<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended JUNE 30, 1998
Commission File Number 000-22217
AMSURG CORP.
(Exact Name of Registrant as Specified in its Charter)
TENNESSEE 62-1493316
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
ONE BURTON HILLS BOULEVARD
SUITE 350
NASHVILLE, TN 37215
(Address of principal executive offices) (Zip code)
(615) 665-1283
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- --------
As of August 10, 1998, there were outstanding 9,525,594 shares of the
Registrant's Class A Common Stock, no par value and 4,787,131 shares of the
Registrant's Class B Common Stock, no par value.
<PAGE> 2
PART I.
ITEM 1. FINANCIAL STATEMENTS
AMSURG CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................. $ 3,706,298 $ 3,406,787
Accounts receivable, net .................................................. 11,786,779 8,220,616
Supplies inventory ........................................................ 1,124,134 905,992
Deferred income taxes ..................................................... 390,000 390,000
Prepaid and other current assets .......................................... 1,372,172 1,020,835
------------ ------------
Total current assets ............................................. 18,379,383 13,944,230
Long-term receivables and deposits ............................................. 322,551 479,012
Property and equipment, net .................................................... 21,851,155 19,248,464
Intangible assets, net ......................................................... 44,627,156 41,566,684
------------ ------------
Total assets ..................................................... $ 85,180,245 $ 75,238,390
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ......................................... $ 1,187,567 $ 1,330,595
Accounts payable .......................................................... 860,398 922,188
Accrued salaries and benefits ............................................. 1,040,915 1,018,844
Other accrued liabilities ................................................. 756,573 1,235,626
Current income taxes payable .............................................. -- 125,396
------------ ------------
Total current liabilities ........................................ 3,845,453 4,632,649
Long-term debt ................................................................. 7,665,131 24,969,718
Deferred income taxes .......................................................... 838,439 1,185,000
Minority interest .............................................................. 11,498,135 9,191,896
Preferred stock, no par value, 5,000,000 shares authorized, 0 and 916,666 shares
outstanding, respectively ................................................... -- 5,267,672
Shareholders' equity:
Common stock:
Class A, no par value, 20,000,000 shares authorized 9,494,173 and
4,758,091 shares outstanding, respectively .......................... 47,859,740 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 ......................................................... 149,364 2,099,491
Deferred compensation on restricted stock ................................. (204,998) (273,348)
------------ ------------
Total shareholders' equity ....................................... 61,333,087 29,991,455
------------ ------------
Total liabilities and shareholders' equity ....................... $ 85,180,245 $ 75,238,390
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
2
<PAGE> 3
AMSURG CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues .................................... $ 20,119,947 $ 13,889,975 $ 37,948,595 $ 26,481,123
Operating expenses:
Salaries and benefits .................. 5,904,896 4,135,497 11,272,237 8,107,161
Other operating expenses ............... 7,202,698 5,002,520 13,586,410 9,453,313
Depreciation and amortization .......... 1,682,702 1,135,678 3,251,109 2,222,941
Net loss (gain) on sale of assets ...... 5,420,595 (64,185) 5,463,509 2,256,983
------------ ------------ ------------ ------------
Total operating expenses ........... 20,210,891 10,209,510 33,573,265 22,040,398
------------ ------------ ------------ ------------
Operating income (loss) ............ (90,944) 3,680,465 4,375,330 4,440,725
Minority interest ........................... 3,155,660 2,286,029 5,962,735 4,233,940
Other (income) and expenses:
Interest expense, net of interest income 630,096 380,216 1,122,921 688,395
------------ ------------ ------------ ------------
Earnings (loss) before income taxes (3,876,700) 1,014,220 (2,710,326) (481,610)
Income tax expense (benefit) ................ (1,226,749) 407,000 (760,199) 736,000
------------ ------------ ------------ ------------
Net earnings (loss) ................ (2,649,951) 607,220 (1,950,127) (1,217,610)
Accretion of preferred stock discount ....... -- 69,990 -- 137,555
------------ ------------ ------------- -------------
Net earnings (loss) available to
common shareholders ........... $ (2,649,951) $ 537,230 $ (1,950,127) $ (1,355,165)
============ ============ ============ ============
Earnings (loss) per common share:
Basic .................................. $ (0.25) $ 0.06 $ (0.19) $ (0.14)
Diluted ................................ $ (0.25) $ 0.06 $ (0.19) $ (0.14)
Weighted average number of shares and share
equivalents outstanding:
Basic .................................. 10,622,889 9,447,249 10,148,168 9,403,745
Diluted ................................ 10,622,889 9,765,574 10,148,168 9,403,745
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE> 4
AMSURG CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................................................... $ (1,950,127) $ (1,217,610)
Adjustments to reconcile net loss to net cash provided by operating activities:
Minority interest ............................................................. 5,962,735 4,233,940
Distributions to minority partners ............................................ (5,630,049) (4,074,328)
Depreciation and amortization ................................................. 3,251,109 2,222,941
Deferred income taxes ......................................................... (346,561) --
Amortization of deferred compensation on restricted stock ..................... 68,350 --
Net loss on sale of assets .................................................... 5,463,509 2,256,983
Increase (decrease) in cash, net of effects of acquisitions, due to changes in:
Accounts receivable, net ................................................. (2,799,258) (758,576)
Supplies inventory ....................................................... (73,995) 10,871
Prepaid and other current assets ......................................... (313,412) (242,513)
Other assets ............................................................. (185,177) (366,909)
Accounts payable ......................................................... (263,546) 517,153
Accrued expenses and other liabilities ................................... (565,960) 91,012
Other, net ............................................................... (5,390) 94,362
------------ ------------
Net cash flows provided by operating activities .......................... 2,612,228 2,767,326
Cash flows from investing activities:
Acquisition of interest in surgery centers and physician practices ................ (9,976,822) (6,954,262)
Acquisition of property and equipment ............................................. (4,084,350) (5,165,210)
Proceeds from sale of assets ...................................................... 652,000 --
Decrease in long-term receivables ................................................. 113,452 19,717
------------ ------------
Net cash flows used in investing activities .............................. (13,295,720) (12,099,755)
Cash flows from financing activities:
Proceeds from long-term borrowings ................................................ 11,193,850 9,094,698
Repayment on long-term borrowings ................................................. (28,777,317) (1,446,546)
Net proceeds from issuance of common stock ........................................ 27,601,480 383,171
Proceeds from capital contributions by minority partners .......................... 1,016,380 1,302,923
Financing cost incurred ........................................................... (51,390) (64,526)
------------ ------------
Net cash flows provided by financing activities .......................... 10,983,003 9,269,720
------------ ------------
Net increase (decrease) in cash and cash equivalents ................................... 299,511 (62,709)
Cash and cash equivalents, beginning of period ......................................... 3,406,787 3,192,408
------------ ------------
Cash and cash equivalents, end of period ............................................... $ 3,706,298 $ 3,129,699
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE> 5
AMSURG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of AmSurg
Corp. and subsidiaries ("the Company") have been prepared in accordance with
generally accepted accounting principles for interim financial reporting and in
accordance with Rule 10-01 of Regulation S-X.
In the opinion of management, the unaudited interim financial
statements contained in this report reflect all adjustments, consisting of only
normal recurring accruals which are necessary for a fair presentation of the
financial position and the results of operations for the interim periods
presented. The results of operations for any interim period are not necessarily
indicative of results for the full year.
The accompanying consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 1997 Annual Report on Form 10-K.
Certain amounts of prior periods have been reclassified to conform to
the current presentation.
(2) SHAREHOLDERS' EQUITY
On June 17, 1998, the Company completed a public stock offering of
3,700,000 shares of Class A Common Stock, for net proceeds of approximately
$27,600,000. Concurrent with the public stock offering, the Series B Convertible
Preferred Stock was converted into 605,998 shares of Class A Common Stock. Net
proceeds from the offering were used to repay borrowings under the Company's
revolving credit facility.
During the first quarter of 1998, the holders of the Series A
Redeemable Preferred Stock converted their preferred shares into 380,952 shares
of Class A Common Stock using a conversion ratio based on the market price of
the Class A Common Stock pursuant to the provisions of the Company's Charter.
(3) ACQUISITIONS AND DISPOSITIONS
In the six months ended June 30, 1998, the Company, through wholly
owned subsidiaries and in separate transactions, acquired majority interests in
three physician practice-based surgery centers. The Company also purchased an
additional interest in an existing surgery center. The aggregate purchase price
and related cost for the acquisitions was approximately $10,270,000, consisting
primarily of cash and Class A Common Stock valued at approximately $290,000, of
which the Company assigned approximately $9,100,000 to excess cost over net
assets of purchased operations.
Subsequent to June 30, 1998, the Company, through a wholly owned
subsidiary, acquired a 57% interest in a physician practice-based surgery center
for approximately $1,950,000.
Also in the six months ended June 30, 1998, a partnership in which the
Company, through a wholly owned subsidiary, owned a 51% interest, sold certain
assets comprising a surgery center developed in 1995 for approximately $650,000
and incurred a net loss of $42,914.
In May 1998, the Company's Board of Directors approved a plan to
dispose of the Company's interests in the two specialty physician practices in
which it then owned a majority interest as part of an overall strategy to exit
the practice management business and focus solely on the development,
acquisition and operation of ambulatory surgery centers and specialty networks.
While the Company's past strategy for network development included the ownership
of related physician practices, the Company's experience in specialty network
development has made it clear that physician practice ownership is not necessary
for the successful development of these networks. Because of this change in
strategy and the fact that the ownership of physician practices is management
intensive and produces lower profit margins than surgery centers, the Company
believes that its capital and management resources are better allocated to the
development and acquisition of surgery centers and networks. In addition, the
Company believes that the ownership of only two physician practices does not
allow for the economies of scale and growth opportunities needed to be
successful in the physician practice management business.
In conjunction with the plan of disposal of these practices, the
Company reduced the carrying value of the long-lived assets held for sale by
approximately $5,400,000 in the three months ended June 30, 1998, based on the
estimated sales proceeds less estimated costs to sell. The Company recognized an
income tax benefit of approximately $1,800,000 associated with the estimated
loss. The remaining carrying value of the net assets of the practices at the
plan of disposal date was approximately $1,700,000.
5
<PAGE> 6
AMSURG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
As of June 30, 1998, the Company had completed the disposal of one of
these practices and was in negotiations regarding the possible sale of the
remaining practice. However, there is no definitive agreement or arrangement
with regard thereto, and therefore, there can be no assurance that the Company
will sell this operation. The Company believes, however, that the estimated
disposal loss will be adequate.
A summary of the information about the operations of the physician
practices for the three and six months ended June 30, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
1998 1997 1998 1997
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues ................................... $ 1,998,137 $2,387,457 $4,240,524 $4,604,316
Operating expenses ......................... 1,905,771 2,149,002 3,822,793 4,123,949
Minority interest .......................... 44,958 82,732 155,661 191,066
Interest expense ........................... 51,400 80,184 114,616 162,542
----------- ---------- ---------- ----------
Contribution margin before income taxes $ (3,992) $ 75,539 $ 147,454 $ 126,759
=========== ========== ========== ==========
</TABLE>
(4) RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" became effective for the Company during the first quarter
of 1998 and its adoption did not have a material impact on the Company's
financial reporting practices. SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" also becomes effective for the Company for
the year ended December 31, 1998. The Company is still evaluating the effects of
adopting this statement, but does not expect its adoption to have a material
effect on the Company's consolidated financial statements.
Statement of Position ("SOP") No. 98-5 "Reporting on the Costs of
Start-Up Activities" becomes effective for the Company for the year ended
December 31, 1999. SOP No. 98-5 requires that start-up costs be expensed as
incurred and that upon adoption, all deferred start-up costs be expensed as a
cumulative effect of a change in accounting principle. The Company does not
anticipate that the adoption of SOP No. 98-5 will have a material effect on the
Company's financial position or ongoing results of operations.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements. These statements,
which have been included in reliance on the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, involve risks and
uncertainties. The Company's actual operations and results may differ materially
from the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, the Company's ability
to enter into partnership or operating agreements for new practice-based
ambulatory surgery centers and new specialty physician networks; its ability to
identify suitable acquisition candidates and negotiate and close acquisition
transactions; its ability to obtain the necessary financing or capital on terms
satisfactory to the Company in order to execute its expansion strategy; its
ability to manage growth; its ability to contract with managed care payers on
terms satisfactory to the Company for its existing centers and its centers that
are currently under development; its ability to obtain and retain appropriate
licensing approvals for its existing centers and centers currently under
development; its ability to minimize start-up losses of its development centers;
its ability to maintain favorable relations with its physician partners; its
ability to sell its remaining physician practice; and 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.
OVERVIEW
The Company develops, acquires and operates practice-based ambulatory
surgery centers in partnership with physician practice groups through
partnerships and limited liability companies. As of June 30, 1998, the Company
owned a majority interest (51% or greater) in 46 surgery centers, owned a
majority interest (60%) in a physician practice and had established and was the
majority owner (51%) of six start-up specialty physician networks.
The Company operated as a majority-owned subsidiary of American
Healthcorp, Inc. ("AHC") from 1992 until December 3, 1997 when AHC distributed
to its stockholders all of its holdings of AmSurg common stock (the
"Distribution"). Prior to the Distribution, the Company effected a
recapitalization pursuant to which every three shares of the Company's then
outstanding common stock were converted into one share of Class A Common Stock.
Immediately following the Recapitalization, AHC exchanged a portion of its
shares of Class A Common Stock for shares of Class B Common Stock. The principal
purpose of the Distribution was to enable the Company to have access to debt and
equity capital markets as an independent, publicly traded company. Upon the
Distribution, the Company became a publicly traded company.
The following table presents the changes in the number of surgery
centers in operation and centers under development during the three and six
months ended June 30, 1998 and 1997. A center is deemed to be under development
when a partnership or limited liability company has been formed with the
physician group partner to develop the center.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ---------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Centers in operation, beginning of period.. 42 29 39 27
New center acquisitions placed in operation 1 1 3 3
New development centers placed in operation 3 1 5 1
Centers sold .............................. -- -- (1) --
--- --- --- ---
Centers in operation, end of period ....... 46 31 46 31
=== === === ===
Centers under development, end of period .. 5 19 5 19
=== === === ===
</TABLE>
Thirty-five of the surgery centers in operation as of June 30, 1998,
perform gastrointestinal endoscopy procedures, nine centers perform
ophthalmology surgery 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.
7
<PAGE> 8
During the three and six months ended June 30, 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, the Company completed the disposal of one of these
practices. Although the Company is currently in negotiations regarding the
possible sale of the remaining practice, there is no definitive agreement or
arrangement with regard thereto. Therefore, there can be no assurance that the
Company will sell the operations of the remaining practice. However, the Company
believes that the estimated disposal loss will be adequate (see Note 3 of the
Consolidated Financial Statements).
The start-up specialty physician networks are owned through limited
partnerships and limited liability companies in which the Company owns a
majority interest. The other partners or members are individual physicians who
will provide the medical services to the patient population covered by the
contracts the network will seek to enter into with managed care payers. The
Company does not expect that the specialty physician networks alone will be a
significant source of income for the Company. These networks were and will be
formed in selected markets primarily as a contracting vehicle for certain
managed care arrangements to generate revenues for the Company's practice-based
surgery centers. As of June 30, 1998, one network had secured a managed care
contract and was operational.
The Company intends to expand through the development and acquisition
of additional practice-based surgery centers in targeted surgical specialties.
In addition, the Company believes that its surgery centers, combined with its
relationships with specialty physician practices in the surgery centers'
markets, will provide the Company with other opportunities for growth from
specialty network development. By using its surgery centers as a base to develop
specialty physician networks that are designed to serve large numbers of covered
lives, the Company believes that it will strengthen its market position in
contracting with managed care organizations.
While the Company generally owns 51% to 70% of the entities that own
the surgery center or physician group practice, the Company's consolidated
statements of operations include 100% of the results of operations of the
entities, reduced by the minority partners' share of the net income or loss of
the surgery center/practice entities.
SOURCES OF REVENUES
The Company's principal source of revenues is a facility fee charged
for surgical procedures performed in its surgery centers. This fee varies
depending on the procedure, but usually includes all charges for operating room
usage, special equipment usage, supplies, recovery room usage, nursing staff and
medications. Facility fees do not include the charges of the patient's surgeon,
anesthesiologist or other attending physicians, which are billed directly to
third-party payers by such physicians. 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 has owned a
majority interest. However, upon the completion of the plan to dispose of its
interest in its physician 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 a majority interest depend upon third-party
reimbursement programs, including governmental and private insurance programs,
to pay for services rendered to patients. The Company derived approximately 40%
and 34% of its net revenues from governmental healthcare programs, including
Medicare and Medicaid, in the six months ended June 30, 1998 and 1997,
respectively. The Medicare program currently pays ambulatory surgery centers and
physicians in accordance with fee schedules which are prospectively determined.
Approximately 9% and 11% of the Company's revenues for the six months
ended June 30, 1998 and 1997, respectively, 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 45% of the revenue associated with these
contracts in the six months ended June 30, 1998 were a part of the operations of
the practice disposed of as of June 26, 1998. The other contracts require the
remaining practice to provide specialty physician and certain outpatient surgery
services for the HMO members on an exclusive basis. These contracts do not
require the practice to provide or to be at risk for hospital or other ancillary
services such as laboratory or imaging services. The services required by these
contracts are provided almost solely by surgery centers and the physician
practice in which the Company owns a majority interest. Because the Company is
only at risk for the cost of providing relatively limited healthcare services to
these HMO members, the Company's risk of overutilization by HMO members is
limited to the cost of the physician's time and the supply, drug and nursing
staff expense required for outpatient surgery.
8
<PAGE> 9
In May 1998 the Company received notification from a payer with which
one of its surgery centers has a capitated contract for surgical
gastroenterology services covering approximately 120,000 lives that the contract
would not be renewed beyond the June 30, 1998 anniversary date of the contract.
The Company continues to provide surgical services under the contract under
provisional arrangements and has negotiated with the payer a new contract with
reimbursement rates no less favorable than those provided by the original
contract. The Company expects to execute the contract during the third quarter
of 1998.
The Company's sources of revenues as a percentage of total
revenues for the three and six months ended June 30, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Surgery centers ... 90% 82% 90% 82%
Physician practices 10 17 10 17
Other ............. -- 1 -- 1
--- --- --- ---
Total ......... 100% 100% 100% 100%
=== === === ===
</TABLE>
RESULTS OF OPERATIONS
The following table shows certain statement of operations items
expressed as a percentage of revenues for the three and six months ended June
30, 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues ................................. 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Salaries and benefits .................. 29.3 29.8 29.7 30.6
Other operating expenses ............... 35.8 36.0 35.8 35.7
Depreciation and amortization .......... 8.4 8.2 8.6 8.4
Net loss (gain) on sale of assets ...... 27.0 (0.5) 14.4 8.5
----- ----- ----- -----
Total operating expenses ............. 100.5 73.5 88.5 83.2
----- ----- ----- -----
Operating income (loss) .............. (0.5) 26.5 11.5 16.8
Minority interest ........................ 15.7 16.5 15.7 16.0
Other (income) and expenses:
Interest expense, net of interest income 3.1 2.7 2.9 2.6
----- ----- ----- -----
Earnings (loss) before income taxes .. (19.3) 7.3 (7.1) (1.8)
Income tax expense (benefit) ............. (6.1) 2.9 (2.0) 2.8
----- ----- ----- -----
Net earnings (loss) .................. (13.2) 4.4 (5.1) (4.6)
Accretion of preferred stock discount .... -- 0.5 -- 0.5
----- ----- ----- -----
Net earnings (loss) available to
common shareholders ............. (13.2)% 3.9% (5.1)% (5.1)%
===== ===== ===== =====
</TABLE>
Revenues were $20.1 million and $37.9 million in the three and six
months ended June 30, 1998, respectively, an increase of $6.2 million and $11.5
million, or 45% and 43%, respectively, over revenues in the comparable 1997
periods. The increase is primarily attributable to additional centers in
operation during the 1998 periods. Same-center revenues in the three and six
months ended June 30, 1998, increased by 9% and 11%, respectively. Same-center
growth resulted primarily from increased procedure volume. The Company
anticipates further revenue growth during 1998 as a result of additional
start-up and acquired centers expected to be placed in operation and from
same-center revenue growth, net of a revenue reduction due to the disposition of
the physician practices. Final implementation of the proposed Medicare
reimbursement rates would also reduce the Company's future revenue as further
described in "Liquidity and Capital Resources."
9
<PAGE> 10
Salaries and benefits expense was $5.9 million and $11.3 million in the
three and six months ended June 30, 1998, an increase of $1.8 million and $3.2
million, or 43% and 39%, respectively, over salaries and benefits expense in the
comparable 1997 periods. Other operating expenses were $7.2 million and $13.6
million in the three and six months ended June 30, 1998, an increase of $2.2
million and $4.1 million, or 44%, over other operating expenses in the
comparable 1997 periods. These increases resulted primarily from additional
centers in operation, from an increase in corporate staff primarily to support
growth in the number of centers in operation and anticipated future growth and
additional corporate cost associated with being a publicly traded company.
The Company anticipates further increases in operating expenses in
1998, primarily due to additional start-up centers and acquired centers expected
to be placed in operation, offset by the expected elimination of physician
practices' operating expenses upon the planned disposal of these practices.
Typically, a start-up center will incur start-up losses during its initial
months of operation and will experience lower revenues and operating margins
than an established center until its case load increases to a more optimal
operating level, which generally is expected to occur within 12 months after a
center opens.
Depreciation and amortization expense increased $547,000 and $1.0
million, or 48% and 46%, respectively in the three and six months ended June 30,
1998, over the comparable 1997 periods, primarily due to 14 additional surgery
centers in operation in the 1998 periods compared to the 1997 periods.
During the three and six months ended June 30, 1998, in conjunction
with its plan to exit the practice management business, the Company reduced the
carrying value of the long-lived assets of the practices held for sale by
approximately $5,400,000 based on the estimated sales proceeds less estimated
costs to sell. The Company also incurred a net loss of $43,000 during the six
months ended June 30, 1998, related to the sale of a surgery center to an
unaffiliated third party. During the comparable 1997 six-month period, the
Company recorded an impairment loss of $2.3 million, which ultimately resulted
in a net loss of $2.0 million, in connection with one partnership which operated
two surgery centers.
The minority interest in earnings in the three and six months ended
June 30, 1998, increased by $870,000 and $1.7 million, or 38% and 41%, over the
comparable 1997 periods 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 $250,000 and $435,000, or 66% and 63%, in
the three and six months ended June 30, 1998, over the comparable 1997 periods
due to debt assumed or incurred in connection with additional acquisitions of
interests in surgery centers, together with the interest expense associated with
newly opened start-up surgery centers financed partially with bank debt.
The Company recognized an income tax benefit of $1.2 million and
$760,000 in the three and six months ended June 30, 1998, respectively, compared
to tax expense of $407,000 and $736,000 in the comparable 1997 periods,
respectively. A tax benefit of $1.8 million was recognized in the three and six
months ended June 30, 1998 in connection with the net loss on sale of assets.
The Company's effective tax rate in all periods was 40% of earnings prior to the
impact of the net loss on sale of assets and differed from the federal statutory
income tax rate of 34% primarily due to the impact of state income taxes.
Accretion of preferred stock discount in the three and six months ended
June 30, 1997, resulted from the issuance during November 1996 of redeemable
preferred stock with a redemption amount of $3.0 million. The preferred stock
was recorded at its fair market value, net of issuance costs. From the time of
issuance, the Series A Redeemable Preferred Stock has been accreted toward its
redemption value, including potential dividends, over the redemption term.
During the 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 has recorded no accretion in 1998.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had working capital of $14.6 million
compared to $5.6 million at June 30, 1997. Operating activities for the six
months ended June 30, 1998, generated $2.6 million in cash flow compared to $2.8
million in the comparable 1997 period. Cash and cash equivalents at June 30,
1998 and 1997 were $3.8 million and $3.1 million, respectively.
During the six months ended June 30, 1998, the Company used
approximately $10.0 million to acquire interests in three 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 approximately $4.1
million in the six months ended June 30, 1998, of which approximately $1.0
million was funded from the capital contributions of the Company's minority
partners. The Company used its cash flow from operations and borrowings on
long-term debt of approximately $11.2 million to fund its acquisition and
development obligations.
10
<PAGE> 11
On June 17, 1998, the Company completed a public stock 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 $28.8
million in borrowings under the Company's revolving credit facility (the "Loan
Agreement") and other long-term debt during the six months ended June 30, 1998.
The Company also received cash proceeds of $650,000 from the sale of a surgery
center during the six months ended June 30, 1998.
At June 30, 1998, the Company's partnerships and limited liability
companies had unfunded construction and equipment purchase commitments for
centers under development of approximately $300,000, of which the Company
expects will be provided by the Company and the physician partners in proportion
to their respective ownership interests in the partnerships and limited
liability companies. The Company intends to fund its portion out of future cash
flows from operations.
At June 30, 1998, borrowings under the Company's revolving credit
facility were $5.6 million, are due in January 2001 and are guaranteed by the
wholly owned subsidiaries of the Company, and in some instances, the underlying
assets of certain developed centers. The Loan Agreement, as amended in the
second quarter of 1998, 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 .15% and .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 June 30,
1998.
On November 20, 1996, the Company issued shares of its Series A
Preferred Stock and Series B Preferred Stock to certain unaffiliated
institutional investors for net cash proceeds of approximately $5.0 million. The
purpose of the offering was to fund the acquisition and development of surgery
centers and to provide other working capital as needed prior to being in
position to access capital markets as an independent public company. The Series
A Preferred Stock, which had a liquidation value of $3.0 million and was subject
to redemption at any time at the option of the Company, upon the occurrence of
certain events and in 2002 at the option of the holders, was converted during
the three months ended March 31, 1998, by its holders into 380,952 shares of
Class A Common Stock using a conversion ratio based on market price of the Class
A Common Stock pursuant to the provisions of the Company's Charter. Upon the
stock offering completed on June 17, 1998, the Series B Preferred Stock
automatically converted into 605,998 of shares of Class A Common Stock as
determined by a conversion ratio providing for the issuance of that number of
shares which approximates 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 originally expired August 11, 1998, and contains a
proposed effective date of October 1, 1998. 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 submitted a comment letter requesting extension
of the comment period and a delay in the effective date. The Company has
received notice that the comment period has been extended for 30 days until
September 10, 1998.
The Company believes that the proposed rule, if adopted in its current
form with an effective date of October 1, 1998, would adversely affect the
Company's revenues and expects that the Company's revenues in fiscal 1998 would
be reduced by approximately 1% and revenues in fiscal 1999 would be reduced by
approximately 4%. The Company expects to take a number of specific actions,
including actions to effect certain cost efficiencies in center operations and
reduce corporate overhead costs, in anticipation of the implementation of a
final rule in order to offset the earnings impact of the rule. 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 is evaluating the Year 2000 issues and the impact upon
information systems and computer technologies. While certain applications in
system software critical to processing financial and operational information are
Year 2000 compliant, the Company expects to incur some costs in testing and
implementing updates to such software. The Company is also evaluating the impact
of the Year 2000 on other computer technologies and software. All costs to
evaluate and make modifications will be expensed as incurred and are not
expected to have a significant impact on the Company's ongoing results of
operations.
11
<PAGE> 12
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" became effective for the Company during the first quarter
of 1998 and its adoption did not have a material impact on the Company's
financial reporting practices. SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" also becomes effective for the Company for
the year ended December 31, 1998. The Company is still evaluating the effects of
adopting this statement, but does not expect its adoption to have a material
effect on the Company's consolidated financial statements.
Statement of Position ("SOP") No. 98-5 "Reporting on the Costs of
Start-Up Activities" becomes effective for the Company for the year ended
December 31, 1999. SOP No. 98-5 requires that start-up costs be expensed as
incurred and that upon adoption, all deferred start-up costs be expensed as a
cumulative effect of a change in accounting principle. The Company does not
anticipate that the adoption of SOP No. 98-5 will have a material effect on the
Company's financial position or ongoing results of operations.
12
<PAGE> 13
PART II
ITEM 1. LEGAL PROCEEDINGS.
Not Applicable.
ITEM 2. CHANGES IN SECURITIES.
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 attributed to the account of the Company aggregated $29,600,000, and
expenses incurred by the Company in connection with the issuance and
distribution of the offering totaled $2,032,220. Net proceeds were $27,567,780
and were used to repay borrowings under the Company's revolving credit facility
as described in the prospectus.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's Annual Shareholders Meeting held on May 15, 1998, the
following members were elected to the Board of Directors by the vote set forth
below:
<TABLE>
<CAPTION>
VOTES VOTES VOTES
FOR AGAINST WITHHELD
--- ------- --------
<S> <C> <C> <C> <C>
Class I Director James A. Deal 46,655,040 - 109,948
Class I Director Steven I. Geringer 46,655,040 - 109,948
</TABLE>
ITEM 5. OTHER INFORMATION.
The Company must be notified of any proposal intended to be presented
for action at the 1999 Annual Meeting of Shareholders by any shareholder of the
Company not later than December 22, 1998. The Company may exercise discretionary
voting authority with respect to any such proposal if it does not have notice of
such matter by that date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Third Amended and Restated Loan Agreement dated as of
May 19, 1998 among the Company, SunTrust Bank, Nashville,
N.A. and NationsBank of Tennessee, N.A. (incorporated by
reference to Exhibit 10.4 of the Company's Registration
Statement on Form S-1, as amended (File No. 333-50813))
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated April
14, 1998 during the quarter ended June 30, 1998 to report the
acquisition of an undivided 51% interest in the assets of
South Denver Endoscopy Center, Inc.
The Company filed a report on Form 8-K dated April
30, 1998 during the quarter ended June 30, 1998 to report the
acquisition of an undivided 60% interest in the assets
comprising the operations of an ophthalmology ambulatory
surgery center owned by Boswell Eye Center L.L.C. and Boswell
Eye Institute, Inc.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMSURG CORP.
Date: August 13, 1998 By: /s/ Claire M. Gulmi
-------------------------------------------------
CLAIRE M. GULMI
Senior Vice President and Chief Financial Officer
(Principal Financial and Duly Authorized Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMSURG
CORP.'S BALANCE SHEET AS OF JUNE 30, 1998 AND STATEMENT OF OPERATIONS FOR THE
SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,706,298
<SECURITIES> 0
<RECEIVABLES> 11,786,779<F1>
<ALLOWANCES> 0
<INVENTORY> 1,124,134
<CURRENT-ASSETS> 18,379,383
<PP&E> 21,851,155<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 85,180,215
<CURRENT-LIABILITIES> 3,845,453
<BONDS> 0
0
0
<COMMON> 61,388,721
<OTHER-SE> (55,634)
<TOTAL-LIABILITY-AND-EQUITY> 85,180,245
<SALES> 0
<TOTAL-REVENUES> 37,948,595
<CGS> 0
<TOTAL-COSTS> 33,573,265
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,122,921
<INCOME-PRETAX> (2,710,326)
<INCOME-TAX> (760,199)
<INCOME-CONTINUING> (1,950,127)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,950,127)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
<FN>
<F1>VALUE REPRESENTS NET AMOUNT
</FN>
</TABLE>
