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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, 1997
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 (Section 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. [X]
As of March 17, 1998, 5,142,543 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 17, 1998) of the Registrant held by nonaffiliates on March 17,
1998 was approximately $81,000,000. 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 15, 1998 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, 1997, the Company owned a majority
interest in 39 surgery centers in 16 states and the District of Columbia and
owned a majority interest in two physician practice groups. As of December 31,
1997, the Company also had 10 centers under development and had executed
letters of intent to acquire or develop nine 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, 1997, the Company had
established five start-up specialty physician networks, located in Alabama,
Florida, 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 1997), an industry publication, outpatient
surgical procedures represented approximately 69% of all surgical procedures
performed in the United States in 1996 and the number of outpatient surgery
cases increased 54% from 3.1 million in 1993 to 4.8 million in 1996. As of
December 31, 1996, there were approximately 2,425 freestanding ambulatory
surgery centers in the U.S., of which approximately 171 were owned by hospitals
and approximately 607 were owned by corporate entities. The remaining
approximately 1,647 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:
Provide Lower-Risk, High Volume Ambulatory Surgery Services. The
Company's surgery centers currently focus on providing lower-risk surgical
procedures in five surgical subspecialties: gastroenterology, ophthalmology,
orthopaedic surgery, urology and otolaryngology. The Company's typical single
specialty practice-based surgery center is designed, built, equipped and
staffed for the needs of a single specialty, which the Company believes creates
efficiencies in operations. The Company believes that as a result, the single
specialty surgery center is a lower cost unit to build, equip and operate, is
more convenient for the physician and patient, and therefore is more attractive
to managed care payers than hospital-based or freestanding multi-specialty
centers.
Develop and Acquire Practice-Based Ambulatory Surgery Centers.
Although the Company has historically grown primarily by acquisition of
existing centers, it anticipates that its future growth in the surgery center
business will come increasingly from development of new practice-based
ambulatory surgery centers. In order to continue the acquisition and
development of ambulatory surgery centers, the Company will require additional
capital resources in the form of debt or equity financing. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Liquidity and Capital Resources."
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 acquired two physician
practices, a urology specialty group and a gastrointestinal and primary care
specialty group, in Miami, Florida, one of which is a partner with the Company
in a practice-based ambulatory surgery center. The other physician practice is
developing an ambulatory surgery center with the Company. The Company has
established and is the majority owner of five start-up 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 and associated physician practices.
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 generally 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, 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
start-up centers that are being developed, 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 which 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 Company's partnerships and limited liability companies 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.
The following table sets forth certain information relating to centers
in operation as of December 31, 1997:
<TABLE>
<CAPTION>
YEAR OPERATING
OR DATE OR AMSURG
SPECIALTY ORIGINALLY ACQUISITION PROCEDURE OWNERSHIP
LOCATION PRACTICE OPENED DATE ROOMS PERCENTAGE
-------- --------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
ACQUIRED CENTERS:
Knoxville, Tennessee Gastroenterology 1987 Nov. 1992 7 51%
Topeka, Kansas Gastroenterology 1990 Nov. 1992 4 60
Nashville, Tennessee Gastroenterology 1989 Nov. 1992 3 60
Nashville, Tennessee Gastroenterology 1988 Dec. 1992 3 60
Washington, D.C. Gastroenterology 1990 Nov. 1993 3 60
Melbourne, Florida Ophthalmology 1986 Nov. 1993 3 51
Torrance, California Gastroenterology 1990 Feb. 1994 2 51
Sebastopol, California Ophthalmology 1988 Apr. 1994 2 60
Maryville, Tennessee Gastroenterology 1992 Jan. 1995 3 51
Miami, Florida Gastroenterology 1995 Apr. 1995 7 70
Panama City, Florida Gastroenterology 1993 July 1996 3 51
Ocala, Florida Gastroenterology 1993 Aug. 1996 3 51
Columbia, South Carolina Gastroenterology 1988 Oct. 1996 3 51
Wichita, Kansas Orthopaedics 1991 Nov. 1996 3 51
Minneapolis, Minnesota Gastroenterology 1993 Nov. 1996 2 51
Crystal River, Florida Gastroenterology 1994 Jan. 1997 3 51
Abilene, Texas Ophthalmology 1987 Mar. 1997 2 51
Fayetteville, Arkansas Gastroenterology 1992 May 1997 2 51
Independence, Missouri Gastroenterology 1994 Sept. 1997 2 60
Kansas City, Missouri Gastroenterology 1995 Sept. 1997 2 60
DEVELOPED CENTERS:
Santa Fe, New Mexico Gastroenterology May 1994 - 3 60
Tarzana, California Gastroenterology July 1994 - 3 51
Beaumont, Texas Gastroenterology Oct. 1994 - 3 51
Abilene, Texas Gastroenterology Dec.1994 - 3 60
Melbourne, Florida Otolaryngology Mar. 1995 - 2 51
Knoxville, Tennessee Ophthalmology June 1996 - 2 60
West Monroe, Louisiana Gastroenterology June 1996 - 2 51
Miami, Florida Gastroenterology Sept. 1996 - 3 60
Sidney, Ohio Ophthalmology Dec. 1996 - 3 51
Urology
General Surgery
Otolaryngology
Montgomery, Alabama Ophthalmology May 1997 - 2 51
Willoughby, Ohio Gastroenterology July 1997 - 2 51
Milwaukee, Wisconsin Gastroenterology July 1997 - 2 51
Chevy Chase, Maryland Gastroenterology July 1997 - 2 51
Melbourne, Florida Gastroenterology Aug. 1997 - 2 51
Lorain, Ohio Gastroenterology Aug. 1997 - 2 51
Hillmont, Pennsylvania Gastroenterology Oct. 1997 - 2 51
Minneapolis, Minnesota Gastroenterology Nov. 1997 - 2 51
Hialeah, Florida Gastroenterology Dec. 1997 - 3 51
Cleveland, Ohio Ophthalmology Dec. 1997 - 2 51
</TABLE>
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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, 1997, 30 of the
Company's centers in operation performed gastrointestinal endoscopy procedures,
six centers performed ophthalmology procedures, one center performed
orthopaedic procedures, one center performed otolaryngology 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.
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 and the practices.
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 and physician practices.
As of December 31, 1997, the Company had established and was the
majority owner and operator of five start-up specialty physician networks.
These networks had not yet generated any revenues as of December 31, 1997.
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 or physician practice, 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.
As part of its network development strategy, in January 1996 the
Company acquired a 70% ownership interest in the assets of Gastroenterology
Group of South Florida ("GGSF") in Miami, Florida, a gastroenterology and
primary care practice currently comprised of seven gastroenterologists and five
primary care physicians that provides gastroenterology physician and outpatient
endoscopy services under a contract with a large managed care payer which
covers approximately 120,000 lives. The Company and certain GGSF physicians
have been partners in a practice-based endoscopy center that provides
outpatient endoscopy services to this base of covered lives and to other
patients. Using GGSF as a base, the Company has developed a gastroenterology
physician network in south Florida and expects to add additional surgery
centers and covered lives as a result of this expansion. In addition, the
Company has established four ophthalmology/eye care networks located in
Knoxville, Tennessee; Montgomery, Alabama; Cleveland, Ohio; and Abilene, Texas.
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Also as part of its network development strategy, in January 1997 the
Company acquired a 60% ownership interest in the assets of Miami Urological
Associates, a urology practice comprised of three urologists and seven
additional contract physicians in Miami, Florida. The practice has contracts
with two managed care payers to provide physician and certain outpatient
procedures for approximately 170,000 covered lives. The Company and Miami
Urological Associates have entered into a partnership to develop an ambulatory
surgery center for the urology practice.
While two of the Company's specialty physician networks include
physician practices that are majority owned by the Company, the Company does
not believe that ownership of physician practices is required in order to
establish a specialty physician network.
REVENUES
The Company's principal source of revenues is a facility fee charged
for surgical procedures performed in its surgery centers. This fee varies
depending on the procedure, but usually includes all charges for operating room
usage, special equipment usage, supplies, recovery room usage, nursing staff
and medications. Facility fees do not include the charges of the patient's
surgeon, anesthesiologist or other attending physicians, which are billed
directly to third-party payers by such physicians. The Company's other
significant source of revenues is the fees for physician services performed by
the two physician group practices in which the Company owns a majority
interest.
Practice-based ambulatory surgery centers and physician practices such
as those in which the Company owns a majority interest depend upon third-party
reimbursement programs, including governmental and private insurance programs,
to pay for services rendered to patients. The Company derived approximately
37% of its net revenues from governmental healthcare programs including
Medicare and Medicaid in 1997. The Medicare program presently pays ambulatory
surgery centers and physicians in accordance with fee schedules which are
prospectively determined. There may be continuing legislative and regulatory
initiatives to limit the rate of increase in expenditures under the Medicare
and Medicaid programs in an effort to curtail or reduce the federal budget
deficit. These limitations, if enacted, may negatively impact the Company's
revenues and operations.
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.
Approximately 11% of the Company's revenues for 1997 were generated by
capitated payment contracts with HMOs. These revenues generally were
attributable to contracts held by physician practices and a surgery center in
which the Company holds a majority interest. These contracts require the
practices to provide specialty physician and certain outpatient surgery
services for the HMO members on an exclusive basis. These contracts do not
require the practices to provide or to be at risk for hospital or other
ancillary services such as lab or imaging. The services required by these
contracts are provided almost solely by surgery centers and the physician
practices in which the Company owns a majority interest. Because the Company is
only at risk for the cost of providing relatively limited healthcare services
to these HMO members, the Company's risk of overutilization by HMO members is
limited to the cost of the physician's time and the supply, drug and nursing
staff expense required for outpatient surgery.
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.
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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.
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 with the exception of the two physician practices majority
owned by the Company, are not affiliated with the Company other than through
the physicians' ownership in the partnerships and limited liability companies
that own the surgery centers. The Company owns a majority interest in two
group practices in Florida, a state which permits physicians to practice
medicine through an entity that is not wholly owned by physicians. All third
party payer contracts are in the name of the group practice entities in which
the Company owns a majority interest. The physicians associated with these
group practices provide medical services to the patients of the practice
entities and are compensated for these services pursuant to either an
employment contract or an independent contractor arrangement with the practice
entity. The Company's operations do not require the Company to otherwise
obtain any license to practice medicine in any other jurisdiction. A recent
ruling by the Florida Board of Medicine that an agreement between a physician
practice and a practice management company constituted impermissible
fee-splitting, if upheld on judicial appeal, would cause the Company to
restructure its relationship with one of the two group practices. The Company
does not believe that any such restructuring would have a material adverse
effect on the Company.
8
<PAGE> 9
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.
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.
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;
9
<PAGE> 10
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. neither the partnership, limited liability company, the
AmSurg subsidiary, nor any of their affiliates will loan any funds 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.
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 the making by a
physician of referrals 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.
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.
10
<PAGE> 11
EMPLOYEES
As of December 31, 1997, the Company and its affiliated entities
employed approximately 250 persons, 200 of whom were full-time employees and 50
of whom were part-time employees. Of the above, 64 were employed at the
Company's headquarters in Nashville, Tennessee. In addition, approximately 190
employees are leased on a full-time basis and 110 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 or its partnerships 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. Thirty-seven of the centers and the physician practices in
operation at December 31, 1997 lease space ranging from 1,200 to 7,800 square
feet with remaining lease terms ranging from two to eighteen years. Two
centers in operation at December 31, 1997 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
At the Company's Special Meeting of Shareholders held on December 1,
1997 (the "Special Meeting"), 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 8,380,384 108,118 2,333
Class I Director Steven I. Geringer 8,380,384 108,118 2,333
Class II Director Henry D. Herr 8,380,384 108,118 2,333
Class II Director Ken P. McDonald 8,380,384 108,118 2,333
Class III Director Thomas G. Cigarran 8,380,384 108,118 2,333
Class III Director Debora A. Guthrie 8,380,384 108,118 2,333
Class III Director Bergein F. Overholt, M.D. 8,380,384 108,118 2,333
</TABLE>
Also, the following proposals were considered and approved at the
Special Meeting by the votes set forth below:
<TABLE>
<CAPTION>
VOTES
VOTES VOTES ABSTAINED/
FOR AGAINST NOT VOTED
--- ------- ---------
<S> <C> <C> <C>
1. Amend and restate the Company's Charter to (i) effect a
recapitalization in the form of a one for three reverse
stock split for all capital stock, (ii) create the Class
B Common Stock, (iii) eliminate the right of the holders
of the Company's preferred stock to elect one director
and (iv) decrease the number of authorized shares of common
stock 8,380,384 108,118 2,333
2. Approve the terms and conditions of an agreement to exchange
shares of Class B Common Stock for certain shares of Class
A Common Stock 8,380,384 108,118 2,333
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
VOTES
VOTES VOTES ABSTAINED/
FOR AGAINST NOT VOTED
--- ------- ---------
<S> <C> <C> <C>
3. Amend the Company's Charter to (i) classify the Board of
Directors and (ii) require the written demand of 15% of
each of the Class A Common Stock and Class B Common Stock
to call a special meeting of shareholders 8,380,384 108,118 2,333
4. Amend the Company's Bylaws to conform to the Amended and
Restated Charter and to formalize the process for shareholders
to nominate directors or conduct new business at an annual
meeting 8,380,384 108,118 2,333
5. Approve the terms and conditions of certain advisory agreements 8,380,384 108,118 2,333
6. Approve the terms and conditions of the indemnification agreements
between the Company and each of its directors, executive officers
and advisors 8,380,384 108,118 2,333
7. Approve the 1997 Stock Incentive Plan 8,380,384 108,118 2,333
</TABLE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding executive
officers of the Company as of December 31, 1997. Executive officers of the
Company serve at the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Ken P. McDonald 57 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 44 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 52 Senior Vice President of Operations since October 1992.
Rodney H. Lunn 48 Senior Vice President of Center Development since 1992; director from
1992 until February 1997.
David L. Manning 48 Senior Vice President of Development and Assistant Secretary of the
Company since April 1992.
</TABLE>
12
<PAGE> 13
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 in the
fourth quarter ended December 31, 1997:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
AMSGA (from December 4, 1997) $9.50 $7.50
AMSGB (from December 4, 1997) $9.25 $7.38
</TABLE>
At March 17, 1998 there were approximately 2,084 holders of the Class A
Common Stock, including 160 shareholders of record, and 2,124 holders of the
Class B Common Stock, including 95 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.
13
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $57,414 $34,898 $22,389 $13,784 $6,558
Operating expenses:
Salaries and benefits 17,363 11,613 6,243 4,092 2,307
Other operating expenses 20,352 11,547 7,558 5,091 3,002
Depreciation and amortization 4,944 3,000 2,397 1,309 665
Net loss on sale of assets 1,425(1) 31 - - -
------- ------- ------- ------- ------
Total operating expenses 44,084 26,191 16,198 10,492 5,974
------- ------- ------- ------- ------
Operating income 13,330 8,707 6,191 3,292 584
Minority interest 9,084 5,433 3,938 2,464 1,121
Other (income) and expenses:
Interest expense, net 1,554 808 627 151 2
Distribution cost 842(2) - - - -
------- ------- ------- ------- ------
Earnings (loss) before income taxes 1,850 2,466 1,626 677 (539)
Income tax expense 1,774 985 578 26 -
------- ------- ------- ------- ------
Net earnings (loss) 76 1,481 1,048 651 (539)
Accretion of preferred stock discount 286 22 - - -
------- ------- ------- ------- ------
Net earnings (loss) available to common
shareholders $ (210) $ 1,459 $ 1,048 $ 651 $ (539)
======= ======= ======= ====== ======
Earnings (loss) per common share:
Basic $ (0.02) $ 0.17 $ 0.13 $0.09 $(0.11)
Diluted $ (0.02) $ 0.16 $ 0.12 $0.09 $(0.11)
======= ======= ======= ===== ======
Weighted average number of shares and share
equivalents outstanding:
Basic 9,453 8,689 8,174 6,999 4,737
Diluted 9,453 9,083 8,581 7,313 4,737
======= ======= ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands except center data)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 3,407 $ 3,192 $ 3,470 $ 1,750 $ 738
Working capital 9,312 4,732 2,931 2,557 993
Total assets 75,238 54,653 35,106 27,065 14,637
Long-term debt 24,970 9,218 4,786 3,520 640
Minority interest 9,192 5,674 3,010 2,019 601
Preferred stock 5,268 4,982 - - -
Shareholders' equity 29,991 28,374 22,479 19,558 12,055
CENTER DATA:
Procedures 101,819 71,323 55,344 30,922 16,051
Centers at end of year 39 27 18 14 6
</TABLE>
- ----------------------------------
(1) 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 4."
(2) 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
<PAGE> 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, 1997, the Company owned a majority interest (51% or greater) in 39 surgery
centers, owned a majority interest (60% or greater) in two physician practices
and had established and was the majority owner (51%) of five start-up specialty
physician networks.
Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements which are based upon
current expectations and involve a number of risks and uncertainties. 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 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; and its ability to
maintain favorable relations with its physician partners.
The Company operated as a majority owned subsidiary of AHC from 1992
until the distribution by AHC to its stockholders of the shares of the
Company's common stock owned by it (the "Distribution") on December 3, 1997.
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, 1997, 1996 and 1995. 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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Centers in operation, beginning of period 27 18 14
New center acquisitions placed in operation 5 6 2
New development centers placed in operation 10 3 2
Centers sold (3) - -
--- --- ---
Centers in operation, end of period 39 27 18
=== === ===
Centers under development, end of period 10 20 13
=== === ===
</TABLE>
Thirty of the surgery centers in operation as of December 31, 1997
perform gastrointestinal endoscopy procedures; six centers perform
ophthalmology procedures; one center performs otolaryngology 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.
In addition, the Company has a majority interest in two physician
practices which were acquired in January 1996 and January 1997, the other
partners of which are entities owned by the principal physicians who provide
professional medical services to patients of the practices. All third party
payer contracts under which the two physician group practices provide
professional services are entered into by the group practice entities in which
the Company is the general partner and owns a majority interest.
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. 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 and physician practices. As of December 31, 1997, these
networks had not yet generated any revenues.
15
<PAGE> 16
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 the Company's 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 earnings or loss
of the surgery center/practice entities.
The Company's sources of revenues as a percentage of total revenues
for the years ended December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Surgery centers 83% 83% 97%
Physician practices 15 15 -
Other 2 2 3
---- ---- ----
Total 100% 100% 100%
==== ==== ====
</TABLE>
The facility fees and fees for physician services received by the
Company's surgery centers and physician practices are generally paid through
third party reimbursement programs, including governmental and private
insurance programs. The Company derived approximately 37%, 36% and 37% of its
revenues in the years ended December 31, 1997, 1996 and 1995, respectively,
from governmental healthcare programs including Medicare and Medicaid.
RESULTS OF OPERATIONS
The following table shows certain statement of operations items
expressed as a percentage of revenues for the years ended December 31, 1997,
1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Operating expenses:
Salaries and benefits 30.2 33.3 27.9
Other operating expenses 35.5 33.1 33.7
Depreciation and amortization 8.6 8.6 10.7
Net loss on sale of assets 2.5 - -
----- ----- -----
Total operating expenses 76.8 75.0 72.3
----- ----- -----
Operating income 23.2 25.0 27.7
Minority interest 15.8 15.6 17.6
Other (income) and expenses:
Interest expense, net of interest income 2.7 2.3 2.8
Distribution cost 1.5 - -
----- ----- -----
Earnings before income taxes 3.2 7.1 7.3
Income tax expense 3.1 2.9 2.6
----- ----- -----
Net earnings 0.1 4.2 4.7
Accretion of preferred stock discount 0.5 - -
----- ----- -----
Net earnings (loss) available to common shareholders (0.4)% 4.2% 4.7%
===== ===== =====
</TABLE>
16
<PAGE> 17
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.
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.
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.
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. Typically a start-up center will incur start-up
losses 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 $1.9 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.
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 plus 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% due primarily to the impact of state income taxes.
17
<PAGE> 18
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 has been accreted toward its redemption value, including potential
dividends, over the redemption term. Subsequent to December 31, 1997, using a
conversion ratio based on the market price of the Company's Class A Common
Stock, the holders of this preferred stock elected to convert their preferred
shares into 380,952 shares of Class A Common Stock pursuant to the provisions
of the Company's Charter.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues were $34.9 million in 1996, an increase of $12.5 million, or
56%, over revenues in 1995. The increase resulted primarily from the growth in
the number of surgery centers in operation, the acquisition of a majority
interest in a physician practice as of January 31, 1996 and an increase of 14%
in same-center revenues at the fifteen centers in operation since January 1,
1995.
Salaries and benefits expense increased by $5.4 million, or 86%, while
other operating expenses increased by $4.0 million, or 53%, in 1996 over 1995.
These increases resulted primarily from the acquisition of the interest in a
physician practice, additional centers in operation and 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 represented in the aggregate approximately 66% of
revenues for 1996 as compared to approximately 62% of revenues for 1995.
Physician group practices generally have lower operating margins than
ambulatory surgery centers. Because the physician practice has both greater
revenues and greater operating expenses as a percentage of revenues than any
single center, its acquisition had a disproportionately large impact on
operating margins.
Depreciation and amortization expense increased $603,000, or 25%, in
1996 over 1995, primarily due to the acquisition of majority interests in
additional surgery centers, the acquisition of the interest in a physician
practice and new start-up surgery centers placed in operation. The increase of
$182,000, or 29%, in interest expense in 1996 over 1995 is primarily
attributable to debt assumed or incurred in connection with additional
acquisitions of interests in surgery centers and a physician practice plus the
interest expense associated with newly opened start-up surgery centers financed
partially with bank debt.
Minority partners' interest in center earnings in 1996 rose to $5.4
million from $3.9 million in 1995, an increase of 38%, primarily as a result of
minority partners' interest in earnings at surgery centers added to operations
and from increased same-center profitability.
Income tax expense increased 70% in 1996 to $985,000 as a result of
increased income before income taxes and an increase in the Company's effective
income tax rate to 40% from 36%. The increase in the effective income tax rate
resulted from the utilization of prior period net operating loss carryforwards
during 1995. The difference between the federal statutory income tax rate of
34% and the Company's effective income tax rates was due primarily to the
utilization of prior period net operating loss carryforwards in 1995 and the
impact of state income taxes.
QUARTERLY STATEMENT OF OPERATIONS DATA
The following table presents certain quarterly statement of operations
data for the years ended December 31, 1997 and 1996. 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.
<TABLE>
<CAPTION>
1996 1997
---------------------------------- -----------------------------------------
FIRST SECOND THIRD FOURTH FIRST(1) SECOND THIRD(2)(3) FOURTH(3)
----- ------ ----- ------ -------- ------ ----------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $7,133 $8,094 $8,774 $10,897 $12,591 $13,890 $14,566 $16,367
Earning (loss) before
income taxes 589 605 470 802 (1,496) 1,014 1,478 854
Net earnings (loss) available
to common shareholders 353 364 282 460 (1,892) 537 862 283
Diluted earnings (loss) per
common share 0.04 0.04 0.03 0.05 (0.20) 0.06 0.09 0.03
</TABLE>
(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.
18
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had working capital of $9.3 million
compared to $4.7 million in 1996. Operating activities for 1997 generated $4.0
million in cash flow from operations compared to $3.8 million in 1996. Cash
and cash equivalents at December 31, 1997 and 1996 were $3.4 million and $3.2
million, respectively.
During 1997 the Company used $12.6 million to acquire interests in
five additional practice-based ambulatory surgery centers and a urology
physician practice. 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 $10.6 million in 1997, of which $3.0 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 $14.1 million to fund its acquisition and development obligations.
The Company received cash proceeds of $2.0 million from the sale of a
surgery center building and equipment and the sale of a partnership interest in
two surgery centers. In addition, the Company received proceeds of $524,000
from the sale of common stock to its minority partners.
At December 31, 1997 the Company's partnerships and limited liability
companies had unfunded construction and equipment purchase commitments for
centers under development of approximately $3.1 million, of which the Company
expects that approximately $1.6 million will be borrowed under the Company's
credit facility (and guaranteed on a pro rata basis by the physicians), and
that the remaining amount will be provided by the Company and the physician
partners in proportion to their respective ownership interests in the
partnerships and limited liability companies. The Company intends to fund its
portion out of future cash flows from operations.
Under the terms of the Second Amended and Restated Loan Agreement, as
amended on December 19, 1997, all borrowings outstanding under the Company's
term loan were converted to its revolving credit facility. At December 31,
1997, borrowings under the credit facility were $22.4 million, are due in
January 2001 and are guaranteed by the wholly owned subsidiaries of the
Company, and in some instances, the underlying assets of certain developed
centers. The credit agreement permits the Company to borrow up to $35.0
million to finance the Company's acquisition and development projects at prime
or 1.75% above LIBOR or a combination thereof, provides for a fee of .35% on
unused commitments, prohibits the payment of dividends and contains covenants
relating to the ratio of debt to net worth, operating performance and minimum
net worth. The Company was in compliance with all covenants at December 31,
1997.
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 subsequent to December 31, 1997 by its holders into 380,952 share of
Class A Common Stock using a conversion ratio based on market price of the
Class A Common Stock pursuant to the provisions of the Company's Charter. Upon
the occurrence of certain events, including an Initial Public Offering (as that
term is defined in the Company's Charter), the Series B Preferred Stock will
automatically convert into a number of shares of Class A Common Stock that
approximates 6% of the equity of the Company determined as of November 20,
1996, with that percentage being ratably increased to 8% of the equity of the
Company if a triggering event has not occurred by November 20, 2000. If a
triggering event does not occur by November 20, 2002, the holders of the Series
B Preferred Stock will have the right to sell such preferred stock to the
Company on an as-if-converted basis at the current market price of the
underlying Class A Common Stock.
Historically the Company depended on AHC for the majority of its
equity financing. A principal purpose of the Distribution was to permit the
Company to have access to public debt and equity capital markets as an
independent public company. While the Company anticipates that its operating
activities will continue to provide cash flow and increased revenues, the
Company will require additional financing in order to fund its development and
acquisition plans and to achieve its long-term strategic growth plans. This
additional financing could take the form of a private or public offering of
debt or equity securities or additional bank financing. No assurances can be
given that the necessary financing will be obtainable on terms satisfactory to
the Company. The failure to raise the funds necessary to finance its future
cash requirements could adversely affect the Company's ability to pursue its
strategy and could adversely affect its results of operations for future
periods.
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.
19
<PAGE> 20
RECENT ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" and No. 131 "Disclosures about Segments of an Enterprise
and Related Information" become effective for the Company for the year ended
December 31, 1998. The Company is still evaluating the effects of adopting
these two statements, but does not expect the adoption of either pronouncement
to have a material effect on the Company's consolidated financial statements.
20
<PAGE> 21
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
February 17, 1998
21
<PAGE> 22
AMSURG CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,406,787 $ 3,192,408
Accounts receivable, net of allowance of $1,436,468 and $1,272,651, respectively 8,220,616 5,640,946
Supplies inventory 905,992 554,839
Deferred income taxes (note 11) 390,000 303,000
Prepaid and other current assets 1,020,835 680,761
------------ -----------
Total current assets 13,944,230 10,371,954
Long-term receivables and deposits (note 4) 479,012 643,516
Property and equipment, net (notes 5,7 and 8) 19,248,464 12,335,892
Intangible assets, net (notes 4 and 6) 41,566,684 31,302,096
------------ -----------
Total assets $ 75,238,390 $54,653,458
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 7) $ 1,330,595 $ 2,616,714
Accounts payable 922,188 1,307,069
Accrued salaries and benefits 1,018,844 998,460
Other accrued liabilities 1,235,626 635,456
Current income taxes payable 125,396 82,586
------------ -----------
Total current liabilities 4,632,649 5,640,285
Long-term debt (note 7) 24,969,718 9,218,281
Deferred income taxes (note 11) 1,185,000 765,000
Minority interest 9,191,896 5,673,960
Preferred stock, no par value, 5,000,000 shares authorized, 916,666 shares
outstanding (note 9) 5,267,672 4,982,057
Shareholders' equity (notes 3, 10 and 12):
Common stock:
Class A, no par value, 20,000,000 shares authorized 4,758,091 and
9,199,525 shares outstanding, respectively 14,636,331 26,064,085
Class B, no par value, 4,800,000 shares authorized, 4,787,131
shares outstanding 13,528,981 -
Retained earnings 2,099,491 2,309,790
Deferred compensation on restricted stock (note 12) (273,348) -
------------ -----------
Total shareholders' equity 29,991,455 28,373,875
------------ -----------
Commitments and contingencies (notes 5, 8, 12 and 13)
Total liabilities and shareholders' equity $ 75,238,390 $54,653,458
============ ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
22
<PAGE> 23
AMSURG CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues (note 2) $57,413,812 $34,898,496 $22,388,739
Operating expenses:
Salaries and benefits (note 12) 17,363,440 11,613,504 6,243,134
Other operating expenses (note 12) 20,352,442 11,546,562 7,557,655
Depreciation and amortization 4,944,483 3,000,183 2,396,796
Net loss on sale of assets (note 4) 1,424,690 30,811 -
----------- ----------- -----------
Total operating expenses 44,085,055 26,191,060 16,197,585
----------- ----------- -----------
Operating income 13,328,757 8,707,436 6,191,154
Minority interest 9,084,132 5,433,588 3,938,364
Other (income) and expenses:
Interest expense, net of interest income of $69,088,
$139,531 and $95,640, respectively 1,553,508 808,332 626,750
Distribution cost (note 3) 841,801 - -
----------- ----------- -----------
Earnings before income taxes 1,849,316 2,465,516 1,626,040
Income tax expense (note 11) 1,774,000 985,000 578,000
----------- ----------- -----------
Net earnings 75,316 1,480,516 1,048,040
Accretion of preferred stock discount (note 9) 285,615 22,057 -
----------- ----------- -----------
Net earnings (loss) available to common shareholders $ (210,299) $ 1,458,459 $ 1,048,040
=========== =========== ===========
Earnings (loss) per common share (note 10):
Basic $ (0.02) $ 0.17 $ 0.13
Diluted $ (0.02) $ 0.16 $ 0.12
=========== =========== ===========
Weighted average number of shares and share equivalents
outstanding (note 10):
Basic 9,453,205 8,689,480 8,173,511
Diluted 9,453,205 9,082,535 8,580,974
=========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
23
<PAGE> 24
AMSURG CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
DEFERRED
COMMON STOCK RETAINED COMPENSATION
--------------------- EARNINGS ON RESTRICTED
SHARES AMOUNT (DEFICIT) STOCK TOTAL
------ ------ --------- ----- -----
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994 7,744,801 $19,754,382 $ (196,709) $ - $19,557,673
Issuance of stock 356,826 1,197,279 - - 1,197,279
Issuance of stock in conjunction with
acquisitions 200,850 676,200 - - 676,200
Net earnings - - 1,048,040 - 1,048,040
--------- ----------- ---------- --------- -----------
Balance December 31, 1995 8,302,477 21,627,861 851,331 - 22,479,192
Issuance of stock 512,239 2,366,262 - - 2,366,262
Issuance of 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 stock 146,087 934,273 - (273,348) 660,925
Issuance of 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
========= =========== ========== ========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
24
<PAGE> 25
AMSURG CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 75,316 $ 1,480,516 $ 1,048,040
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Minority interest 9,084,132 5,433,588 3,938,364
Distributions to minority partners (8,907,875) (5,084,294) (3,840,787)
Depreciation and amortization 4,944,483 3,000,183 2,396,796
Deferred income taxes 333,000 249,000 213,000
Net loss on sale of assets 1,424,690 (30,811) -
Increase (decrease) in cash, net of effects of
acquisitions, due to changes in:
Accounts receivable, net (1,620,141) (1,353,365) (467,620)
Supplies inventory (212,403) (128,248) (73,413)
Prepaid and other current assets (572,455) (213,838) (110,443)
Other assets (803,022) (266,801) (109,360)
Accounts payable (384,881) 648,292 241,428
Accrued expenses and other liabilities 322,870 (43,734) 568,525
Other, net 273,593 156,001 106,220
------------ ----------- -----------
Net cash flows provided by operating activities 3,957,307 3,846,489 3,910,750
Cash flows from investing activities:
Acquisition of interest in surgery centers (12,643,331) (12,669,794) (3,186,512)
Acquisition of property and equipment (10,578,551) (3,863,052) (1,831,445)
Proceeds from sale of assets 1,978,462 - -
Decrease (increase) in long-term receivables 57,504 137,582 (846)
------------ ----------- -----------
Net cash flows used in investing activities (21,185,916) (16,395,264) (5,018,803)
Cash flows from financing activities:
Proceeds from long-term borrowings 17,629,000 10,544,700 2,164,949
Repayment on long-term borrowings (3,524,641) (7,261,534) (999,929)
Net proceeds from issuance of preferred stock - 4,960,000 -
Net proceeds from issuance of common stock 524,216 2,366,262 1,197,279
Proceeds from capital contributions by minority partners 2,952,507 1,681,324 476,693
Financing cost incurred (138,094) (19,230) (11,345)
------------ ----------- -----------
Net cash flows provided by financing activities 17,442,988 12,271,522 2,827,647
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 214,379 (277,253) 1,719,594
Cash and cash equivalents, beginning of year 3,192,408 3,469,661 1,750,067
------------ ----------- -----------
Cash and cash equivalents, end of year $ 3,406,787 $ 3,192,408 $ 3,469,661
============ =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
25
<PAGE> 26
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 and physician practices. 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. OTHER CURRENT ASSETS
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 being
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. Intangibles and other long-lived assets to be disposed of are reported
at the lower of the carrying amount or fair value less cost to sell.
DEFERRED PRE-OPENING COSTS
Deferred pre-opening costs consist of cost incurred for surgery
centers while under development. Deferred pre-opening costs are amortized
over one year, starting upon the commencement date of operations.
OTHER INTANGIBLE ASSETS
Other intangible assets consist of deferred organization costs and
deferred financing costs of the Company and the entities included in the
Company's consolidated financial statements. Deferred organization costs are
amortized over five years and deferred financing costs are amortized over the
term of the related debt.
26
<PAGE> 27
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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
Effective December 31, 1997, the Company has adopted the provisions of
SFAS No. 128 "Earnings Per Share" and has restated all previously reported
amounts to conform to the new standard. 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
Prior to January 1, 1996, the Company accounted 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. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted SFAS No.123
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma
net earnings and pro forma earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to continue
to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
i. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
requires disclosure of the fair value of certain 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
Distributions to minority partners, disclosed as a financing activity
in prior years' consolidated statements of cash flows, is classified as an
operating activity in order to present cash flows provided by operating
activities more comparably to industry practices. Certain other prior year
amounts have been reclassified to conform to the 1997 presentation.
l. RECENT ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" and No. 131 "Disclosures about Segments of an Enterprise
and Related Information" become effective for the Company for the year ended
December 31, 1998. The Company is continuing to evaluate the effects of
adopting these two statements, but does not expect the adoption of either
pronouncement to have a material effect on the Company's consolidated financial
statements.
27
<PAGE> 28
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. REVENUE RECOGNITION
Revenues for the years ended December 31, 1997, 1996 and 1995 are
comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Surgery centers $47,803,933 $28,950,498 $21,641,743
Physician practices 8,677,522 5,155,148 -
Other 932,357 792,850 746,996
----------- ----------- -----------
Revenues $57,413,812 $34,898,496 $22,388,739
=========== =========== ===========
</TABLE>
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. The billings are 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, 1997, 1996 and 1995 approximately 37%, 36%, and 37%,
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. PUBLIC DISTRIBUTION OF 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. 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. 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.
4. ACQUISITIONS AND DISPOSITIONS
a. ACQUISITIONS
The Company, through wholly owned subsidiaries and in separate
transactions, acquired a majority interest in five, four and two
practiced-based surgery centers during 1997, 1996 and 1995, 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, common stock, note payable or a
combination thereof. Total consideration paid in 1997, 1996 and 1995 for all
acquisitions was $14,471,503, $13,561,661 and $4,415,000, respectively, of
which the Company assigned $13,738,220, $12,289,386 and $3,976,358,
respectively, to excess of cost over net assets of purchased operations. The
acquisitions were accounted for as purchases, and the accompanying consolidated
financial statements include the results of their operations from the dates of
acquisition.
An acquisition which occurred in 1995 was structured such that if
certain operating results were not achieved, the purchase price would be
adjusted. Subsequent operations of the center did not meet the predefined
levels, and the purchase price adjustment, which is reflected as a long-term
receivable in the accompanying consolidated balance sheets, is being repaid to
the Company over a thirty-month period.
28
<PAGE> 29
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
b. PRO FORMA INFORMATION
The unaudited consolidated pro forma results for the years ended
December 31, 1997 and 1996, assuming all 1997 and 1996 acquisitions had been
consummated on January 1, 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenues $60,090,000 $51,287,000
Net earnings (loss) available to common shareholders (16,000) 2,216,000
Earnings per common share
Basic 0.00 0.24
Diluted 0.00 0.23
Weighted average number of shares and share equivalents
Basic 9,587,000 9,189,000
Diluted 9,587,000 9,583,000
=========== ===========
</TABLE>
c. DISPOSITIONS
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 practice.
In conjunction with the sale of the surgery center building and equipment, the
Company also terminated its management agreement with the physician practice
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.
d. SUBSEQUENT ACQUISITIONS
In January 1998, the Company, through a wholly owned subsidiary,
acquired a majority interest in a practiced-based surgery center. Consideration
paid for the acquired interest consisted of cash of $1,400,000, of which the
Company assigned approximately $970,000 to excess of cost over net assets of
purchased operations.
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land and improvements $ 98,540 $ 98,540
Building and improvements 10,264,481 7,017,163
Moveable equipment 13,820,039 8,725,140
Construction in progress 1,180,250 316,384
----------- -----------
25,363,310 16,157,227
Less accumulated depreciation and amortization (6,114,846) (3,821,335)
----------- -----------
Property and equipment, net $19,248,464 $12,335,892
=========== ===========
</TABLE>
At December 31, 1997, the Company and its partnerships had unfunded
construction and equipment purchase commitments for centers under development
of approximately $3,100,000 in order to complete construction in progress.
29
<PAGE> 30
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. INTANGIBLE ASSETS
Intangible assets at December 31, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Excess of cost over net assets of purchased operations, net of accumulated
amortization of $4,123,482 and $2,757,394, respectively $40,636,399 $30,771,784
Deferred pre-opening cost, net of accumulated amortization of $336,091
and $66,095, respectively 614,944 220,942
Other intangible assets, net of accumulated amortization of $388,108 and
$336,308, respectively 315,341 309,370
----------- -----------
Intangible assets, net $41,566,684 $31,302,096
=========== ===========
</TABLE>
7. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 is comprised of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
$35,000,000 credit agreement at prime or 1.75% above LIBOR
(average rate of 7.5% at December 31, 1997), due January 10, 2001 $22,399,935 $ 3,157,657
Term loan at prime or 1.75% above LIBOR - 5,030,590
Other debt at an average rate of 8.3%, due through September 23, 2003 2,847,048 2,508,828
Capitalized lease arrangements at an average rate of 10.0%, due through
March 1, 2002 (see note 8) 1,053,330 1,137,920
----------- -----------
26,300,313 11,834,995
Less current portion 1,330,595 2,616,714
----------- -----------
Long-term debt $24,969,718 $ 9,218,281
=========== ===========
</TABLE>
On December 19, 1997, the Company amended its credit agreement. Under
the terms of the newly amended agreement, all borrowings outstanding under the
Company's term loan with the same lending institutions were converted to its
revolving credit facility. 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 permits the Company to borrow up to $35,000,000 to finance the
Company's acquisition and development projects at prime or 1.75% above LIBOR or
a combination thereof, provides for a fee of .35% on unused commitments,
prohibits the payment of dividends and contains covenants relating to the ratio
of debt to net worth, operating performance and minimum net worth. The Company
was in compliance with all covenants at December 31, 1997.
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 $6,300,000. The Company and the partners or members have
guaranteed payment of the loans.
Principal payments required on long-term debt in the five years
subsequent to December 31, 1997 are $1,330,595, $1,118,876, $693,653,
$22,957,821 and $199,368.
30
<PAGE> 31
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. 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, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITALIZED
YEAR ENDED EQUIPMENT OPERATING
DECEMBER 31, LEASES LEASES
- ------------ ------ ------
<S> <C> <C>
1998 $ 537,415 $ 3,473,344
1999 391,495 3,195,189
2000 192,124 2,782,336
2001 55,709 2,460,708
2002 13,927 1,727,441
Thereafter - 5,136,659
---------- -----------
Total minimum rentals 1,190,670 $18,775,677
===========
Less amounts representing interest at rates ranging from 10.0% to 10.2% (137,340)
----------
Capital lease obligations $1,053,330
==========
</TABLE>
At December 31, 1997, equipment with a cost of $1,669,134 and
accumulated amortization of $760,630 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, 1997, 1996 and 1995 was
$3,093,000, $1,775,000 and $1,201,000 (see note 12).
9. PREFERRED STOCK
Preferred stock, net of issuance costs, is comprised of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Series A Redeemable Preferred Stock, 500,000 shares outstanding $2,059,905 $1,774,290
Series B Convertible Preferred Stock, 416,666 shares outstanding 3,207,767 3,207,767
---------- ----------
$5,267,672 $4,982,057
========== ==========
</TABLE>
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 Series A Redeemable Preferred Stock, with a stated
amount of $3,000,000, was to pay a cumulative dividend of 8% commencing
November 21, 1998. Subsequent to December 31, 1997, the holders of the Series
A Redeemable Preferred Stock converted their preferred shares into 380,952
shares of Class A Common Stock using a conversion ratio based on market price
of the Class A Common Stock pursuant to the provisions of the Company's
Charter. The Series B Convertible Preferred Stock, with a stated amount of
$2,500,000, is convertible into that number of shares of Class A Common Stock
that approximates 6% of the equity of the Company determined as of November 20,
1996, with that percentage being ratably increased to 8% of the equity of the
Company if an event of liquidity has not occurred by November 20, 2000. An
event of liquidity is defined as an initial public offering of common stock or
sale of the Company yielding net cash proceeds to the Company of at least
$25,000,000, or in the event the Company has completed a spin-off, yielding net
proceeds of $20,000,000 to the Company and/or its shareholders. If such events
of liquidity do not occur by November 20, 2002, the holders of the Series B
Convertible Preferred Stock have the right to require the Company to redeem the
stock at current market price as defined by the Company's Charter. The
preferred stock was recorded at its fair value, net of issuance costs. From
the time of issuance, the Series A Redeemable Preferred Convertible Stock has
been accreted toward its stated amount, including potential dividends, over the
redemption term. The Series B Preferred Stock is not being accreted because
management expects a conversion upon an event of liquidity.
31
<PAGE> 32
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. SHAREHOLDERS' EQUITY
a. COMMON STOCK
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 December 3, 1997, the Company issued Class B Common
Stock in connection with the Distribution (see note 3). Class B Common Stock
differs from Class A Common Stock only 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.
b. EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominators of
basic and diluted earnings per share:
<TABLE>
<CAPTION>
EARNINGS (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
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
========== =========
For the year ended December 31, 1995:
Basic earnings per share:
Earnings available to common shareholders $1,048,040 8,173,511 $0.13
Effect of dilutive securities options - 407,463
---------- ---------
Diluted earnings per share:
Earnings available to common shareholders $1,048,040 8,580,974 $0.12
========== =========
</TABLE>
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 to 380,952 shares of Class A Common Stock,
which occurred subsequent to December 31, 1997 (see note 9), 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.
32
<PAGE> 33
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 4 years at the rate of 25% per year. Options have a term of
10 years from the date of grant. As of December 31, 1997, 491,232 shares were
reserved for future options.
Stock option activity for the years ended December 31, 1997, 1996 and
1995 is summarized below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
------ -----
<S> <C> <C>
Outstanding at December 31, 1994 650,867 $1.71
Options granted 35,000 3.36
----------
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
==========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1997:
<TABLE>
<CAPTION>
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
--------------- ----------- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
$0.75 - $1.50 344,000 4.3 $0.75 344,000 $0.75
1.50 - 3.00 217,526 5.3 2.59 215,026 2.58
3.00 - 4.50 113,493 6.8 3.33 78,459 3.32
4.50 - 6.00 329,832 8.6 5.32 78,447 5.13
6.00 - 7.50 94,998 9.3 6.15 66,666 6.15
7.50 - 8.70 75,000 9.9 8.70 - N/A
--------- -------
0.75 - 8.70 1,174,849 6.6 2.61 782,598 2.41
========= =======
</TABLE>
33
<PAGE> 34
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
1997, 1996 and 1995 were $3.93, $2.73 and $1.80 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 1997, 1996
and 1995 and an average risk free interest rate of 6.4% in 1997, 6.2% in 1996
and 6.6% in 1995. The Company also assumed a volatility rate of 54% in 1997,
based upon the volatility rate of AHC, and 49% and 46% in 1996 and 1995,
respectively, 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, 1997, 1996 and 1995 net income
and net income per share attributable to common shareholders would have been
reduced to the following pro forma amounts.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net earnings available to common shareholders:
As reported $(210,299) $1,458,459 $1,048,040
Pro forma (690,359) 1,241,874 1,028,040
Basic earnings (loss) per share available to common
shareholders:
As reported (0.02) 0.17 0.13
Pro forma (0.07) 0.14 0.13
Diluted earnings (loss) per share available to common
shareholders:
As reported (0.02) 0.16 0.12
Pro forma (0.07) 0.14 0.12
</TABLE>
In 1994, the Company issued warrants to purchase its common stock to
AHC. These warrants were exercised February 26, 1996 for 85,907 shares at $2.70
per share. The warrants were issued in return for AHC's prior guaranty of
Company debt.
11. INCOME TAXES
Income tax expense for the years ended December 31, 1997, 1996 and
1995 is comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $1,188,000 $593,000 $301,000
State 253,000 143,000 64,000
Deferred 333,000 249,000 213,000
---------- -------- --------
Income tax expense $1,774,000 $985,000 $578,000
========== ======== ========
</TABLE>
Total income tax expense for the years ended December 31, 1997, 1996
and 1995 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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax $ 629,000 $ 838,000 $553,000
State income taxes, net of Federal income tax benefit 188,000 132,000 60,000
Increase (decrease) in valuation allowance (26,000) 49,000 (124,000)
Non-deductible distribution cost and net loss on sale of assets 812,000 - -
Other 171,000 (34,000) 89,000
---------- --------- --------
Income tax expense $1,774,000 $ 985,000 $578,000
========== ========= ========
</TABLE>
34
<PAGE> 35
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for uncollectible accounts $ 354,000 $297,000
State net operating losses 69,000 60,000
Other 36,000 6,000
--------- --------
Gross deferred tax assets 459,000 363,000
Valuation allowance (34,000) (60,000)
--------- --------
Net deferred tax assets 425,000 303,000
Deferred tax liabilities:
Property and equipment, principally due to difference in depreciation 95,000 66,000
Excess of cost over net assets of purchased operations, principally due to
differences in amortization 1,125,000 699,000
--------- --------
Gross deferred tax liabilities 1,220,000 765,000
--------- --------
Net deferred tax liability $ 795,000 $462,000
========= ========
The net deferred tax liability at December 31, 1997 and 1996, is recorded as follows:
Current deferred income tax asset $ 390,000 $303,000
Noncurrent deferred income tax liability 1,185,000 765,000
--------- --------
Net deferred tax liability $ 795,000 $462,000
========= ========
</TABLE>
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.
12. RELATED PARTY TRANSACTIONS
Included in other operating expenses for the years ended December 31,
1997, 1996 and 1995 is $382,467, $213,820 and $186,215, 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 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 $2,198,802,
$1,205,849 and $871,054 for the years ended December 31, 1997, 1996 and 1995,
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 $7,024,657, $4,616,745 and $3,538,925 for the years ended
December 31, 1997, 1996 and 1995, respectively.
35
<PAGE> 36
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
13. 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.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended December 31,
1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 1,583,963 $ 909,884 $ 550,725
Income taxes, net of refunds $ 1,398,190 $ 970,309 $ 74,105
=========== =========== ===========
Noncash investing and financing activities:
Effect of acquisitions:
Assets acquired, net of cash $15,253,504 $17,181,505 $ 5,680,262
Liabilities assumed (762,797) (2,441,749) (1,187,550)
Issuance of common stock (1,847,376) (2,069,962) (676,200)
Issuance of note payable - - (630,000)
----------- ----------- ------------
Payment for assets acquired $12,643,331 $12,669,794 $ 3,186,512
=========== =========== ===========
Capital lease obligations incurred to acquire equipment $ 333,041 $ - $ 306,630
Forgiveness of debt and treasury stock received in
connection with sale of a partnership interest $ 808,070 $ - $ -
=========== =========== ===========
</TABLE>
36
<PAGE> 37
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 15, 1998, 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 15, 1998, under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance" 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 15, 1998, 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 15, 1998, under
the caption "Security Ownership of Certain Beneficial Owners and Management,"
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 15, 1998, 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:
<TABLE>
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
</TABLE>
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.
37
<PAGE> 38
<TABLE>
<CAPTION>
(3) EXHIBITS
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
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 Second Amended and Restated Loan Agreement dated as of April 15, 1997 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 to the Registration Statement on
Form 10, as amended)
10.5 Third Amendment to the Second Amended and Restated Loan Agreement dated as of December 19,
1997.
10.6 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)
10.7 * 1992 Stock Option Plan (incorporated by reference to Exhibit 10.7 to the Registration Statement
on Form 10, as amended)
10.8 * 1997 Stock Incentive Plan (incorporated by reference to Exhibit 10.8 to the Registration
Statement on Form 10, as amended)
10.9 * Form of Employment Agreement with executive officers (incorporated by reference to Exhibit 10.9
to the Registration Statement on Form 10, as amended)
10.10 * 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)
10.11 * 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)
10.12 * 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)
10.13 Asset Purchase Agreement dated September 2, 1997, by and among AmSurg Corp., AmSurg Holdings,
Inc., The Endoscopy Center, Inc. and the shareholders thereof (incorporated by reference to
Exhibit 2 of the Current Report on Form 8-K, dated September 2, 1997)
10.14 Asset Purchase Agreement dated January 30, 1998, by and among AmSurg Holdings, Inc., Arizona
Ophthalmic Outpatient Surgery, LLC and the shareholders thereof (incorporated by reference to
Exhibit 2 of the Current Report on Form 8-K, dated January 30, 1998)
21 Subsidiaries of AmSurg
23 Consent of Independent Auditors
27 Financial Data Schedule
</TABLE>
_________________
* Management contract or compensatory plan, contract or arrangement
38
<PAGE> 39
(b) Reports on Form 8-K
The Company filed one report on Form 8-K/A dated September 2,
1997 during the quarter ended December 31, 1997 to provide the
required financial statements of The Endoscopy Center, Inc., an entity
in whose assets the Company acquired an undivided 60% interest.
(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).
39
<PAGE> 40
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 27, 1998 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- -----
<S> <C> <C>
/s/ Thomas G. Cigarran Chairman of the Board March 27, 1998
- -------------------------------------
Thomas G. Cigarran
/s/ James A. Deal Director March 27, 1998
- -------------------------------------
James A. Deal
/s/ Steven I. Geringer Director March 27, 1998
- -------------------------------------
Steven I. Geringer
/s/ Debora A. Guthrie Director March 27, 1998
- -------------------------------------
Debora A. Guthrie
/s/ Henry D. Herr Director March 27, 1998
- -------------------------------------
Henry D. Herr
/s/ Bergein F. Overholt, M.D. Director March 27, 1998
- -------------------------------------
Bergein F. Overholt, M.D.
/s/ Ken P. McDonald President, Chief Executive Officer and March 27, 1998
- ------------------------------------- Director
Ken P. McDonald (Principal Executive Officer)
/s/ Claire M. Gulmi Senior Vice President, Chief Financial March 27, 1998
- ------------------------------------- Officer and Secretary
Claire M. Gulmi (Principal Financial and Accounting Officer)
</TABLE>
40
<PAGE> 41
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, 1997 and 1996 and for each of the years in
the three-year period ended December 31, 1997, and have issued our report
thereon dated February 17, 1998; 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 17, 1998
S-1
<PAGE> 42
AMSURG CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COST AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS(2) PERIOD
--------- -------- ----------- ------------- ------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS INCLUDED
UNDER THE BALANCE SHEET CAPTION "ACCOUNTS
RECEIVABLE":
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
========== ========== ======== ========== ==========
Year ended December 31, 1995 $ 300,403 $ 694,078 $ 58,974 $ 597,827 $ 455,628
========== ========== ======== ========== ==========
- ----
</TABLE>
(1) Valuation of allowance for uncollectible accounts at the acquisition of
AmSurg physician practice-based ambulatory surgery centers and physician
practices. Between 51% and 70% was charged to excess of cost over net
assets of purchased companies. See note 4 of Notes to the Consolidated
Financial Statements.
(2) Charge-off against allowance.
S-2
<PAGE> 1
Exhibit 10.5
THIRD AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT
ENTERED INTO by and among AMSURG CORP., a Tennessee corporation (the
"Borrower"), SUNTRUST BANK, NASHVILLE, N.A., AGENT for the Lenders defined
("Agent"), SUNTRUST BANK, NASHVILLE, N.A., a national bank ("STB"), and
NATIONSBANK OF TENNESSEE, N.A., a national bank ("NBT") (herein STB and NBT
shall be referred to as "Lenders") as of this 19th day of December, 1997.
RECITALS:
1. The Borrower, the Agent, and the Lenders entered into a Second
Amended and Restated Loan Agreement dated as of April 15, 1997 as amended by a
First Amendment to Second Amended and Restated Loan Agreement dated as of May 5,
1997 and as amended by a Second Amendment to Second Amended and Restated Loan
Agreement dated September 2, 1997 (herein the Amended and Restated Loan
Agreement as amended shall be referred to as the "Loan Agreement").
2. The Borrower, the Agent, and the Lenders desire to amend the Loan
Agreement as set forth herein.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
1. The definition of "Loan" or "Loans" as set forth in Article I of the
Loan Agreement is hereby amended and restated in its entirety as follows:
"Loan" or "Loans" means any borrowing by Borrower under this
Agreement, the Revolving Credit Notes, and/or any extension of credit
by Agent on behalf of Lenders or by any of the Lenders to or for
Borrower pursuant to this Agreement or any other Loan Document,
including any renewal, amendment, extension, or modification thereof.
2. The definition of "Loan Documents" as set forth in Article I of the
Loan Agreement is hereby amended and restated in its entirety as follows:
"Loan Documents" means, collectively, each document, paper or
certificate executed, furnished or delivered in connection with this
Agreement (whether before, at, or after the Closing Date), including,
without limitation, this Agreement, the Revolving Credit Notes, the
Guarantees, and all other documents, certificates, reports, and
instruments that this Agreement requires or that were executed or
delivered (or both) at Agent's request.
<PAGE> 2
3. The definition of "Revolving Credit Note" and "Revolving Credit
Notes" as used in Article I of the Loan Agreement means those Revolving Credit
Notes executed by the Borrower payable to the order of each of the Lenders, each
Revolving Credit Note being substantially in the form of Exhibit C hereto and in
the principal amount that each Lender's Pro Rata Share bears to $35,000,000,
including all amendments, renewals, and extensions thereto.
4. The definition of "Term Note" or "Term Notes" as used in Article I
of the Loan Agreement shall be deleted.
5. Section 2.01 of the Loan Agreement shall be amended and restated in
its entirety as follows:
Section 2.01 The Revolving Credit Notes. Subject to the
conditions and the terms of the Loan Documents and subject to the
limitations of Section 2.11 set forth below, and in reliance upon the
representations, warranties, and covenants set forth in the Loan
Documents, the Lenders agree to extend the Borrower credit on a
revolving credit basis, in the principal amount of up to $35,000,000
pursuant to the Revolving Credit Notes.
6. Section 2.04 of the Loan Agreement shall be amended and restated in
its entirety as follows:
Section 2.04 Minimum Advance Amounts. Advances under the
Revolving Credit Notes calculated at the Base Rate shall not be made in
amounts less than $100,000 without Agent's prior written consent, and
Advances under the Revolving Credit Notes calculated at the LIBOR-Based
Rate shall not be made in amounts less than $500,000 without Agent's
prior written consent.
7. Section 2.05 of the Loan Agreement shall be amended and restated in
its entirety as follows:
Section 2.05 Required Payments. The Revolving Credit Notes
shall be payable as set forth therein. Each payment under the Revolving
Credit Notes shall be made without defense, setoff, or counterclaim to
Agent at its Principal Office in U.S. Dollars for the account of each
of the Lenders and in immediately available funds before 12:00 Noon
Nashville Time on the date such payment is due.
8. Section 2.06(b) of the Loan Agreement shall be deleted.
9. Section 2.06(c) of the Loan Agreement shall be amended and restated
in its entirety as follows:
(c) At any time that the outstanding principal balance of an
Advance bears interest at the Base Rate, the Borrower may elect upon
two (2) Business Days prior
- 2 -
<PAGE> 3
written notice and delivery to Agent of a Notice of Interest Rate
Election to convert the Applicable Interest Rate to a LIBOR-Based Rate.
10. Section 2.06(e) of the Loan Agreement shall be amended and restated
in its entirety as follows:
(e) At any time, no more than six (6) different LIBOR-Based
Rate Periods may be applicable to the Advances.
11. Section 2.06(h) of the Loan Agreement shall be amended and restated
in its entirety as follows:
(h) Borrower may prepay the principal amount evidenced by any
Advance at any time that the Applicable Interest Rate is the Base Rate.
Except as provided specifically in Section 2.06(g)(iii) and (iv),
Borrower may not prepay any Advance so long as the Applicable Interest
Rate is the LIBOR-Base Rate, except at the maturity of any applicable
LIBOR-Based Rate Period.
12. Section 2.07 of the Loan Agreement shall be deleted.
13. The last sentence of Section 2.09 of the Loan Agreement shall be
deleted.
14. Section 2.10 of the Loan Agreement shall be amended and restated in
its entirety as follows:
Section 2.10 Payments to Principal Office; Debit Authority.
Each payment under the Revolving Credit Notes (including any permitted
prepayment and payment of interest) shall be made to Agent at its
Principal Office for the account of Lenders in U.S. dollars and in
immediately available funds before 11:00 a.m. Nashville Time on the
date such payment is due.
15. Section 4.19 of the Loan Agreement shall be amended and restated in
its entirety as follows:
Section 4.19 Use of Proceeds; Purpose of the Credit. Borrower
has used and will use proceeds from the Revolving Credit Notes
exclusively for the purposes stated in this Agreement.
16. Section 5.01(a) of the Loan Agreement shall be amended and restated
in its entirety as follows:
(a) Revolving Credit Notes and Loan Documents. The Revolving
Credit Notes and all other Loan Documents.
- 3 -
<PAGE> 4
17. Section 7.11(d) of the Loan Agreement shall be amended and restated
in its entirety as follows:
(d) Debt Service Coverage Ratio. As calculated on the last day
of each Fiscal Quarter, permit the ratio of EBITDA to an amount equal
to: (i) Interest Expense, plus (ii) current payments of long term Debt
to be less than 2.25 to 1.0.
18. Section 8.01(a) of the Loan Agreement shall be amended and restated
in its entirety as follows:
(a) Principal and Interest Payments. Borrower fails to make
payment when due of any installment of principal or interest on any of
the Revolving Credit Notes or the Indebtedness within fifteen (15) days
of the date thereof, or Borrower fails to pay when due any payment due
hereunder or under any of the Loan Documents within fifteen (15) days
of the due date thereof; or
19. Section 11.04(b) of the Loan Agreement shall be amended and
restated in its entirety as follows:
(b) The Agent shall not be responsible to any of the Lenders
for any recitals, statements, information, representations or
warranties herein or in any document, certificate or other writing
delivered in connection herewith or for the execution, effectiveness,
genuineness, validity, enforceability, collectability, priority or
sufficiency of this Agreement, the Revolving Credit Notes, the
Guarantees, the other Loan Documents, or any other documents
contemplated hereby or thereby, or the financial condition of the
Borrower or the Guarantors, or be required to make any inquiry
concerning either the performance or observance of any of the terms,
provisions or conditions of this Agreement, the Revolving Credit Notes,
the Guarantees, the other Loan Documents or the other documents
contemplated hereby or thereby, or the financial condition of the
Borrower or the Guarantors, or the existence or possible existence of
any Default Condition or Event of Default.
20. The Loan Agreement is not amended in any other respect.
21. The Borrower reaffirms its obligations under the Loan Agreement, as
amended hereby, and the Borrower agrees that its obligations are valid and
binding and are enforceable in accordance with its respective terms, subject to
no defense, counterclaim, or objection.
22. The Borrower shall pay to Lender a commitment fee in connection
with the transaction evidenced by this Third Amendment of $17,500.
- 4 -
<PAGE> 5
ENTERED INTO as of this 19th day of December, 1997.
BORROWER:
AMSURG CORP.
By: CLAIRE M. GULMI
----------------------------------
Title: Senior Vice President
-------------------------------
AGENT:
SUNTRUST BANK, NASHVILLE, N.A.,
AGENT
By: KAREN COLE AHERN
----------------------------------
Title: General Vice President
-------------------------------
LENDERS
SUNTRUST BANK, NASHVILLE, N.A.
By: KAREN COLE AHERN
----------------------------------
Title: General Vice President
-------------------------------
NATIONSBANK OF TENNESSEE, N.A.
By: ANNE F. JENKINS
----------------------------------
Title: Assistant Vice President
-------------------------------
- 5 -
<PAGE> 1
EXHIBIT 21
SUBSIDIARY LIST
AS OF MARCH 23, 1998
PAGE (1 OF 6)
<TABLE>
<CAPTION>
STATE OF OWNERSHIP
NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE
------------------ ------------ -------- ----------
<S> <C> <C> <C>
AmSurg KEC, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of TN AmSurg KEC, Inc. 51%
Knoxville, L.P.
AmSurg EC Topeka, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of TN AmSurg EC Topeka, Inc. 60%
Topeka, L.P.
AmSurg EC St. Thomas, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of St. TN AmSurg EC St. Thomas, 60%
Thomas, L.P. Inc.
AmSurg EC Centennial, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of TN AmSurg EC Centennial, 60%
Centennial, L.P. Inc.
AmSurg EC Beaumont, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of TN AmSurg EC Beaumont, 51%
Southeast Texas, L.P. Inc.
AmSurg EC Santa Fe, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of TN AmSurg EC Santa Fe, 60%
Santa Fe, L.P. Inc.
AmSurg EC Washington, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of TN AmSurg EC Washington, 60%
Washington D.C., L.P. Inc.
AmSurg Torrance, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of the TN AmSurg Torrance, Inc. 51%
South Bay, L.P.
AmSurg Encino, Inc. TN AmSurg Corp. 100%
</TABLE>
<PAGE> 2
EXHIBIT 21
SUBSIDIARY LIST
AS OF MARCH 23, 1998
PAGE (2 OF 6)
<TABLE>
<CAPTION>
STATE OF OWNERSHIP
NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE
------------------ ------------ -------- ----------
<S> <C> <C> <C>
The Valley Endoscopy Center, TN AmSurg Encino, Inc. 51%
L.P.
AmSurg Brevard, Inc. TN AmSurg Corp. 100%
The Ophthalmology Center of TN AmSurg Brevard, Inc. 51%
Brevard, L.P.
AmSurg Sebastopol, Inc. TN AmSurg Corp. 100%
The Sebastopol ASC, L.P. TN AmSurg Sebastopol, Inc. 60%
AmSurg ENT Brevard, Inc. TN AmSurg Corp. 100%
The ENT Center of Brevard, TN AmSurg ENT Brevard, 51%
L.P. Inc.
AmSurg Abilene, Inc. TN AmSurg Corp. 100%
The Abilene ASC, L.P. TN AmSurg Abilene, Inc. 60%
AmSurg West Tennessee, Inc. TN AmSurg Corp. 100%
AmSurg Lakeland, Inc. TN AmSurg Corp. 100%
AmSurg SWFLA, Inc. TN AmSurg Corp. 100%
AmSurg Lorain, Inc. TN AmSurg Corp. 100%
The Loraine ASC, L.P. TN AmSurg Lorain, Inc. 51%
AmSurg Maryville, Inc. TN AmSurg Corp. 100%
The Maryville ASC TN AmSurg Maryville, Inc. 51%
AmSurg Miami, Inc. TN AmSurg Corp. 100%
The Miami ASC, L.P. TN AmSurg Miami, Inc. 70%
AmSurg North Platte, Inc. TN AmSurg Corp. 100%
AmSurg Fort Collins, Inc. TN AmSurg Corp. 100%
AmSurg Hanford, Inc. TN AmSurg Corp. 100%
</TABLE>
<PAGE> 3
EXHIBIT 21
SUBSIDIARY LIST
AS OF MARCH 23, 1998
PAGE (3 OF 6)
<TABLE>
<CAPTION>
STATE OF OWNERSHIP
NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE
------------------ ------------ -------- ----------
<S> <C> <C> <C>
The Hanford ASC, L.P. TN AmSurg Hanford, Inc. 63%
AmSurg Dallas, Inc. TN AmSurg Corp. 100%
AmSurg Port Arthur, Inc. TN AmSurg Corp. 100%
AmSurg Melbourne, Inc. TN AmSurg Corp. 100%
The Melbourne ASC, L.P. TN AmSurg Melbourne, Inc. 51%
AmSurg Chicago, Inc. TN AmSurg Corp. 100%
The Chicago Endoscopy ASC, TN AmSurg Chicago, Inc. 51%
L.P.
AmSurg Hillmont, Inc. TN AmSurg Corp. 100%
The Hillmont ASC, L.P. TN AmSurg Hillmont, Inc. 51%
AmSurg Northwest Florida, TN AmSurg Corp. 100%
Inc.
The Northwest Florida ASC, TN AmSurg Northwest 51%
L.P. Florida, Inc.
AmSurg Palmetto, Inc. TN AmSurg Corp. 100%
The Palmetto ASC, L.P. TN AmSurg Palmetto, Inc. 51%
AmSurg Hallandale, Inc. TN AmSurg Corp. 100%
The Hallandale Surgery ASC, TN AmSurg Hallandale, Inc. 51%
L.P.
AmSurg Ocala, Inc. TN AmSurg Corp. 100%
The Ocala Endoscopy ASC, TN AmSurg Ocala, Inc. 51%
L.P.
AmSurg South Florida TN AmSurg Corp. 100%
Network, Inc.
</TABLE>
<PAGE> 4
EXHIBIT 21
SUBSIDIARY LIST
AS OF MARCH 23, 1998
PAGE (4 OF 6)
<TABLE>
<CAPTION>
STATE OF OWNERSHIP
NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE
------------------ ------------ -------- ----------
<S> <C> <C> <C>
The GI Network of South TN AmSurg South Florida 51%
Florida, L.P. Network, Inc.
AmSurg Largo, Inc. TN AmSurg Corp. 100%
The Largo Urology ASC, L.P. TN AmSurg Largo, Inc. 40%
AmSurg Dade County, Inc. TN AmSurg Corp. 100%
Gastroenterology Group of TN AmSurg Dade County, 70%
South Florida Inc.
AmSurg Panama City, Inc. TN AmSurg Corp. 100%
AmSurg Miami Urology, Inc. TN AmSurg Corp. 100%
The Miami Urology Group, TN AmSurg Miami Urology, 60%
L.P. Inc.
The Miami Urology ASC, L.P. TN AmSurg Miami Urology, 60%
Inc.
AmSurg Crystal River, Inc. TN AmSurg Corp. 100%
The Crystal River Endoscopy TN AmSurg Crystal River, 51%
ASC, L.P. Inc.
AmSurg Abilene Eye, Inc. TN AmSurg Corp. 100%
The Abilene Eye ASC, L.P. TN AmSurg Abilene Eye, 51%
Inc.
AmSurg Holdings, Inc. TN AmSurg Corp. 100%
The Knoxville Ophthalmology TN AmSurg Holdings, Inc. 60%
ASC, LLC
The West Monroe Endoscopy TN AmSurg Holdings, Inc. 55%
ASC, LLC
The Montgomery Eye Surgery TN AmSurg Holdings, Inc. 51%
Center, LLC
</TABLE>
<PAGE> 5
EXHIBIT 21
SUBSIDIARY LIST
AS OF MARCH 23, 1998
PAGE (5 OF 6)
<TABLE>
<CAPTION>
STATE OF OWNERSHIP
NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE
------------------ ------------ -------- ----------
<S> <C> <C> <C>
The Evansville ASC, LLC TN AmSurg Holdings, Inc. 40%
The Sidney ASC, LLC TN AmSurg Holdings, Inc. 51%
The Cleveland ASC, LLC TN AmSurg Holdings, Inc. 51%
The Milwaukee ASC, LLC TN AmSurg Holdings, Inc. 51%
The Eye Care Network, LLC TN AmSurg Holdings, Inc. 51%
The Alabama Eye Care TN AmSurg Holdings, Inc. 51%
Network, LLC
The Columbia ASC, LLC TN AmSurg Holdings, Inc. 51%
The Wichita Orthopaedic TN AmSurg Holdings, Inc. 51%
ASC, LLC
The Minneapolis Endoscopy TN AmSurg Holdings, Inc. 51%
ASC, LLC
The West Glen Endoscopy TN AmSurg Holdings, Inc. 40%
Center, LLC
West Texas Eyecare Network, TN AmSurg Holdings, Inc. 51%
LLC
Cleveland Eyecare Network, TN AmSurg Holdings, Inc. 51%
LLC
The Willoughby ASC, LLC TN AmSurg Holdings, Inc. 51%
The Chevy Chase ASC, LLC TN AmSurg Holdings, Inc. 51%
The Oklahoma City ASC, LLC TN AmSurg Holdings, Inc. 51%
The Mountain West TN AmSurg Holdings, Inc. 51%
Gastroenterology ASC, LLC
The Cincinnati ASC, LLC TN AmSurg Holdings, Inc. 51%
The Fayetteville ASC, LLC TN AmSurg Holdings, Inc. 51%
</TABLE>
<PAGE> 6
EXHIBIT 21
SUBSIDIARY LIST
AS OF MARCH 23, 1998
PAGE (6 OF 6)
<TABLE>
<CAPTION>
STATE OF OWNERSHIP
NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE
------------------ ------------ -------- ----------
<S> <C> <C> <C>
The Independence ASC, LLC TN AmSurg Holdings, Inc. 60%
AmSurg Northern Kentucky TN AmSurg Holdings, Inc. 100%
GI, LLC
AmSurg Louisville GI, LLC TN AmSurg Holdings, Inc. 100%
AmSurg Kentucky TN AmSurg Holdings, Inc. 100%
Ophthalmology, LLC
The Union City ASC, LLC TN AmSurg Holdings, Inc. 51%
AmSurg El Paso, Inc. TN AmSurg Corp. 100%
The El Paso ASC, LLC TN AmSurg Holdings, Inc. 51%
The Phoenix Ophthalmology TN AmSurg Holdings, Inc. 51%
ASC, LLC
The Toledo Endoscopy ASC, TN AmSurg Holdings, Inc. 51%
LLC
</TABLE>
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement of
AmSurg Corp. on Form S-8 of our reports dated February 17, 1998 appearing in
this Annual Report on Form 10-K of AmSurg Corp. for the year ended December 31,
1997.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMSURG
CORP.'S CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1997.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,406,787
<SECURITIES> 0
<RECEIVABLES> 9,657,084
<ALLOWANCES> 1,436,468
<INVENTORY> 905,992
<CURRENT-ASSETS> 13,944,230
<PP&E> 25,363,310
<DEPRECIATION> 6,114,846
<TOTAL-ASSETS> 75,238,390
<CURRENT-LIABILITIES> 4,632,649
<BONDS> 24,969,718
0
5,267,672
<COMMON> 28,165,312
<OTHER-SE> 1,826,143
<TOTAL-LIABILITY-AND-EQUITY> 75,238,390
<SALES> 0
<TOTAL-REVENUES> 57,413,812
<CGS> 0
<TOTAL-COSTS> 44,085,055
<OTHER-EXPENSES> 841,801
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,553,508
<INCOME-PRETAX> 1,849,316
<INCOME-TAX> 1,774,000
<INCOME-CONTINUING> 75,316
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (210,299)<F1>
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
<FN>
<F1>Net of accretion of preferred stock discount.
</FN>
</TABLE>
