Attached files

file filename
EX-21.1 - EX-21.1 - AMSURG CORPg22200exv21w1.htm
EX-32.1 - EX-32.1 - AMSURG CORPg22200exv32w1.htm
EX-31.1 - EX-31.1 - AMSURG CORPg22200exv31w1.htm
EX-23.1 - EX-23.1 - AMSURG CORPg22200exv23w1.htm
EX-10.28 - EX-10.28 - AMSURG CORPg22200exv10w28.htm
EX-10.17 - EX-10.17 - AMSURG CORPg22200exv10w17.htm
EX-31.2 - EX-31.2 - AMSURG CORPg22200exv31w2.htm
Table of Contents

UNITED STATES 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, 2009
Commission File Number 000-22217
AMSURG CORP.
(Exact Name of Registrant as Specified in Its Charter)
     
Tennessee
(State or Other Jurisdiction of Incorporation or Organization)
  62-1493316
(I.R.S. Employer Identification No.)
     
20 Burton Hills Boulevard, 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:
  Common Stock, no par value    
 
  (Title of class)    
   
 
  Nasdaq Global Select Market    
 
  (Name of each exchange on which registered)    
     
 
   
Securities registered pursuant to Section 12(g) of the Act:
  None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ      No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o      No þ
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 þ      No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o      No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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.   þ
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o  Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting Company o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o      No þ
As of February 25, 2010, 30,891,467 shares of the Registrant’s common stock were outstanding. The aggregate market value of the shares of common stock of the Registrant held by nonaffiliates on June 30, 2009 (based upon the closing sale price of these shares as reported on the Nasdaq Global Select Market as of June 30, 2009) was approximately $643,000,000. 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 may disclaim.
Documents Incorporated by Reference
Portions of the Registrant’s Definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 20, 2010, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 


 

Table of Contents to Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2009
 
                 
 
Part I      
 
       
    Item 1.       1  
            14  
    Item 1A.       15  
    Item 1B.       19  
    Item 2.       19  
    Item 3.       19  
    Item 4.       19  
       
 
       
Part II      
 
       
    Item 5.       20  
    Item 6.       21  
    Item 7.       22  
    Item 7A.       31  
    Item 8.       32  
    Item 9.       56  
    Item 9A.       56  
    Item 9B.       58  
       
 
       
Part III      
 
       
    Item 10.       58  
    Item 11.       58  
    Item 12.       58  
    Item 13.       58  
    Item 14.       59  
       
 
       
Part IV      
 
       
    Item 15.       59  
       
 
       
    Signatures     62  
 EX-10.17
 EX-10.28
 EX-21.1
 EX-23.1
 EX-31.1
 EX-31.2
 EX-32.1
 


Table of Contents

 
Part I
Item 1.   Business
Our company was formed in 1992 for the purpose of developing, acquiring and operating ambulatory surgery centers, or ASCs, in partnership with physicians throughout the United States. An AmSurg surgery center is typically located adjacent to or in close proximity to the medical practices of our physician partners. Each of our surgery centers provides a narrow range of high volume, lower-risk surgical procedures and has been designed with a cost structure that enables us to charge fees which we believe are generally less than those charged by hospitals for similar services performed on an outpatient basis. As of December 31, 2009, we owned a majority interest in 202 surgery centers in 32 states and the District of Columbia and had one center under development.
We file reports with the Securities and Exchange Commission, or SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and other reports from time to time. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E., Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer and the SEC maintains an Internet site at http://www.sec.gov that contains the reports, proxy and information statements and other information filed electronically. Our website address is: http://www.amsurg.com. We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information provided on our website is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report. Our principal executive offices are located at 20 Burton Hills Boulevard, Nashville, Tennessee 37215, and our telephone number is 615-665-1283.
Industry Overview
For many years, government programs, private insurance companies, managed care organizations and self-insured employers have implemented various cost-containment measures intended 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 sites, including ASCs. According to the Centers for Medicare and Medicaid Services, or CMS, there were approximately 5,300 Medicare-certified ASCs as of December 31, 2009. We believe that of those ASCs, approximately 65% performed procedures in a single specialty and 35% performed procedures in more than one specialty. Among the single specialty centers, approximately 2,000 are in our preferred specialties of gastroenterology, ophthalmology, orthopaedic, ear, nose and throat, or ENT, and urology, while the remainder are in specialties such as plastic surgery, podiatry and pain management. We believe approximately 50% of single specialty ASCs and approximately 25% of multi-specialty ASCs are independently owned.
We believe that the following factors have contributed to the growth of ambulatory surgery:
Cost-Effective Alternative. Ambulatory surgery is generally less expensive than hospital-based 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. Accordingly, charges to patients and payors by ASCs are generally less than hospital charges.
Physician and Patient Preference. We believe that many physicians prefer ASCs because these 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, hospital outpatient departments 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 an ASC because their patients prefer the simplified admissions and discharge process and the less institutional atmosphere.
New Technology. New technology and advances in anesthesia, which have been increasingly accepted by physicians and payors, have significantly expanded the types of surgical procedures that can be performed in ASCs. 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.
Strategy
We believe we are a leader in the acquisition, development and operation of ASCs. The key components of our strategy are to:
    selectively acquire both single-specialty ASCs and muti-specialty ASCs with substantial minority physician ownership;
 
    develop new ASCs in partnership with physicians; and
 
    grow revenues and profitability at our existing surgery centers.
 

1


Table of Contents

Item 1.   Business – (continued)
 
Currently, approximately 88% of our centers are single-specialty centers that perform gastroenterology or ophthalmology procedures. These specialties have a higher concentration of older patients than other specialties, such as orthopaedics or ENT. We believe the aging demographics of the U.S. population will be a source of procedure growth for gastroenterology and ophthalmology.
Acquisition and Development of Surgery Centers
We operate both single-specialty and multi-specialty ASCs. Our single-specialty ASCs are generally equipped and staffed for a single medical specialty and located adjacent to or in close proximity to the medical practices of our physician partners. We have targeted ownership in single-specialty ASCs that perform gastrointestinal endoscopy, ophthalmology and orthopaedic procedures. We target these medical specialties because they generally involve a high volume of lower-risk procedures that can be performed in an outpatient setting on a safe and cost-effective basis. Our multi-specialty ASCs are equipped and staffed to perform general surgical procedures, as well as procedures in more than one of the specialties listed above.
Our development staff identifies existing centers that are potential acquisition candidates and physicians who are potential partners for new center development. We begin our acquisition process with a due diligence review of the target center and its market. We use experienced teams of operations and financial personnel to conduct a review of all aspects of the center’s operations, including the following:
    quality of the physicians affiliated with the center;
 
    market position of the center and the physicians affiliated with the center;
 
    payor and case mix;
 
    competition and growth opportunities in the market;
 
    staffing and supply review;
 
    equipment assessment; and
 
    opportunities for operational efficiencies.
In presenting the advantages to physicians of developing a new ASC in partnership with us, our development staff emphasizes the proximity of a 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 and the state-of-the-art surgical equipment. We also focus on our expertise in developing and operating centers, including contracting with vendors and third-party payors. In a development project, we provide services, such as financial feasibility pro forma analysis; site selection; financing for construction, equipment and buildout; and architectural oversight. Capital contributed by the physicians and AmSurg plus debt financing provides the funds necessary to construct and equip a new surgery center and initial working capital.
As part of each acquisition or development transaction, we form a limited partnership or limited liability company and enter into a limited partnership agreement or operating agreement with our physician partners. We generally own 51% of the limited partnerships or limited liability companies. Under these agreements, we receive a percentage of the net income and cash distributions of the entity equal to our percentage ownership interest in the entity and have the right to the same percentage of the proceeds of a sale or liquidation of the entity. In the limited partnership structure, as the sole general partner, one of our affiliates is generally liable for the debts of the limited partnership. However, the physician partners are generally required to guarantee their pro rata share of any indebtedness or lease agreements to which the limited partnership is a party in proportion to their ownership interest in the limited partnership.
We manage each limited partnership and limited liability company and oversee the business office, marketing, financial reporting, accreditation and administrative operations of the surgery center. The physician partners provide the center with a medical director and performance improvement chairman and may provide certain other specified services such as billing and collections, transcription and accounts payable processing. In addition, the limited partnership or limited liability company may lease the services of certain non-physician personnel from the physician partners, who will provide services at the center. The cost of the salary and benefits of these personnel are reimbursed to the physician partners 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 AmSurg and our physician partners. We work closely with our physician partners to increase the likelihood of a successful partnership.
Substantially all of the limited partnership and operating agreements provide that, if certain regulatory changes take place, we will be obligated to purchase some or all of the noncontrolling interests of our physician partners. The regulatory changes that could trigger such obligations include changes that: (i) make the referral of Medicare and other patients to our surgery centers by physicians affiliated with us illegal; (ii) create the substantial likelihood that cash distributions from the limited partnerships or limited liability companies to the affiliated physicians will be illegal; or (iii) cause the ownership by the physicians of interests in the limited
 

2


Table of Contents

Item 1.   Business – (continued)
 
partnerships or limited liability companies to be illegal. There can be no assurance that our existing capital resources would be sufficient for us to meet the obligations, if they arise, to purchase these noncontrolling interests held by physicians. The determination of whether a triggering event has occurred generally would be made by the concurrence of our legal counsel and counsel for the physician partners or, in the absence of such concurrence, by independent counsel having expertise in healthcare law chosen by both parties. Such determination therefore would not be within our control. The triggering of these obligations could have a material adverse effect on our financial condition and results of operations. See “– Government Regulation.”
Growth in Revenues at Existing Facilities
We grow revenues in our existing facilities primarily through increasing procedure volume. We grow our procedure volume through:
    growth in the number of physicians performing procedures at our centers;
 
    obtaining new or more favorable managed care contracts for our centers;
 
    marketing our centers to referring physicians, payors and patients; and
 
    achieving efficiencies in center operations.
Growth in the number of physicians performing procedures. The most effective way to increase procedure volume and revenues at our ASCs is to increase the number of physicians that use the centers through:
    encouraging the physicians affiliated with the ASCs to recruit new physicians to their practices;
 
    identifying additional physicians or physician practices to join the partnerships that own the ASCs; and
 
    recruiting non-partner physicians in the same or other specialties to use excess capacity at the ASCs.
We also work with our partners to plan for the retirement or departure of physicians who utilize our ASCs.
Obtaining new or more favorable managed care contracts. Maintaining access to physicians and patients through third-party payor contracts is important to the successful operation of our ASCs. We have a dedicated business development team that is responsible for negotiating contracts with third-party payors. They are responsible for obtaining new contracts for our ASCs with payors that do not currently contract with us and negotiating increased reimbursement rates pursuant to existing contracts.
Marketing our centers to referring physicians, payors and patients. We seek to increase procedure volume at our ASCs by marketing our ASCs to referring physicians and payors emphasizing the quality and high patient satisfaction and lower cost at our ASCs; and increasing awareness of the benefits of our ASCs with employers and patients through public awareness programs, health fairs and screening programs, including programs designed to educate employers and patients as to the health and cost benefits of detecting colon cancer in its early stages through routine endoscopy procedures. We continue to increase our efforts in direct-to-consumer marketing through the expansion of our web-marketing strategy, colon cancer awareness campaigns and various local marketing programs.
Achieving efficiencies in center operations. We have dedicated teams with business and clinical expertise that are responsible for implementing best practices within our ASCs. The implementation of these best practices allows the ASCs to improve operating efficiencies through:
    physician scheduling enhancements;
 
    specially trained clinical staff focused on improved patient flow; and
 
    improved operating room turnover.
The information we gather and collect from our ASCs and team members allows us to develop best practices and identify those ASCs that could most benefit from improved operating efficiency techniques.
Surgery Center Operations
The size of our typical single-specialty ASC is approximately 3,000 to 6,000 square feet. Our single-specialty ASCs are generally located adjacent to or in close proximity to our physician partners’ offices. The size of our typical multi-specialty ASC is approximately 5,000 to 10,000 square feet. Each center typically has two to three operating or procedure rooms with areas for reception, preparation, recovery and administration. Each surgery center is specifically tailored to meet the needs of its physician partners. Our surgery centers perform an average of approximately 6,300 procedures per year, though there is a wide range among centers from a low of approximately 1,200 procedures per year to a high of 31,000 procedures per year. The cost of developing a typical surgery center is approximately $2.5 million. Constructing, equipping and licensing a surgery center generally takes 12 to 15 months. As of December 31, 2009, 142 of our centers performed gastrointestinal endoscopy procedures, 36 centers performed ophthalmology surgery procedures, 17 centers were multi-specialty centers and seven centers performed orthopaedic procedures. The procedures performed at our centers generally do not require an extended recovery period. Our centers are staffed with approximately 10 to 15 clinical professionals and administrative personnel, including nurses and surgical technicians, some of whom may be shared with our physician partners.
 

3


Table of Contents

Item 1.   Business – (continued)
 
The types of procedures performed at each center depend on the specialty of the practicing physicians. The procedures most commonly performed at our surgery centers are:
    gastroenterology - colonoscopy and other endoscopy procedures;
 
    ophthalmology - cataracts and retinal laser surgery; and
 
    orthopaedic - knee and shoulder arthroscopy and carpal tunnel repair.
We market our surgery centers directly to patients, referring physicians and third-party payors, including health maintenance organizations, or HMOs, preferred provider organizations, or PPOs, other managed care organizations, and employers. Marketing activities conducted by our management and center administrators emphasize the high quality of care, cost advantages and convenience of our surgery centers and are focused on making each center an approved provider under local managed care plans.
Accreditation
Many managed care organizations in certain markets will only contract with a facility that is accredited by either the Accreditation Association for Ambulatory Health Care, or AAAHC or The Joint Commission. In these markets, we generally seek and obtain these accreditations. Currently, 147 of our 202 surgery centers are accredited by AAAHC or The Joint Commission, and 27 of our surgery centers are scheduled for initial accreditation surveys during 2010. All of the accredited centers received three-year certifications.
Surgery Center Locations
The following table sets forth certain information relating to our surgery centers as of December 31, 2009:
                 
            Operating or
        Acquisition/   Procedure
Location   Specialty   Opening Date   Rooms
 
 
               
Acquired Centers:
               
 
               
Knoxville, Tennessee
  Gastroenterology   November 1992     8  
Topeka, Kansas
  Gastroenterology   November 1992     3  
Nashville, Tennessee
  Gastroenterology   November 1992     3  
Washington, D.C.
  Gastroenterology   November 1993     3  
Torrance, California
  Gastroenterology   February 1994     2  
Maryville, Tennessee
  Gastroenterology   January 1995     3  
Miami, Florida
  Gastroenterology   April 1995     5  
Panama City, Florida
  Gastroenterology   July 1996     3  
Ocala, Florida
  Gastroenterology   August 1996     3  
Columbia, South Carolina
  Gastroenterology   October 1996     4  
Wichita, Kansas
  Orthopaedic   November 1996     3  
Crystal River, Florida
  Gastroenterology   January 1997     3  
Abilene, Texas
  Ophthalmology   March 1997     2  
Fayetteville, Arkansas
  Gastroenterology   May 1997     3  
Independence, Missouri
  Gastroenterology   September 1997     1  
Kansas City, Missouri
  Gastroenterology   September 1997     1  
Phoenix, Arizona
  Ophthalmology   February 1998     2  
Denver, Colorado
  Gastroenterology   April 1998     4  
Sun City, Arizona
  Ophthalmology   May 1998     5  
Baltimore, Maryland
  Gastroenterology   November 1998     3  
Boca Raton, Florida
  Ophthalmology   December 1998     2  
Indianapolis, Indiana
  Gastroenterology   June 1999     4  
Chattanooga, Tennessee
  Gastroenterology   July 1999     3  
Mount Dora, Florida
  Ophthalmology   September 1999     2  
Oakhurst, New Jersey
  Gastroenterology   September 1999     2  
Cape Coral, Florida
  Gastroenterology   November 1999     2  
La Jolla, California
  Gastroenterology   December 1999     2  
Burbank, California
  Ophthalmology   December 1999     1  
Waldorf, Maryland
  Gastroenterology   December 1999     2  
Las Vegas, Nevada
  Ophthalmology   December 1999     2  
Glendale, California
  Ophthalmology   January 2000     1  
Las Vegas, Nevada
  Ophthalmology   May 2000     2  
Hutchinson, Kansas
  Ophthalmology   June 2000     2  
 

4


Table of Contents

Item 1.   Business – (continued)
 
                 
 
            Operating or
        Acquisition/   Procedure
Location   Specialty   Opening Date   Rooms
 
 
               
New Orleans, Louisiana
  Ophthalmology   July 2000     2  
Kingston, Pennsylvania
  Ophthalmology, Pain Management   December 2000     3  
Inverness, Florida
  Gastroenterology   December 2000     3  
Columbia, Tennessee
  Multispecialty   February 2001     2  
Bel Air, Maryland
  Gastroenterology   February 2001     2  
Dover, Delaware
  Multispecialty   February 2001     3  
Sarasota, Florida
  Ophthalmology   February 2001     2  
Greensboro, North Carolina
  Ophthalmology   March 2001     4  
Ft. Lauderdale, Florida
  Ophthalmology   March 2001     3  
Bloomfield, Connecticut
  Ophthalmology   July 2001     1  
Lawrenceville, New Jersey
  Multispecialty   October 2001     3  
Newark, Delaware
  Gastroenterology   October 2001     5  
Alexandria, Louisiana
  Ophthalmology   December 2001     2  
Paducah, Kentucky
  Ophthalmology   May 2002     2  
Columbia, Tennessee
  Gastroenterology   June 2002     2  
Ft. Myers, Florida
  Ophthalmology   July 2002     2  
Tulsa, Oklahoma
  Ophthalmology   July 2002     3  
Peoria, Arizona
  Multispecialty   October 2002     3  
Lewes, Delaware
  Gastroenterology   December 2002     2  
Rogers, Arkansas
  Ophthalmology   December 2002     2  
Winter Haven, Florida
  Ophthalmology   December 2002     2  
Mesa, Arizona
  Gastroenterology   December 2002     4  
Voorhees, New Jersey
  Gastroenterology   March 2003     4  
St. George, Utah
  Gastroenterology   July 2003     2  
San Antonio, Texas
  Gastroenterology   July 2003     4  
Pueblo, Colorado
  Ophthalmology   September 2003     2  
Reno, Nevada
  Gastroenterology   December 2003     4  
Edina, Minnesota
  Ophthalmology   December 2003     1  
Gainesville, Florida
  Orthopaedic   February 2004     5  
West Palm, Florida
  Gastroenterology   March 2004     2  
Raleigh, North Carolina
  Gastroenterology   April 2004     4  
Sun City, Arizona
  Gastroenterology   September 2004     2  
Casper, Wyoming
  Gastroenterology   October 2004     2  
Rockville, Maryland
  Gastroenterology   October 2004     5  
Overland Park, Kansas
  Gastroenterology   October 2004     3  
Lake Bluff, Illinois
  Gastroenterology   November 2004     3  
San Luis Obispo, California
  Gastroenterology   December 2004     2  
Templeton, California
  Gastroenterology   December 2004     2  
Lutherville, Maryland
  Gastroenterology   January 2005     2  
Tacoma, Washington
  Gastroenterology   March 2005     5  
Tacoma, Washington
  Gastroenterology   March 2005     2  
Tacoma, Washington
  Gastroenterology   March 2005     2  
Tacoma, Washington
  Gastroenterology   March 2005     2  
Orlando, Florida
  Gastroenterology   June 2005     1  
Orlando, Florida
  Gastroenterology   June 2005     4  
Ocala, Florida
  Multispecialty   June 2005     3  
Scranton, Pennsylvania
  Gastroenterology   August 2005     3  
Towson, Maryland
  Gastroenterology   August 2005     4  
Yuma, Arizona
  Gastroenterology   October 2005     3  
St. Louis, Missouri
  Orthopaedic   November 2005     2  
Salem, Oregon
  Ophthalmology   December 2005     2  
West Orange, New Jersey
  Gastroenterology   December 2005     3  
St. Cloud, Minnesota
  Ophthalmology   December 2005     2  
Tulsa, Oklahoma
  Gastroenterology   December 2005     3  
Laurel, Maryland
  Gastroenterology   December 2005     3  
Torrance, California
  Multispecialty   February 2006     4  
Nashville, Tennessee
  Ophthalmology   February 2006     2  
Arcadia, California
  Gastroenterology   March 2006     2  
Towson, Maryland
  Gastroenterology   August 2006     2  
 

5


Table of Contents

Item 1.   Business – (continued)
 
                 
            Operating or
        Acquisition/   Procedure
Location   Specialty   Opening Date   Rooms
 
 
               
The Woodlands, Texas
  Gastroenterology   September 2006     2  
Bala Cynwyd, Pennsylvania
  Gastroenterology   September 2006     2  
Malvern, Pennsylvania
  Gastroenterology   September 2006     3  
Oakland, California
  Gastroenterology   October 2006     3  
South Bend, Indiana
  Gastroenterology   January 2007     4  
Lancaster, Pennsylvania
  Gastroenterology   January 2007     2  
Silver Spring, Maryland
  Gastroenterology   January 2007     2  
Rockville, Maryland
  Gastroenterology   January 2007     3  
New Orleans, Louisiana
  Gastroenterology   January 2007     2  
Marrero, Louisiana
  Gastroenterology   January 2007     2  
Metairie, Louisiana
  Gastroenterology   January 2007     3  
Tom’s River, New Jersey
  Gastroenterology   May 2007     2  
Pottsville, Pennsylvania
  Gastroenterology   June 2007     3  
Memphis, Tennessee
  Gastroenterology   July 2007     4  
Kissimmee, Florida
  Gastroenterology   July 2007     1  
Glendora, California
  Gastroenterology   August 2007     4  
Mesquite, Texas
  Gastroenterology   August 2007     2  
Conroe, Texas
  Gastroenterology   August 2007     4  
Altamonte Springs, Florida
  Gastroenterology   September 2007     3  
New Port Richey, Florida
  Multispecialty   October 2007     3  
Glendale, Arizona
  Gastroenterology   October 2007     3  
Orlando, Florida
  Gastroenterology   October 2007     1  
San Diego, California
  Multispecialty   November 2007     4  
Poway, California
  Multispecialty   November 2007     2  
Baton Rouge, Louisiana
  Gastroenterology   December 2007     10  
Baltimore, Maryland
  Gastroenterology   January 2008     4  
Glen Burnie, Maryland
  Gastroenterology   January 2008     2  
St. Clair Shores, Michigan
  Ophthalmology   May 2008     2  
Orlando, Florida
  Gastroenterology   May 2008     4  
Greenbrae, California
  Gastroenterology   August 2008     3  
Pomona, California
  Multispecialty   September 2008     5  
Akron, Ohio
  Gastroenterology   November 2008     3  
Redding, California
  Gastroenterology   December 2008     2  
Phoenix, Arizona
  Gastroenterology   December 2008     2  
Silver Spring, Maryland
  Ophthalmology   December 2008     3  
Phoenix, Arizona
  Orthopaedic   December 2008     8  
Bryan, Texas
  Gastroenterology   December 2008     3  
Westminster, Maryland
  Gastroenterology   December 2008     2  
McKinney, Texas
  Multispecialty   December 2008     2  
Durham, North Carolina
  Gastroenterology   December 2008     4  
Dayton, Ohio
  Gastroenterology   December 2008     1  
Kettering, Ohio
  Gastroenterology   December 2008     5  
Huber Heights, Ohio
  Gastroenterology   December 2008     1  
Springboro, Ohio
  Gastroenterology   December 2008     3  
North Charleston, South Carolina
  Gastroenterology   January 2009     3  
North Knoxville, Tennessee
  Gastroenterology   January 2009     2  
West Bridgewater, Massachusetts
  Gastroenterology   February 2009     2  
Canon City, Colorado
  Multispecialty   June 2009     2  
Media, Pennsylvania
  Gastroenterology   July 2009     3  
Hermitage, Tennessee
  Gastroenterology   October 2009     3  
Phoenix, Arizona
  Orthopaedic   December 2009     5  
Dallas, Texas
  Gastroenterology   December 2009     4  
Dallas, Texas
  Gastroenterology   December 2009     3  
Bedford, Texas
  Gastroenterology   December 2009     3  
Plano, Texas
  Gastroenterology   December 2009     4  
North Richland Hills, Texas
  Gastroenterology   December 2009     4  
 

6


Table of Contents

Item 1.   Business – (continued)
 
                 
            Operating or
        Acquisition/   Procedure
Location   Specialty   Opening Date   Rooms
 
 
               
Developed Centers:
               
 
               
Santa Fe, New Mexico
  Gastroenterology   May 1994     3  
Beaumont, Texas
  Gastroenterology   October 1994     5  
Abilene, Texas
  Gastroenterology   December 1994     3  
Knoxville, Tennessee
  Ophthalmology   June 1996     2  
Sidney, Ohio
  Multispecialty   December 1996     4  
Montgomery, Alabama
  Ophthalmology   May 1997     2  
Willoughby, Ohio
  Gastroenterology   July 1997     2  
Milwaukee, Wisconsin
  Gastroenterology   July 1997     3  
Chevy Chase, Maryland
  Gastroenterology   July 1997     4  
Melbourne, Florida
  Gastroenterology   August 1997     2  
Lorain, Ohio
  Gastroenterology   August 1997     2  
Hillmont, Pennsylvania
  Gastroenterology   October 1997     2  
Hialeah, Florida
  Gastroenterology   December 1997     3  
Cincinnati, Ohio
  Gastroenterology   January 1998     3  
Evansville, Indiana
  Ophthalmology   February 1998     2  
Shawnee, Kansas
  Gastroenterology   April 1998     3  
Salt Lake City, Utah
  Gastroenterology   April 1998     2  
Oklahoma City, Oklahoma
  Gastroenterology   May 1998     4  
El Paso, Texas
  Gastroenterology   December 1998     4  
Toledo, Ohio
  Gastroenterology   December 1998     3  
Florham Park, New Jersey
  Gastroenterology   December 1999     3  
Minneapolis, Minnesota
  Ophthalmology   June 2000     2  
Crestview Hills, Kentucky
  Gastroenterology   September 2000     3  
Louisville, Kentucky
  Gastroenterology   September 2000     3  
Louisville, Kentucky
  Ophthalmology   September 2000     2  
Ft. Myers, Florida
  Gastroenterology   October 2000     3  
Seneca, Pennsylvania
  Multispecialty   October 2000     4  
Sarasota, Florida
  Gastroenterology   December 2000     2  
Tamarac, Florida
  Gastroenterology   December 2000     2  
Inglewood, California
  Gastroenterology   May 2001     3  
Clemson, South Carolina
  Orthopaedic   September 2002     3  
Middletown, Ohio
  Gastroenterology   October 2002     3  
Troy, Michigan
  Gastroenterology   August 2003     3  
Kingsport, Tennessee
  Ophthalmology   October 2003     2  
Columbia, South Carolina
  Gastroenterology   November 2003     2  
Greenville, South Carolina
  Gastroenterology   August 2004     4  
Sebring, Florida
  Ophthalmology   November 2004     2  
Temecula, California
  Gastroenterology   November 2004     2  
Escondido, California
  Gastroenterology   December 2004     2  
Tampa, Florida
  Gastroenterology   January 2005     8  
Rockledge, Florida
  Gastroenterology   May 2005     3  
Lakeland, Florida
  Gastroenterology   May 2005     4  
Liberty, Missouri
  Gastroenterology   June 2005     1  
Knoxville, Tennessee
  Gastroenterology   September 2005     2  
Sun City, Arizona
  Multispecialty   November 2005     3  
Port Huron, Michigan
  Orthopaedic   March 2006     2  
Hanover, New Jersey
  Gastroenterology   October 2006     3  
Raleigh, North Carolina
  Gastroenterology   December 2006     3  
San Antonio, Texas
  Gastroenterology   May 2007     3  
Cary, North Carolina
  Gastroenterology   November 2007     4  
El Dorado, Arkansas
  Multispecialty   December 2007     2  
Greensboro, North Carolina
  Gastroenterology   August 2008     2  
Puyallup, Washington
  Gastroenterology   May 2009     3  
Blaine, Minnesota
  Multispecialty   November 2009     3  
 
               
 
               
 
            576  
 
               
 

7


Table of Contents

Item 1.   Business – (continued)
 
Our limited partnerships and limited liability companies generally lease the real property on which our surgery centers operate, either from the physician partners or from unaffiliated parties.
Revenues
Substantially all of our revenues are derived from facility fees charged for surgical procedures performed in our surgery centers. These fees vary depending on the procedure, but usually include 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 by the physicians. In limited instances, our revenues include charges for anesthesia services delivered by medical professionals employed or contracted by our centers. Revenue is recorded at the time of the patient encounter and billings for such procedures are made on or about that same date. At the majority of our centers, it is our policy to collect patient co-payments and deductibles at the time the surgery is performed. Our revenues are recorded net of estimated contractual adjustments from third-party medical service payors. Our billing and accounting systems provide us historical trends of the surgery centers’ cash collections and contractual write-offs, accounts receivable agings and established fee adjustments from third-party payors. These estimates are recorded and monitored monthly for each of our surgery centers as revenue is recognized. Our ability to accurately estimate contractual adjustments is dependent upon and supported by the fact that our surgery centers perform and bill for limited types of procedures, the range of reimbursement for those procedures within each surgery center specialty is very narrow and payments are typically received within 15 to 45 days of billing. These estimates are not, however, established from billing system generated contractual adjustments based on fee schedules for the patient’s insurance plan for each patient encounter.
ASCs depend upon third-party reimbursement programs, including governmental and private insurance programs, to pay for substantially all of the services rendered to patients. We derived approximately 33%, 34% and 34% of our revenues in the years ended December 31, 2009, 2008 and 2007, respectively, from governmental healthcare programs, primarily Medicare. The Medicare program currently pays ASCs in accordance with predetermined fee schedules. Our surgery centers are not required to file cost reports and, accordingly, we have no unsettled amounts from governmental third-party payors.
Effective January 1, 2008, CMS revised the payment system for services provided in ASCs. The key points of the revised payment system as it relates to us are:
    ASCs are paid based upon a percentage of the payments to hospital outpatient departments pursuant to the hospital outpatient prospective payment system;
 
    a scheduled phase-in of the revised rates over four years from 2008 through 2011; and
 
    planned annual increases in the ASC rates beginning in 2010 based on the consumer price index, or CPI.
The revised payment system has resulted in a significant reduction in the reimbursement rates for gastroenterology procedures, which comprise approximately 79% of the procedures performed by our surgery centers, and certain ophthalmology and pain procedures. We estimate that our net earnings per share were negatively impacted by the revised payment system by $0.05 in 2008 and an additional $0.07 in 2009. In November 2009, CMS announced final reimbursement rates for 2010 under the revised payment system, which included a 1.2% CPI increase. Based upon our current procedure mix, payor mix and volume, we believe the 2010 payment rates will reduce our net earnings per diluted share in 2010 by approximately $0.06 as compared to 2009 and that our diluted earnings per share in 2011 will be reduced by an incremental $0.06 as compared to the prior year as a result of the scheduled reduction in rates. Any increase in reimbursement rates as a result of CPI adjustments in 2011 will partially offset the scheduled payment reductions that year. Beginning in 2012, the scheduled phase-in of the revised rates will be completed, and reimbursement rates for our ASCs should be increased annually based upon increases in the CPI. There can be no assurance, however, that CMS will not further revise the payment system, or that any annual CPI increases will be material.
CMS is increasing its administrative audit efforts through the nationwide expansion of the recovery audit contractor (“RAC”) program. RACs are private contractors that conduct post-payment reviews of providers and suppliers that bill Medicare to detect and correct improper payments for services. We could incur costs associated with appealing any alleged overpayments and be required to repay any alleged overpayments identified by these or other administrative audits.
We expect value-based purchasing programs, including programs that condition reimbursement on patient outcome measures, to become more common and to involve a higher percentage of reimbursement amounts. Effective January 15, 2009, CMS promulgated three national coverage determinations that prevent Medicare from paying for certain serious, preventable medical errors performed in any healthcare facility, such as surgery performed on the wrong patient or the wrong site. Several commercial payors also do not reimburse providers for certain preventable adverse events. In addition, a 2006 federal law authorizes CMS to require ASCs to submit data on certain quality measures. ASCs that fail to submit the required data would face a two percentage point reduction in their annual reimbursement rate increase. CMS has not yet implemented the quality measure reporting requirement but has announced that it expects to do so in a future rulemaking.
In addition to payment from governmental programs, ASCs derive a significant portion of their revenues from private healthcare insurance plans. These plans include both standard indemnity insurance programs as well as managed care programs, such as
 

8


Table of Contents

Item 1.   Business – (continued)
 
PPOs and HMOs. The strengthening of managed care systems nationally has resulted in substantial competition among providers of surgery center services that contract with these systems. Exclusion from participation in a managed care network could result in material reductions in patient volume and revenue. Some of our competitors have greater financial resources and market penetration than we do. We believe that all payors, 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 our efforts to contract with healthcare payors, we believe that our position as a low-cost alternative for certain surgical procedures should enable our surgery centers to compete effectively in the evolving healthcare marketplace.
Competition
We encounter competition in three separate areas: competition with other companies for acquisitions of existing centers, competition with other providers for physicians to utilize our centers, patients and managed care contracts and competition for joint venture development of new centers.
Competition for Center Acquisitions. There are several public and private companies that may compete with us for the acquisition of existing ASCs. Some of these competitors may have greater resources than we have. The principal competitive factors that affect our and our competitors’ ability to acquire surgery centers are price, experience and reputation, and access to capital.
Competition for Physicians to Utilize Our Centers, Patients and Managed Care Contracts. We compete with hospitals and other surgery centers in recruiting physicians to utilize our surgery centers, for patients and for the opportunity to contract with payors. In some of the markets in which we operate, there are shortages of physicians in certain specialties, including gastroenterology. In several of the markets in which we operate, hospitals are recruiting physicians or groups of physicians to become employed by the hospitals, including primary care physicians and physicians in certain specialties, including gastroenterology, and restricting those physicians’ ability to refer patients to physicians and facilities not affiliated with the hospital. Competition with hospitals and other surgery centers may limit our ability to contract with payors or negotiate favorable payment rates.
Competition for Joint Venture Development of Centers. We believe that we do not have a direct corporate competitor in the development of single-specialty ASCs across the specialties of gastroenterology and ophthalmology. There are, however, several publicly and privately held companies that develop multi-specialty surgery centers, and these companies may compete with us in the development of multi-specialty centers. Further, many physicians develop surgery centers without a corporate partner, utilizing consultants who typically perform these services for a fee and who take a small equity interest or no equity interest in the ongoing operations of the center.
Government Regulation
The healthcare industry is subject to extensive regulation by a number of governmental entities at the federal, state and local level. Government regulation affects our business activities by controlling our growth, requiring licensure and certification for our facilities, regulating the use of our properties and controlling reimbursement to us for the services we provide.
Certification. We depend on third-party programs, including governmental and private health insurance programs, to reimburse us for services rendered to patients in our ASCs. In order to receive Medicare reimbursement, each surgery center must meet the applicable conditions of participation set forth by the Department of Health and Human Services, or 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. ASCs undergo periodic on-site Medicare certification surveys. Each of our existing centers is certified as a Medicare provider. Although we intend for our centers to participate in Medicare and other government reimbursement programs, there can be no assurance that these centers will continue to qualify for participation. Effective May 18, 2009, CMS revised the conditions for coverage for ASCs. The rule revised four existing conditions for coverage: (1) governing body and management; (2) surgical services; (3) evaluation of quality, which was renamed quality assessment and performance improvement; and (4) laboratory and radiologic services. The rule also added three new conditions for coverage: (i) patient rights; (ii) infection control; and (iii) patient admission, assessment and discharge. These additional conditions for coverage increase information collection requirements and other administrative obligations for ASCs.
Medicare-Medicaid Fraud and Abuse Provisions. The federal anti-kickback statute prohibits healthcare providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration (including any kickback, bribe or rebate) with the intent of generating referrals or orders for services or items covered by a federal healthcare program. The anti-kickback statute is very broad in scope, and many of its provisions have not been uniformly or definitively interpreted by case law or regulations. Violations may result in criminal penalties or fines of up to $25,000 or imprisonment for up to five years, or both. Violations of the anti-kickback statute may also result in substantial civil penalties, including penalties of up to $50,000 for each violation, plus three times the amount claimed, and exclusion from participation in the Medicare and Medicaid programs. Exclusion from these programs would result in significant reductions in revenue and would have a material adverse effect on our business.
 

9


Table of Contents

Item 1.   Business – (continued)
 
DHHS has published final safe harbor regulations that outline categories of activities that are deemed protected from prosecution under the anti-kickback statute. Two of the safe harbor regulations relate to investment interests in general: 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 safe harbor regulations also include safe harbors for investments in certain types of ASCs. The limited partnerships and limited liability companies that own our surgery centers do not meet all of the criteria of either of the investment interests safe harbors or the surgery center safe harbor. Thus, they do not qualify for safe harbor protection from government review or prosecution under the anti-kickback statute. However, a business arrangement that does not substantially comply with a safe harbor is not necessarily illegal under the anti-kickback statute.
The DHHS Office of Inspector General, or OIG, is authorized to issue advisory opinions regarding the interpretation and applicability of the federal anti-kickback statute, including whether an activity constitutes grounds for the imposition of civil or criminal sanctions. We have not sought such an opinion regarding any of our arrangements. However, in February 2003, the OIG issued an advisory opinion on a proposed multi-specialty ASC joint venture involving a hospital and a multi-specialty group practice. The OIG concluded that because the group practice was comprised of a large number of physicians who were not surgeons and therefore were not in a position to personally perform the procedures referred to the surgery center, the proposed arrangement could potentially violate the federal anti-kickback statute. In October 2007, the OIG reached a similar conclusion in an advisory opinion regarding a potential investment by optometrists in an ASC owned jointly by ophthalmologists and a hospital. The OIG determined that ownership by optometrists could potentially violate the federal anti-kickback statute because the optometrists could not personally perform procedures referred to the surgery center.
Although these advisory opinions are not binding on any entity other than the parties who submitted the requests, we believe that these advisory opinions provide us with some guidance as to how the OIG would analyze joint ventures involving surgeons such as our physician partners. We believe our joint ventures are generally distinguishable from the joint ventures described in the advisory opinions because, among other things, our physician investors are surgeons who not only refer their patients to the surgery centers but also personally perform the surgical procedures.
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 our limited partnerships and limited liability companies. We believe that we are in compliance with the current requirements of applicable federal and state law because, among other factors:
    the limited partnerships and limited liability companies exist to effect legitimate business purposes, including the ownership, operation and continued improvement of high quality, cost-effective and efficient services to the patients served;
 
    the limited 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;
 
    our physician partners have a substantial investment at risk in the limited partnerships and limited liability companies;
 
    terms of the investment do not take into account volume of the physician partners’ past or anticipated future services provided to patients of the centers;
 
    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;
 
    the limited partnerships, the limited liability companies, our subsidiaries and our affiliates will not loan any funds to or guarantee any debt on behalf of the physician partners with respect to their investment; and
 
    distributions by the limited partnerships and limited liability companies are allocated uniformly in proportion to ownership interests.
The safe harbor regulations also set forth a safe harbor for personal services and management contracts. Certain of our limited partnerships and limited liability companies have entered into ancillary services agreements with our physician partners’ group practices, pursuant to which the practice may provide the center with billing and collections, transcription, payables processing, payroll and other ancillary services. The consideration payable by a limited partnership or limited liability company for certain of these services may be based on the volume of services provided by the practice, which is measured by the limited partnership’s or limited liability company’s revenues. Although these relationships do not meet all of the criteria of the personal services and management contracts safe harbor, we believe that the ancillary services agreements are in compliance with the current requirements of applicable federal and state law because, among other factors, the fees payable to the physician practices are equal to the fair market value of the services provided thereunder.
Many of the states in which we operate also have adopted laws that prohibit payments to physicians in exchange for referrals similar to the federal anti-kickback statute, some of which apply regardless of the source of payment for care. These statutes typically provide criminal and civil penalties as well as loss of licensure.
Notwithstanding our belief that the relationship of physician partners to our surgery centers should not constitute illegal remuneration under the federal anti-kickback statute or similar laws, we cannot assure you 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 interests in our centers to become illegal, or result
 

10


Table of Contents

Item 1.   Business – (continued)
 
in the imposition of penalties on us or certain of our facilities. Even the assertion of a violation could have a material adverse effect upon us.
In addition to the anti-kickback statute, the Health Insurance Portability and Accountability Act of 1996, or HIPAA, provides for criminal penalties for healthcare fraud offenses that apply to all health benefit programs, including the payment of inducements to Medicare and Medicaid beneficiaries in order to influence those beneficiaries to order or receive services from a particular provider or practitioner. Federal enforcement officials have numerous enforcement mechanisms to combat fraud and abuse, including the Medicare Integrity Program and an incentive program under which individuals can receive up to $1,000 for providing information on Medicare fraud and abuse that leads to the recovery of at least $100 of Medicare funds. In addition, federal enforcement officials have the ability to exclude from Medicare and Medicaid any investors, officers and managing employees associated with business entities that have committed healthcare fraud.
Evolving interpretations of current, or the adoption of new, federal or state laws or regulations could affect many of our arrangements. Law enforcement authorities, including the OIG, the courts and Congress, are increasing their scrutiny of arrangements between healthcare providers and potential referral sources to ensure that the arrangements are not designed as a mechanism to exchange remuneration for patient care referrals or opportunities. Investigators also have demonstrated a willingness to look behind the formalities of a business transaction to determine the underlying purposes of payments between healthcare providers and potential referral sources.
Prohibition on Physician Ownership of Healthcare Facilities and Certain Self-Referrals. The federal physician self-referral law, commonly referred to as the Stark Law, prohibits a physician from making a referral for a designated health service to an entity if the physician or a member of the physician’s immediate family has a financial relationship with the entity. Sanctions for violating the Stark Law include civil money penalties of up to $15,000 per prohibited service provided and exclusion from the federal healthcare programs. The Stark Law applies to referrals involving the following services under the definition of “designated health services”: clinical laboratory services; physical therapy services; occupational therapy services; radiology and imaging services; radiation therapy services and supplies; durable medical equipment and supplies; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services.
Through a series of rulemakings, CMS has issued final regulations interpreting the Stark Law. While the regulations help clarify the requirements of the exceptions to the Stark Law, it is difficult to determine the full effect of the regulations. Under these regulations, services that would otherwise constitute a designated health service, but that are paid by Medicare as a part of the surgery center payment rate, are not a designated health service for purposes of the Stark Law. In addition, the Stark Law contains an exception covering implants, prosthetics, implanted prosthetic devices and implanted durable medical equipment provided in a surgery center setting under certain circumstances. Therefore, we believe the Stark Law does not prohibit physician ownership or investment interests in our surgery centers to which they refer patients.
Effective January 1, 2008, CMS expanded the so-called ASC exemption to the Stark Law by excluding from the definition of “radiology and certain other imaging services” any radiology and imaging procedures that are integral to a covered ASC surgical procedure and that are performed immediately before, during, or immediately following the surgical procedure (that is, on the same day). Similarly, CMS has excluded from the Stark Law definition of “outpatient prescription drugs” any drugs that are “covered as ancillary services” under the revised ASC payment system. These drugs include those furnished during the immediate postoperative recovery period to a patient to reduce suffering from nausea or pain. CMS cautioned, however, that only those radiology, imaging and outpatient prescription drug items and services that are integral to an ASC procedure and performed on the same day as the covered surgical procedure will quality for the ASC exemption. The Stark Law prohibition will continue to prohibit a physician-owned ASC from furnishing outpatient prescription drugs for use in a patient’s home. In addition, several states in which we operate have self-referral statutes similar to the Stark Law. We believe that physician ownership of surgery centers is not prohibited by these state self-referral statutes. However, the Stark Law and similar state statutes are subject to different interpretations. Violations of any of these self-referral laws may result in substantial civil or criminal penalties, including large civil monetary penalties and exclusion from participation in the Medicare and Medicaid programs. Exclusion of our surgery centers from these programs could result in significant loss of revenues and could have a material adverse effect on us. We can give you no assurances that further judicial or agency interpretations of existing laws or further legislative restrictions on physician ownership or investment in health care entities will not be issued that could have a material adverse effect on us.
The Federal False Claims Act and Similar Federal and State Laws. We are 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 payors 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 (or whistleblower) on the government’s behalf. When a private plaintiff brings a qui tam action under the False Claims Act, the defendant often will not be
 

11


Table of Contents

Item 1.   Business – (continued)
 
made aware of the lawsuit until the government commences its own investigation or makes a determination whether it will intervene. The Fraud Enforcement and Recovery Act of 2009 expanded the scope of the False Claim Act by, among other things, creating liability for knowingly or improperly avoiding repayment of an overpayment received from the government and broadening protections for whistleblowers. In some cases, qui tam plaintiffs and the federal government have taken the position, and some courts have held, that providers who allegedly have violated other statutes, such as the anti-kickback statute or the Stark Law, have thereby submitted false claims under the False Claims Act. When a defendant is determined by a court of law to be liable under the False Claims Act, the defendant may be required to pay three times the amount of the alleged false claim, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim. The private plaintiff may receive a share of any settlement or judgment. We believe that we have procedures in place to ensure the accurate completion of claims forms and requests for payment. However, the laws and regulations defining proper Medicare or Medicaid billing are frequently unclear and have not been subjected to extensive judicial or agency interpretation. Billing errors can occur despite our best efforts to prevent or correct them, and we cannot assure you that the government will regard such errors as inadvertent and not in violation of the False Claims Act or related statutes.
Under the Deficit Reduction Act of 2005, or DEFRA, every entity that receives at least $5.0 million annually in Medicaid payments must have established, by January 1, 2007, written policies for all employees, contractors or agents, providing detailed information about false claims, false statements and whistleblower protections under certain federal laws, including the federal False Claims Act, and similar state laws.
A number of states, including states in which we operate, have adopted their own false claims provisions as well as their own qui tam provisions whereby a private party may file a civil lawsuit in state court. DEFRA creates an incentive for states to enact false claims laws that are comparable to the federal False Claims Act.
Healthcare Industry Investigations. Both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies, as well as their executives and managers. These investigations relate to a wide variety of topics, including referral and billing practices.
From time to time, the OIG and the Department of Justice have established national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Some of our activities could become the subject of governmental investigations or inquiries. For example, we have significant Medicare billings and we have joint venture arrangements involving physician investors. In addition, our executives and managers, many of whom have worked at other healthcare companies that are or may become the subject of federal and state investigations and private litigation, could be included in governmental investigations or named as defendants in private litigation. We are not aware of any governmental investigations involving any of our facilities, our executives or our managers. A future adverse investigation of us, our executives or our managers could result in significant expense to us, as well as adverse publicity.
Privacy and Security Requirements. There are currently numerous legislative and regulatory initiatives at the state and federal levels addressing the privacy and security of patient health and other identifying information. The privacy and security regulations promulgated pursuant to HIPAA extensively regulate the use and disclosure of individually identifiable health information and require healthcare providers to implement administrative, physical and technical safeguards to protect the security of such information. Violations of the regulations may result in civil and criminal penalties. The American Recovery and Reinvestment Act of 2009 (“ARRA”) strengthened the requirements of the HIPAA privacy and security regulations and significantly increased the penalties for violations, with penalties of up to $50,000 per violation for a maximum civil penalty of $1.5 million in a calendar year for violations of the same requirement. Under ARRA, DHHS is required to conduct periodic compliance audits of covered entities and their business associates (entities that handle identifiable health information on behalf of covered entities). In addition, ARRA authorizes State Attorneys General to bring civil actions seeking either injunction or damages in response to violations of HIPAA privacy and security regulations that threaten the privacy of state residents. ARRA also extends the application of certain provisions of the security and privacy regulations to business associates and subjects business associates to civil and criminal penalties for violation of the regulations.
As required by ARRA, DHHS published an interim final rule on August 24, 2009, that requires covered entities to report breaches of unsecured protected health information to affected individuals without unreasonable delay, but not to exceed 60 days of discovery of the breach by the covered entity of its agents. Notification must also be made to DHHS and, in certain situations involving large breaches, to the media.
Our facilities remain subject to any state laws that relate to privacy or the reporting of security breaches that are more restrictive than the regulations issued under HIPAA and the requirements of ARRA. For example, various state laws and regulations may require us to notify affected individuals in the event of a data breach involving certain individually identifiable health or financial information.
In addition, the Federal Trade Commission issued a final rule in October 2007 requiring financial institutions and creditors, which may include ASCs and other healthcare providers, to implement written identity theft prevention programs to detect, prevent, and mitigate identity theft in connection with certain accounts. The enforcement date for this rule has been postponed until June 1, 2010.
 

12


Table of Contents

Item 1.   Business – (continued)
 
HIPAA Administrative Simplification Requirements. Pursuant to HIPAA, DHHS has adopted regulations establishing electronic data transmission standards that all healthcare providers must use when submitting or receiving certain healthcare transactions electronically. In addition, HIPAA requires that each provider use a National Provider Identifier. In January 2009, CMS published a final rule regarding updated standard code sets for certain diagnoses and procedures known as ICD-10 code sets and related changes to the formats used for certain electronic transactions. While use of the ICD-10 code sets is not mandatory until October 1, 2013, we will be modifying our payment systems and processes to prepare for the implementation. Use of the ICD-10 code sets will require significant administrative changes; however, we believe that the cost of compliance with these regulations has not had and is not expected to have a material, adverse effect on our business, financial position or results of operations.
Obligations to Buy Out Physician Partners. Under many of our agreements with physician partners, we are obligated to purchase the interests of the physicians at an amount as determined by a predefined formula, as specified in the limited partnership and operating agreements, in the event that their continued ownership of interests in the limited partnerships and limited liability companies becomes prohibited by the statutes or regulations described above. The determination of such a prohibition generally is required to be made by our counsel in concurrence with counsel of the physician partners or, if they cannot concur, by a nationally recognized law firm with expertise in healthcare law jointly selected by us and the physician partners. The interest we are required to purchase will not exceed the minimum interest required as a result of the change in the law or regulation causing such prohibition.
CONs and State Licensing. Certificate of Need, or CON, statutes and regulations control the development of ASCs in certain states. CON statutes and regulations 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. In giving approval, a designated state health planning agency must determine that a need exists for expanded or additional facilities or services. Our development of ASCs focuses on states that do not require CONs. Acquisitions of existing surgery centers usually do not require CON approval.
State licensing of ASCs 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, as well as local building and safety codes. In addition, every state imposes licensing requirements on individual physicians, and many states impose licensing requirements on 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 laws of several states in which we operate or may operate in the future do not permit business corporations to practice medicine, exercise control over physicians who practice medicine or engage in various business practices, such as fee-splitting with physicians. The physicians who perform procedures at the surgery centers are individually licensed to practice medicine. In most instances, the physicians and physician group practices are not affiliated with us other than through the physicians’ ownership in the limited partnerships and limited liability companies that own the surgery centers and through the service agreements we have with some physicians. The laws in most states regarding the corporate practice of medicine have been subjected to limited judicial and regulatory interpretation, and interpretation and enforcement of these laws vary significantly from state to state. Therefore, we cannot provide assurances that our activities, if challenged, will be found to be in compliance with these laws.
Employees
As of December 31, 2009, we and our affiliated entities employed approximately 2,780 persons, approximately 1,840 of whom were full-time employees and 940 of whom were part-time employees. Of our employees, 240 were employed at our headquarters in Nashville, Tennessee. In addition, we lease the services of approximately 885 full-time employees and 530 part-time employees from our associated physician practices. None of these employees is represented by a union. We believe our relationships with our employees to be good.
Legal Proceedings and Insurance
From time to time, we may be named a party to legal claims and proceedings in the ordinary course of business. We are not aware of any claims or proceedings against us or our limited partnerships and limited liability companies that we believe will have a material financial impact on us. Each of our surgery centers maintains separate medical malpractice insurance in amounts deemed adequate for its business. We also maintain insurance for general liability, director and officer liability and property. Certain policies are subject to deductibles.
 

13


Table of Contents

Item 1.   Business – (continued)
 
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the persons serving as our executive officers as of December 31, 2009. Our executive officers serve at the pleasure of the Board of Directors.
             
Name   Age   Experience
 
           
Christopher A. Holden
    45     Chief Executive Officer and Director since October 2007; Senior Vice President and a Division President of Triad Hospitals Inc. from May 1999 to July 2007; President – West Division of the Central Group of Columbia/HCA Healthcare Corporation from January 1998 to May 1999.
Claire M. Gulmi
    56     Executive Vice President since February 2006; Chief Financial Officer since September 1994; Director since May 2004; Senior Vice President from March 1997 to February 2006; Secretary since December 1997; Vice President from September 1994 through March 1997.
David L. Manning
    60     Executive Vice President and Chief Development Officer since February 2006; Senior Vice President of Development from April 1992 to February 2006.
Phillip A. Clendenin
    45     Senior Vice President of Corporate Services since March 2009; Chief Executive Officer of River Region Health System from July 2001 to July 2008; Chief Executive Officer of Greenview Regional Hospital from November 1997 to June 2001.
Kevin D. Eastridge
    44     Senior Vice President of Finance since July 2008; Vice President of Finance from April 1998 to July 2008; Chief Accounting Officer since July 2004; Controller from March 1997 to June 2004.
Billie A. Payne
    58     Senior Vice President of Operations since December 2007; Vice President of Operations from March 1998 to December 2007.
 

14


Table of Contents

Item 1A.   Risk Factors
 
The following factors affect our business and the industry in which we operate. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also have an adverse effect on us. If any of the matters discussed in the following risk factors were to occur, our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected.
Our business may be adversely affected by current and future economic conditions. Financial markets around the world have been experiencing extreme volatility in the prices of securities, severely diminished liquidity and credit availability, and other adverse events. While these conditions have not impaired our ability to finance our operations and our acquisition activities in 2009, we cannot assure you that there will not be further disruptions to financial markets or other adverse economic conditions that would have an adverse impact on us. Adverse economic conditions could prompt the federal government to reduce reimbursement or make other changes in the Medicare program, result in the inability or refusal of the lenders under our credit agreement to lend additional monies to us to fund our operations, cause patients at our ASCs to cancel or delay procedures, or force persons with whom we have relationships to seek bankruptcy protection or cease operations. Although we believe economic conditions will adversely impact us during 2010, we are unable to predict the likely duration or severity of the current adverse economic conditions or the severity of the effect of those conditions on our business and results of operations.
We may be unable to renew or replace our revolving credit agreement when it terminates in July 2011, and the terms of any renewed or replacement agreement could be materially different than the terms in place today. Our current revolving credit agreement expires in July 2011. At December 31, 2009, we had $276.3 million of outstanding borrowings under our revolving credit agreement. Based upon the current condition of credit markets, as well as other factors that may arise, we may not be successful in securing a renewal or replacement revolving credit agreement on terms acceptable to us, or at all, which could have a material adverse effect on our business, financial condition or results of operations. Further, in the event we are unable to secure additional credit, our future liquidity may be impacted, which could have a material adverse effect on our financial condition, results of operations or ability to execute our growth strategy through acquisitions.
We depend on payments from third-party payors, including government healthcare programs. If these payments decrease or do not increase as our costs increase, our operating margins and profitability would be adversely affected. We depend on private and governmental third-party sources of payment for the services provided to patients in our surgery centers. We derived approximately 33% of our revenues in 2009 from U.S. government healthcare programs, primarily Medicare. The amount our surgery centers receive for their services may be adversely affected by market and cost factors as well as other factors over which we have no control, including future changes to the Medicare and Medicaid payment systems and the cost containment and utilization decisions of third-party payors. In the final months of 2009, both houses of the U.S. Congress passed separate bills intended to reform the healthcare system. While neither of these bills has yet become law, such laws or similar proposals have been, and we anticipate may continue to be, a focus at the federal level. Several states are also considering healthcare reform measures. This focus on healthcare reform may increase the likelihood of significant changes affecting government healthcare programs.
Managed care plans have increased their market share in some areas in which we operate, which has resulted in substantial competition among healthcare providers for inclusion in managed care contracting and may limit the ability of healthcare providers to negotiate favorable payment rates. In addition, managed care payors may lower reimbursement rates in response to future reductions in Medicare reimbursement rates. We can give you no assurances that future changes to reimbursement rates by government healthcare programs, cost containment measures by private third-party payors, including fixed fee schedules and capitated payment arrangements, or other factors affecting payments for healthcare services will not adversely affect our future revenues, operating margins or profitability.
Our business may be adversely affected by changes to the medical practices of our physician partners or if we fail to maintain good relationships with the physician partners who use our surgery centers. Our business depends on, among other things, the efforts and success of the physician partners who perform procedures at our surgery centers and the strength of our relationship with these physicians. The medical practices of our physician partners may be negatively impacted by general economic conditions, changes in payment rates or systems by payors, actions taken by referring physicians, other providers and payors, and other factors impacting their practices. Our physician partners may perform procedures at other facilities and are not required to use our surgery centers. From time to time, we may have disputes with physicians who use or own interests in our surgery centers. Our revenues and profitability would be adversely affected if a physician or group of physicians stopped using or reduced their use of our surgery centers as a result of changes in their physician practice or a disagreement with us. In addition, if the physicians who use our surgery centers do not provide quality medical care or follow required professional guidelines at our facilities or there is damage to the reputation of a physician or group of physicians who use our surgery centers, our business and reputation could be damaged.
If we fail to acquire and develop additional surgery centers on favorable terms, our future growth and operating results could be adversely affected. Our growth strategy includes increasing our revenues and earnings by acquiring existing surgery centers and developing new surgery centers. Our efforts to execute our acquisition and development strategy may be affected by our ability to identify suitable acquisition and development opportunities and negotiate and close transactions in a timely manner and on favorable terms. The surgery centers we develop typically incur losses during the initial months of operation. We can give you
 

15


Table of Contents

Item 1A.   Risk Factors – (continued)
 
no assurances that we will be successful in acquiring and developing additional surgery centers, that the surgery centers we acquire and develop will achieve satisfactory operating results or that newly developed centers will not incur greater than anticipated operating losses.
If we are unable to increase procedure volume at our existing centers, our operating margins and profitability could be adversely affected. Our growth strategy includes increasing our revenues and earnings primarily by increasing the number of procedures performed at our surgery centers. Because we expect the amount of the payments we receive from third-party payors to remain fairly consistent, our operating margins will be adversely affected if we do not increase the procedure volume of our surgery centers and generate increased revenue to offset increases in our operating costs. We seek to increase procedure volume at our surgery centers by increasing the number of physicians performing procedures at our centers, obtaining new or more favorable managed care contracts, improving patient flow at our centers, promoting screening programs and increasing patient and physician awareness of our centers. We can give you no assurances that we will be successful at increasing procedure volumes or maintaining current revenues and operating margins at our centers.
If we are unable to manage the growth in our business, our operating results could be adversely affected. To accommodate our past and anticipated future growth, we will need to continue to implement and improve our management, operational and financial information systems and to expand, train, manage and motivate our workforce. We can give you no assurances that our personnel, systems, procedures or controls will be adequate to support our operations in the future or that the costs and management attention related to the expansion of our operations will not adversely affect our results of operations.
If we do not have sufficient capital resources to complete acquisitions and develop new surgery centers, our growth and results of operations could be adversely affected. We will need capital to acquire, develop, integrate, operate and expand surgery centers. We may finance future acquisition and development projects through debt or equity financings. To the extent that we undertake these financings, our shareholders may experience ownership dilution. To the extent we incur debt, we may have significant interest expense and may be subject to covenants in the related debt agreements that affect the conduct of our business. If we do not have sufficient capital resources, our growth could be limited and our results of operations could be adversely impacted. Our credit agreement requires that we comply with financial covenants and may not permit additional borrowing or other sources of debt financing if we are not in compliance with those covenants. We can give you no assurances that we will be able to obtain financing necessary for our acquisition and development strategy or that, if available, the financing will be available on terms acceptable to us.
If we are unable to effectively compete for physician partners, managed care contracts, patients and strategic relationships, our business would be adversely affected. The healthcare business is highly competitive. We compete with other healthcare providers, primarily hospitals and other surgery centers, in recruiting physicians to utilize our surgery centers, for patients and in contracting with managed care payors. In some of the markets in which we operate, there are shortages of physicians in certain specialties, including gastroenterology. In several of the markets in which we operate, hospitals are recruiting physicians or groups of physicians to become employed by the hospitals, including primary care physicians and physicians in certain specialties, including gastroenterology, and restricting those physicians’ ability to refer patients to physicians and facilities not affiliated with the hospital. These restrictions may impact our surgery centers and the medical practices of our physician partners. Some of our competitors may have greater resources than we do, including financial, marketing, staff and capital resources, have or may develop new technologies or services that are attractive to physicians or patients, or have established relationships with physicians and payors.
We compete with public and private companies in the development and acquisition of ASCs. Further, many physician groups develop ASCs without a corporate partner. We can give you no assurances that we will be able to compete effectively in any of these areas or that our results of operations will not be adversely impacted.
Our surgery centers may be negatively impacted by weather and other factors beyond our control. The results of operations of our surgery centers may be adversely impacted by adverse weather conditions, including hurricanes, or other factors beyond our control that cause disruption of patient scheduling, displacement of our patients, employees and physician partners, and force certain of our surgery centers to close temporarily. In certain markets, we have a large concentration of surgery centers that may be simultaneously affected by adverse weather conditions or events. Our future financial and operating results may be adversely affected by weather and other factors that disrupt the operation of our surgery centers.
If we fail to comply with applicable laws and regulations, we could suffer penalties or be required to make significant changes to our operations. We are subject to many laws and regulations at the federal, state and local government levels in the jurisdictions in which we operate. These laws and regulations require that our surgery centers and our operations meet various licensing, certification and other requirements, including those relating to:
    physician ownership of our surgery centers;
 
    our relationships with physicians and other referral sources;
 
    CON approvals and other regulations affecting the construction or acquisition of centers, capital expenditures or the addition of services;
 

16


Table of Contents

Item 1A.   Risk Factors – (continued)
 
    the adequacy of medical care, equipment, personnel, and operating policies and procedures;
 
    qualifications of medical and support personnel;
 
    maintenance and protection of records;
 
    billing for services by healthcare providers, including appropriate treatment of overpayments and credit balances;
 
    privacy and security of individually identifiable health information; and
 
    environmental protection.
If we fail to comply with applicable laws and regulations, we could suffer civil or criminal penalties, including the loss of our licenses to operate and our ability to participate in Medicare, Medicaid and other government sponsored and third-party healthcare programs. CMS has enacted additional conditions for coverage that ASCs must meet to enroll and remain enrolled in Medicare, which were effective May 18, 2009. In addition, a number of states have adopted or are considering legislation or regulations imposing additional restrictions on or otherwise affecting ASCs, including expansion of CON requirements, restrictions on ownership, taxes on gross receipts, data reporting requirements and restrictions on the enforceability of covenants not to compete affecting physicians. Different interpretations or enforcement of existing or new laws and regulations could subject our current practices to allegations of impropriety or illegality, or require us to make changes in our operations, facilities, equipment, personnel, services, capital expenditure programs or operating expenses. We can give you no assurances that current or future legislative initiatives, government regulation or judicial or regulatory interpretations thereof will not have a material adverse effect on us or reduce the demand for our services.
If a federal or state agency asserts a different position or enacts new laws or regulations regarding illegal remuneration or other forms of fraud and abuse, we could suffer penalties or be required to make significant changes to our operations. The federal anti-kickback statute prohibits healthcare providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration with the intent of generating referrals or orders for services or items covered by a federal healthcare program. The anti-kickback statute is very broad in scope and many of its provisions have not been uniformly or definitively interpreted by case law or regulations. Violations of the anti-kickback statute may result in substantial civil or criminal penalties and exclusion from participation in the Medicare and Medicaid programs. Exclusion from these programs would result in significant reductions in revenue and would have a material adverse effect on our business.
DHHS has published regulations that outline categories of activities that are deemed protected from prosecution under the anti-kickback statute. Three of the safe harbors apply to business arrangements similar to those used in connection with our surgery centers: the “surgery centers,” “investment interest” and “personal services and management contracts” safe harbors. The structure of the limited partnerships and limited liability companies operating our surgery centers, as well as our various business arrangements involving physician group practices, does not satisfy all of the requirements of any safe harbor. Nevertheless, a business arrangement that does not substantially comply with a safe harbor is not necessarily illegal under the anti-kickback statute. In addition, many of the states in which we operate also have adopted laws, similar to the anti-kickback statute, that prohibit payments to physicians in exchange for referrals, some of which apply regardless of the source of payment for care. These statutes typically impose criminal and civil penalties as well as loss of license.
In addition to the anti-kickback statute, HIPAA provides for criminal penalties for healthcare fraud offenses that apply to all health benefit programs, including the payment of inducements to Medicare and Medicaid beneficiaries in order to influence those beneficiaries to order or receive services from a particular provider or practitioner. Federal enforcement officials have numerous enforcement mechanisms to combat fraud and abuse, including the Medicare Integrity Program and an incentive program under which individuals can receive up to $1,000 for providing information on Medicare fraud and abuse that leads to the recovery of at least $100 of Medicare funds. In addition, DEFRA creates an incentive for states to enact false claims laws that are comparable to the federal False Claims Act. Federal enforcement officials have the ability to exclude from Medicare and Medicaid any investors, officers and managing employees associated with business entities that have committed healthcare fraud.
Providers in the healthcare industry have been the subject of federal and state investigations, and we may become subject to investigations in the future. Both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies, as well as their executives and managers. These investigations relate to a wide variety of topics, including referral and billing practices. Further, the federal False Claims Act permits private parties to bring “qui tam” whistleblower lawsuits against companies. Some states have adopted similar state whistleblower and false claims provisions.
From time to time, the OIG and the Department of Justice have established national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Some of our activities could become the subject of governmental investigations or inquiries. For example, we have significant Medicare billings and we have joint venture arrangements involving physician investors. In addition, our executives and managers, some of whom have worked at other healthcare companies that are or may become the subject of federal and state investigations and private litigation, could be included in governmental investigations or named as defendants in private litigation. A governmental investigation of us, our executives or our managers could result in significant expense to us, as well as adverse publicity.
 

17


Table of Contents

Item 1A.   Risk Factors – (continued)
 
If regulations or regulatory interpretations change, we may be obligated to buy out interests of physicians who are minority owners of the surgery centers. Substantially all of our limited partnership and operating agreements provide that if certain regulations or regulatory interpretations change, we will be obligated to purchase some or all of the noncontrolling interests of our physician partners. The regulatory changes that could trigger such obligations include changes that:
    make the referral of Medicare and other patients to our surgery centers by physicians affiliated with us illegal;
 
    create the substantial likelihood that cash distributions from the limited partnerships or limited liability companies to the affiliated physicians will be illegal; or
 
    cause the ownership by the physicians of interests in the limited partnerships or limited liability companies to be illegal.
The cost of repurchasing these noncontrolling interests would be substantial if a triggering event were to result in simultaneous purchase obligations at a substantial number or at all of our surgery centers. The purchase price to be paid in such event would be determined by a predefined formula, as specified in each of the limited partnership and operating agreements, which also provide for the payment terms, generally over four years. There can be no assurance, however, that our existing capital resources would be sufficient for us to meet the obligations, if they arise, to purchase these noncontrolling interests held by physicians. The determination of whether a triggering event has occurred generally would be made by the concurrence of our legal counsel and counsel for the physician partners or, in the absence of such concurrence, by a nationally recognized law firm having an expertise in healthcare law jointly selected by both parties. Such determinations therefore would not be within our control. The triggering of these obligations could have a material adverse effect on our financial condition and results of operations. While we believe physician ownership of ASCs as structured within our limited partnerships and limited liability companies is in compliance with applicable law, we can give no assurances that legislative or regulatory changes would not have an adverse impact on us. From time to time, the issue of physician ownership in ASCs is considered by some state legislatures and federal and state regulatory agencies.
We are liable for the debts and other obligations of the limited partnerships that own and operate certain of our surgery centers. In the limited partnerships in which one of our affiliates is the general partner, our affiliate is liable for 100% of the debts and other obligations of the limited partnership; however, the physician partners are generally required to guarantee their pro rata share of any indebtedness or lease agreements to which the limited partnership is a party in proportion to their ownership interest in the limited partnership. We also have primary liability for the bank debt that may be incurred for the benefit of the limited liability companies, and in turn, lend funds to these limited liability companies, although the physician members also guarantee this debt. There can be no assurance that a third-party lender or lessor would seek performance of the guarantees rather than seek repayment from us of any obligation of the limited partnership or limited liability company if there is a default, or that the physician partners or members would have sufficient assets to satisfy their guarantee obligations.
We may be subject to liabilities for claims brought against our facilities. We are subject to litigation related to our business practices, including claims and legal actions by patients and others in the ordinary course of business alleging malpractice, product liability or other legal theories. See “Business – Legal Proceedings.” These actions could involve large claims and significant defense costs. If payments for claims exceed our insurance coverage or are not covered by insurance or our insurers fails to meet their obligations, our results of operations and financial position could be adversely affected.
We have a legal responsibility to the minority owners of the entities through which we own our surgery centers, which may conflict with our interests and prevent us from acting solely in our own best interests. As the owner of majority interests in the limited partnerships and limited liability companies that own our surgery centers, we owe a fiduciary duty to the noncontrolling interest holders in these entities and may encounter conflicts between our interests and that of the minority holders. In these cases, our representatives on the governing board of each joint venture are obligated to exercise reasonable, good faith judgment to resolve the conflicts and may not be free to act solely in our own best interests. In our role as manager of the limited partnership or limited liability company, we generally exercise our discretion in managing the business of the surgery center. Disputes may arise between us and the physician partners regarding a particular business decision or the interpretation of the provisions of the limited partnership agreement or limited liability company operating agreement. The agreements provide for arbitration as a dispute resolution process in some circumstances. We cannot assure you that any dispute will be resolved or that any dispute resolution will be on terms satisfactory to us.
We may write-off intangible assets, such as goodwill. As a result of purchase accounting for our various acquisition transactions, our balance sheet at December 31, 2009 contained an intangible asset designated as goodwill totaling approximately $815.3 million. Additional purchases of interests in surgery centers that result in the recognition of additional intangible assets would cause an increase in these intangible assets. On an ongoing basis, we evaluate whether facts and circumstances indicate any impairment of the value of intangible assets. As circumstances change, we cannot assure you that the value of these intangible assets will be realized by us. If we determine that a significant impairment has occurred, we will be required to write-off the impaired portion of intangible assets, which could have a material adverse effect on our results of operations in the period in which the write-off occurs.
The IRS may challenge tax deductions for certain acquired goodwill. For federal income tax purposes, goodwill and other intangibles acquired as part of the purchase of a business after August 10, 1993 are deductible over a 15-year period. We have
 

18


Table of Contents

Item 1A.   Risk Factors – (continued)
 
been claiming and continue to take tax deductions for goodwill obtained in our acquisition of assets of and ownership interests in ASCs. In 1997, the IRS published proposed regulations that applied “anti-churning” rules to call into question the deductibility of goodwill purchased in transactions structured similarly to some of our acquisitions. The anti-churning rules are designed to prevent taxpayers from converting existing goodwill for which a deduction would not have been allowable prior to 1993 into an asset that could be deducted over 15 years, such as by selling a business some of the value of which arose prior to 1993 to a related party. On January 25, 2000, the IRS issued final regulations that continue to call into question the deductibility of goodwill purchased in transactions structured similarly to some of our acquisitions. This uncertainty applies only to goodwill that arose in part prior to 1993, so the tax deductions we have taken with respect to interests acquired in surgery centers that were formed after August 10, 1993 are not affected. In response to these final regulations, in 2000 we changed our methods of acquiring interests in ASCs so as to comply with guidance found in the final regulations. There is a risk that the IRS could challenge tax deductions for pre-1993 goodwill in acquisitions we completed prior to changing our approach. Loss of these tax deductions would increase the amount of our tax payments and could subject us to interest and penalties.
Item 1B.   Unresolved Staff Comments
Not applicable.
Item 2.   Properties
Our principal executive offices are located in Nashville, Tennessee and contain an aggregate of approximately 70,000 square feet of office space, which we lease from a third-party pursuant to an agreement that expires in 2014. We have the option to renew our lease for two additional terms of five years following the expiration of the current term. We also lease office space for our regional offices in Coral Gables, Florida, Tempe, Arizona, Dallas, Texas and Wayne, Pennsylvania. Our affiliated limited partnerships and limited liability companies generally lease space for their surgery centers. Of the centers in operation at December 31, 2009, 201 leased space ranging from 1,000 to 24,000 square feet, with expected remaining lease terms ranging from one to twenty-one years. One center in operation at December 31, 2009 is located in a building owned by our general partnership that operates the surgery center and one of our limited liability companies owns a building in which it previously operated the surgery center.
Item 3.   Legal Proceedings
Not applicable.
Item 4.   Submission of Matters to a Vote of Security Holders
Not applicable.
 

19


Table of Contents

 
PART II
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock trades under the symbol “AMSG” on the Nasdaq Global Select Market. The following table sets forth the high and low sales prices per share for the common stock for each of the quarters in 2008 and 2009, as reported on the Nasdaq Global Select Market:
                                 
     
    1st   2nd   3rd   4th
    Quarter   Quarter   Quarter   Quarter
     
2008:
                               
High
  $ 29.76     $ 27.79     $ 28.93     $ 26.05  
Low
  $ 22.72     $ 21.96     $ 23.96     $ 17.91  
 
                               
2009:
                               
High
  $ 24.03     $ 21.71     $ 22.65     $ 23.61  
Low
  $ 12.23     $ 15.18     $ 18.95     $ 20.25  
At February 25, 2010, there were approximately 9,400 holders of our common stock, including 210 shareholders of record. We have never declared or paid a cash dividend on our common stock. We intend to retain our earnings to finance the growth and development of our business and do not expect to declare or pay any cash dividends in the foreseeable future. The declaration of dividends is within the discretion of our Board of Directors. Presently, the declaration of dividends is prohibited by a covenant in our credit agreement.
 

20


Table of Contents

Item 6.   Selected Financial Data
 
                                         
    Year Ended December 31,  
    2009     2008     2007     2006     2005  
    (Dollars in thousands, except per share data)  
Consolidated Statement of Earnings Data:
                                       
Revenues
  $ 668,752     $ 600,107     $ 517,707     $ 439,435     $ 361,455  
Operating expenses
    443,387       389,549       336,573       285,390       229,438  
     
Operating income
    225,365       210,558       181,134       154,045       132,017  
Interest expense
    7,789       9,938       9,569       7,387       3,897  
     
Earnings from continuing operations before income taxes
    217,576       200,620       171,565       146,658       128,120  
Income tax expense
    35,687       33,101       27,065       22,941       21,853  
     
Net earnings from continuing operations
    181,889       167,519       144,500       123,717       106,267  
Discontinued operations:
                                       
Earnings from operations of discontinued interests in surgery centers, net of income tax expense
    163       180       4,091       6,671       6,780  
(Loss) gain on disposal of discontinued interests in surgery centers, net of income tax (benefit) expense
    (702 )     (1,773 )     1,712       (463 )     (1,158 )
     
Net (loss) gain earnings from discontinued operations
    (539 )     (1,593 )     5,803       6,208       5,622  
     
Net earnings
    181,350       165,926       150,303       129,925       111,889  
Less net earnings attributable to noncontrolling interests
    129,202       118,880       106,128       92,186       76,738  
     
Net earnings attributable to AmSurg Corp. common shareholders
  $ 52,148     $ 47,046     $ 44,175     $ 37,739     $ 35,151  
     
Amounts attributable to AmSurg Corp. common shareholders:
                                       
Earnings from continuing operations, net of tax
  $ 52,788     $ 49,541     $ 41,785     $ 35,207     $ 33,071  
Discontinued operations, net of tax
    (640 )     (2,495 )     2,390       2,532       2,080  
     
Net earnings attributable to AmSurg Corp. common shareholders
  $ 52,148     $ 47,046     $ 44,175     $ 37,739     $ 35,151  
     
 
                                       
Basic earnings per common share:
                                       
Net earnings from continuing operations attributable to AmSurg Corp. common shareholders
  $ 1.73     $ 1.57     $ 1.36     $ 1.18     $ 1.12  
Net earnings attributable to AmSurg Corp. common shareholders
  $ 1.71     $ 1.49     $ 1.44     $ 1.27     $ 1.19  
Diluted earnings per common share:
                                       
Net earnings from continuing operations attributable to AmSurg Corp. common shareholders
  $ 1.71     $ 1.55     $ 1.34     $ 1.16     $ 1.10  
Net earnings attributable to AmSurg Corp. common shareholders
  $ 1.69     $ 1.47     $ 1.42     $ 1.24     $ 1.17  
Weighted average number of shares and share equivalents outstanding (in thousands):
                                       
Basic
    30,576       31,503       30,619       29,822       29,573  
Diluted
    30,862       31,963       31,102       30,398       30,147  
Operating and Other Financial Data:
                                       
Continuing centers at end of year
    202       188       168       144       133  
Procedures performed during year
    1,238,339       1,108,585       952,370       803,603       683,712  
Same-center revenue increase
    0 %     3 %     4 %     5 %     3 %
Cash flows provided by operating activities
  $ 232,584     $ 209,696     $ 182,916     $ 162,689     $ 139,060  
Cash flows used in investing activities
    (112,792 )     (131,780 )     (179,368 )     (71,794 )     (83,308 )
Cash flows used in financing activities
    (121,963 )     (76,321 )     (6,322 )     (91,308 )     (50,248 )
 
                                       
    At December 31,  
    2009     2008     2007     2006     2005  
    (In thousands)  
Consolidated Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 29,377     $ 31,548     $ 29,953     $ 20,083     $ 20,496  
Working capital
    80,493       85,497       83,792       66,591       61,072  
Total assets
    1,058,757       905,879       781,634       590,032       527,816  
Long-term debt and other long-term liabilities
    311,077       288,251       232,223       127,821       125,712  
Non-redeemable and redeemable noncontrolling interests
    128,618   (1)   66,079       62,006       52,341       47,271  
AmSurg Corp. shareholders’ equity
    505,116       460,429       411,225       343,108       294,618  
(1)   See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies.”
 

21


Table of Contents

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Statements
This report contains certain forward-looking statements (all statements other than statements with respect to historical fact) within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forward-looking statements involve known and unknown risks and uncertainties including, without limitation, those described in Item 1A. Risk Factors, some of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate. Therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. Actual results could differ materially and adversely from those contemplated by any forward-looking statement. In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements in this discussion to reflect events and circumstances occurring after the date hereof or to reflect unanticipated events. Forward-looking statements and our liquidity, financial condition and results of operations may be affected by the risks set forth in Item 1A. Risk Factors or by other unknown risks and uncertainties.
Overview
We acquire, develop and operate ambulatory surgery centers, or ASCs, in partnership with physicians. As of December 31, 2009, we owned a majority interest (51% or greater) in 202 ASCs. The following table presents the number of procedures performed at our continuing centers and changes in the number of ASCs in operation, under development and under letter of intent for the years ended December 31, 2009, 2008 and 2007. An ASC is deemed to be under development when a limited partnership or limited liability company has been formed with the physician partners to develop the ASC.
                         
    2009     2008     2007  
 
                       
Procedures
    1,238,339       1,108,585       952,370  
Continuing centers in operation, end of year
    202       188       168  
Average number of continuing centers in operation, during year
    193       172       155  
New centers added during year
    14       20       24  
Centers disposed during year
    (1 )     (6 )     (4 )
Centers under development, end of year
    1       3       2  
Centers held for sale, end of year
    (1 )     (1 )      
Centers under letter of intent, end of year
    1       5       4  
In addition to the centers under letter of intent, in December 2009, we entered into an agreement to purchase a controlling interest in a center, contingent upon satisfaction of certain closing conditions. We expect to complete this transaction in March 2010.
Of the continuing surgery centers in operation at December 31, 2009, 142 centers performed gastrointestinal endoscopy procedures, 36 centers performed ophthalmology surgery procedures, 17 centers performed procedures in multiple specialties and seven centers performed orthopaedic procedures. We intend to expand primarily through the acquisition and development of additional ASCs in targeted surgical specialties and through future same-center growth. Our growth targets for 2010 include the acquisition or development of 13 to 16 surgery centers. Similar to our results in 2009, we expect our same-center growth to be flat in 2010. Our expectation is primarily based on reductions in Medicare reimbursement rates for 2010, as well as the continuing poor economic outlook and high unemployment rate, which we believe will result in limited incremental patient visits and thus surgical procedures.
While we generally own 51% of the entities that own the surgery centers, our consolidated statements of earnings include 100% of the results of operations of the entities, reduced by the noncontrolling partners’ share of the net earnings or loss of the surgery center entities. The noncontrolling ownership interest in each limited partnership or limited liability company is generally held directly or indirectly by physicians who perform procedures at the center.
Sources of Revenues
Substantially all of our revenues are derived from facility fees charged for surgical procedures performed in our 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 by the physicians. In limited instances, our revenues include charges for anesthesia services delivered by medical professionals employed or contracted by our centers. Our revenues are recorded net of estimated contractual adjustments from third-party medical service payors.
ASCs depend upon third-party reimbursement programs, including governmental and private insurance programs, to pay for services rendered to patients. The amount of payment a surgery center receives for its services may be adversely affected by market and cost factors as well as other factors over which we have no control, including changes to the Medicare and Medicaid
 

22


Table of Contents

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
 
payment systems and the cost containment and utilization decisions of third-party payors. We derived approximately 33%, 34% and 34% of our revenues in the years ended December 31, 2009, 2008 and 2007, respectively, from governmental healthcare programs, primarily Medicare, and the remainder from a wide mix of commercial payors and patient co-pays and deductibles. The Medicare program currently pays ASCs in accordance with predetermined fee schedules.
Effective January 1, 2008, CMS revised the payment system for services provided in ASCs. The key points of the revised payment system as it relates to us are:
    ASCs are paid based upon a percentage of the payments to hospital outpatient departments pursuant to the hospital outpatient prospective payment system;
 
    a scheduled phase-in of the revised rates over four years from 2008 through 2011; and
 
    planned annual increases in the ASC rates beginning in 2010 based on the consumer price index, or CPI.
The revised payment system has resulted in a significant reduction in the reimbursement rates for gastroenterology procedures, which comprise approximately 79% of the procedures performed by our surgery centers, and certain ophthalmology and pain procedures. We estimate that our net earnings per share were negatively impacted by the revised payment system by $0.05 in 2008 and an additional $0.07 in 2009. In November 2009, CMS announced final reimbursement rates for 2010 under the revised payment system, which included a 1.2% CPI increase. Based upon our current procedure mix, payor mix and volume, we believe the 2010 payment rates will reduce our net earnings per diluted share in 2010 by approximately $0.06 as compared to 2009 and that our diluted earnings per share in 2011 will be reduced by an incremental $0.06 as compared to the prior year as a result of the scheduled reduction in rates. Any increase in reimbursement rates as a result of CPI adjustments in 2011 will partially offset the scheduled payment reductions that year. Beginning in 2012, the scheduled phase-in of the revised rates will be completed, and reimbursement rates for our ASCs should be increased annually based upon increases in the CPI. There can be no assurance, however, that CMS will not further revise the payment system, or that any annual CPI increases will be material.
CMS is increasing its administrative audit efforts through the nationwide expansion of the recovery audit contractor, or RAC, program. RACs are private contractors that conduct post-payment reviews of providers and suppliers that bill Medicare to detect and correct improper payments for services. We could incur costs associated with appealing any alleged overpayments and be required to repay any alleged overpayments identified by these or other administrative audits.
We expect value-based purchasing programs, including programs that condition reimbursement on patient outcome measures, to become more common and to involve a higher percentage of reimbursement amounts. Effective January 15, 2009, CMS promulgated three national coverage determinations that prevent Medicare from paying for certain serious, preventable medical errors performed in any healthcare facility, such as surgery performed on the wrong patient or wrong site. Several commercial payors also do not reimburse providers for certain preventable adverse events. In addition, a 2006 federal law authorizes CMS to require ASCs to submit data on certain quality measures. ASCs that fail to submit the required data would face a two percentage point reduction in their annual reimbursement rate increase. CMS has not yet implemented the quality measure reporting requirement but has announced that it expects to do so in a future rulemaking.
In addition to payment from governmental programs, ASCs derive a significant portion of their revenues from private healthcare insurance plans. These plans include both standard indemnity insurance programs as well as managed care programs, such as PPOs and HMOs.
Critical Accounting Policies
Our accounting policies are described in note 1 of our consolidated financial statements. We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures 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. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition and cash flows.
Principles of Consolidation. The consolidated financial statements include the accounts of AmSurg and our subsidiaries and the majority owned limited partnerships and limited liability companies in which our wholly owned subsidiaries are the general partner or majority member. Consolidation of such limited partnerships and limited liability companies is necessary, as our wholly owned subsidiaries have 51% or more of the financial interest of each entity, are the general partner or majority member with all the duties, rights and responsibilities thereof, are responsible for the day-to-day management of the limited partnership or limited liability company and have control of the entity. The responsibilities of our noncontrolling partners are to supervise the delivery of medical services, with their rights being restricted to those that protect their financial interests, such as approval of the acquisition of significant assets or the incurrence of debt that they are required to guarantee on a pro rata basis based upon their respective ownership interests. Intercompany profits, transactions and balances have been eliminated.
 

23


Table of Contents

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
 
We clearly identify and present ownership interests in subsidiaries held by noncontrolling parties in our consolidated financial statements within the equity section but separate from our equity. However, in instances in which certain redemption features that are not solely within our control are present, classification of noncontrolling interests outside of permanent equity is required. The amounts of consolidated net income attributable to us and to the noncontrolling interests are clearly identified and presented on the face of the consolidated statements of earnings; changes in ownership interests are accounted for as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary is measured at fair value. Lastly, the cash flow impact of certain transactions with noncontrolling interests are classified within financing activities.
Upon the occurrence of various fundamental regulatory changes, we would be obligated under the terms of certain of our partnership and operating agreements to purchase the noncontrolling interests related to substantially all of our partnerships. While we believe that the likelihood of a change in current law that would trigger such purchases was remote as of December 31, 2009, and the occurrence of such regulatory changes is outside of our control. As a result, these noncontrolling interests that are subject to this redemption feature are not included as part of our equity and are classified as noncontrolling interests – redeemable on our consolidated balance sheets.
Center profits and losses are allocated to our partners in proportion to their ownership percentages and reflected in the aggregate as net earnings attributable to noncontrolling interests. The partners of our center partnerships typically are organized as general partnerships, limited partnerships or limited liability companies that are not subject to federal income tax. Each partner shares in the pre-tax earnings of the center in which it is a partner. Accordingly, the earnings attributable to noncontrolling interests in each of our partnerships are generally determined on a pre-tax basis. Total net earnings attributable to noncontrolling interests are presented after net earnings. However, we consider the impact of the net earnings attributable to noncontrolling interests on earnings before income taxes in order to determine the amount of pre-tax earnings on which we must determine our tax expense. In addition, distributions from the partnerships are made to both our wholly owned subsidiaries and the partners on a pre-tax basis.
We operate in one reportable business segment, the ownership and operation of ASCs.
Revenue Recognition. Center revenues consist of billing for the use of the centers’ facilities, or facility fees, directly to the patient or third-party payor, and in limited instances, billing for anesthesia services. Such revenues are recognized when the related surgical procedures are performed. Revenues exclude any amounts billed for physicians’ surgical services, which are billed separately by the physicians to the patient or third-party payor.
Allowance for Contractual Adjustments and Bad Debt Expense. Our revenues are recorded net of estimated contractual adjustments from third-party medical service payors, which we estimate based on historical trends of the surgery centers’ cash collections and contractual write-offs, accounts receivable agings, established fee schedules, contracts with payors and procedure statistics. In addition, we must estimate allowances for bad debt expense using similar information and analysis. These estimates are recorded and monitored monthly for each of our surgery centers as additional revenue is recognized. Our ability to accurately estimate contractual adjustments is dependent upon and supported by the fact that our surgery centers perform and bill for limited types of procedures, that the range of reimbursement for those procedures within each surgery center specialty is very narrow and that payments are typically received within 15 to 45 days of billing. In addition, our surgery centers are not required to file cost reports, and therefore, we have no risk of unsettled amounts from governmental third-party payors. These estimates are not, however, established from billing system-generated contractual adjustments based on fee schedules for the patient’s insurance plan for each patient encounter. While we believe that our allowances for contractual adjustments and bad debt expense are adequate, if the actual contractual adjustments and write-offs are in excess of our estimates, our results of operations may be overstated. During the years ended December 31, 2009, 2008 and 2007, we had no significant adjustments to our allowances for contractual adjustments and bad debt expense related to prior periods. At December 31, 2009 and 2008, net accounts receivable reflected allowances for contractual adjustments of $100.8 million and $95.1 million, respectively, and allowances for bad debt expense of $12.4 million and $11.8 million, respectively. The increase in our contractual allowance and allowances for bad debt expense is primarily related to allowances established for new centers acquired during 2009. At December 31, 2009 and 2008, we had 32 and 38 days outstanding, respectively, reflected in our gross accounts receivable.
Purchase Price Allocation. We allocate the respective purchase price of our acquisitions by first determining the fair value of net tangible and identifiable intangible assets acquired. Secondly, the excess amount of purchase price is allocated to unidentifiable intangible assets (goodwill). The fair value of goodwill attributable to noncontrolling interests in centers acquired subsequent to December 31, 2008, is also reflected in the allocation and is based on significant inputs that are not observable in the market. Key inputs used to determine the fair value include financial multiples used in the purchase of noncontrolling interests in centers. Such multiples, based on earnings, are used as a benchmark for the discount to be applied for the lack of control or marketability. A significant portion of each surgery center’s purchase price historically has been allocated to goodwill due to the nature of the businesses acquired, the pricing and structure of our acquisitions and the absence of other factors indicating any significant value that could be attributable to separately identifiable intangible assets.
Goodwill. We evaluate goodwill for impairment at least on an annual basis. Impairment of carrying value will also be evaluated more frequently if certain indicators are encountered. Goodwill is required to be tested at the reporting unit level, defined as an
 

24


Table of Contents

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
 
operating segment or one level below an operating segment (referred to as a component), with the fair value of the reporting unit being compared to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired. We have determined that we have one operating, as well as one reportable, segment. For impairment testing purposes, our centers each qualify as components of that operating segment. Because they have similar economic characteristics, they are aggregated and deemed a single reporting unit. We completed our annual impairment test as required as of December 31, 2009, and have determined that it is not necessary to recognize impairment in our goodwill.
Results of Operations
Our revenues are directly related to the number of procedures performed at our surgery centers. Our overall growth in procedure volume is impacted directly by the increase in the number of surgery centers in operation and the growth in procedure volume at existing centers. We increase our number of surgery centers through both acquisitions and developments. Procedure growth at any existing center may result from additional contracts entered into with third-party payors, increased market share of our physician partners, additional physicians utilizing the center and/or scheduling and operating efficiencies gained at the surgery center. A significant measurement of how much our revenues grow from year to year for existing centers is our same-center revenue percentage. We define our same-center group each year as those centers that contain full year-to-date operations in both comparable reporting periods, including the expansion of the number of operating centers associated with a limited partnership or limited liability company. Our 2009 same-center group, comprised of 173 centers, had revenue growth of 0%, which was negatively impacted by 1% due to the revised payment system by CMS. Our same-center group in 2010 will be comprised of 192 centers, which constitutes approximately 95% of our total number of centers. We expect our same-center revenue growth to be flat in 2010. We expect flat same-center revenue growth for 2010 due to reductions in Medicare reimbursement rates for 2010, as well as the declining growth we experienced in 2009 and the continuing poor economic outlook and high unemployment rate in 2010, which we believe will continue to limit the incremental patient visits and thus surgical procedures.
Expenses directly and indirectly related to procedures performed at our surgery centers include clinical and administrative salaries and benefits, supply cost and other operating expenses such as linen cost, repair and maintenance of equipment, billing fees and bad debt expense. The majority of our corporate salary and benefits cost is associated directly with the number of centers we own and manage and tends to grow in proportion to the growth of our centers in operation. Our centers and corporate offices also incur costs that are more fixed in nature, such as lease expense, legal fees, property taxes, utilities and depreciation and amortization.
Beginning in 2009, we adopted updates to Financial Accounting Standards Board, or FASB, Accounting Standards Codification Topic 810 Consolidations, or ASC 810. While the adoption of certain updates to ASC 810 did not have an impact on our net earnings or net earnings per diluted share, the presentation of our financial statements has been changed. Net earnings attributable to noncontrolling interests, previously referred to as minority interest, is now reported after net earnings. Surgery center profits are allocated to our noncontrolling partners in proportion to their individual ownership percentages and reflected in the aggregate as total net earnings attributable to noncontrolling interests. The noncontrolling partners of our center limited partnerships and limited liability companies typically are organized as general partnerships, limited partnerships or limited liability companies that are not subject to federal income tax. Each noncontrolling partner shares in the pre-tax earnings of the center of which it is a partner. Accordingly, net earnings attributable to the noncontrolling interests in each of our center limited partnerships and limited liability companies are generally determined on a pre-tax basis.
The most significant impact of this financial statement presentation is on the determination of pre-tax earnings, which is presented before net earnings attributable to noncontrolling interests has been subtracted. Accordingly, the effective tax rate on pre-tax earnings as presented has been reduced to approximately 16%. However, the effective tax rate based on pre-tax earnings attributable to AmSurg Corp. common shareholders, on an annual basis, will remain near the historical percentage of 39.6%. We file a consolidated federal income tax return and numerous state income tax returns with varying tax rates. Our income tax expense reflects the blending of these rates.
Net earnings from continuing operations attributable to AmSurg Corp. common shareholders is disclosed on the consolidated statements of earnings.
Our interest expense results primarily from our borrowings used to fund acquisition and development activity, as well as interest incurred on capital leases. Our current revolving credit agreement matures in July 2011. There can be no assurance that we will be able to refinance our existing indebtedness. In the event we refinance or extend the term of our existing indebtedness, we expect that the terms of any new or extended revolving credit agreement will result in a significant increase in our interest expense for periods following the date of such refinancing or extension. See “– Liquidity and Captial Resources.”
 

25


Table of Contents

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
 
The following table shows certain statement of earnings items expressed as a percentage of revenues for the years ended December 31, 2009, 2008 and 2007:
                         
    2009     2008     2007  
     
 
                       
Revenues
    100.0 %     100.0 %     100.0 %
 
                       
Operating expenses:
                       
Salaries and benefits
    29.9       28.9       29.4  
Supply cost
    12.4       11.8       11.5  
Other operating expenses
    20.6       20.8       20.5  
Depreciation and amortization
    3.4       3.4       3.6  
     
 
                       
Total operating expenses
    66.3       64.9       65.0  
     
 
                       
Operating income
    33.7       35.1       35.0  
Interest expense
    1.2       1.7       1.9  
     
 
                       
Earnings from continuing operations before income taxes
    32.5       33.4       33.1  
 
                       
Income tax expense
    5.3       5.5       5.2  
     
 
                       
Net earnings from continuing operations, net of income tax expense
    27.2       27.9       27.9  
   
Discontinued operations:
                       
Earnings from operations of discontinued interests in surgery centers, net of income tax expense
                0.8  
(Loss) gain on disposal of discontinued interests in surgery centers, net of income tax expense (benefit)
    (0.1 )     (0.3 )     0.3  
     
 
                       
Net (loss) gain from discontinued operations
    (0.1 )     (0.3 )     1.1  
     
 
                       
Net earnings
    27.1       27.6       29.0  
 
                       
Less net earnings attributable to noncontrolling interests:
                       
Net earnings from continuing operations
    19.3       19.6       19.8  
Net earnings from discontinued operations
          0.2       0.7  
     
 
                       
Total net earnings attributable to noncontrolling interests
    19.3       19.8       20.5  
     
 
                       
Net earnings attributable to AmSurg Corp. common shareholders
    7.8       7.8       8.5  
     
 
                       
Amounts attributable to AmSurg Corp. common shareholders:
                       
Earnings from continuing operations, net of tax
    7.9       8.2       8.1  
Discontinued operations, net of tax
    (0.1 )     (0.4 )     0.4  
     
 
                       
Net earnings attributable to AmSurg Corp. common shareholders
    7.8       7.8       8.5  
     
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Revenues increased $68.6 million, or 11%, to $668.8 million in 2009 from $600.1 million in 2008. The number of procedures performed in our ASCs increased by 129,754, or 12%, to 1,238,339 in 2009 from 1,108,585 in 2008. The additional revenues resulted primarily from:
    centers acquired or opened in 2008, which contributed $59.7 million of additional revenues due to having a full period of operations in 2009; and
 
    centers acquired and opened in 2009, which generated $8.6 million in revenues.
While our same-center procedure growth was approximately 1% in 2009, due to the revised payment system implemented by CMS, poor economic conditions and high unemployment, our same-center revenue growth was flat. Staff at newly acquired and developed centers, as well as the additional staffing required at certain existing centers, resulted in a 13% increase in salaries and benefits at our surgery centers in 2009. We experienced a 32% increase in salaries and benefits at our corporate offices during 2009 over 2008. The increase in corporate office salaries and benefits was primarily due to higher bonus expense incurred during
 

26


Table of Contents

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
 
the 2009 period, year over year salary increases, investment gains associated with our supplemental retirement plan, which are allocated to salaries and benefits because the gains are attributable to the participants’ self-directed investments, and additional employees, primarily in our information technology area. Salaries and benefits increased in total by 16% to $200.3 million in 2009 from $173.4 million in 2008. Salaries and benefits as a percentage of revenues increased in 2009 compared to 2008 primarily due to the impact of flat revenue growth within our same center group against the increase in corporate salaries and benefits in 2009, as described above.
Supply cost was $82.6 million in 2009, an increase of $12.0 million, or 17%, over supply cost in 2008. This increase was primarily the result of additional procedure volume. Our average supply cost per procedure in 2009 increased by approximately $3. This increase is related to a combination of higher utilization of disposable supplies at our gastroenterology centers, greater use of premium cataract lenses at our ophthalmology centers and a greater percentage of non-gastroenterology procedures performed, which had a higher weighted average cost.
Other operating expenses increased $12.9 million, or 10%, to $137.6 million in 2009 from $124.8 million in 2008. The additional expense in the 2009 period resulted primarily from:
    centers acquired or opened during 2008, which resulted in an increase of $10.4 million in other operating expenses;
 
    centers acquired or opened during 2009, which resulted in an increase of $2.2 million in other operating expenses; and
 
    an increase of $2.1 million in other operating expenses at our 2009 same-center group resulting primarily from general inflationary cost increases and additional procedure volume.
Other operating expenses at our corporate offices decreased during 2009 from 2008 by approximately $1.9 million primarily due to changes in the gains and losses of the Company’s supplemental employee retirement plan investments, which offset the corresponding increases in salary cost.
Depreciation and amortization expense increased $2.1 million, or 10%, in 2009 from 2008, primarily as a result of centers acquired since 2008 and newly developed surgery centers in operation, which have an initially higher level of depreciation expense due to their construction costs.
We anticipate further increases in operating expenses in 2010, primarily due to additional acquired centers and an additional start-up center 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. This typically continues until the case load at the center grows to a more normal operating level, which generally is expected to occur within 12 months after the center opens. At December 31, 2009, we had one center under development and two centers that had been open for less than one year.
Although our average debt outstanding was approximately 28% higher in 2009 over 2008, interest expense decreased $2.1 million in 2009, or 22%, from 2008, due to a reduced average interest rate in 2009 on our variable interest debt. See “– Liquidity and Capital Resources.”
We recognized income tax expense from continuing operations of $35.7 million in 2009 compared to $33.1 million in 2008. Our effective tax rate in 2009 was 16.4%, of earnings from continuing operations before income taxes. This differs from the federal statutory income tax rate of 35.0% primarily due to the exclusion of the noncontrolling interests share of pre-tax earnings and the impact of state income taxes. Because we deduct goodwill amortization for tax purposes only, approximately 40% of our income tax expense is deferred and our deferred tax liability continues to increase, which would only be due in part or in whole upon the disposition of a portion or all of our surgery centers.
During 2009, we sold our interests in one surgery center following management’s assessment of limited growth opportunities at this center. In 2008, we sold our interests in three surgery centers, closed three surgery centers and classified one surgery center as held for sale. These centers’ results of operations and gains and losses associated with their dispositions have been classified as discontinued operations in all periods presented. We recognized an after tax loss for the disposition of discontinued interests in surgery centers of $702,000 during 2009 and an after tax loss for the disposition of discontinued interests in surgery centers of $1.8 million in 2008. The net earnings derived from the operations of the discontinued surgery centers was $163,000 for 2009 and the net earnings from the operations of the discontinued surgery centers for 2008 was $180,000.
Net earnings from continuing operations attributable to noncontrolling interests in 2009 increased $11.1 million, or 9%, to $129.1 million from the comparable 2008 period, primarily as a result of net earnings associated with surgery centers recently added to operations. As a percentage of revenues, net earnings attributable to noncontrolling interests decreased to 19.3% from 19.7% during the 2008 period, as a result of reduced center profit margins caused by lower same-center revenue growth. The net earnings from discontinued operations attributable to noncontrolling interests were $101,000 and $902,000 in 2009 and 2008, respectively.
 

27


Table of Contents

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
 
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Revenues increased $82.4 million, or 16%, to $600.1 million in 2008 from $517.7 million in 2007. Our 2008 revenues were negatively impacted by approximately $5.0 million due to revisions in the Medicare payment system implemented by CMS in January 2008 (see “– Sources of Revenues”). Our procedures increased by 156,215, or 16%, to 1,108,585 in 2008 from 952,370 in 2007. The additional revenues resulted primarily from:
    centers acquired or opened in 2007, which contributed $53.6 million of additional revenues due to having a full period of operations in 2008;
 
    centers acquired or opened in 2008, which generated $15.0 million in revenues; and
 
    $13.9 million of revenue growth recognized by our 2008 same-center group primarily as a result of procedure growth.
Staff at newly acquired and developed centers, as well as the additional staffing required at existing centers due to increased volume, resulted in an 18% increase in salaries and benefits at our surgery centers in 2008. We experienced a 4% decrease in salaries and benefits at our corporate offices during 2008 over 2007. The decrease in corporate office salaries and benefits was primarily due to an investment loss associated with the Company’s supplemental retirement plan, which offsets salaries and benefits expense because it is a loss that is attributed to the participants’ self-directed investments. Salaries and benefits increased in total by 14% to $173.4 million in 2008 from $152.1 million in 2007. Salaries and benefits as a percentage of revenues decreased in 2008 compared to 2007 due in part to a change from incremental, annual vesting of stock-based awards in five installments to cliff vesting of stock-based awards four years following the date of grant beginning with grants made during 2007.
Supply cost was $70.6 million in 2008, an increase of $10.7 million, or 18%, over supply cost in 2007. This increase was primarily the result of additional procedure volume and a 1% increase in our average supply cost per procedure.
Other operating expenses increased $18.8 million, or 18%, to $124.8 million in 2008 from $106.0 million in 2007. The additional expense in the 2008 period resulted primarily from:
    centers acquired or opened during 2007, which resulted in an increase of $9.2 million in other operating expenses;
 
    an increase of $4.1 million in other operating expenses at our 2008 same-center group resulting primarily from additional procedure volume and general inflationary cost increases; and
 
    centers acquired or opened during 2008, which resulted in an increase of $2.8 million in other operating expenses.
Depreciation and amortization expense increased $2.2 million, or 12%, in 2008 from 2007, primarily as a result of centers acquired since 2007 and newly developed surgery centers in operation, which have an initially higher level of depreciation expense due to their construction costs.
Interest expense increased $369,000 in 2008, or 4%, from 2007, primarily due to additional long-term debt outstanding during 2008 resulting from our acquisition activities, net of lower interest expense as a result of a reduced average interest rate experienced during 2008.
We recognized income tax expense from continuing operations of $33.1 million in 2008 compared to $27.1 million in 2007. Our effective tax rate in 2008 was 16.5%, of earnings from continuing operations before income taxes. This differs from the federal statutory income tax rate of 35.0% primarily due to the exclusion of the noncontrolling interests share of pre-tax earnings and the impact of state income taxes. Because we deduct goodwill amortization for tax purposes only, our deferred tax liability continues to increase, which would only be due in part or in whole upon the disposition of a portion or all of our surgery centers.
During 2008, we sold our interests in three surgery centers, closed three surgery centers and classified one surgery center as held for sale following management’s assessment of limited growth opportunities at these centers. In 2007, we sold our interests in three surgery centers and closed one surgery center. These centers’ results of operations and gains and losses associated with their dispositions have been classified as discontinued operations in all periods presented, along with the results of operations of the center sold in 2009. We recognized an after tax loss for the disposition of discontinued interests in surgery centers of $1.8 million during 2008 and an after tax gain for the disposition of discontinued interests in surgery centers of $1.7 million in 2007. The net earnings derived from the operations of the discontinued surgery centers was $180,000 for 2008 and the net earnings from the operations of the discontinued surgery centers for 2007 was $4.1 million.
Net earnings from continuing operations attributable to noncontrolling interests in 2008 increased $15.3 million, or 15%, to $118.0 million from the comparable 2007 period, primarily as a result of net earnings associated with surgery centers recently added to operations. As a percentage of revenues, net earnings attributable to noncontrolling interests decreased to 19.7% from 19.8% during the 2007 period, as a result of reduced center profit margins caused by lower same-center revenue growth. The net earnings from discontinued operations attributable to noncontrolling interests was $902,000 and $3.4 million in 2008 and 2007, respectively.
 

28


Table of Contents

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
 
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 2009 and 2008 were $29.4 million and $31.5 million, respectively. At December 31, 2009, we had working capital of $79.7 million, compared to $85.5 million at December 31, 2008. Operating activities for 2009 generated $232.6 million in cash flow from operations, compared to $209.7 million in 2008. The increase in operating cash flow resulted primarily from higher net earnings in the 2009 period and a reduction of seven days outstanding in our accounts receivable due to increased electronic payments received from commercial payors, increased collections from patient copays and deductibles at the date of service and improved insurance verification and claim documentation. Positive operating cash flows of individual centers are the sole source of cash used to make distributions to our wholly owned subsidiaries, as well as to the partners, which we are obligated to make on a monthly basis in accordance with each partnership’s partnership or operating agreement. Distributions to noncontrolling interests, which is considered a financing activity, in the year ended December 31, 2009 and 2008 were $130.9 million and $118.8 million, respectively. Distributions to noncontrolling interests increased $12.1 million, primarily as a result of additional centers in operation.
The principal source of our operating cash flow is the collection of accounts receivable from governmental payors, commercial payors and individuals. Each of our surgery centers bills for services as delivered, usually within several days following the date of the procedure. Generally, unpaid amounts that are 30 days past due are rebilled based on a standard set of procedures. If amounts remain uncollected after 60 days, our surgery centers proceed with a series of late-notice notifications until amounts are either collected, contractually written off in accordance with contracted rates or determined to be uncollectible, typically after 90 to 120 days. Receivables determined to be uncollectible are written off and such amounts are applied to our estimate of allowance for bad debts as previously established in accordance with our policy for allowance for bad debt expense. The amount of actual write-offs of account balances for each of our surgery centers is continuously compared to established allowances for bad debt to ensure that such allowances are adequate. At December 31, 2009 and 2008, our accounts receivable represented 32 and 38 days of revenue outstanding, respectively.
During 2009, we had total acquisitions and capital expenditures of $115.8 million, which included:
    $95.8 million for acquisitions of interests in ASCs and related transactions;
 
    $16.4 million for new or replacement property at existing centers, including $148,000 in new capital leases; and
 
    $3.7 million for centers under development.
In December 2009, we entered into an agreement to purchase a controlling interest in a center for $28.1 million. The consummation of the acquisition is contingent upon the satisfaction of closing conditions customary for transactions of this type. We anticipate closing this transaction in March 2010 and intend to fund the acquisition through a combination of operating cash flow and borrowings under our revolving credit agreement.
During 2009, we had unfunded construction and equipment purchase commitments for centers under development or under renovation of approximately $1.9 million, which we intend to fund through additional borrowings of long-term debt, operating cash flow and capital contributions by our partners.
During 2009, we received $1.3 million in proceeds from the sale of surgery centers. In addition, we collected approximately $1.7 million on a note receivable related to the sale of a center in 2004, which was paid in full as of September 30, 2009. We also received $1.0 million in capital contributions from our noncontrolling partners.
During 2009, we had net borrowings on long-term debt of $20.2 million, and at December 31, 2009 we had $276.3 million outstanding under our revolving credit agreement. Pursuant to our revolving credit agreement, we may borrow up to $300.0 million to, among other things, finance our acquisition and development projects and any stock repurchase programs at a rate equal to, at our option, the prime rate, LIBOR plus 0.50% to 1.50% or a combination thereof. The loan agreement provides for a fee of 0.15% to 0.30% of 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. We were in compliance with all covenants at December 31, 2009. Borrowings under the revolving credit agreement are due in July 2011 and are secured primarily by a pledge of the stock of our subsidiaries that serve as the general partners of our limited partnerships and our partnership and membership interests in the limited partnerships and limited liability companies.
Our current revolving credit agreement matures July 2011, which we expect to refinance in the second quarter of 2010. The terms of any new or extended revolving credit agreement will result in additional fees and interest rate spreads over LIBOR that are 150 to 200 basis points higher than we currently incur. We expect this will result in an increase in interest expense of approximately $5.5 million in 2010 over 2009 and a reduction of $0.10 to $0.11 in our net earnings per share in 2010.
In September 2008, our Board of Directors authorized a stock repurchase program for up to $25.0 million of our outstanding common stock. During the three months ended March 31, 2009, we repurchased 830,700 shares for $12.6 million, which completed this program. On April 22, 2009, our Board of Directors approved an additional stock repurchase program for up to $40.0 million of our outstanding shares of common stock to be purchased over the following 18 months. As of December 31, 2009, no shares had been repurchased pursuant to this repurchase program. We intend to fund the purchase price for any shares acquired using primarily cash generated from our operations and borrowings under our revolving credit agreement.
 

29


Table of Contents

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
 
The following schedule summarizes all of our contractual obligations by period as of December 31, 2009 (in thousands):
                                         
    Payments Due by Period
            Less than                   More than 5
    Total   1 Year   1-3 Years   3-5 Years   Years
     
   
Long-term debt, including interest (1)
  $ 292,468     $ 4,351     $ 283,192     $ 3,787     $ 1,138  
Capital lease obligations, including interest
    4,493       2,234       2,142       117        
Operating leases, including renewal option periods (2)
    419,538       35,504       68,718       64,607       250,709  
Construction in progress commitments
    1,891       1,891                    
Liability for unrecognized tax benefits
    8,383             8,383              
Purchase committment
    28,070       28,070                    
     
   
Total contractual cash obligations
  $ 754,843     $ 72,050     $ 362,435     $ 68,511     $ 251,847  
     
 
 
(1)   Our long-term debt may increase based on future acquisition activity. We will use our operating cash flow to repay existing long-term debt under our revolving credit agreement prior to its maturity date.
 
(2)   Operating lease obligations do not include common area maintenance, or CAM, insurance or tax payments for which the Company is also obligated. Total expense related to CAM, insurance and taxes for the 2009 fiscal year was approximately $4.2 million.
In addition, as of February 25, 2010, we had available under our revolving credit agreement $38.2 million for acquisition borrowings, of which we expect to use approximately $28.1 million to acquire a center in March 2010.
Based upon our current operations and anticipated growth, we believe our operating cash flow and borrowing capacity will be adequate to meet our working capital and capital expenditure requirements for the next 12 to 18 months. In addition to acquiring and developing single ASCs, we may from time to time consider other acquisitions or strategic joint ventures involving other companies, multiple-center chains or networks of ASCs. Such acquisitions, joint ventures or other opportunities may require an amendment to our current credit agreement or additional external financing. As previously discussed, we cannot assure you that any required financing will be available, or will be available on terms acceptable to us.
Recent Accounting Pronouncements
In June 2009, the FASB issued guidance that establishes the FASB ASC as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with Generally Accepted Accounting Principles, or GAAP. Use of the new Codification is effective for interim and annual periods ending after September 15, 2009. We have used the new Codification in reference to GAAP in this annual report on Form 10-K and such use has not impacted our consolidated results.
In June 2009, the FASB amended the consolidation guidance related to variable-interest entities. The amendments include the elimination of the exemption for qualifying special purpose entities, revised criteria for determining the primary beneficiary of a variable-interest entity, and expanded the requirements for reconsideration of the primary beneficiary. This standard is effective for us on January 1, 2010. We do not expect the adoption of this standard to have a material impact on our consolidated results of operations or financial condition.
 

30


Table of Contents

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
 
We are subject to market risk from exposure to changes in interest rates based on our financing, investing and cash management activities. We utilize a balanced mix of maturities along with both fixed-rate and variable-rate debt to manage our exposures to changes in interest rates. Our debt instruments are primarily indexed to the prime rate or LIBOR. We entered into an interest rate swap agreement in April 2006 in which $50.0 million of the principal amount outstanding under the revolving credit agreement will bear interest at a fixed-rate of 5.365% for the period from April 28, 2006 to April 28, 2011. Interest rate changes would result in gains or losses in the market value of our debt portfolio due to differences in market interest rates and the rates at the inception of the debt agreements. Based upon our indebtedness and the terms of our credit agreement and interest rate swap agreement at December 31, 2009, a 100 basis point interest rate change would impact our net earnings and cash flow by approximately $1.4 million annually. Although there can be no assurances that interest rates will not change significantly, we do not expect changes in interest rates to have a material effect on our income or cash flows in 2010. As previously discussed, we expect to refinance our revolving credit agreement in the second quarter of 2010, which will result in additional fees and interest rate spreads. Accordingly, our interest expense will increase and our operating cash flow will decrease by approximately $5.5 million in 2010.
The table below provides information as of December 31, 2009 about our long-term debt obligations based on maturity dates that are sensitive to changes in interest rates, including principal cash flows and related weighted average interest rates by expected maturity dates (in thousands, except percentage data):
                                                                 
                                                            Fair
                                                            Value at
    Years Ended December 31,                   December 31,
    2010   2011   2012   2013   2014   Thereafter   Total   2009
   
Fixed rate
  $ 4,651     $ 53,643     $ 2,534     $ 1,699     $ 821     $     $ 63,348     $ 59,548  
Average interest rate
    6.6 %     6.3 %     5.9 %     5.9 %     6.1 %                      
 
                                                               
Variable rate
  $ 1,006     $ 227,309     $ 890     $ 674     $ 429     $ 1,042     $ 231,350     $ 223,495  
Average interest rate
    4.8 %     1.8 %     5.3 %     6.1 %     5.3 %     4.9 %                
The difference in maturities of long-term obligations and overall increase in total borrowings from 2008 to 2009 principally resulted from our borrowings associated with acquisitions of surgery centers. The average interest rates on these borrowings at December 31, 2009 remained consistent as compared to December 31, 2008.
 

31


Table of Contents

Item 8.   Financial Statements and Supplementary Data
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
AmSurg Corp.
Nashville, Tennessee
We have audited the accompanying consolidated balance sheets of AmSurg Corp. and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of earnings, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2009. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 the Company as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2009, the Company adopted the amended provisions of Financial Accounting Standards Accounting Standards Codification (“ASC”) 805, Business Combinations, which resulted in the Company changing the method in which it accounts for business combinations, and ASC 810, Consolidation, which resulted in the Company changing its presentation of noncontrolling interests in subsidiaries. Additionally, as discussed in Note 1 to the consolidated financial statements, effective January 1, 2007, the Company adopted the amended provisions of ASC 740, Income Taxes, which resulted in the Company changing the method in which it accounts for uncertainties in income taxes.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2010 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Nashville, Tennessee
February 25, 2010
 

32


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
AmSurg Corp.
Consolidated Balance Sheets
December 31, 2009 and 2008
(Dollars in thousands)
                 
    2009     2008  
     
Assets
               
 
               
Current assets:
               
Cash and cash equivalents
  $ 29,377     $ 31,548  
Accounts receivable, net of allowance of $12,375 and $11,757, respectively
    66,886       63,602  
Supplies inventory
    8,745       8,083  
Deferred income taxes
    2,324       1,378  
Prepaid and other current assets
    15,408       17,223  
Current assets held for sale
    34       25  
     
 
               
Total current assets
    122,774       121,859  
 
               
Long-term receivables and other assets
    56       46  
Property and equipment, net
    112,084       111,884  
Goodwill
    813,876       661,693  
Intangible assets, net
    9,797       10,221  
Long-term assets held for sale
    170       176  
     
 
               
Total assets
  $ 1,058,757     $ 905,879  
     
 
               
Liabilities and Equity
               
 
               
Current liabilities:
               
Current portion of long-term debt
  $ 5,657     $ 6,801  
Accounts payable
    14,821       14,240  
Accrued salaries and benefits
    18,156       12,040  
Other accrued liabilities
    3,208       3,246  
Current income taxes payable
    402        
Current liabilities held for sale
    37       35  
     
 
               
Total current liabilities
    42,281       36,362  
 
               
Long-term debt
    289,041       265,835  
Deferred income taxes
    71,665       54,758  
Other long-term liabilities
    22,036       22,416  
Commitments and contingencies
               
Noncontrolling interests – redeemable
    123,363       63,202  
Preferred stock, no par value, 5,000,000 shares authorized, no shares issued or outstanding
           
 
               
Equity:
               
Common stock, no par value 70,000,000 shares authorized, 30,674,525 and 31,342,241 shares outstanding, respectively
    163,729       172,192  
Retained earnings
    343,236       291,088  
Accumulated other comprehensive loss, net of income taxes
    (1,849 )     (2,851 )
     
 
               
Total AmSurg Corp. equity
    505,116       460,429  
Noncontrolling interests – non-redeemable
    5,255       2,877  
     
 
               
Total equity
    510,371       463,306  
     
 
               
Total liabilities and equity
  $ 1,058,757     $ 905,879  
     
See accompanying notes to the consolidated financial statements.
 

33


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
AmSurg Corp.
Consolidated Statements of Earnings
Years Ended December 31, 2009, 2008 and 2007
(In thousands, except earnings per share
)
                         
    2009     2008     2007  
     
 
Revenues
  $ 668,752     $ 600,107     $ 517,707  
 
                       
Operating expenses:
                       
Salaries and benefits
    200,281       173,369       152,104  
Supply cost
    82,565       70,601       59,864  
Other operating expenses
    137,614       124,764       105,957  
Depreciation and amortization
    22,927       20,815       18,648  
     
 
                       
Total operating expenses
    443,387       389,549       336,573  
     
 
                       
Operating income
    225,365       210,558       181,134  
Interest expense
    7,789       9,938       9,569  
     
 
                       
Earnings from continuing operations before income taxes
    217,576       200,620       171,565  
Income tax expense
    35,687       33,101       27,065  
     
 
                       
Net earnings from continuing operations
    181,889       167,519       144,500  
 
                       
Discontinued operations:
                       
Earnings from operations of discontinued interests in surgery centers, net of income tax expense
    163       180       4,091  
(Loss) gain on disposal of discontinued interests in surgery centers, net of income tax (benefit) expense
    (702 )     (1,773 )     1,712  
     
 
                       
Net (loss) gain from discontinued operations
    (539 )     (1,593 )     5,803  
     
 
                       
Net earnings
    181,350       165,926       150,303  
 
                       
Less net earnings attributable to noncontrolling interests:
                       
Net earnings from continuing operations
    129,101       117,978       102,715  
Net earnings from discontinued operations
    101       902       3,413  
     
 
Total net earnings attributable to noncontrolling interests
    129,202       118,880       106,128  
     
 
                       
Net earnings attributable to AmSurg Corp. common shareholders
  $ 52,148     $ 47,046     $ 44,175  
     
 
                       
Amounts attributable to AmSurg Corp. common shareholders:
                       
Earnings from continuing operations, net of tax
  $ 52,788     $ 49,541     $ 41,785  
Discontinued operations, net of tax
    (640 )     (2,495 )     2,390  
     
 
                       
Net earnings attributable to AmSurg Corp. common shareholders
  $ 52,148     $ 47,046     $ 44,175  
     
 
                       
Earnings per share-basic:
                       
Net earnings from continuing operations attributable to AmSurg Corp. common shareholders
  $ 1.73     $ 1.57     $ 1.36  
Net (loss) gain from discontinued operations attributable to AmSurg Corp. common shareholders
    (0.02 )     (0.08 )     0.08  
     
 
                       
Net earnings attributable to AmSurg Corp. common shareholders
  $ 1.71     $ 1.49     $ 1.44  
     
 
                       
Earnings per share-diluted:
                       
Net earnings from continuing operations attributable to AmSurg Corp. common shareholders
  $ 1.71     $ 1.55     $ 1.34  
Net (loss) gain from discontinued operations attributable to AmSurg Corp. common shareholders
    (0.02 )     (0.08 )     0.08  
     
 
                       
Net earnings attributable to AmSurg Corp. common shareholders
  $ 1.69     $ 1.47     $ 1.42  
     
 
                       
Weighted average number of shares and share equivalents outstanding:
                       
Basic
    30,576       31,503       30,619  
Diluted
    30,862       31,963       31,102  
See accompanying notes to the consolidated financial statements.
 

34


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
AmSurg Corp.
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2009, 2008 and 2007
(In thousands
)
                         
    2009     2008     2007  
     
 
Net earnings
  $ 181,350     $ 165,926     $ 150,303  
 
                       
Other comprehensive income, net of tax:
                       
Unrealized gain (loss) on interest rate swap, net of tax
    1,002       (1,414 )     (967 )
     
 
                       
Comprehensive income, net of tax
    182,352       164,512       149,336  
 
                       
Less comprehensive income attributable to noncontrolling interests
    129,202       118,880       106,128  
     
 
                       
Comprehensive income attributable to AmSurg Corp. common shareholders
  $ 53,150     $ 45,632     $ 43,208  
     
See accompanying notes to the consolidated financial statements.
 

35


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
AmSurg Corp.
Consolidated Statements of Changes in Equity
Years Ended December 31, 2009, 2008 and 2007
(In thousands
)
                                                                 
    AmSurg Corp. Shareholders                        
                                                    Non-    
                                    Non-           Controlling    
                            Accumulated   Controlling           Interests–    
                Other   Interests–   Total   Redeemable    
    Common Stock   Retained   Comprehensive   Non-   Equity   (Temporary   Net
    Shares   Amount   Earnings   Loss   Redeemable   (Permanent)   Equity)   Earnings
     
     
Balance at January 1, 2007
    29,934     $ 143,077     $ 200,501     $ (470 )   $     $ 343,108     $ 52,341          
Cumulative adjustment to beginning retained earnings on
January 1, 2007
                (634 )                 (634 )              
Issuance of restricted common stock
    200                                              
Cancellation of restricted common stock
    (5 )                                            
Stock options exercised
    1,074       17,661                         17,661                
Share-based compensation
          4,560                         4,560                
Tax benefit related to exercise of stock options
          3,322                         3,322                
Net earnings
                44,175             465       44,640       105,663     $ 150,303  
 
                                                               
Distributions to noncontrolling interests, net of capital contributions
                            (280 )     (280 )     (102,785 )        
Acquisitions and other transactions impacting noncontrolling interests
                            2,352       2,352       4,250          
Loss on interest rate swap, net of income tax expense of $624
                      (967 )           (967 )              
             
 
                                                               
Balance at December 31, 2007
    31,203       168,620       244,042       (1,437 )     2,537       413,762       59,469          
Issuance of restricted common stock
    147                                              
Cancellation of restricted common stock
    (10 )                                            
Stock options exercised
    519       9,970                         9,970                
Stock repurchased
    (517 )     (12,413 )                       (12,413 )              
Share-based compensation
          4,710                         4,710                
Tax benefit related to exercise of stock options
          1,305                         1,305                
Net earnings
                47,046             3,308       50,354       115,572     $ 165,926  
 
                                                               
Distributions to noncontrolling interests, net of capital contributions
                            (3,087 )     (3,087 )     (115,100 )        
Acquisitions and other transactions impacting noncontrolling interests
                            119       119       3,261          
Loss on interest rate swap, net of income tax benefit of $911
                      (1,414 )           (1,414 )              
             
 
                                                               
Balance at December 31, 2008
    31,342     $ 172,192     $ 291,088     $ (2,851 )   $ 2,877     $ 463,306     $ 63,202          
 
                                                               
See accompanying notes to the consolidated financial statements.
 

36


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
AmSurg Corp.
Consolidated Statements of Changes in Equity – (continued)
Years Ended December 31, 2009, 2008 and 2007
(In thousands
)
                                                                 
    AmSurg Corp. Shareholders                        
                                                    Non-    
                                    Non-           Controlling    
                            Accumulated   Controlling           Interests –    
                Other   Interests–   Total   Redeemable    
    Common Stock   Retained   Comprehensive   Non-   Equity   (Temporary   Net
    Shares   Amount   Earnings   Loss   Redeemable   (Permanent)   Equity)   Earnings
     
     
Balance at December 31, 2008
    31,342     $ 172,192     $ 291,088     $ (2,851 )   $ 2,877     $ 463,306     $ 63,202          
Issuance of restricted common stock
    162                                              
Cancellation of restricted common stock
    (14 )     (26 )                       (26 )              
Stock options exercised
    15       201                         201                
Stock repurchased
    (831 )     (12,587 )                       (12,587 )              
Share-based compensation
          4,068                         4,068                
Tax benefit related to exercise of stock options
          2                         2                
Net earnings
                52,148             4,065       56,213       125,137     $ 181,350  
 
                                                               
Distributions to noncontrolling interests, net of capital contributions
                            (3,848 )     (3,848 )     (126,797 )        
Sale of noncontrolling interests
          (121 )                       (121 )     947          
Acquisitions and other transactions impacting noncontrolling interests
                            2,161       2,161       60,874          
Gain on interest rate swap, net of income tax expense of $646
                      1,002             1,002                
             
 
                                                               
Balance at December 31, 2009
    30,674     $ 163,729     $ 343,236     $ (1,849 )   $ 5,255     $ 510,371     $ 123,363          
             
See accompanying notes to the consolidated financial statements.
 

37


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
AmSurg Corp.
Consolidated Statements of Cash Flows
Years Ended December 31, 2009, 2008 and 2007
(In thousands
)
                         
    2009     2008     2007  
     
Cash flows from operating activities:
                       
Net earnings
  $ 181,350     $ 165,926     $ 150,303  
Adjustments to reconcile net earnings to net cash provided by operating activities:
                       
Depreciation and amortization
    22,927       20,815       18,648  
Net loss on sale and impairment of long-lived assets
    455       922       724  
Share-based compensation
    4,068       4,710       4,560  
Excess tax benefit from share-based compensation
    (32 )     (1,351 )     (3,322 )
Deferred income taxes
    14,703       14,729       8,063  
Increase (decrease) in cash and cash equivalents, net of effects of acquisitions and dispositions, due to changes in:
                       
Accounts receivable, net
    1,494       3,792       (2,300 )
Supplies inventory
    (60 )     (83 )     47  
Prepaid and other current assets
    (733 )     2,344       (2,958 )
Accounts payable
    1,289       (1,904 )     962  
Accrued expenses and other liabilities
    6,666       (487 )     8,128  
Other, net
    457       283       61  
     
 
                       
Net cash flows provided by operating activities
    232,584       209,696       182,916  
 
                       
Cash flows from investing activities:
                       
Acquisition of interests in surgery centers and related transactions
    (95,826 )     (118,671 )     (162,777 )
Acquisition of property and equipment
    (19,930 )     (18,379 )     (24,640 )
Proceeds from sale of interests in surgery centers
    1,298       3,812       5,433  
Repayment of notes receivable
    1,666       1,458       2,616  
     
 
                       
Net cash flows used in investing activities
    (112,792 )     (131,780 )     (179,368 )
 
                       
Cash flows from financing activities:
                       
Proceeds from long-term borrowings
    137,178       157,787       178,316  
Repayment on long-term borrowings
    (116,951 )     (114,788 )     (89,712 )
Distributions to noncontrolling interests
    (130,855 )     (118,769 )     (103,545 )
Proceeds from issuance of common stock upon exercise of stock options
    201       9,970       17,661  
Repurchase of common stock
    (12,587 )     (12,413 )      
Capital contributions and ownership transactions by noncontrolling interests
    1,036       582       480  
Excess tax benefit from share-based compensation
    32       1,351       3,322  
Financing cost incurred
    (17 )     (41 )     (200 )
     
 
                       
Net cash flows (used in) provided by financing activities
    (121,963 )     (76,321 )     6,322
     
 
                       
Net (decrease) increase in cash and cash equivalents
    (2,171 )     1,595       9,870  
Cash and cash equivalents, beginning of year
    31,548       29,953       20,083  
     
 
                       
Cash and cash equivalents, end of year
  $ 29,377     $ 31,548     $ 29,953  
     
See accompanying notes to the consolidated financial statements.
 

38


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
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 51%, in limited partnerships and limited liability companies (“LLCs”) which own and operate ambulatory surgery centers (“centers”). The Company also has majority ownership interests in other limited 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’s wholly owned subsidiaries are the general partner or majority member. Consolidation of such limited partnerships and LLCs is necessary as the Company’s wholly owned subsidiaries have 51% or more of the financial interest, are the general partner or majority member with all the duties, rights and responsibilities thereof, are responsible for the day-to-day management of the limited partnerships and LLCs and have control of the entities. The responsibilities of the Company’s noncontrolling partners (limited partners and noncontrolling members) are to supervise the delivery of medical services, with their rights being restricted to those that protect their financial interests, such as approval of the acquisition of significant assets or the incurrence of debt which they are generally required to guarantee on a pro rata basis based upon their respective ownership interests. Intercompany profits, transactions and balances have been eliminated. All limited partnerships and LLCs and noncontrolling partners and members are referred to herein as partnerships and partners, respectively.
The Company adopted certain updates to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 810 Consolidations, or (“ASC 810”) , which were effective January 1, 2009. These updates establish accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, changes in a parent’s ownership of a noncontrolling interest, calculation and disclosure of the consolidated net income attributable to the parent and the noncontrolling interest, changes in a parent’s ownership interest while the parent retains its controlling financial interest and fair value measurement of any retained noncontrolling equity investment. ASC 810 generally requires the Company to clearly identify and present ownership interests in subsidiaries held by parties other than the Company in the consolidated financial statements within the equity section but separate from the Company’s equity. However, in instances in which certain redemption features that are not solely within the control of the issuer are present, classification of noncontrolling interests outside of permanent equity is required. It also requires the amounts of consolidated net income attributable to the Company and to the noncontrolling interests to be clearly identified and presented on the face of the consolidated statements of income; changes in ownership interests to be accounted for as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary to be measured at fair value. The implementation of the updates to ASC 810 also results in the cash flow impact of certain transactions with noncontrolling interests being classified within financing activities. Such treatment is consistent with the view that under ASC 810 transactions between the Company (or its subsidiaries) and noncontrolling interests are considered to be equity transactions. The adoption of the updates to ASC 810 have been applied retrospectively for all periods presented.
As further described in note 13, upon the occurrence of various fundamental regulatory changes, the Company would be obligated, under the terms of certain of its partnership and operating agreements, to purchase the noncontrolling interests related to substantially all of certain of the Company’s partnerships. While the Company believes that the likelihood of a change in current law that would trigger such purchases was remote as of December 31, 2009, the occurrence of such regulatory changes is outside the control of the Company. As a result, these noncontrolling interests that are subject to this redemption feature are not included as part of the Company’s equity and are classified as noncontrolling interests – redeemable on the Company’s consolidated balance sheets.
Center profits and losses are allocated to the Company’s partners in proportion to their ownership percentages and reflected in the aggregate as net earnings attributable to noncontrolling interests. The partners of the Company’s center partnerships typically are organized as general partnerships, limited partnerships or limited liability companies that are not subject to federal income tax. Each partner shares in the pre-tax earnings of the center in which it is a partner. Accordingly, the earnings attributable to noncontrolling interests in each of the Company’s partnerships are generally determined on a pre-tax basis. In accordance with ASC 810, total net earnings attributable to noncontrolling interests are presented after net earnings. However, the Company considers the impact of the net earnings attributable to noncontrolling interests on earnings before income taxes in order to determine the amount of pre-tax earnings on which the Company must determine its tax expense. In addition, distributions from the partnerships are made to both the Company’s wholly owned subsidiaries and the partners on a pre-tax basis.
The Company operates in one reportable business segment, the ownership and operation of ambulatory surgery centers.
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 of less than three months when purchased.
39

 


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
AmSurg Corp.
Notes to the Consolidated Financial Statements – (continued)
c.   Supplies Inventory
Supplies inventory consists of medical and drug supplies and is recorded at cost on a first-in, first-out basis.
d.   Prepaid and Other Current Assets
At December 31, 2009, prepaid and other current assets were comprised of prepaid insurance expense of $3,412,000, other prepaid expenses of $3,930,000, short-term investments of $4,544,000, other current receivables of $2,904,000 and other current assets of $618,000. At December 31, 2008, prepaid and other current assets were comprised of prepaid insurance expense of $2,973,000, other prepaid expenses of $3,073,000, notes receivable of $1,667,000, short-term investments of $3,005,000, other current receivables of $4,824,000, income tax receivable of $1,021,000 and other current assets of $660,000.
e.   Property and Equipment, net
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 to 40 years or, for leasehold improvements, over the remaining term of the lease plus renewal options for which failure to renew the lease imposes a penalty on the Company in such an amount that a renewal appears, at the inception of the lease, to be reasonably assured. The primary penalty to which the Company is subject is the economic detriment associated with existing leasehold improvements which might be impaired if a decision is made not to continue the use of the leased property. Depreciation for movable equipment and software and software development costs is recognized over useful lives of three to ten years.
f.   Goodwill
The Company evaluates goodwill for impairment at least on an annual basis and more frequently if certain indicators are encountered. Goodwill is to be tested at the reporting unit level, defined as an operating segment or one level below an operating segment (referred to as a component), with the fair value of the reporting unit being compared to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired. The Company has determined that it has one operating, as well as one reportable, segment. For impairment testing purposes, the centers qualify as components of that operating segment. Because they have similar economic characteristics, the components are aggregated and deemed a single reporting unit. The Company completed its annual impairment test as of December 31, 2009, and determined that goodwill was not impaired.
g.   Intangible Assets
Intangible assets consist primarily of deferred financing costs of the Company and certain amortizable and non-amortizable non-compete and customer agreements. Deferred financing costs and amortizable non-compete agreements and customer agreements are amortized over the term of the related debt as interest expense and the contractual term or estimated life (five to ten years) of the agreements as amortization expense, respectively.
h.   Other Long-Term Liabilities
Other long-term liabilities are primarily comprised of tax-effected unrecognized benefits (see note 1(k)), negative fair value of our interest rate swap and purchase price obligations.
i.   Revenue Recognition
Center revenues consist of billing for the use of the centers’ facilities (the “facility fee”) directly to the patient or third-party payor and, in limited instances, billing for anesthesia services. Such revenues are recognized when the related surgical procedures are performed. Revenues exclude any amounts billed for physicians’ surgical services, which are billed separately by the physicians to the patient or third-party payor.
Revenues from centers are recognized on the date of service, net of estimated contractual adjustments from third-party medical service payors including Medicare and Medicaid (see note 1(o)). During the years ended December 31, 2009, 2008 and 2007, the Company derived approximately 33%, 34% and 34%, respectively, of its revenues from government healthcare programs, primarily Medicare. Concentration of credit risk with respect to other payors is limited due to the large number of such payors.
j.   Operating Expenses
Substantially all of the Company’s operating expenses relate to the cost of revenues and the delivery of care at the Company’s surgery centers. Such costs primarily include the surgery centers’ clinical and administrative salaries and benefits, supply cost, rent and other variable expenses, such as linen cost, repair and maintenance of equipment, billing fees and bad debt expense. Bad
40

 


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
AmSurg Corp.
Notes to the Consolidated Financial Statements – (continued)
debt expense was approximately $16,781,000, $17,015,000 and $13,921,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
k.   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.
The Company adopted the provisions of ASC 740, Income Taxes, (“ASC 740”) on January 1, 2007. As of the adoption date, the Company had no unrecognized benefits that, if recognized, would affect its effective tax rate. Except for a cumulative adjustment in accordance with ASC 740, it is the Company’s policy to recognize interest accrued and penalties, if any, related to unrecognized benefits as income tax expense in its statement of earnings. Approximately $1,101,000 of accrued interest was established as a ASC 740 liability on January 1, 2007 through a tax affected adjustment to beginning retained earnings of $634,000. Additionally, as of January 1, 2007, the Company reclassified approximately $4,868,000 from long-term deferred tax liability to other long-term liabilities to reflect the amount of its tax-effected unrecognized benefits.
The Company applies recognition thresholds and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return as it relates to accounting for uncertainty in income taxes. In addition, it is the Company’s policy to recognize interest accrued and penalties, if any, related to unrecognized benefits as income tax expense in its statement of earnings. The Company does not expect significant changes to its tax positions or liability for tax uncertainties during the next 12 months.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company’s tax years for 2006 through 2008 are subject to examination by the tax authorities. In limited instances, the Company is subject to certain state income tax examinations for years prior to 2006.
l.   Earnings Per Share
Basic earnings per share is computed by dividing net earnings attributable to AmSurg Corp. common shareholders by the combined weighted average number of common shares, while diluted earnings per share is computed by dividing net earnings attributable to AmSurg Corp. common shareholders by the weighted average number of such common shares and dilutive share equivalents.
m.   Fair Value of Financial Instruments
Cash and cash equivalents, receivables and payables are reflected in the financial statements at cost, which approximates fair value. Short-term investments are recorded at fair value of $4,544,000. The fair value of fixed-rate long-term debt, with a carrying value of $63,348,000, was $59,548,000 at December 31, 2009. The fair value of variable-rate long-term debt, with a carrying value of $231,350,000, was $223,495,000 at December 31, 2009.
n.   Share-Based Compensation
Transactions in which the Company receives employee and non-employee services in exchange for the Company’s equity instruments or liabilities that are based on the fair value of the Company’s equity securities or may be settled by the issuance of these securities are accounted using a fair value method. The Company applies the Black-Scholes method of valuation in determining share-based compensation expense.
Benefits of tax deductions in excess of recognized compensation cost are reported as a financing cash flow, thus reducing the Company’s net operating cash flows and increased its financing cash flows by $32,000, $1,351,000 and $3,322,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
The Company examines its concentrations of holdings, its historical patterns of award exercises and forfeitures as well as forward-looking factors, in an effort to determine if there were any discernable employee populations. From this analysis, the Company has identified three employee populations, consisting of senior executives, officers and all other recipients. The expected volatility rate applied was estimated based on historical volatility. The expected term assumption applied is based on contractual terms, historical exercise and cancellation patterns and forward-looking factors where present for each population identified. The risk-free interest rate used is based on the U.S. Treasury yield curve in effect at the time of the grant. The pre-vesting forfeiture rate is based on historical rates and forward-looking factors for each population identified. The Company will
41

 


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
AmSurg Corp.
Notes to the Consolidated Financial Statements – (continued)
adjust the estimated forfeiture rate to its actual experience. The Company is precluded from paying dividends under its credit agreement, and therefore, there is no expected dividend yield.
o.   Use of Estimates
The preparation of financial statements in conformity with Generally Accepted Accounting Principles, or GAAP, 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.
The determination of contractual and bad debt allowances constitutes a significant estimate. Some of the factors considered by management in determining the amount of such allowances are the historical trends of the centers’ cash collections and contractual and bad debt write-offs, accounts receivable agings, established fee schedules, contracts with payors and procedure statistics. Accordingly, net accounts receivable at December 31, 2009 and 2008 reflect allowances for contractual adjustments of $100,088,000 and $95,053,000, respectively, and allowance for bad debt expense of $12,375,000 and $11,757,000, respectively.
p.   Recent Accounting Pronouncements
In June 2009, the FASB issued guidance that establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Use of the new Codification is effective for interim and annual periods ending after September 15, 2009. The Company has used the new Codification in reference to GAAP in this annual report on Form 10-K and such use has not impacted the consolidated results of the Company.
In June 2009, the FASB amended the consolidation guidance related to variable-interest entities. The amendments include the elimination of the exemption for qualifying special purpose entities, revised criteria for determining the primary beneficiary of a variable-interest entity, and expanded the requirements for reconsideration of the primary beneficiary. This standard is effective for the Company on January 1, 2010. The Company does not expect the adoption of this standard to have a material impact on its consolidated results of operations or financial condition.
q.   Reclassifications and Restatements
The presentation of common stock as of December 31, 2008 and 2007 has been corrected to combine the previously presented balance of common stock of $177,624,000 and $172,536,000 with deferred compensation of ($5,432,000) and ($3,916,000), totaling $172,192,000 and $168,620,000, respectively. These corrections had no impact on total equity.
Certain prior year amounts have been reclassified to reflect the impact of additional discontinued operations as further discussed in note 2(c).
2.   Acquisitions and Dispositions
 
a.   Acquisitions
In December 2007, the FASB issued ASC 805, Business Combinations (“ASC 805”), which retains the fundamental requirements that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. ASC 805 defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date the acquirer achieves control. ASC 805 requires an entity to record separately from the business combination the direct costs incurred in connection with the business combination, where previously these costs were included in the total allocated purchase price of the acquisition. ASC 805 requires an entity to recognize the assets acquired, liabilities assumed and any noncontrolling interests in the acquired business at the acquisition date, at their fair values as of that date. This compares to the cost allocation method previously applied. ASC 805 requires an entity to recognize as an asset or liability at fair value certain contingencies, either contractual or non-contractual, if certain criteria are met. Finally, ASC 805 requires an entity to recognize contingent consideration at the date of acquisition, based on the fair value at that date. ASC 805 is effective for business combinations completed on or after the first annual reporting period beginning on or after December 15, 2008 and is to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009, except for the amended provisions related to the accounting for income taxes which are applied retrospectively. Upon adoption of ASC 805, there was no impact on the Company’s consolidated results of operations and financial condition for acquisitions previously completed. The provisions of ASC 805 and its required disclosures have been applied to acquisitions completed in 2009. The adoption of ASC 805 did not have a material effect on the Company’s consolidated results of operations or cash flows.
42

 


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
AmSurg Corp.
Notes to the Consolidated Financial Statements – (continued)
As a significant part of its growth strategy, the Company acquires controlling interests in centers. The Company, through a wholly owned subsidiary and in separate transactions, acquired 51% controlling interests in 11 and 19 centers during 2009 and 2008, respectively. The aggregate amount paid for the acquisitions was approximately $95,826,000 and $118,671,000, during 2009 and 2008, respectively, which was paid in cash and funded by a combination of operating cash flow and borrowings under the Company’s revolving credit agreement. The total fair value of an acquisition includes an amount allocated to goodwill, which results from the centers’ favorable reputations in their markets, their market positions and their ability to deliver quality care with high patient satisfaction consistent with the Company’s business model.
At December 31, 2008, the Company had a contingent purchase price obligation of $580,000 related to an acquisition dependent upon certain requirements of the physician entity. The Company funded the purchase price obligation in May 2009 through operating cash flow. The purchase price obligation was reflected as other long-term liabilities in the balance sheet as of December 31, 2008.
The acquisition date fair value of the total consideration transferred and acquisition date fair value of each major class of consideration for the acquisitions completed during 2009 are as follows (in thousands):
         
    2009  
 
       
Accounts receivable
  $ 4,603  
Prepaid and other current assets
    616  
Property and equipment
    5,263  
Accounts payable
    (898 )
Other accrued liabilities
    (955 )
Long-term debt
    (1,802 )
Goodwill (approximately $92,283 deductible for tax purposes)
    152,227  
     
 
       
Total fair value
    159,054  
Less: Fair value attributable to noncontrolling interests
    63,228  
     
 
       
Acquisition date fair value of total consideration transferred
  $ 95,826  
     
Fair value attributable to noncontrolling interests is based on significant inputs that are not observable in the market. Key inputs used to determine the fair value include financial multiples used in the purchase of noncontrolling interests in centers. Such multiples, based on earnings, are used as a benchmark for the discount to be applied for the lack of control or marketability. The fair value of noncontrolling interests may be subject to adjustment as the Company completes its initial accounting for acquired intangible assets.
The Company incurred and expensed in other operating expenses approximately $324,000 in acquisition related costs, primarily attorney fees for the year ended December 31, 2009.
Revenues and net earnings included in the years ended December 31, 2009 associated with these acquisitions are as follows (in thousands):
         
    2009  
 
Revenues
  $ 10,327  
 
       
Net earnings
    3,721  
Less: Net earnings attributable to noncontrolling interests
    2,264  
     
 
       
Net earnings attributable to AmSurg Corp. common shareholders
  $ 1,457  
     
43

 


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
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, 2009 and 2008, assuming all 2009 and 2008 acquisitions had been consummated on January 1, 2008, are as follows (in thousands, except per share data):
                 
    2009     2008  
     
 
Revenues
  $ 710,007     $ 711,338  
Net earnings
    194,006       197,423  
Amounts attributable to AmSurg Corp. common shareholders:
               
Net earnings from continuing operations
    57,446       58,768  
Net earnings
    56,806       56,273  
Net earnings from continuing operations per common share:
               
Basic
  $ 1.88     $ 1.87  
Diluted
  $ 1.86     $ 1.84  
Net earnings:
               
Basic
  $ 1.86     $ 1.79  
Diluted
  $ 1.84     $ 1.76  
Weighted average number of shares and share equivalents:
               
Basic
    30,576       31,503  
Diluted
    30,862       31,963  
c.   Dispositions
During 2009, the Company sold its interest in a surgery center and, at December 31, 2009, held for sale an additional surgery center that was classified as discontinued in 2008, which will either be sold in 2010 or closed as it fulfills its near-term lease obligation. An after-tax loss of $539,000 was incurred associated with the disposition in 2009. The Company disposed of six centers in 2008, had one center held for sale at December 31, 2008 and recognized an after-tax loss of $1,593,000 associated with these dispositions. During 2007, the Company sold its interest in three surgery centers and closed a center, recognizing an after tax gain of $5,803,000. In the aggregate, the Company received $400,000 in cash associated with the 2009 transaction, $3,664,000 in cash and a secured note receivable of $885,000 associated with the 2008 transactions and $5,225,000 in cash associated with the 2007 transactions. The Company’s disposition of its interests in the surgery centers in 2009, 2008 and 2007 as described above resulted from management’s assessment of the limited growth opportunities at these centers.
The results of operations of the 12 centers have been classified as discontinued operations in all periods presented. Results of operations of the combined discontinued surgery centers for the years ended December 31, 2009, 2008 and 2007 are as follows (in thousands):
                       
    2009     2008     2007  
     
 
Revenues
  $ 1,714     $ 6,110     $ 19,738  
Earnings before income taxes
    204       156       5,782  
Net earnings
    163       180       4,091  
3.   Property and Equipment
Property and equipment at December 31, 2009 and 2008 were as follows (in thousands):
                 
    2009     2008  
     
 
Land and improvements
  $ 164     $ 164  
Building and improvements
    98,565       88,875  
Movable equipment, software and software development costs
    143,990       131,085  
Construction in progress
    2,521       4,913  
     
 
               
 
    245,240       225,037  
Less accumulated depreciation
    (133,156 )     (113,153 )
     
 
               
Property and equipment, net
  $ 112,084     $ 111,884  
     
44

 


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
AmSurg Corp.
Notes to the Consolidated Financial Statements – (continued)
The Company capitalized interest in the amount of $66,000, $96,000 and $213,000 for the years ended December 31, 2009, 2008 and 2007, respectively. At December 31, 2009, the Company and its partnerships had unfunded construction and equipment purchases of approximately $1,900,000 in order to complete construction in progress. Depreciation expense for continuing and discontinued operations for the years ended December 31, 2009, 2008 and 2007 was $22,784,000, $21,185,000 and $19,516,000, respectively.
4.   Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the years ended December 31, 2009 and 2008 are as follows (in thousands):
                 
    2009     2008  
     
 
               
Balance, beginning of year
  $ 661,693     $ 546,915  
Purchase price allocations
    152,594       117,003  
Disposals
    (411 )     (2,225 )
     
 
               
Balance, end of year
  $ 813,876     $ 661,693  
     
Amortizable intangible assets at December 31, 2009 and 2008 consisted of the following (in thousands):
                                                 
    2009   2008
    Gross                   Gross        
    Carrying   Accumulated           Carrying   Accumulated    
    Amount   Amortization   Net   Amount   Amortization   Net
         
 
                                               
Deferred financing cost
  $ 2,780     $ (2,310 )   $ 470     $ 2,744     $ (2,018 )   $ 726  
Customer and non-compete agreements
    3,180       (1,618 )     1,562       3,180       (1,418 )     1,762  
         
 
                                               
Total amortizable intangible assets
  $ 5,960     $ (3,928 )   $ 2,032     $ 5,924     $ (3,436 )   $ 2,488  
         
Amortization of intangible assets for the years ended December 31, 2009, 2008 and 2007 was $492,000, $480,000 and $453,000, respectively. Estimated amortization of intangible assets for the five years and thereafter subsequent to December 31, 2009, with a weighted average amortization period of 5.8 years, is $526,000, $377,000, $231,000, $228,000, $224,000 and $446,000.
At December 31, 2009 and 2008, other non-amortizable intangible assets related to restrictive covenant arrangements were $7,765,000 and $7,733,000, respectively.
5.   Long-term Debt
Long-term debt at December 31, 2009 and 2008 was comprised of the following (in thousands):
                 
    2009     2008  
     
 
               
$300,000,000 credit agreement at prime, or LIBOR plus 0.50% to 1.50%, or a combination thereof (revolving average rate of 1.8% at December 31, 2009), due July 2011
  $ 276,300     $ 249,000  
Other debt at an average rate of 5.6%, due through 2022
    14,250       17,445  
Capitalized lease arrangements at an average rate of 7.1%, due through 2014
    4,148       6,191  
     
 
               
 
    294,698       272,636  
Less current portion
    5,657       6,801  
     
 
               
Long-term debt
  $ 289,041     $ 265,835  
     
The Company’s revolving credit agreement permits the Company to borrow up to $300,000,000 to, among other things, finance its acquisition and development projects and any future stock repurchase programs at an interest rate equal to, at the Company’s option, the prime rate, or LIBOR plus 0.50% to 1.50%, or a combination thereof; provides for a fee of 0.15% to 0.30% of unused commitments; prohibits the payment of dividends; and contains certain covenants relating to the ratio of debt to net worth,
45

 


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
AmSurg Corp.
Notes to the Consolidated Financial Statements – (continued)
operating performance and minimum net worth. Borrowings under the revolving credit agreement mature in July 2011. At December 31, 2009, the Company was in compliance with all covenants.
Certain partnerships included in the Company’s consolidated financial statements have loans with local lending institutions, included above in other debt, which are collateralized by certain assets of the centers with a book value of approximately $38,975,000. The Company and the partners have guaranteed payment of the loans in proportion to the relative partnership interests.
Principal payments required on long-term debt in the five years and thereafter subsequent to December 31, 2009 are $5,657,000, $280,952,000, $3,423,000, $2,373,000, $1,251,000 and $1,042,000.
6.   Derivative Instruments
The Company adopted certain updates to FASB ASC 815, Derivatives and Hedging (“ASC 815”). The updates are intended to enhance the current disclosure framework surrounding derivative instruments and hedging activities by requiring that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. This disclosure is intended to better convey the purpose of derivative use in terms of risks that the entity is intending to manage. The updates to ASC 815 were effective for financial statements issued for fiscal years beginning after November 15, 2008 and became effective for the Company beginning with the first quarter of 2009. The updates to ASC 815 did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
The Company entered into an interest rate swap agreement in April 2006, the objective of which is to hedge exposure to the variability of the future expected cash flows attributable to the variable interest rate of a portion of the Company’s outstanding balance under its revolving credit agreement. The interest rate swap has a notional amount of $50,000,000. The Company pays to the counterparty a fixed-rate of 5.365% of the notional amount of the interest rate swap and receives a floating rate from the counterparty based on LIBOR. The interest rate swap matures in April 2011. In the opinion of management and as permitted by ASC 815, the interest rate swap (as a cash flow hedge) is a fully effective hedge. Payments or receipts of cash under the interest rate swap are shown as a part of operating cash flows, consistent with the interest expense incurred pursuant to the revolving credit agreement. The value of the swap represents the estimated amount the Company would have paid as of December 31, 2009 upon termination of the agreement based on a valuation obtained from the financial institution that is the counterparty to the interest rate swap agreement. An increase in the fair value of the interest rate swap, net of tax, of $1,002,000 was included in other comprehensive income in the year ended December 31, 2009. A decrease in the fair value of the interest rate swap, net of tax, of $1,414,000 and $967,000 was included in other comprehensive income for the years ended December 31, 2008 and 2007, respectively. Accumulated other comprehensive loss, net of income taxes, was $1,849,000 and $2,851,000 as of December 31, 2009 and 2008, respectively.
The fair values of derivative instruments in the consolidated balance sheets as of December 31, 2009 and 2008 were as follows (in thousands):
                                         
    Asset Derivatives December 31,   Liability Derivatives December 31,
    2009   2008   2009   2008
    Balance       Balance       Balance           Balance    
    Sheet   Fair   Sheet   Fair   Sheet   Fair   Sheet   Fair
    Location   Value   Location   Value   Location   Value   Location   Value
 
                                       
Derivatives designated
as hedging
instruments under
ASC 815
  Other
assets,
net
  $    –   Other
assets,
net
  $    –   Other
long-term
liabilities
  $ 3,095     Other
long-term
liabilities
  $ 4,689  
7.   Fair Value Measurements
The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. The Company uses fair value measurements based on quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2) or unobservable inputs for assets or liabilities (Level 3), depending on the nature of the item being valued.
Cash and cash equivalents, receivables and payables are reflected in the financial statements at cost, which approximates fair value. The fair value of fixed rate long-term debt, with a carrying value of $63,348,000, was $59,548,000 at December 31, 2009. The fair value of variable-rate long-term debt, with a carrying value of $231,350,000, was $227,536,000 at December 31, 2009.
46

 


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
AmSurg Corp.
Notes to the Consolidated Financial Statements – (continued)
The fair value is determined based on an estimation of discounted future cash flows of the debt at rates currently quoted or offered to the Company for similar debt instruments of comparable maturities by its lenders.
In determining the fair value of assets and liabilities that are measured on a recurring basis, the following measurement methods were applied as of December 31, 2009 and were commensurate with the market approach (in thousands):
                                 
            Fair Value Measurements at
            Reporting Date Using:
            Quoted Prices        
            in Active   Significant    
            Markets for   Other   Significant
    December 31,   Identical   Observable   Unobservable
    2009   Assets   Inputs   Inputs
     
 
Assets:
                               
Supplemental executive retirement savings plan investments
  $ 4,544     $     $ 4,544     $   –  
     
 
                               
Liabilities:
                               
Supplemental executive retirement savings plan obligations
  $ 4,734     $     $ 4,734     $   –  
Interest rate swap agreements
    3,095             3,095         –  
     
 
                               
Total liabilities
  $ 7,829     $     $ 7,829     $   –  
     
The supplemental executive retirement savings plan investments and obligations are included in prepaid and other current assets and accrued salaries and benefits, respectively. The interest rate swap agreement is included in other long-term liabilities.
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 2031. Future minimum lease payments, including payments during expected renewal option periods, at December 31, 2009 were as follows (in thousands):
                  
    Capitalized        
Year Ended   Equipment     Operating  
December 31,   Leases     Leases  
 
 
               
2010
  $ 2,234     $ 35,504  
2011
    1,546       34,855  
2012
    596       33,863  
2013
    105       32,855  
2014
    12       31,752  
Thereafter
          250,709  
     
 
               
Total minimum rentals
    4,493     $ 419,538  
 
         
Less amounts representing interest at rates ranging from 3.8% to 9.7%
    345          
 
           
 
               
Capital lease obligations
  $ 4,148          
 
           
At December 31, 2009, equipment with a cost of approximately $6,617,000 and accumulated depreciation of approximately $2,464,000 was held under capital leases. The Company and the partners in the partnerships have guaranteed payment of certain of these leases. Rental expense for operating leases for the years ended December 31, 2009, 2008 and 2007 was approximately $35,401,000, $32,782,000 and $28,003,000, respectively.
9.   Shareholders’ Equity
 
a.   Common Stock
In September 2008, the Company’s Board of Directors authorized a stock repurchase program for up to $25,000,000 of the Company’s outstanding common stock over the following 12 months. During the three months ended December 31, 2008, the Company purchased 517,052 shares of the Company’s common stock for approximately $12,413,000, at an average price of $24 per share.
 
47


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
AmSurg Corp.
Notes to the Consolidated Financial Statements – (continued)
During the year ended December 31, 2009, the Company purchased 830,700 shares of the Company’s common stock for approximately $12,587,000, at an average price of $15 per share, which completed the $25,000,000 stock repurchase program authorized by the Company’s Board of Directors in September 2008. On April 22, 2009 the Company’s Board of Directors approved an additional stock repurchase program for up to $40,000,000 of the Company’s shares of common stock over the following 18 months. As of December 31, 2009, no shares had been repurchased pursuant to this plan.
b.   Shareholder Rights Plan
In 1999, the Company’s Board of Directors adopted a shareholder rights plan and declared a distribution of one stock purchase right for each outstanding share of the Company’s common stock to shareholders of record on December 16, 1999 and for each share of common stock issued thereafter. The rights, which were exercisable only upon certain conditions, were not exercised and expired on December 2, 2009.
c.   Stock Incentive Plans
In May 2006, the Company adopted the AmSurg Corp. 2006 Stock Incentive Plan. The Company also has options outstanding under the AmSurg Corp. 1997 Stock Incentive Plan, under which no additional options may be granted. Under these plans, the Company has granted restricted stock and non-qualified options to purchase shares of common stock to employees and outside directors from its authorized but unissued common stock. Restricted stock granted to outside directors vests one-third on the date of grant, with the remaining shares vesting over a two-year term and is restricted from trading for five years from the date of grant. Restricted stock granted to employees prior to December 31, 2009, vests at the end of four years from the date of grant. The fair value of restricted stock is determined based on the closing bid price of the Company’s common stock on the grant date.
Options are granted at market value on the date of the grant. Prior to 2007, granted options vested ratably over four years. Options granted in 2007 and 2008 vest at the end of four years from the grant date. Options have a term of ten years from the date of grant. No options were issued in 2009. At December 31, 2009, 2,760,250 shares were authorized for grant under the 2006 Stock Incentive Plan and 1,608,146 shares were available for future equity grants, including 477,966 shares available for issuance as restricted stock.
Other information pertaining to share-based activity for the years ended December 31, 2009, 2008 and 2007, respectively, was as follows (in thousands):
                         
    2009   2008   2007
 
                       
Share-based compensation expense
  $ 4,068     $ 4,710     $ 4,560  
Fair value of shares vested
    5,382       6,523       5,729  
Cash received from option exercises
    201       9,970       17,661  
Tax benefit from option exercises
    34       1,549       3,558  
As of December 31, 2009, the Company had total unrecognized compensation cost of approximately $6,669,000 related to non-vested awards, which the Company expects to recognize through 2013 and over a weighted-average period of 1.2 years.
Average outstanding share-based awards to purchase approximately 2,457,000, 907,000 and 1,286,000 shares of common stock that had an exercise price in excess of the average market price of the common stock during the years ended years ended December 31, 2009, 2008 and 2007, respectively, were not included in the calculation of diluted securities options under the treasury method for purposes of determining diluted earnings per share due to their anti-dilutive impact.
 
48


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
AmSurg Corp.
Notes to the Consolidated Financial Statements – (continued)
A summary of the status of and changes for non-vested restricted shares for the three years ended December 31, 2009, is as follows:
                 
            Weighted
    Number   Average
    of   Exercise
    Shares   Price
     
 
               
Non-vested shares at January 1, 2007
    3,262     $ 26.19  
Shares granted
    199,795       23.11  
Shares vested
    (3,626 )     25.27  
Shares forfeited
    (5,432 )     22.84  
 
           
 
               
Non-vested shares at December 31, 2007
    193,999       23.13  
Shares granted
    147,724       24.79  
Shares vested
    (4,210 )     24.94  
Shares forfeited
    (9,762 )     24.01  
 
           
 
               
Non-vested shares at December 31, 2008
    327,751       23.83  
Shares granted
    162,507       19.34  
Shares vested
    (9,666 )     22.55  
Shares forfeited
    (14,205 )     23.59  
 
           
 
               
Non-vested shares at December 31, 2009
    466,387     $ 22.29  
 
           
A summary of stock option activity for the three years ended December 31, 2009 is summarized as follows:
                         
                    Weighted
            Weighted   Average
    Number   Average   Remaining
    of   Exercise   Contractual
    Shares   Price   Term (in years)
     
 
                       
Outstanding at January 1, 2007
    4,589,532     $ 20.46       7.4  
Options granted
    385,293       22.84          
Options exercised with total intrinsic value of $7,639,000
    (1,074,334 )     16.44          
Options terminated
    (226,017 )     23.22          
 
                   
 
                       
Outstanding at December 31, 2007
    3,674,474       21.72       7.1  
Options granted
    203,911       24.75          
Options exercised with total intrinsic value of $3,947,000
    (518,702 )     19.25          
Options terminated
    (83,880 )     24.26          
 
                   
 
                       
Outstanding at December 31, 2008
    3,275,803       22.23       6.7  
Options granted
                   
Options exercised with total intrinsic value of $112,000
    (14,699 )     13.67          
Options terminated
    (110,052 )     23.73          
 
                   
 
                       
Outstanding at December 31, 2009 with aggregate intrinsic value of $4,332,000
    3,151,052     $ 22.22       5.0  
 
                   
 
                       
Vested or expected to vest at December 31, 2009 with total intrinsic value of $4,313,013
    3,056,520     $ 22.19       4.9  
 
                   
 
                       
Exercisable at December 31, 2009 with total intrinsic value of $4,200,000
    2,493,851     $ 22.00       4.5  
 
                   
The aggregate intrinsic value represents the total pre-tax intrinsic value received by the option holders on the exercise date or that would have been received by the option holders had all holders of in-the-money outstanding options at December 31, 2009 exercised their options at the Company’s closing stock price on December 31, 2009.
 
49


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
AmSurg Corp.
Notes to the Consolidated Financial Statements – (continued)
The Company issued no options during the year ended December 31, 2009. The Company, using the Black-Scholes option pricing model for all stock option awards on the date of grant, determined that the weighted average fair value of options at the date of grant issued during the years ended December 31, 2008 and 2007 were $8.20 and $8.62, respectively, by applying the following assumptions:
                 
    2008     2007  
 
               
Applied assumptions:
               
Expected term/life of options in years
    5.1       4.9  
Forfeiture rate
    3.0 %     3.0 %
Average risk-free interest rate
    2.7 %     4.7 %
Volatility rate
    31.9 %     34.2 %
Dividends
           
d.   Earnings per Share
The following is a reconciliation of the numerator and denominators of basic and diluted earnings per share (in thousands, except per share amounts):
                         
    Earnings     Shares     Per Share  
    (Numerator)     (Denominator)     Amount  
For the year ended December 31, 2009:
                       
Net earnings from continuing operations attributable to AmSurg Corp.
per common share (basic)
  $ 52,788       30,576     $ 1.73  
Effect of dilutive securities options and non-vested shares
          286          
             
 
                       
Net earnings from continuing operations attributable to AmSurg Corp.
per common share (diluted)
  $ 52,788       30,862     $ 1.71  
             
 
                       
Net earnings attributable to AmSurg Corp.
per common share (basic)
  $ 52,148       30,576     $ 1.71  
Effect of dilutive securities options and non-vested shares
          286          
             
 
                       
Net earnings attributable to AmSurg Corp.
per common share (diluted)
  $ 52,148       30,862     $ 1.69  
             
 
                       
For the year ended December 31, 2008:
                       
Net earnings from continuing operations attributable to AmSurg Corp.
per common share (basic)
  $ 49,541       31,503     $ 1.57  
Effect of dilutive securities options and non-vested shares
          460          
             
 
                       
Net earnings from continuing operations attributable to AmSurg Corp.
per common share (diluted)
  $ 49,541       31,963     $ 1.55  
             
 
                       
Net earnings attributable to AmSurg Corp.
per common share (basic)
  $ 47,046       31,503     $ 1.49  
Effect of dilutive securities options and non-vested shares
          460          
             
 
                       
Net earnings attributable to AmSurg Corp.
per common share (diluted)
  $ 47,046       31,963     $ 1.47  
             
 
                       
For the year ended December 31, 2007:
                       
Net earnings from continuing operations attributable to AmSurg Corp.
per common share (basic)
  $ 41,785       30,619     $ 1.36  
Effect of dilutive securities options and non-vested shares
          483          
             
 
                       
Net earnings from continuing operations attributable to AmSurg Corp.
per common share (diluted)
  $ 41,785       31,102     $ 1.34  
             
 
                       
Net earnings attributable to AmSurg Corp.
per common share (basic)
  $ 44,175       30,619     $ 1.44  
Effect of dilutive securities options and non-vested shares
          483          
             
 
                       
Net earnings attributable to AmSurg Corp.
per common share (diluted)
  $ 44,175       31,102     $ 1.42  
             
 
50

 


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
AmSurg Corp.
Notes to the Consolidated Financial Statements – (continued)
10.   Income Taxes
Total income taxes expense (benefit) for the years ended December 31, 2009, 2008 and 2007 was included within the following sections of the consolidated financial statements as follows (in thousands):
                         
    2009   2008   2007
 
                       
Income from continuing operations
  $ 35,687     $ 33,101     $ 27,065  
Discontinued operations
    287       1,512       1,663  
Shareholders’ equity
    (2 )     (1,305 )     (3,945 )
Other comprehensive income (loss)
    646       (911 )     (624 )
     
 
                       
Total
  $ 36,618     $ 32,397     $ 24,159  
     
Income tax expense from continuing operations for the years ended December 31, 2009, 2008 and 2007 was comprised of the following (in thousands):
                         
    2009   2008   2007
 
                       
Current:
                       
Federal
  $ 17,113     $ 20,204     $ 14,798  
State
    4,454       4,074       2,927  
Deferred:
                       
Federal
    11,950       7,401       7,783  
State
    2,170       1,422       1,557  
     
 
                       
Income tax expense
  $ 35,687     $ 33,101     $ 27,065  
     
Income tax expense from continuing operations for the years ended December 31, 2009, 2008 and 2007 differed from the amount computed by applying the U.S. federal income tax rate of 35% to earnings before income taxes as a result of the following (in thousands):
                         
    2009   2008   2007
 
                       
Statutory federal income tax
  $ 76,152     $ 70,217     $ 60,048  
Less federal income tax assumed directly by noncontrolling interests
    (45,185 )     (41,292 )     (35,950 )
State income taxes, net of federal income tax benefit
    4,281       3,433       2,545  
Increase in valuation allowances
    327       564       108  
Interest related to unrecognized tax benefits
    2       57       224  
Other
    110       122       90  
     
 
                       
Income tax expense
  $ 35,687     $ 33,101     $ 27,065  
     
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. Interest of $18,000, $57,000 and $388,000 was recognized in the consolidated statement of earnings for the years ended December 31, 2009, 2008 and 2007, respectively, resulting in a total recognition of approximately $1,564,000 and $1,546,000 in the consolidated balance sheet at December 31, 2009 and 2008, respectively. No amounts for penalties have been recorded.
The Company primarily has unrecognized tax benefits that represent an amortization deduction which is temporary in nature. A reconciliation of the beginning and ending amount of the liability associated with unrecognized tax benefits for the years ended December 31, 2009, 2008 and 2007 is as follows (in thousands):
                         
    2009   2008   2007
 
                       
Balance at beginning of year
  $ 6,190     $ 5,569     $ 4,868  
Additions for tax positions of current year
    576       621       701  
     
 
                       
Balance at end of year
  $ 6,766     $ 6,190     $ 5,569  
     
 
51

 


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
AmSurg Corp.
Notes to the Consolidated Financial Statements – (continued)
The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits will increase $437,000 within the next 12 months due to continued amortization deductions. The total amount of unrecognized tax benefits that would affect our effective tax rate if recognized is approximately $100,000.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2009 and 2008 were as follows (in thousands):
                 
    2009   2008
 
               
Deferred tax assets:
               
Allowance for uncollectible accounts
  $ 1,137     $ 1,348  
Accrued assets and other
    2,943       1,280  
Valuation allowances
    (1,066 )     (676 )
     
 
               
Total current deferred tax assets
    3,014       1,952  
 
Share-based compensation
    7,269       5,490  
Interest on unrecognized tax benefits
    667       655  
Accrued liabilities and other
    3,264       4,505  
Operating and capital loss carryforwards
    3,875       3,553  
Valuation allowances
    (3,272 )     (2,547 )
     
 
               
Total non-current deferred tax assets
    11,803       11,656  
     
 
               
Total deferred tax assets
    14,817       13,608  
 
Deferred tax liabilities:
               
Prepaid expenses
    690       574  
Accrued liabilities and other
    203       405  
Property and equipment, principally due to differences in depreciation
    1,594       724  
Goodwill, principally due to differences in amortization
    81,671       65,285  
     
 
               
Total deferred tax liabilities
    84,158       66,988  
     
 
               
Net deferred tax liabilities
  $ 69,341     $ 53,380  
     
The net deferred tax liabilities at December 31, 2009 and 2008 were recorded as follows (in thousands):
                 
    2009   2008
 
               
Current deferred income tax assets
  $ 2,324     $ 1,378  
Non-current deferred income tax liabilities
    71,665       54,758  
     
 
               
Net deferred tax liabilities
  $ 69,341     $ 53,380  
     
The Company has provided valuation allowances on its gross deferred tax assets to the extent that management does not believe that it is more likely than not that such asset will be realized. Capital loss carryforwards will begin to expire in 2013, and state net operating losses will begin to expire in 2015.
11.   Related Party Transactions
Certain surgery centers lease space from their physician partners at negotiated rates that management believes were equal to fair market value at the inception of the leases based on relevant market data. Certain surgery centers reimburse their physician partners for salaries and benefits and billing fees related to time spent by employees of their practices on activities of the centers at current market rates. In addition, certain centers compensate their physician partners for physician advisory services provided to the surgery centers, including medical director and performance improvement services.
Related party payments for the years ended December 31, 2009, 2008 and 2007, respectively, were as follows (in thousands):
                         
    2009   2008   2007
 
                       
Operating leases
  $ 18,176     $ 14,235     $ 12,378  
Salaries and benefits
    60,298       64,132       53,374  
Billing fees
    9,589       9,007       7,951  
Medical advisory services
    1,989       1,836       1,499  
 
52

 


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
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 policy that all transactions by the Company with officers, directors, five percent shareholders and their affiliates be entered into only if such transactions are on terms no less favorable to the Company than could be obtained from unaffiliated third parties, are reasonably expected to benefit the Company and are approved by the Nominating and Corporate Governance Committee of the Company’s Board of Directors.
12.   Employee Benefit Programs
As of January 1, 1999, the Company adopted the AmSurg 401(k) Plan and Trust. This plan is a defined contribution plan covering substantially all employees of the Company and provides for voluntary contributions by these employees, subject to certain limits. Company contributions are based on specified percentages of employee compensation. The Company funds contributions as accrued. The Company’s contributions for the years ended December 31, 2009, 2008 and 2007 were approximately $525,000, $479,000 and $416,000, respectively, and vest immediately or incrementally over five years, depending on the tenures of the respective employees for which the contributions were made.
As of January 1, 2000, the Company adopted the Supplemental Executive Retirement Savings Plan. This plan is a defined contribution plan covering all officers of the Company and provides for voluntary contributions of up to 50% of employee annual compensation. Company contributions are at the discretion of the Compensation Committee of the Board of Directors and vest incrementally over five years. The employee and employer contributions are placed in a Rabbi Trust and recorded in the accompanying consolidated balance sheets in prepaid and other current assets. Employer contributions to this plan for the years ended December 31, 2009, 2008 and 2007 were approximately $1,170,000, $174,000 and $130,000, respectively.
13.   Commitments and Contingencies
The Company and its partnerships are insured with respect to medical malpractice risk on a claims-made basis. The Company also maintains insurance for general liability, director and officer liability and property. Certain policies are subject to deductibles. In addition to the insurance coverage provided, the Company indemnifies its officers and directors for actions taken on behalf of the Company and its partnerships. Management is not aware of any claims against it or its partnerships which would have a material financial impact on the Company.
The Company’s wholly owned subsidiaries, as general partners in the limited partnerships, are responsible for all debts incurred but unpaid by the limited partnership. As manager of the operations of the limited partnerships, the Company has the ability to limit potential liabilities by curtailing operations or taking other operating actions.
In the event of a change in current law that would prohibit the physicians’ current form of ownership in the partnerships, the Company would be obligated to purchase the physicians’ interests in substantially all of the Company’s partnerships. The purchase price to be paid in such event would be determined by a predefined formula, as specified in the partnership agreements. The Company believes the likelihood of a change in current law, which would trigger such purchases, was remote as of December 31, 2009.
On December 22, 2009, the Company entered into an agreement to purchase a controlling interest in a center for $28,070,000. The consummation of the acquisition is contingent upon the satisfaction of closing conditions customary for transactions of this type. The Company anticipates closing this transaction in March 2010 and intends to fund the acquisition through a combination of operating cash flow and borrowings under its revolving credit agreement.
 

53


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
AmSurg Corp.
Notes to the Consolidated Financial Statements – (continued)
14.   Supplemental Cash Flow Information
Supplemental cash flow information for the years ended December 31 2009, 2008 and 2007 is as follows (in thousands):
                         
    2009   2008   2007
     
 
                       
Cash paid during the year for:
                       
Interest
  $ 7,854     $ 10,188     $ 9,961  
Income taxes, net of refunds
    19,336       19,297       14,906  
 
                       
Non-cash investing and financing activities:
                       
(Decrease) increase in accounts payable associated with acquisition of property and equipment
    (1,892 )     2,098       607  
Capital lease obligations incurred to acquire equipment
    148       970       746  
Notes received for sale of a partnership interest
          885        
Effect of acquisitions and related transactions:
                       
Assets acquired, net of cash and adjustments
    162,709       134,512       178,882  
Liabilities assumed and noncontrolling interests
    (66,883 )     (14,861 )     (16,105 )
Notes payable and other obligations
          (980 )      
     
 
                       
Payment for interests in surgery centers and related transactions
  $ 95,826     $ 118,671     $ 162,777  
     
15.   Subsequent Events
The Company assessed events occurring subsequent to December 31, 2009 for potential recognition and disclosure in the consolidated financial statements. No events have occurred that would require adjustment to or disclosure in the consolidated financial statements.
 

54


Table of Contents

Item 8.   Financial Statements and Supplementary Data – (continued)
 
AmSurg Corp.
Notes to the Consolidated Financial Statements – (continued)
Quarterly Statement of Earnings Data (Unaudited)
The following table presents certain quarterly statement of earnings data for the years ended December 31, 2008 and 2009. The quarterly statement of earnings data set forth below was derived from our unaudited financial statements and includes all adjustments, consisting of normal recurring adjustments, which we consider 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.
                                                                 
    2008   2009
    Q1   Q2   Q3   Q4   Q1   Q2   Q3   Q4
                    (In thousands, except per share data)                
 
                                                               
Revenues
  $ 145,579     $ 150,722     $ 150,749     $ 153,057     $ 163,424     $ 168,844     $ 167,873     $ 168,611  
Earnings from continuing operations before income taxes
    48,311       51,411       50,257       50,641       52,853       56,366       54,856       53,501  
Net earnings from continuing operations
    40,395       43,017       42,240       41,867       44,307       47,001       45,912       44,669  
Net earnings (loss) from discontinued operations
    312       (1,163 )     467       (1,209 )     8       (148 )     410       (809 )
Net earnings
    40,707       41,854       42,707       40,658       44,315       46,853       46,322       43,860  
 
                                                               
Net earnings attributable to AmSurg Corp. common shareholders:
                                                               
Continuing
    11,622       12,444       12,595       12,880       12,613       13,798       13,393       12,984  
Discontinuing
    84       (1,200 )     (211 )     (1,168 )     3       (218 )     410       (835 )
     
 
                                                               
Net earnings
  $ 11,706     $ 11,244     $ 12,384     $ 11,712     $ 12,616     $ 13,580     $ 13,803     $ 12,149  
     
 
                                                               
Diluted net earnings from continuing operations per common share
  $ 0.37     $ 0.39     $ 0.39     $ 0.41     $ 0.40     $ 0.45     $ 0.44     $ 0.42  
Diluted net earnings per common share
  $ 0.37     $ 0.35     $ 0.38     $ 0.37     $ 0.40     $ 0.44     $ 0.45     $ 0.40  
 

55


Table of Contents

 
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.   Controls and Procedures
Management’s Report on Internal Control Over Financial Reporting
We are responsible for the preparation and integrity of the consolidated financial statements appearing in our Annual Report. The consolidated financial statements were prepared in conformity with United States generally accepted accounting principles and include amounts based on management’s estimates and judgments. All other financial information in this report has been presented on a basis consistent with the information included in the consolidated financial statements.
We are also responsible for establishing and maintaining adequate internal controls over financial reporting. We maintain a system of internal controls that is designed to provide reasonable assurance as to the fair and reliable preparation and presentation of the consolidated financial statements, as well as to safeguard assets from unauthorized use or disposition. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
Our control environment is the foundation for our system of internal controls over financial reporting and is embodied in our Code of Conduct. It sets the tone of our organization and includes factors such as integrity and ethical values. Our internal controls over financial reporting are supported by formal policies and procedures which are reviewed, modified and improved as changes occur in business conditions and operations.
We conducted an evaluation of effectiveness of our internal controls over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, effectiveness of controls and a conclusion on this evaluation. Although there are inherent limitations in the effectiveness of any system of internal controls over financial reporting, based on our evaluation, we have concluded that our internal controls over financial reporting were effective as of December 31, 2009.
The effectiveness of the Company’s internal control over financial reporting has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, and they have issued an attestation report on the Company’s internal control over financial reporting which is set forth in the Report of Independent Registered Public Accounting Firm in Part II, Item 9A of this Annual Report on Form 10-K.
         
     
/s/ Christopher A. Holden  
   
Christopher A. Holden     
President and Chief Executive Officer     
     
/s/ Claire M. Gulmi  
   
Claire M. Gulmi     
Executive Vice President and Chief Financial Officer     
 
 

56


Table of Contents

Item 9A.   Controls and Procedures – (continued)
 
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
AmSurg Corp.
Nashville, Tennessee
We have audited the internal control over financial reporting of AmSurg Corp. and subsidiaries (the “Company”) as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s Board of Directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2009 of the Company and our report dated February 25, 2010 expressed an unqualified opinion on those financial statements and included an explanatory paragraph concerning the adoption of the amended provisions of ASC 805, Business Combinations, ASC 810, Consolidation, and ASC 740, Income Taxes.
/s/ DELOITTE & TOUCHE LLP
Nashville, Tennessee
February 25, 2010
 

57


Table of Contents

Item 9A.   Controls and Procedures – (continued)
 
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management team, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of December 31, 2009. Based on that evaluation, our chief executive officer (principal executive officer) and chief financial officer (principal accounting officer) have concluded that our disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
During the fourth fiscal quarter of the period covered by this report, there has been no change in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
Item 9B.   Other Information
Not applicable.
Part III
Item 10.   Directors, Executive Officers and Corporate Governance
Information with respect to our directors, set forth in our Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 20, 2010, under the caption “Election of Directors,” is incorporated herein by reference. Pursuant to General Instruction G(3), information concerning our executive officers 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 our Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 20, 2010, under the caption “Section 16(a) Beneficial Ownership Reporting Compliance,” is incorporated herein by reference.
Information with respect to our code of ethics, set forth in our Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 20, 2010, under the caption “Code of Conduct” and “Code of Ethics,” is incorporated herein by reference.
Information with respect to our audit committee and audit committee financial experts, set forth in our Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 20, 2010, under the caption “Election of Directors,” is incorporated herein by reference.
Item 11.   Executive Compensation
Information required by this caption, set forth in our Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 20, 2010, under the caption “Executive Compensation,” is incorporated herein by reference.
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information with respect to security ownership of certain beneficial owners and management and related stockholder matters, set forth in our Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 20, 2010, under the caption “Stock Ownership” and information with respect to our equity compensation plans at December 31, 2009, set forth in our Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 20, 2010, under the caption “Equity Compensation Plan Information,” is incorporated herein by reference.
Item 13.   Certain Relationships and Related Transactions, and Director Independence
Information with respect to certain relationships and related transactions, set forth in our Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 20, 2010, under the caption “Certain Relationships and Related Transactions,” is incorporated herein by reference.
Information with respect to the independence of our directors, set forth in our Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 20, 2010, under the caption “Corporate Governance,” is incorporated herein by reference.
 

58


Table of Contents

 
Item 14.   Principal Accounting Fees and Services
Information with respect to the fees paid to and services provided by our principal accountant, set forth in our Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 20, 2010, under the caption “Fees Billed to Us by Deloitte & Touche LLP During 2009 and 2008,” is incorporated herein by reference.
Part IV
Item 15.   Exhibits and Financial Statement Schedules
(a) Financial Statements, Financial Statement Schedules and Exhibits
  (1)   Financial Statements: See Item 8 herein.
 
  (2)   Financial Statement Schedules:
         
    S-1  
    S-2  
(All other schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or notes thereto.)
       
  (3)   Exhibits: See the exhibit listing set forth below.
 

59


Table of Contents

(3) Exhibits
 
         
Exhibit       Description
 
 
       
3.1
      Second Amended and Restated Charter of AmSurg, as amended (incorporated by reference to Exhibit 4.2 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2004)
 
       
3.2
      Second Amended and Restated Bylaws of AmSurg, as amended (incorporated by reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2004)
 
       
4.1
      Specimen common stock certificate (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form 10/A-4 (filed with the Commission on July 13, 2001))
 
       
4.2
      Second Amended and Restated Rights Agreement, dated as of July 12, 2001, between AmSurg and SunTrust Bank, Atlanta, including the Form of Rights Certificate (Exhibit A) and the Form of Summary of Rights (Exhibit B) (incorporated by reference to Exhibit 1 to Amendment No. 2 to the Registration Statement on Form 8-A/A (filed with the Commission on July 13, 2001))
 
       
4.3
      First Amendment to Second Amended and Restated Rights Agreement, dated as of April 16, 2003, by and between AmSurg and SunTrust Bank, Atlanta (incorporated by reference to Exhibit 4 of the Quarterly Report on Form 10-Q for the quarter ended June 30, 2003)
 
       
10.1
  *   Form of Indemnification Agreement with directors, executive officers and advisors (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form 10 (filed with the Commission on March 11, 1997))
 
       
10.2
      Third Amended and Restated Revolving Credit Agreement, dated as of July 28, 2006, among AmSurg, SunTrust Bank, as Administrative Agent, and various banks and other financial institutions (incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K, dated August 1, 2006)
 
       
10.3
      First Amendment to Third Amended and Restated Revolving Credit Agreement, dated as of October 29, 2007, by and among AmSurg Corp., the several banks and other financial institutions from time to time party thereto (the “Lenders”), and SunTrust Bank, in its capacity as Administrative Agent for the Lenders (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, dated November 2, 2007)
 
       
10.4
  *   Amended and Restated 1997 Stock Incentive Plan (incorporated by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2004)
 
       
10.5
  *   First Amendment to Amended and Restated 1997 Stock Incentive Plan (incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K, dated November 21, 2006)
 
       
10.6
  *   Form of Non-Qualified Stock Option Agreement – 1997 Incentive Plan (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K, dated February 2, 2005)
 
       
10.7
  *   Form of Restricted Stock Agreement for Non-Employee Directors – 1997 Incentive Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, dated May 24, 2005)
 
       
10.8
      Lease Agreement dated February 24, 1999 between Burton Hills III, LLC and AmSurg (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)
 
       
10.9
      First Amendment to Lease Agreement dated June 27, 2001 by and between Burton Hills III, LLC and AmSurg (incorporated by reference to Exhibit 10 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2002)
 
       
10.10
      Second Amendment to Lease Agreement dated January 31, 2003 by and between Burton Hills III Partnership and AmSurg (incorporated by reference to Exhibit 10.14 to the Annual Report on Form 10-K for the year ended December 31, 2003)
 
       
10.11
      Third Amendment to Lease Agreement dated September 1, 2003 by and between Burton Hills III Partnership and AmSurg (incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2003)
 
       
10.12
      Fourth Amendment to Lease Agreement dated October 31, 2003 by and between Burton Hills III Partnership and AmSurg (incorporated by reference to Exhibit 10.16 to the Annual Report on Form 10-K for the year ended December 31, 2003)
 

60


Table of Contents

(3) Exhibits – (continued)
 
         
Exhibit       Description
 
 
       
10.13
  *   Amended and Restated Supplemental Executive Retirement Savings Plan, as amended (Restated for SEC electronic purposes only and incorpated by reference to Exhibit 10.14 to the Annual Report on Form 10-K for the year ended December 31, 2008)
 
       
10.14
  *   AmSurg Corp. 2006 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)
 
       
10.15
  *   Form of Restricted Share Award Agreement for Non-Employee Directors – 2006 Incentive Plan (incorporated by reference to Exhibit 99.3 to the Current Report on Form 8-K, dated February 21, 2007)
 
       
10.16
  *   Form of Non-Qualified Stock Option Agreement for Executive Officers – 2006 Incentive Plan (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K, dated February 21, 2007)
 
       
10.17
  *   Form of Restricted Share Award for Employees – 2006 Incentive Plan
 
       
10.18
  *   Restricted Share Award Agreement, dated February 21, 2008, between the Company and Ken P. McDonald (incorporated by reference to Exhibit 10.20 to the Annual Report on Form 10-K for the year ended December 31, 2007)
 
       
10.19
  *   Non-Qualified Stock Option Agreement, dated February 21, 2008, between the Company and Ken P. McDonald (incorporated by reference to Exhibit 10.21 to the Annual Report on Form 10-K for the year ended December 31, 2007)
 
       
10.20
  *   AmSurg Corp. Long-Term Care Plan (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2005)
 
       
10.21
  *   Amended and Restated Employment Agreement, dated January 30, 2009, between AmSurg and Christopher A. Holden (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K, dated February 5, 2009)
 
       
10.22
  *   Second Amended and Restated Employment Agreement, dated January 30, 2009, between AmSurg and Claire M. Gulmi (incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K, dated February 5, 2009)
 
       
10.23
  *   Second Amended and Restated Employment Agreement, dated January 30, 2009, between AmSurg and David L. Manning (incorporated by reference to Exhibit 99.3 to the Current Report on Form 8-K, dated February 5, 2009)
 
       
10.24
  *   Amended and Restated Employment Agreement, dated February 7, 2008, between AmSurg and Royce D. Harrell (incorporated by reference to Exhibit 99.5 to the Current Report on Form 8-K, dated February 13, 2008)
 
       
10.25
  *   Second Amended and Restated Employment Agreement, dated January 30, 2009, between AmSurg and Billie A. Payne (incorporated by reference to Exhibit 99.4 to the Current Report on Form 8-K, dated February 5, 2009)
 
       
10.26
  *   Employment Agreement, dated January 30, 2009, between AmSurg and Kevin D. Eastridge (incorporated by reference to Exhibit 99.5 to the Current Report on Form 8-K, dated February 5, 2009)
 
       
10.27
  *   Employment Agreement, dated March 23, 2009, between AmSurg and Phillip A. Clendenin (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K, dated March 27, 2009)
 
       
10.28
      Schedule of Non-employee Director Compensation
 
       
21.1
      Subsidiaries of AmSurg
 
       
23.1
      Consent of Independent Registered Public Accounting Firm
 
       
24.1
      Power of Attorney (appears on page 59)
 
       
31.1
      Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
 
       
31.2
      Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
 
       
32.1
      Section 1350 Certifications
 
*   Management contract or compensatory plan, contract or arrangement
 

61


Table of Contents

 
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.
 
 
February 25, 2010  By:     /s/ Christopher A. Holden    
    Christopher A. Holden   
    (President and Chief Executive Officer) 
 
     KNOW ALL MEN BY THESE PRESENTS, each person whose signature appears below hereby constitutes and appoints Christopher A. Holden and Claire M. Gulmi, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this report, and to file the same with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
         
Signature   Title   Date
 
 
       
  /s/ Christopher A. Holden
 
  Christopher A. Holden
  President, Chief Executive Officer and Director
(Principal Executive Officer)
  February 25, 2010
 
       
  /s/ Claire M. Gulmi
 
  Claire M. Gulmi
  Executive Vice President, Chief Financial Officer,
Secretary and Director (Principal
Financial and Accounting Officer)
  February 25, 2010
 
       
  /s/ Steven I. Geringer
 
  Chairman of the Board    February 25, 2010
  Steven I. Geringer
       
 
       
  /s/ Thomas G. Cigarran
 
  Director    February 25, 2010
  Thomas G. Cigarran
       
 
       
  /s/ James A. Deal
 
  Director    February 25, 2010
  James A. Deal
       
 
       
  /s/ Debora A. Guthrie
 
  Director    February 25, 2010
  Debora A. Guthrie
       
 
       
  /s/ Henry D. Herr
 
  Director    February 25, 2010
  Henry D. Herr
       
 
       
  /s/ Kevin P. Lavender
 
  Director    February 25, 2010
  Kevin P. Lavender
       
 
       
  /s/ Ken P. McDonald
 
  Director    February 25, 2010
  Ken P. McDonald
       
 
       
  /s/ John W. Popp, Jr., M.D.
 
  Director    February 25, 2010
  John W. Popp, Jr., M.D.
       
 

62


Table of Contents

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
AmSurg Corp.
Nashville, Tennessee
We have audited the consolidated financial statements of AmSurg Corp. and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and for each of the three years in the period ended December 31, 2009, and the Company’s internal control over financial reporting as of December 31, 2009, and have issued our reports thereon dated February 25, 2010 which report expresses an unqualified opinion and includes an explanatory paragraph concerning the adoption of the amended provisions of ASC 805, Business Combinations, ASC 810, Consolidation, and ASC 740, Income Taxes; such reports are included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedule of the Company listed in Item 15. 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.
/s/ DELOITTE & TOUCHE LLP
Nashville, Tennessee
February 25, 2010
 

S-1


Table of Contents

AmSurg Corp.
Schedule II – Valuation and Qualifying Accounts
For the Years Ended December 31, 2009, 2008 and 2007
(In thousands
)
                                         
            Additions   Deductions    
    Balance at   Charged to   Charged to   Charge-off   Balance
    Beginning   Cost and   Other   Against   at End of
    of Period   Expenses   Accounts (1)   Allowances   Period
     
 
                                       
Allowance for uncollectible accounts included under the balance sheet caption “Accounts receivable”:
                                       
 
                                       
Year ended December 31, 2009
  $ 11,757     $ 16,844     $ 1,359     $ (17,585 )   $ 12,375  
     
 
                                       
Year ended December 31, 2008
  $ 8,310     $ 17,169     $ 2,401     $ (16,123 )   $ 11,757  
     
 
                                       
Year ended December 31, 2007
  $ 6,628     $ 14,286     $ 1,885     $ (14,489 )   $ 8,310  
     
 
 
(1)   Valuation of allowance for uncollectible accounts as of the acquisition date of physician practice-based surgery centers, net of dispositions. See “Item 8 Financial Statements and Supplementary Data – Notes to the Consolidated Financial Statements – Note 2.”
 

S-2