<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended MARCH 31, 1999
Commission File Number 000-22217
AMSURG CORP.
(Exact Name of Registrant as Specified in its Charter)
TENNESSEE 62-1493316
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
ONE BURTON HILLS BOULEVARD
SUITE 350
NASHVILLE, TN 37215
(Address of principal executive offices) (Zip code)
(615) 665-1283
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------- ----------
As of May 14, 1999, there were outstanding 9,567,048 shares of the
Registrant's Class A Common Stock, no par value and 4,787,131 shares of the
Registrant's Class B Common Stock, no par value.
<PAGE> 2
PART I.
ITEM 1. FINANCIAL STATEMENTS
AMSURG CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 5,310,512 $ 6,069,767
Accounts receivable, net of allowance of $2,079,208 and $1,937,765, respectively 13,762,332 12,122,277
Supplies inventory ............................................................. 1,248,716 1,250,487
Deferred income taxes .......................................................... 507,000 507,000
Prepaid and other current assets ............................................... 943,785 951,638
------------ ------------
Total current assets .................................................. 21,772,345 20,901,169
Long-term receivables and deposits .................................................. 1,945,468 2,045,474
Property and equipment, net ......................................................... 23,723,894 23,139,495
Intangible assets, net .............................................................. 51,422,364 52,334,975
------------ ------------
Total assets .......................................................... $ 98,864,071 $ 98,421,113
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .............................................. $ 1,476,944 $ 1,378,270
Notes payable .................................................................. -- 2,385,150
Accounts payable ............................................................... 1,451,830 1,195,305
Accrued salaries and benefits .................................................. 1,361,122 1,724,419
Other accrued liabilities ...................................................... 1,051,918 887,985
Current income taxes payable ................................................... 1,194,987 376,092
------------ ------------
Total current liabilities ............................................. 6,536,801 7,947,221
Long-term debt ...................................................................... 11,895,572 12,483,458
Deferred income taxes ............................................................... 1,827,000 1,827,000
Minority interest ................................................................... 12,742,729 11,794,389
Shareholders' equity:
Common stock:
Class A, no par value, 20,000,000 shares authorized 9,539,049 and
9,533,486 shares outstanding, respectively ............................... 48,136,158 48,115,915
Class B, no par value, 4,800,000 shares authorized, 4,787,131
shares outstanding ....................................................... 13,528,981 13,528,981
Retained earnings .............................................................. 4,299,302 2,860,796
Deferred compensation on restricted stock ...................................... (102,472) (136,647)
------------ ------------
Total shareholders' equity ............................................ 65,861,969 64,369,045
------------ ------------
Total liabilities and shareholders' equity ............................ $ 98,864,071 $ 98,421,113
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
2
<PAGE> 3
AMSURG CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
------------ -----------
<S> <C> <C>
Revenues .......................................................................... $ 23,393,973 $17,828,648
Operating expenses:
Salaries and benefits ........................................................ 6,529,306 5,367,341
Other operating expenses ..................................................... 8,182,182 6,383,712
Depreciation and amortization ................................................ 1,696,366 1,568,407
Net loss on sale of assets ................................................... -- 42,914
------------ -----------
Total operating expenses ................................................. 16,407,854 13,362,374
------------ -----------
Operating income ......................................................... 6,986,119 4,466,274
Minority interest ................................................................. 4,208,507 2,807,075
Other expenses:
Interest expense, net of interest income ..................................... 233,266 492,825
------------ -----------
Earnings before income taxes and cumulative effect of an accounting change 2,544,346 1,166,374
Income tax expense ................................................................ 979,573 466,550
------------ -----------
Net earnings before cumulative effect of an accounting change ............ 1,564,773 699,824
Cumulative effect of the change in the method in which start-up costs are recorded (126,267) --
------------ -----------
Net earnings ............................................................. $ 1,438,506 $ 699,824
============ ===========
Basic earnings per common share:
Net earnings before cumulative effect of an accounting change ................ $ 0.11 $ 0.07
Net earnings ................................................................. $ 0.10 $ 0.07
Diluted earnings per common share:
Net earnings before cumulative effect of an accounting change ................ $ 0.11 $ 0.07
Net earnings ................................................................. $ 0.10 $ 0.07
Weighted average number of shares and share equivalents outstanding:
Basic ........................................................................ 14,322,710 9,673,447
Diluted ...................................................................... 14,719,069 10,347,306
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE> 4
AMSURG CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ...................................................................... $ 1,438,506 $ 699,824
Adjustments to reconcile net earnings to net cash provided by operating activities:
Minority interest ............................................................. 4,208,507 2,807,075
Distributions to minority partners ............................................ (3,409,862) (2,825,098)
Depreciation and amortization ................................................. 1,696,366 1,568,407
Amortization of deferred compensation on restricted stock ..................... 34,175 34,175
Net loss on sale of assets .................................................... -- 42,914
Cumulative effect of an accounting change ..................................... 126,267 --
Increase (decrease) in cash, net of effects of acquisitions, due to changes in:
Accounts receivable, net ................................................. (1,557,055) (1,594,191)
Supplies inventory ....................................................... 1,771 (24,403)
Prepaid and other current assets ......................................... 7,853 59,812
Other assets ............................................................. -- (58,096)
Accounts payable ......................................................... 256,525 370,395
Accrued expenses and other liabilities ................................... 703,709 47,539
Other, net ............................................................... 11,838 (43,737)
----------- -----------
Net cash flows provided by operating activities .......................... 3,518,600 1,084,616
Cash flows from investing activities:
Acquisition of interest in surgery centers ........................................ (86,610) (4,562,773)
Acquisition of property and equipment ............................................. (1,161,079) (2,420,369)
Proceeds from sale of assets ...................................................... -- 641,078
Decrease in long-term receivables ................................................. 68,364 14,557
----------- -----------
Net cash flows used by investing activities .............................. (1,179,325) (6,327,507)
Cash flows from financing activities:
Repayment of notes payable ........................................................ (2,385,150) --
Proceeds from long-term borrowings ................................................ 582,939 5,172,850
Repayment on long-term borrowings ................................................. (1,614,833) (385,640)
Net proceeds from issuance of common stock ........................................ 20,243 18,481
Proceeds from capital contributions by minority partners .......................... 298,271 804,431
Financing cost incurred ........................................................... -- (1,971)
----------- -----------
Net cash flows provided (used) by financing activities ................... (3,098,530) 5,608,151
----------- -----------
Net increase (decrease) in cash and cash equivalents ................................... (759,255) 365,260
Cash and cash equivalents, beginning of period ......................................... 6,069,767 3,406,787
----------- -----------
Cash and cash equivalents, end of period ............................................... $ 5,310,512 $ 3,772,047
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE> 5
AMSURG CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of AmSurg
Corp. and subsidiaries (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial reporting and in
accordance with Rule 10-01 of Regulation S-X.
In the opinion of management, the unaudited interim financial
statements contained in this report reflect all adjustments, consisting of only
normal recurring accruals which are necessary for a fair presentation of the
financial position and the results of operations for the interim periods
presented. The results of operations for any interim period are not necessarily
indicative of results for the full year.
The accompanying consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 1998 Annual Report on Form 10-K.
(2) CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE
Prior to January 1, 1999, deferred pre-opening costs, which consist of
costs incurred for surgery centers while under development, had been amortized
over one year, starting upon the commencement date of operations. In 1999, the
Company adopted Statement of Position ("SOP") No. 98-5 "Reporting on the Costs
of Start-Up Activities," which requires that pre-opening costs be expensed as
incurred and that upon adoption all unamortized deferred pre-opening costs be
expensed as a cumulative effect of a change in accounting principle.
Accordingly, as of January 1, 1999, the Company expensed $126,267, net of
minority interest and income taxes, as a cumulative effect of an accounting
change.
(3) SUBSEQUENT ACQUISITION
Subsequent to March 31, 1999, the Company, through a wholly owned
subsidiary, acquired a majority interest in a physician practiced-based surgery
center for approximately $1,300,000.
5
<PAGE> 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements. These statements,
which have been included in reliance on the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, involve risks and
uncertainties. The Company's actual operations and results may differ materially
from the results discussed in any such forward-looking statements. Factors that
might cause such a difference include, but are not limited to, the Company's
ability to enter into partnership or operating agreements for new practice-based
ambulatory surgery centers and new specialty physician networks; its ability to
identify suitable acquisition candidates and negotiate and close acquisition
transactions; its ability to obtain the necessary financing or capital on terms
satisfactory to the Company in order to execute its expansion strategy; its
ability to manage growth; its ability to contract with managed care payers on
terms satisfactory to the Company for its existing centers and its centers that
are currently under development; its ability to obtain and retain appropriate
licensing approvals for its existing centers and centers currently under
development; its ability to minimize start-up losses of its development centers;
its ability to maintain favorable relations with its physician partners; the
implementation of the proposed rule issued by the Health Care Financing
Administration ("HCFA") which would update the ratesetting methodology, payment
rates, payment policies and the list of covered surgical procedures for
ambulatory surgery centers; and risks relating to the Company's technological
systems, including becoming Year 2000 compliant. As to the potential asset
purchase from Physicians Resource Group, Inc. ("PRG"), factors include, but are
not limited to the companies' respective ability to meet all the conditions to
the execution of a definitive agreement and the consummation of the transactions
contemplated thereunder; the Company's ability to enter into partnership or
operating agreements with the physician owners of the surgery centers; and the
Company's ability to effectively integrate the operations of the PRG surgery
centers into its operations.
OVERVIEW
The Company develops, acquires and operates practice-based ambulatory
surgery centers in partnership with physician practices. As of March 31, 1999,
the Company owned a majority interest (51% or greater) in 52 surgery centers and
had established seven start-up specialty physician networks, of which it was the
majority owner (51%) of six of them.
The following table presents the changes in the number of surgery
centers in operation and centers under development during the three months ended
March 31, 1999 and 1998. A center is deemed to be under development when a
partnership or limited liability company has been formed with the physician
group partner to develop the center.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---- ----
<S> <C> <C>
Centers in operation, beginning of period ...... 52 39
New center acquisitions placed in operation .... -- 2
New development centers placed in operation .... -- 2
Centers sold ................................... -- (1)
---- ----
Centers in operation, end of period ............ 52 42
==== ====
Centers under development, end of period ....... 8 8
==== ====
</TABLE>
Thirty-nine of the surgery centers in operation as of March 31, 1999,
perform gastrointestinal endoscopy procedures, eleven centers perform
ophthalmology surgery procedures, one center performs orthopaedic procedures and
one center performs ophthalmology, urology, general surgery and otolaryngology
procedures. The other partner or member in each partnership or limited liability
company is in each case an entity owned by physicians who perform procedures at
the center.
The specialty physician networks are owned through limited partnerships
and limited liability companies in which, with the exception of one, 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 alone will be a
significant source of income for the Company. These networks were and will be
formed in selected markets primarily as a contracting vehicle for certain
managed care arrangements to generate revenues for the Company's practice-based
surgery centers. As of March 31, 1999, three networks had secured managed care
contracts and were operational.
6
<PAGE> 7
The Company intends to expand through the development and acquisition
of additional practice-based surgery centers in targeted surgical specialties.
In addition, the Company believes that its surgery centers, combined with its
relationships with specialty physician practices in the surgery centers'
markets, will provide the Company with other opportunities for growth from
specialty network development. By using its surgery centers as a base to develop
specialty physician networks that are designed to serve large numbers of covered
lives, the Company believes that it will strengthen its market position in
contracting with managed care organizations.
In April 1999, the Company signed a letter of intent with PRG for the
purchase by the Company of a portion of PRG's ownership interests in up to
approximately 40 of its practice-based ophthalmology surgery centers.
Consummation of the transaction is subject to, among other things, the execution
of a definitive purchase agreement; the completion of due diligence by the
Company; the sale by PRG of physician practice assets and interests and, in some
instances, interests in surgery centers to its affiliated practices and a
concurrent termination of management services agreements and execution of mutual
releases between PRG and such practices; the completion of agreements between
the Company and the physician practices for a joint ownership interest in each
of the surgery centers; and approval of PRG's shareholders.
While the Company generally owns 51% to 70% of the entities that own
the surgery centers, the Company's consolidated statements of operations include
100% of the results of operations of the entities, reduced by the minority
partners' share of the net earnings or loss of the surgery center entities.
SOURCES OF REVENUES
The Company's principal source of revenues is a facility fee charged
for surgical procedures performed in its surgery centers. This fee varies
depending on the procedure, but usually includes all charges for operating room
usage, special equipment usage, supplies, recovery room usage, nursing staff and
medications. Facility fees do not include the charges of the patient's surgeon,
anesthesiologist or other attending physicians, which are billed directly to
third-party payers by such physicians. Historically, the Company's other
significant source of revenues had been the fees for physician services
performed by two physician group practices in which the Company owned a majority
interest. However, as a result of the disposition of these practices occurring
in 1998, the Company no longer earns such revenue.
Practice-based ambulatory surgery centers and physician practices such
as those in which the Company owns or has owned a majority interest depend upon
third-party reimbursement programs, including governmental and private insurance
programs, to pay for services rendered to patients. The Company derived
approximately 44% and 40% of its net revenues from governmental healthcare
programs, including Medicare and Medicaid, in the three months ended March 31,
1999 and 1998, respectively. The Medicare program currently pays ambulatory
surgery centers and physicians in accordance with fee schedules which are
prospectively determined.
The Company's sources of revenues as a percentage of total revenues for
the three months ended March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---- ----
<S> <C> <C>
Surgery centers ................... 99% 87%
Physician practices ............... -- 12
Other ............................. 1 1
--- ---
Total ......................... 100% 100%
=== ===
</TABLE>
7
<PAGE> 8
RESULTS OF OPERATIONS
The following table shows certain statement of operations items
expressed as a percentage of revenues for the three months ended March 31, 1999
and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
----- -----
<S> <C> <C>
Revenues ......................................................................... 100.0% 100.0%
Operating expenses:
Salaries and benefits ........................................................ 27.9 30.1
Other operating expenses ..................................................... 35.0 35.8
Depreciation and amortization ................................................ 7.2 8.8
Net loss on sale of assets ................................................... -- 0.2
----- -----
Total operating expenses ................................................ 70.1 74.9
----- -----
Operating income ........................................................ 29.9 25.1
Minority interest ................................................................ 18.0 15.8
Other expenses:
Interest expense, net of interest income ..................................... 1.0 2.8
----- -----
Earnings before income taxes and cumulative effect of an accounting
change .............................................................. 10.9 6.5
Income tax expense ............................................................... 4.2 2.6
----- -----
Net earnings before cumulative effect of an accounting change .......... 6.7 3.9
Cumulative effect of the change in the method in which start-up costs are recorded (0.6) --
----- -----
Net earnings ............................................................ 6.1% 3.9%
===== =====
</TABLE>
Revenues were $23.4 million in the three months ended March 31, 1999,
an increase of $5.6 million, or 31.2%, over revenues in the comparable period.
The increase is primarily attributable to additional centers in operation during
the three months ended March 31, 1999. Same-center revenues in the three months
ended March 31, 1999, increased by 11%. Same-center growth is primarily
attributable to additional procedure volume. The Company anticipates further
revenue growth during 1999 as a result of additional start-up and acquired
centers expected to be placed in operation and from same-center revenue growth.
Salaries and benefits expense was $6.5 million in the three months
ended March 31, 1999, an increase of $1.2 million, or 22%, over salaries and
benefits expense in the comparable 1998 period. This increase resulted primarily
from additional centers in operation, offset by the absence of physician
salaries of a practice disposed of in June 1998. The absence of physician
salaries in 1999 also caused salaries and benefits expense as a percentage of
revenue to decrease in the 1999 period.
Other operating expenses were $8.2 million in the three months ended
March 31, 1999, an increase of $1.8 million, or 28%, over other operating
expenses in the comparable 1998 period. This increase resulted primarily from
additional centers in operation. This increase was offset by the absence of
physician practice expenses of the practices disposed of in 1998.
The Company anticipates further increases in operating expenses in
1999, primarily due to additional start-up centers and acquired centers expected
to be placed in operation. Typically a start-up center will incur start-up
losses while under development and during its initial months of operation and
will experience lower revenues and operating margins than an established center
until its case load increases to a more optimal operating level, which generally
is expected to occur within 12 months after a center opens.
Depreciation and amortization expense increased $128,000, or 8%, in the
three months ended March 31, 1999, over the comparable 1998 period, primarily
due to 10 additional surgery centers in operation in the 1999 period compared to
the 1998 period. This increase was offset by a reduction in the amortization of
excess of cost over net assets of purchased operations and deferred pre-opening
cost in the aggregate of approximately $237,000 due to physician practices sold
in 1998 and the adoption of Statement of Position ("SOP") No. 98-5 "Reporting on
Cost of Start-Up Activities," as further discussed below.
8
<PAGE> 9
The Company incurred a net loss on sale of assets of $43,000 during the
three months ended March 31, 1998, related to the sale of a surgery center to an
unaffiliated third party.
The minority interest in earnings in the three months ended March 31,
1999 increased by $1.4 million, or 50%, over the comparable 1998 period
primarily as a result of minority partners' interest in earnings at surgery
centers recently added to operations and from increased same-center
profitability. Minority interest as a percentage of revenues increased in the
three months ended March 31, 1999 over the comparable 1998 period primarily as a
result of the absence of physician practice revenues of the practices disposed
of in 1998 which are not as marginally profitable to the Company's respective
minority partners as are the Company's existing surgery centers.
Interest expense decreased $260,000, or 53%, in the three months ended
March 31, 1999 from the comparable 1998 period. The reduction in the three month
period was the result of the repayment of long-term debt from the proceeds of
the public offering in June 1998 (see "Liquidity and Capital Resources") and a
decrease in the Company's borrowing rate due to a decrease in borrowing levels.
The reduction in interest expense was partially offset by an increase in debt
assumed or incurred in connection with additional acquisitions of interests in
surgery centers and interest expense associated with newly opened start-up
surgery centers financed partially with bank debt.
The Company recognized income tax expense of $980,000 in the three
months ended March 31, 1999, compared to $467,000 in the comparable 1998 period.
The Company's effective tax rate in the three months ended March 31, 1999 and
1998 was 38.5% and 40%, respectively, of net earnings before income taxes and
cumulative effect of an accounting change and differed from the federal
statutory income tax rate of 34% primarily due to the impact of state income
taxes.
Prior to January 1, 1999, deferred pre-opening costs, which consist of
costs incurred for surgery centers while under development, had been amortized
over one year, starting upon the commencement date of operations. In 1999, the
Company adopted SOP No. 98-5, which requires that pre-opening costs be expensed
as incurred and that upon adoption all unamortized deferred pre-opening costs be
expensed as a cumulative effect of a change in accounting principle.
Accordingly, as of January 1, 1999, the Company expensed $126,000, net of
minority interest and income taxes, as a cumulative effect of an accounting
change.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had working capital of $15.2 million
compared to $11.2 million at the comparable 1998 period. Operating activities
for the three months ended March 31, 1999, generated $3.5 million in cash flows
compared to $1.1 million in the comparable 1998 period. Cash and cash
equivalents at March 31, 1999 and 1998 were $5.3 million and $3.8 million,
respectively.
During the three months ended March 31, 1999, the Company used
approximately $87,000 to satisfy liabilities related to direct acquisition costs
associated with the acquisitions of interests in practice-based ambulatory
surgery centers completed in prior periods. In addition, the Company made
capital expenditures primarily for new start-up surgery centers and for new or
replacement property at existing centers which totaled approximately $1.2
million in the three months ended March 31, 1999, of which approximately
$298,000 was funded from the capital contributions of the Company's minority
partners. The Company used its existing cash and cash flows from operations to
fund its development obligations.
The Company also used approximately $3.4 million, net of new
borrowings, from its existing cash and cash flows from operations to repay notes
payable and borrowings on long-term debt.
At March 31, 1999, borrowings under the Company's revolving credit
facility were $8.0 million, are due in January 2001 and are guaranteed by the
wholly owned subsidiaries of the Company, and in some instances, the underlying
assets of certain developed centers. The loan agreement permits the Company to
borrow up to $50.0 million to finance the Company's acquisition and development
projects at a rate equal to, at the Company's option, the prime rate or LIBOR
plus a spread of 1.0% to 2.25%, depending upon borrowing levels. The loan
agreement also provides for a fee ranging between 0.15% and 0.40% of unused
commitments based on borrowing levels. The loan agreement also prohibits the
payment of dividends and contains covenants relating to the ratio of debt to net
worth, operating performance and minimum net worth. The Company was in
compliance with all covenants at March 31, 1999.
On June 17, 1998, the Company completed a public offering of 3,700,000
shares of Class A Common Stock for net proceeds of $27.6 million. The net
proceeds were used to repay borrowings under the Company's revolving credit
facility and other long-term debt.
On June 12, 1998, HCFA published a proposed rule that would update the
ratesetting methodology, payment rates, payment policies and the list of covered
surgical procedures for ambulatory surgery centers. The proposed rule is subject
to a comment period that has been extended until June 30, 1999, and provides for
an implementation date that has been extended to a date no earlier than January
2000. The proposed rule reduces the rates paid for certain ambulatory surgery
center procedures reimbursed by Medicare, including a number of endoscopy and
ophthalmological procedures performed at the Company's centers.
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<PAGE> 10
The Company believes that the proposed rule if adopted in its current
form would adversely affect the Company's annual revenues by approximately 4% at
that time. However, if the proposed rule were adopted in its current form, the
Company expects that the earnings impact will be offset by certain actions taken
by the Company or that the Company intends to take, including actions to effect
certain cost efficiencies in center operations, reduce corporate overhead costs
and provide for contingent purchase price adjustments for future acquisitions.
There can be no assurance that the Company will be able to implement
successfully these actions or that if implemented the actions will offset fully
the adverse impact of the rule, as finally adopted, on the earnings of the
Company. There also can be no assurance that HCFA will not modify the proposed
rule, before it is enacted in final form, in a manner that would adversely
impact the Company's financial condition, results of operation and business
prospects.
YEAR 2000
The Company has evaluated its risks associated with software and
hardware components which may fail due to the millennium change and has
determined these risks include but are not limited to (i) risk that surgical
equipment critical to the patient's care may fail, (ii) risk that billing and
administration software will not support timely billing and collection efforts
and (iii) risk that third party payers will not be able to provide timely
reimbursement for services performed.
Because the Company generally has no internally designed software
systems or hardware components nor does the Company market or support any
software or hardware products, the Company has focused its efforts on ensuring
that its systems are Year 2000 compliant by implementing a plan designed to
evaluate all critical systems purchased from third parties at each of its
operating surgery centers and its corporate offices. In order to address these
risks, the Company has designed and implemented a Year 2000 assessment and
remediation plan for each of its surgery centers which includes the following
steps:
(1) identifying all potential Year 2000 hardware and software components,
including but not limited to medical equipment, office machinery,
financial software, building operating support equipment and general
service equipment and components;
(2) contracting with a third party consultant to measure medical equipment
products against their Year 2000 compliance database;
(3) obtaining verification from third parties stating that their products
are Year 2000 compliant and, if not, the third parties' ability to
make the appropriate modifications;
(4) replacing or upgrading equipment and systems which are found not to be
Year 2000 compliant; and
(5) contacting all significant suppliers and third party payers to
determine if they are Year 2000 compliant and if they will be able to
continue to provide products, services or reimbursement in 2000.
This assessment and remediation plan was initiated in the third quarter
of 1998 and is expected to continue throughout 1999. All of the Company's
surgery centers have completed steps 1 through 3, and critical medical systems
in approximately 33% of the Company's surgery centers were found to be
noncompliant. Based on the findings of the assessment plan, the Company has
developed a list of critical and noncritical Year 2000 noncompliant equipment
and systems for all of its surgery centers and has begun negotiating and
communicating with various key vendors in order to begin the procurement and
replacement process. In addition, approximately 20% of the billing systems used
by its surgery centers will need to be upgraded in order to become Year 2000
compliant. For all noncompliant billing systems identified, remediation plans
are in progress which will be completed at various stages throughout the
remainder of 1999.
All significant systems and equipment residing at the Company's
corporate offices have been identified and the testing of all systems is
expected to be completed by the end of the second quarter of 1999. To date, the
Company has identified no significant Year 2000 compliance issues at its
corporate offices.
Although a complete cost assessment will not be determinable until all
operating locations have been fully assessed and final bids and quotes from
vendors have been received, the Company currently estimates that the Company and
the surgery centers in the aggregate may incur total capitalizable and
non-capitalizable costs ranging from $400,000 to $500,000 in 1999 to ensure that
all centers and the corporate offices are Year 2000 compliant, which it expects
to fund primarily through its cash flows from operations. Such amounts are
currently within the Company's preestablished budget for Year 2000 compliance.
However, until the assessment and remediation processes are completed, the
Company is unable to estimate with certainty the total costs to make the Company
Year 2000 compliant. The Company has thus far been able to implement its Year
2000 assessment and remediation plan primarily with internal resources as a
normal part of operating activities and has incurred to date less than $100,000
of internal and external costs associated
10
<PAGE> 11
with Year 2000 compliance. All costs to evaluate and make modifications have
been and will be expensed as incurred, will generally be shared by the Company's
physician partners in proportion to their ownership interest in the surgery
centers and are not expected to have a significant impact on the Company's
financial position or ongoing results of operations.
The Company is reliant upon a number of third parties which provide
products or services to the Company's corporate offices and surgery centers. The
Company's surgery centers have inquired as to the Year 2000 readiness of all
significant third party suppliers of products and services and based on those
responses, the Company estimates that on a consolidated basis the levels of
compliance of third party suppliers pose no significant risks to the Company.
To date, attempts to confirm governmental and private third party
payers' ability to provide timely reimbursement in Year 2000 has been limited
due to the low level of reliance the Company would be able to place on such
responses or the Company's ability to influence the actions of noncompliant
respondents. No payers have indicated an inability to continue remittances in
the normal course of business; however, most payers, including the federal
government, are in the process of evaluating and updating their internal systems
and cannot yet assure us that their systems are Year 2000 compliant. An
inability of such payers to provide timely reimbursement could result in
significant decreases in operating cash flows, the effects of which could be
material to the Company. The Company would be forced to rely on its current cash
on hand and available borrowing capacity in order to satisfy working capital
needs, the extent of which is not measurable at this time. The Company considers
this possibility to be its most likely worst case scenario associated with Year
2000 compliance.
The Company is currently formulating contingency plans in order to
address its identified risks for its corporate office and each of its surgery
centers and intends to have such plans finalized by the second quarter of 1999.
Such plans will include the development of certain manual processes that can be
performed in place of automated systems. Because the Company's surgery centers
perform elective surgeries on an outpatient basis, each surgery center will be
required on January 1, 2000 to completely retest all medical and non-medical
equipment before admitting any patients, thereby minimizing any risks that
patient care is hindered by equipment or software failures. Also as part of the
contingency plans, the Company's surgery centers will be expected to increase
medical supplies and drug inventories prior to January 1, 2000 in preparation of
any potential supply shortages. These contingency plans are not expected to
require any significant incremental costs to implement. Currently, the Company
does not have a contingency plan for failure of its payers to provide timely
reimbursement but will attempt to form such a plan for dealing with payer issues
if and when such issues become more specifically known to the Company.
In light of its assessment and remediation plan, the Company believes
that overall risk associated with Year 2000 compliance is not significant to the
Company and its surgery centers. However, because of uncertainties associated
with Year 2000 compliance issues and because of the necessary reliance placed on
third parties, there can be no assurance that the Company's assessment is
correct, that its assessment and remediation plan will successfully resolve all
significant Year 2000 concerns or that the Company's estimates of the financial
impact are materially correct.
11
<PAGE> 12
PART II
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule (for SEC use only)
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMSURG CORP.
Date: May 14, 1999 By: /s/ Claire M. Gulmi
--------------------------------------
CLAIRE M. GULMI
Senior Vice President and Chief Financial Officer
(Principal Financial and Duly Authorized Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMSURG
CORP.'S BALANCE SHEET AS OF MARCH 31, 1999 AND STATEMENT OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31,
1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,310,512
<SECURITIES> 0
<RECEIVABLES> 13,762,332<F1>
<ALLOWANCES> 0
<INVENTORY> 1,248,716
<CURRENT-ASSETS> 21,772,345
<PP&E> 23,723,894<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 98,864,071
<CURRENT-LIABILITIES> 6,536,801
<BONDS> 0
0
0
<COMMON> 61,665,139
<OTHER-SE> 4,196,830
<TOTAL-LIABILITY-AND-EQUITY> 98,864,071
<SALES> 0
<TOTAL-REVENUES> 23,393,973
<CGS> 0
<TOTAL-COSTS> 16,407,854
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 233,266
<INCOME-PRETAX> 2,544,346
<INCOME-TAX> 979,573
<INCOME-CONTINUING> 1,564,773
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (126,267)
<NET-INCOME> 1,438,506
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
<FN>
<F1>VALUE REPRESENTS NET AMOUNT.
</FN>
</TABLE>
