earnings per share:
Earnings available to common shareholders... $1,458,459 9,082,535 $ 0.16
========== ==========
Options to purchase 1,174,849 shares of common stock at prices ranging
from $0.75 to $8.70, representing common share equivalents of 335,927 under the
treasury stock method, were outstanding at December 31, 1997 but were not
included in the computation of diluted earnings per share for the year then
ended because to do so would have been anti-dilutive to the net loss per share
available to common shareholders. The options will expire at various dates
through December 2007. The effect of the conversion of 500,000 shares of Series
A Redeemable Preferred Stock into 380,952 shares of Class A Common Stock, which
occurred subsequent to December 31, 1997 (see note 8), has also been excluded
from the computation of diluted earnings per share for the year ended December
31, 1997 because to do so would have been anti-dilutive after giving
consideration to the elimination of related accretion of preferred stock.
C. STOCK OPTIONS
The Company has two stock option plans under which it has granted
non-qualified options to purchase shares of Class A Common Stock to employees
and outside directors. Options are granted at market value on the date of the
grant and vest over four years at the rate of 25% per year. Options have a term
of 10 years from the date of grant. As of December 31, 1998, 153,368 shares were
reserved and available for future option grants.
33
34
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Stock option activity for the years ended December 31, 1998, 1997 and
1996 is summarized below:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
------ -----
Outstanding at December 31, 1995........... 685,867 $ 1.80
Options granted ....................... 229,750 5.01
Options exercised ..................... (2,917) 2.70
Options terminated .................... (5,917) 3.21
---------
Outstanding at December 31, 1996........... 906,783 2.61
Options granted ....................... 294,033 6.70
Options exercised ..................... (1,500) 3.44
Options terminated .................... (24,467) 5.21
---------
Outstanding at December 31, 1997........... 1,174,849 3.56
Options granted ....................... 233,902 8.76
Options exercised ..................... (26,151) 3.18
Options terminated .................... (38,106) 7.21
---------
Outstanding at December 31, 1998 .......... 1,344,494 4.37
=========
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YRS.) PRICE EXERCISABLE PRICE
--------------- ----------- ----------- ----- ----------- -----
$0.75 - $2.50............. 427,331 3.36 $1.07 427,331 $1.07
2.51 - 4.25............. 224,388 5.29 3.00 216,472 2.98
4.26 - 6.00............. 310,866 7.56 5.32 145,927 5.22
6.01 - 7.75............. 138,431 8.59 6.48 73,751 6.15
7.76 - 9.50............. 233,478 8.78 8.97 24,036 8.79
9.51 - 10.13............. 10,000 9.32 10.08 -- N/A
--------- -------
0.75 - 10.13............. 1,344,494 6.17 4.37 887,517 2.85
========= =======
34
35
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company accounts for its stock options issued to employees and
outside directors pursuant to APB No. 25. Accordingly, no compensation expense
has been recognized in connection with the issuance of stock options. The
estimated weighted average fair values of the options at the date of grant using
the Black-Scholes option pricing model as promulgated by SFAS No. 123 in 1998,
1997 and 1996 were $4.79, $3.93 and $2.73 per share, respectively. In applying
the Black-Scholes model, the Company assumed no dividends, an expected life for
the options of seven years and a forfeiture rate of 3% in 1998, 1997 and 1996
and an average risk free interest rate of 5.6% in 1998, 6.4% in 1997 and 6.2% in
1996. The Company also assumed a volatility rate of 50% in 1998 based on its own
volatility, 54% in 1997 based upon the volatility rate of AHC, and 49% in 1996
based upon an average of comparable companies. Had the Company used the
Black-Scholes estimates to determine compensation expense for the options
granted in the years ended December 31, 1998, 1997 and 1996 net earnings (loss)
and net earnings (loss) per share attributable to common shareholders would have
been reduced to the following pro forma amounts.
1998 1997 1996
---- ---- ----
Net earnings (loss) available to common shareholders:
As reported ................................................... $761,305 $(210,299) $1,458,459
Pro forma ..................................................... 152,102 (690,359) 1,241,874
Basic earnings (loss) per share available to common shareholders:
As reported ................................................... 0.06 (0.02) 0.17
Pro forma ..................................................... 0.01 (0.07) 0.14
Diluted earnings (loss) per share available to common shareholders:
As reported ................................................... 0.06 (0.02) 0.16
Pro forma ..................................................... 0.01 (0.07) 0.14
10. INCOME TAXES
Total income tax expense for the year ended December 31, 1998, 1997 and
1996 was allocated as follows:
1998 1997 1996
---- ---- ----
Income from operations ................................... $1,047,423 $1,774,000 $985,000
Shareholders' equity, for compensation expense for tax
purposes in excess of amounts recognized for
financial reporting purposes ......................... (42,506) -- --
---------- ---------- --------
Total income tax expense ........................ $1,004,917 $1,774,000 $985,000
========== ========== ========
Income tax expense from operations for the years ended December 31,
1998, 1997 and 1996 is comprised of the following:
1998 1997 1996
---- ---- ----
Current:
Federal .............................................. $ 219,868 $1,188,000 $593,000
State ................................................ 302,555 253,000 143,000
Deferred ................................................. 525,000 333,000 249,000
---------- ---------- --------
Income tax expense .............................. $1,047,423 $1,774,000 $985,000
========== ========== ========
35
36
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Income tax expense from operations for the years ended December 31,
1998, 1997 and 1996 differed from the amount computed by applying the U.S.
Federal income tax rate of 34 percent to earnings before income taxes as a
result of the following:
1998 1997 1996
---- ---- ----
Statutory Federal income tax ............................ $ 614,968 $ 629,000 $838,000
State income taxes, net of Federal income tax benefit ... 71,626 188,000 132,000
Increase (decrease) in valuation allowance .............. (10,000) (26,000) 49,000
Non-deductible distribution cost and net loss on
sale of assets ........................................ 324,000 812,000 --
Other ................................................... 46,829 171,000 (34,000)
---------- ---------- --------
Income tax expense .................................. $1,047,423 $1,774,000 $985,000
========== ========== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997 are as follows:
1998 1997
---- ----
Deferred tax assets:
Allowance for uncollectible accounts ................... $ 475,000 $ 354,000
State net operating losses ............................. 26,000 69,000
Other .................................................. 32,000 36,000
---------- ----------
Gross deferred tax assets ......................... 533,000 459,000
Valuation allowance .................................... (24,000) (34,000)
---------- ----------
Net deferred tax assets ........................... 509,000 425,000
Deferred tax liabilities:
Property and equipment, principally due to difference in
depreciation ........................................ 197,000 95,000
Excess of cost over net assets of purchased operations,
principally due to differences in amortization ...... 1,632,000 1,125,000
---------- ----------
Gross deferred tax liabilities .................... 1,829,000 1,220,000
---------- ----------
Net deferred tax liability ........................ $1,320,000 $ 795,000
========== ==========
The net deferred tax liability at December 31, 1998 and 1997, is
recorded as follows:
Current deferred income tax asset .......................... $ 507,000 $ 390,000
Noncurrent deferred income tax liability ................... 1,827,000 1,185,000
---------- ----------
Net deferred tax liability ............................. $1,320,000 $ 795,000
========== ==========
The Company has provided a valuation allowance on its gross deferred
tax asset primarily related to state net operating losses to the extent that
management does not believe that it is more likely than not that such asset will
be realized.
11. RELATED PARTY TRANSACTIONS
The Company leases space for certain surgery centers from its physician
partners affiliated with its centers at rates the Company believes approximate
fair market value. Payments on these leases were approximately $2,378,000,
$2,199,000 and $1,206,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
The Company reimburses certain of its limited partners for salaries and
benefits related to time spent by employees of their practices on activities of
the centers. Total reimbursement of such salary and benefit costs totaled
approximately $9,652,000, $7,025,000 and $4,617,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
36
37
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Included in other operating expenses for the years ended December 31,
1997 and 1996 is $382,467 and $213,820, respectively, paid to AHC for management
and financial services provided by AHC to the Company. These expenses were
incurred pursuant to an agreement under which AHC was paid for the services of
AHC's chief executive officer and chief financial officer as well as ongoing
accounting and tax services for surgery center and corporate operations. Upon
the Distribution, the Company issued to AHC's chief executive officer and chief
financial officer, who also serve as directors of the Company, restricted shares
of Class A Common Stock valued at approximately $350,000, in accordance with an
agreement in which they are to provide advisory services to the Company through
December 3, 1999. Deferred compensation associated with the restricted stock is
amortized over the term of the agreement.
The Company also rents approximately 15,000 square feet of office space
from AHC pursuant to a sublease which expires December 1999. Included in other
operating expenses for the years ended December 31, 1997 and 1996 is $271,194
and $163,212, respectively, related to this sublease.
The Company believes that the foregoing transactions are in its best
interests. It is the Company's current policy that all transactions by the
Company with officers, directors, five percent shareholders and their affiliates
will be entered into only if such transactions are on terms no less favorable to
the Company than could be obtained from unaffiliated parties, are reasonably
expected to benefit the Company and are approved by a majority of the
disinterested independent members of the Company's Board of Directors.
12. COMMITMENTS AND CONTINGENCIES
The Company and its partnerships are insured with respect to medical
malpractice risk on a claims made basis. Management is not aware of any claims
against it or its partnerships which would have a material financial impact.
The Company or its wholly owned subsidiaries, as general partners in
the limited partnerships, are responsible for all debts incurred but unpaid by
the partnership. As manager of the operations of the partnership, the Company
has the ability to limit its potential liabilities by curtailing operations or
taking other operating actions.
In the event of a change in current law which would prohibit the
physicians' current form of ownership in the partnerships or LLCs, the Company
is obligated to purchase the physicians' interests in the partnerships or LLCs.
The purchase price to be paid in such event is generally the greater of the
physicians' capital account or a multiple of earnings.
13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended December 31,
1998, 1997 and 1996 is as follows:
1998 1997 1996
---- ---- ----
Cash paid during the year for:
Interest ................................................ $ 1,573,936 $ 1,583,963 $ 909,884
Income taxes, net of refunds ............................ 229,221 1,398,190 970,309
Noncash investing and financing activities:
Capital lease obligations incurred to acquire equipment.. 798,548 333,041 --
Conversion of preferred stock ........................... 5,267,672 -- --
Note received for sale of a partnership interest ........ 1,945,000 -- --
Forgiveness of debt and treasury stock received in
connection with sale of a partnership interest ........ -- 808,070 --
Effect of acquisitions:
Assets acquired, net of cash ....................... 22,810,028 15,253,504 17,181,505
Liabilities assumed ................................ (1,409,107) (762,797) (2,441,749)
Issuance of common stock ........................... (450,689) (1,847,376) (2,069,962)
Issuance of notes payable .......................... (2,385,150) -- --
----------- ----------- -----------
Payment for assets acquired .................... $18,565,082 $12,643,331 $12,669,794
=========== =========== ===========
37
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the directors of the Company, set forth in
the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders
to be held May 21, 1999, under the caption "Election of Directors," is
incorporated herein by reference. Pursuant to General Instruction G(3),
information concerning executive officers of the Company is included in Part I
of this Annual Report on Form 10-K under the caption "Executive Officers of the
Registrant."
Information with respect to compliance with Section 16(a) of the
Securities Exchange Act of 1934, set forth in the Company's Definitive Proxy
Statement relating to the Annual Meeting of Shareholders to be held May 21,
1999, under the caption "Stock Ownership," is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to the executive officers of the Company, set
forth in the Company's Definitive Proxy Statement relating to the Annual Meeting
of Shareholders to be held May 21, 1999, under the caption "Executive
Compensation," is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to the security ownership of certain
beneficial owners and management, set forth in the Company's Definitive Proxy
Statement relating to the Annual Meeting of Shareholders to be held May 21,
1999, under the caption "Stock Ownership," is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related
transactions, set forth in the Company's Definitive Proxy Statement relating to
the Annual Meeting of Shareholders to be held May 21, 1999, under the caption
"Certain Relationships and Related Transactions," is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Consolidated Financial Statements, Financial Statement
Schedules and Exhibits
(1) FINANCIAL STATEMENTS: See Item 8 herein.
(2) FINANCIAL STATEMENT SCHEDULES:
Independent Auditors' Report .............................. S-1
Schedule II - Valuation and Qualifying Accounts............ S-2
All other schedules are omitted, because they are not
applicable or not required, or because the required information is
included in the consolidated financial statements or notes thereto.
38
39
(3) EXHIBITS
EXHIBIT DESCRIPTION
------- -----------
2.1 Amended and Restated Distribution Agreement (incorporated by
reference to Exhibit 2.1 to the Registration Statement on
Form 10, as amended)
2.2 Exchange Agreement (incorporated by reference to Exhibit 2.2
to the Registration Statement on Form 10, as amended)
3.1 Amended and Restated Charter of AmSurg (incorporated by
reference to Exhibit 3.1 to the Registration Statement on
Form 10, as amended)
3.2 Amended and Restated Bylaws of AmSurg (incorporated by
reference to Exhibit 3.2 to the Registration Statement on
Form 10, as amended)
4.1 Specimen certificate representing the Class A Common
Stock (incorporated by reference to Exhibit 4.1 to
the Registration Statement on Form 10, as amended)
4.2 Specimen certificate representing the Class B Common
Stock (incorporated by reference to Exhibit 4.2 to
the Registration Statement on Form 10, as amended)
4.3 Form of Shareholders' Agreement between AmSurg and
certain investors (incorporated by reference to
Exhibit 4.3 to the Registration Statement on Form 10,
as amended)
4.4 Preferred Stock Purchase Agreement dated November 20,
1996 by and among AmSurg, Electra Investment Trust
P.L.C., Capitol Health Partners, L.P. and Michael E.
Stephens (incorporated by reference to Exhibit 4.4 to
the Registration Statement on Form 10, as amended)
10.1 Form of Management and Human Resources Agreement
between AmSurg and AHC (incorporated by reference to
Exhibit 10.1 to the Registration Statement on Form
10, as amended)
10.2 Registration Agreement, dated April 2, 1992, as
amended November 30, 1992, and November 20, 1996
among AmSurg and certain named investors therein
(incorporated by reference to Exhibit 10.2 to the
Registration Statement on Form 10, as amended)
10.3 * Form of Indemnification Agreement with directors,
executive officers and advisors (incorporated by
reference to Exhibit 10.3 to the Registration
Statement on Form 10, as amended)
10.4 Third Amended and Restated Loan Agreement dated as of
May 19, 1998 among AmSurg, SunTrust Bank, Nashville,
N.A., and NationsBank of Tennessee, N.A., as amended
on May 6, 1997 and September 2, 1997 (incorporated by
reference to Exhibit 10.4 of the Registration
Statement on Form S-1, as amended)
10.5 Sublease dated June 9, 1996 between AHC and AmSurg
(incorporated by reference to Exhibit 10.5 to the
Registration Statement on Form 10, as amended)
10.6 * 1992 Stock Option Plan (incorporated by reference to
Exhibit 10.7 to the Registration Statement on Form 10, as
amended)
10.7 * 1997 Stock Incentive Plan (incorporated by reference to
Exhibit 10.8 to the Registration Statement on Form 10, as
amended)
10.8 * Form of Employment Agreement with executive officers
(incorporated by reference to Exhibit 10.9 to the
Registration Statement on Form 10, as amended)
10.9 * Form of Advisory Agreement with Thomas G. Cigarran and
Henry D. Herr (incorporated by reference to Exhibit 10.10 to
the Registration Statement on Form 10, as amended)
10.10 * Agreement dated April 11, 1997 between AmSurg and Rodney
H. Lunn (incorporated by reference to Exhibit 10.11 to the
Registration Statement on Form 10, as amended)
10.11 * Agreement dated April 11, 1997 between AmSurg and David L.
Manning (incorporated by reference to Exhibit 10.12 to the
Registration Statement on Form 10, as amended)
10.12 * Medical Director Agreement dated as of January 1, 1998,
between the Company and Bergein F. Overholt, M.D.
(incorporated by reference to Exhibit 10 of the Quarterly
Report on Form 10-Q, dated November 17, 1998)
21 Subsidiaries of AmSurg
23 Consent of Independent Auditors
27 Financial Data Schedule
----------------
* Management contract or compensatory plan, contract or arrangement
39
40
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated November 2, 1998
during the quarter ended December 31, 1998 to report the acquisition of
an undivided 60% interest in the assets of Gastrointestinal Diagnostic
Center, LLC.
The Company filed a report on Form 8-K dated November 13, 1998
during the quarter ended December 31, 1998 to report the acquisition of
an undivided 60% interest in the assets of Endoscopy Center of Naples,
Inc.
(c) Exhibits
The response to this portion of Item 14 is submitted as a
separate section of this report. See Item 14(a)(3).
(d) Financial Statement Schedules
Additional information relating to the response to this
portion of Item 14 is submitted as a separate section of this report.
See Item 14(a)(2).
40
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 26, 1999 By: /s/ Ken P. McDonald
---------------------------------------
Ken P. McDonald
(President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Thomas G. Cigarran Chairman of the Board March 26, 1999
- --------------------------------------
Thomas G. Cigarran
/s/ James A. Deal Director March 26, 1999
- --------------------------------------
James A. Deal
/s/ Steven I. Geringer Director March 26, 1999
- --------------------------------------
Steven I. Geringer
/s/ Debora A. Guthrie Director March 26, 1999
- --------------------------------------
Debora A. Guthrie
/s/ Henry D. Herr Director March 26, 1999
- --------------------------------------
Henry D. Herr
/s/ Bergein F. Overholt, M.D. Director March 26, 1999
- --------------------------------------
Bergein F. Overholt, M.D.
/s/ Ken P. McDonald President, Chief Executive March 26, 1999
- -------------------------------------- Officer and Director
Ken P. McDonald (Principal Executive Officer)
/s/ Claire M. Gulmi Senior Vice President, Chief March 26, 1999
- -------------------------------------- Financial Officer and Secretary
Claire M. Gulmi (Principal Financial and
Accounting Officer)
41
42
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
AmSurg Corp.
Nashville, Tennessee
We have audited the consolidated financial statements of AmSurg Corp.
(the "Company") as of December 31, 1998 and 1997 and for each of the years in
the three-year period ended December 31, 1998, and have issued our report
thereon dated February 15, 1999; such report is included elsewhere in this Form
10-K. Our audits also included the consolidated financial statement schedule of
the Company, listed in Item 14. This consolidated financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
February 15, 1999
S-1
43
AMSURG CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COST AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS (1) DEDUCTIONS (2) PERIOD
--------- -------- ------------ -------------- ------
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS INCLUDED
UNDER THE BALANCE SHEET CAPTION "ACCOUNTS
RECEIVABLE":
Year ended December 31, 1998........ $1,436,468 $2,862,112 $167,885 $2,528,700 $1,937,765
========== ========== ======== ========== ==========
Year ended December 31, 1997........ $1,272,651 $1,534,992 $673,758 $2,044,933 $1,436,468
========== ========== ======== ========== ==========
Year ended December 31, 1996........ $ 455,628 $1,227,315 $366,636 $ 776,928 $1,272,651
========== ========== ======== ========== ==========
- -------------------
(1) Valuation of allowance for uncollectible accounts at the acquisition of
AmSurg physician practice-based ambulatory surgery centers and physician
practices, net of dispositions. Between 51% and 70% was charged to excess
of cost over net assets of purchased companies. See note 3 of Notes to the
Consolidated Financial Statements.
(2) Charge-off against allowance.
S-2