Attached files
file | filename |
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EXCEL - IDEA: XBRL DOCUMENT - AMSURG CORP | Financial_Report.xls |
EX-31.2 - EX-31.2 - AMSURG CORP | g25553exv31w2.htm |
EX-31.1 - EX-31.1 - AMSURG CORP | g25553exv31w1.htm |
EX-21.1 - EX-21.1 - AMSURG CORP | g25553exv21w1.htm |
EX-23.1 - EX-23.1 - AMSURG CORP | g25553exv23w1.htm |
EX-32.1 - EX-32.1 - AMSURG CORP | g25553exv32w1.htm |
EX-10.27 - EX-10.27 - AMSURG CORP | g25553exv10w27.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, 2010
For the Fiscal Year Ended December 31, 2010
Commission File Number 000-22217
AMSURG CORP.
(Exact Name of Registrant as Specified in Its Charter)
Tennessee | 62-1493316 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
20 Burton Hills Boulevard, Nashville, TN | 37215 | |
(Address of Principal Executive Offices) | (Zip Code) |
(615) 665-1283
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no par value
(Title of class)
(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 þ 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 Registrants 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 24, 2011, 31,304,626 shares of the Registrants common stock were outstanding. The
aggregate market value of the shares of common stock of the Registrant held by nonaffiliates on
June 30, 2010 (based upon the closing sale price of these shares as reported on the Nasdaq Global
Select Market as of June 30, 2010) was approximately $537,000,000. 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 Registrants Definitive Proxy Statement for its Annual Meeting of Shareholders to
be held on May 20, 2011, 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, 2010
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EX-10.27 | ||||||||
EX-21.1 | ||||||||
EX-23.1 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
i
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, 2010, we owned a majority interest in 204 surgery centers in 33 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 SECs 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, 2010. 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 multi-specialty ASCs with substantial minority physician ownership; | ||
| develop new ASCs in partnership with physicians; and | ||
| grow revenues and profitability at our existing surgery centers. |
We also intend to pursue acquisitions of other companies that own and manage ASCs.
1
Table of Contents
Item 1. Business (continued)
Currently, approximately 80% of our revenues are from 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 equipped
and staffed for a single medical specialty. 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 centers 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 physicians 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 centers 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 build out; 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
entities affiliated with the physician partners, who will provide services at the center. Certain
significant aspects of the limited partnerships or limited liability companys 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 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.
2
Table of Contents
Item 1. Business (continued)
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:
| the physicians affiliated with the ASCs recruiting new physicians to their practices; | ||
| identifying additional physicians 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. 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 $2.7 million. Constructing, equipping and licensing a surgery center generally takes
12 to 15 months. As of December 31, 2010, 140 of our centers performed gastrointestinal endoscopy
procedures, 37 centers performed ophthalmology surgery procedures, 19 centers were multi-specialty
centers and eight 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 leased on a full or part-time basis from entities
affiliated with our physician partners.
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. |
3
Table of Contents
Item 1. Business (continued)
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
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. We generally seek accreditation for all of our ASCs. Currently, 167 of our 204
surgery centers are accredited by AAAHC or The Joint Commission, and 37 of our surgery centers are
scheduled for initial accreditation surveys during 2011. 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, 2010:
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 | |||||
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
|
Multispecialty | June 2000 | 2 | |||||
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 |
4
Table of Contents
Item 1. Business (continued)
Operating or | ||||||||
Acquisition/ | Procedure | |||||||
Location | Specialty | Opening Date | Rooms | |||||
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 | |||||
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 | |||||
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 |
5
Table of Contents
Item 1. Business (continued)
Operating or | ||||||||
Acquisition/ | Procedure | |||||||
Location | Specialty | Opening Date | Rooms | |||||
Metairie, Louisiana
|
Gastroenterology | January 2007 | 3 | |||||
Toms 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
|
Orthopaedic | 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 | |||||
Waltham, Massachusetts
|
Orthopaedic | March 2010 | 4 | |||||
Boynton Beach, Florida
|
Multispecialty | May 2010 | 4 | |||||
Waco, Texas
|
Gastroenterology | July 2010 | 3 | |||||
Port St. Lucie, Florida
|
Ophthalmology | August 2010 | 2 | |||||
Port Orange, Florida
|
Multispecialty | October 2010 | 3 | |||||
Phoenix, Arizona
|
Gastroenterology | November 2010 | 3 | |||||
Columbus, Ohio
|
Ophthalmology | December 2010 | 3 | |||||
Developed Centers: |
||||||||
Santa Fe, New Mexico
|
Gastroenterology | May 1994 | 3 | |||||
Beaumont, Texas
|
Gastroenterology | October 1994 | 5 | |||||
Abilene, Texas
|
Gastroenterology | December 1994 | 3 |
6
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Item 1. Business (continued)
Operating or | ||||||||
Acquisition/ | Procedure | |||||||
Location | Specialty | Opening Date | Rooms | |||||
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 | |||||
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 | |||||
Inglewood, California
|
Gastroenterology | May 2001 | 3 | |||||
Clemson, South Carolina
|
Multispecialty | 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 | |||||
587 | ||||||||
Our limited partnerships and limited liability companies generally lease the real property on which our surgery centers operate, either from entities affiliated with our 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 patients surgeon,
7
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Item 1. Business (continued)
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 patients 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 31%, 33% and 34% of our revenues in the years ended December 31, 2010, 2009 and 2008,
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, beginning January 1, 2008; 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 78% of the procedures performed by our
surgery centers, and certain ophthalmology and pain procedures. Effective for fiscal year 2011 and
subsequent years, the Patient Protection and Affordable Care Act, as amended by the Health Care and
Education Reconciliation Act of 2010, or the Health Reform Law, provides for the annual CPI
increases applicable to ASCs to be reduced by a productivity adjustment, which will be based on
historical nationwide productivity gains. We estimate that our net earnings per share were
negatively impacted by the revised payment system by $0.05 in 2008, by an additional $0.07 in 2009
and an additional $0.06 in 2010. In November 2010, CMS announced final reimbursement rates for
2011 under the revised payment system, which reflect a 1.5% CPI increase and a 1.3% productivity
adjustment decrease. Based upon our current procedure mix and payor mix volume, we believe the
2011 scheduled reduction in payment rates will reduce our net earnings per diluted share in 2011 by
approximately $0.05 as compared to 2010. The phase-in of the revised rates will be completed in
2011, and reimbursement rates for our ASCs should be increased annually thereafter based upon
increases in the CPI. However, rates will also be subject to annual reductions based on a
productivity adjustment. There can be no assurance that CMS will not further revise the payment
system, or that any annual CPI increases will be material.
In March 2010, President Obama signed the Health Reform Law. The Health Reform Law represents
significant change across the healthcare industry. The Health Reform Law contains a number of
provisions designed to reduce Medicare program spending, including an annual productivity
adjustment that will reduce payment updates to ASCs beginning in fiscal year 2011. However, the
Health Reform Law also expands coverage of uninsured individuals through a combination of public
program expansion and private sector health insurance reforms. For example, the Health Reform Law,
as enacted expands eligibility under existing Medicaid programs, imposes financial penalties on
individuals who fail to carry insurance coverage, creates affordability credits for those not
enrolled in an employer-sponsored health plan, requires each state to establish a health insurance
exchange and permits states to create federally funded, non-Medicaid plans for low-income residents
not eligible for Medicaid. The Health Reform Law also establishes a number of private health
insurance market reforms, including a ban on lifetime limits and pre-existing condition exclusions,
new benefit mandates, and increased dependent coverage.
Effective for plan years beginning on or after September 23, 2010, many health plans are required
to cover, without cost-sharing, certain preventive services designated by the U.S. Preventive
Services Task Force, including colonoscopies. Beginning January 1, 2011, Medicare must also cover these preventive services without cost-sharing, and,
beginning in 2013, states that provide Medicaid coverage of these preventive services without
cost-sharing will receive a one percentage point increase in their federal medical assistance
percentage for these services.
Health insurance market reforms that expand insurance coverage may result in an increased volume
for certain procedures at our centers. However, many of these provisions of the Health Reform Law
will not become effective until 2014 or later, and these provisions may be amended or eliminated or
their impact could be offset by reductions in reimbursement under the Medicare program. More than
20 challenges to the Health Reform Law have been filed in federal courts. Some federal district
courts have upheld the constitutionality of the Health Reform Law or dismissed cases on procedural
grounds. Others have held the
8
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Item 1. Business (continued)
requirement that individuals maintain health insurance or pay a penalty to be unconstitutional and
have either found the Health Reform Law void in its entirety or left the remainder of the law
intact. These lawsuits are subject to appeal. Further, Congress is considering bills that would
repeal or revise the Health Reform Law.
Because of the many variables involved, including the laws complexity, lack of implementing
regulations or interpretive guidance, gradual implementation, pending court challenges, and
possible amendment or repeal, we are unable to predict the net effect of the reductions in Medicare
spending, the expected increases in revenues from increased procedure volumes, and numerous other
provisions in the law that may affect the Company. We are further unable to foresee how
individuals and employers will respond to the choices afforded them by the Health Reform Law.
Thus, we cannot predict the full impact of the Health Reform Law on the Company at this time.
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.
The Health Reform Law expands the RAC programs scope to include Medicaid claims by requiring all
states to establish programs to contract with RACs by December 31, 2010. In addition to RACs,
other contractors, such as Medicaid Integrity Contractors, perform payment audits to identify and
correct improper payments. 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. Further,
the Health Reform Law required the Department of Health and Human Services, or HHS, to present a
plan to Congress by January 1, 2011 for implementing a value-based purchasing system that would tie
Medicare payments to ASCs to quality and efficiency measures. HHS has not yet publicly issued this
plan. The Health Reform Law also requires HHS to study whether to expand to ASCs its current
policy of not paying additional amounts for care provided to treat conditions acquired during an
inpatient hospital stay.
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. 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 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. Physicians, hospitals,
payors and other providers may form accountable care organizations or similar entity arrangements
that restrict the physicians who may treat certain patients or the facilities at which patients may
be treated. 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
9
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Item 1. Business (continued)
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 HHS, 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. Courts have found a violation of the
anti-kickback statute if just one purpose of the remuneration is to general referrals, even if
there are other lawful purposes. Furthermore, the Health Reform Law provides that knowledge of the
law or intent to violate the law is not required. 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. The Health Reform
Law provides that submission of a claim for services or items generated in violation of the
anti-kickback statute constitutes a false or fraudulent claim and may be subject to additional
penalties under the federal False Claims Act.
HHS 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 HHS 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.
10
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Item 1. Business (continued)
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 partnerships or limited liability
companys 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 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 Certain Self-Referrals and Physician Ownership of Healthcare Facilities. 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 physicians 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
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Item 1. Business (continued)
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 patients 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 governments behalf. When a private plaintiff brings a qui tam action under
the False Claims Act, the defendant often will not be 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. Under the Health
Reform Law, civil penalties may be imposed for failure to report and return an overpayment within
60 days of identifying the overpayment. 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. The Health Reform Law clarifies this issue with respect
to the anti-kickback statute by providing that submission of claims for services or items generated
in violation of the anti-kickback statute constitutes a false or fraudulent claim 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 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.
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Item 1. Business (continued)
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. The Health Reform Law includes
additional federal funding of $350 million over the next 10 years to fight health care fraud, waste
and abuse, including $105 million for federal fiscal year 2011 and $65 million for federal fiscal
year 2012. 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, or 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, HHS 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, HHS 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 HHS 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, or FTC, 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 FTC delayed enforcement of this rule until
December 31, 2010. In addition, on December 18, 2010, the Red Flag Program Clarification Act of
2010 became law, restricting the definition of a creditor. This law may exempt our ASCs and
other healthcare providers from complying with this rule.
HIPAA Administrative Simplification Requirements. Pursuant to HIPAA, HHS 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
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Item 1. Business (continued)
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, 2010, we and our affiliated entities employed approximately 3,100 persons,
approximately 1,900 of whom were full-time employees and 1,200 of whom were part-time employees.
Of our employees, 280 were employed at our headquarters in Nashville, Tennessee. In addition, we
lease the services of approximately 900 full-time employees and 500 part-time employees from
entities affiliated with our physician partners. None of these employees are 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.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the persons serving as our executive
officers as of December 31, 2010. Our executive officers serve at the pleasure of the Board of Directors.
Name | Age | Experience | ||||
Christopher A. Holden
|
46 | 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
|
57 | 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
|
61 | Executive Vice President and Chief Development Officer since February 2006; Senior Vice President of Development from April 1992 to February 2006. | ||||
Phillip A. Clendenin
|
46 | 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
|
45 | 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
|
59 | Senior Vice President of Operations since December 2007; Vice President of Operations from March 1998 to December 2007. |
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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.
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 31% of our
revenues in 2010 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.
Although the Health Reform Law, as enacted, expands coverage of preventive care and the number of
individuals with healthcare coverage, the law also provides for reductions to Medicare and Medicaid
program spending. It is impossible to predict how the various components of the Health Reform Law,
many of which do not take effect for several years, will affect our business and the businesses of
our physician partners. Several states are also considering healthcare reform measures. This focus
on healthcare reform at the federal and state levels may increase the likelihood of significant
changes affecting government healthcare programs in the future.
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 increased obligations
on payors imposed by the Health Reform Law or 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
(including Medicare), actions taken by referring physicians, other providers and payors, and other
factors impacting their practices. Adverse economic conditions, including high unemployment rates,
could cause patients of our physician partners and our ASC to cancel or delay procedures. 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, changes in payment rates or systems, 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 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. During 2010, procedure growth at our ASCs was
adversely impacted by adverse economic conditions, including high unemployment rates, that caused
patients to cancel and delay procedures. We believe economic conditions will continue to
negatively impact our business in 2011. 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
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Item 1A. Risk Factors (continued)
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. Physicians, hospitals, payors and
other providers may form accountable care organizations or similar entity arrangements that
restrict the physicians who may treat certain patients or the facilities at which patients may be
treated. 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.
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 2010, 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 rates or make other changes
in the Medicare program, result in the inability or refusal of the lenders under our credit
agreements to lend additional monies to us to fund our operations 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 2011, 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.
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; | ||
| 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. |
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Item 1A. Risk Factors (continued)
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, and 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. Courts have found a violation of the anti-kickback statute if just one purpose of the
remuneration is to general referrals, even if there are other lawful purposes. Furthermore, the
Health Reform Law provides that knowledge of the law or intent to violate the law is not required.
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.
HHS 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.
We are unable to predict the impact of the Health Reform Law, which represents significant change
across the health care industry. The Health Reform Law represents significant change to the
healthcare industry. As enacted, it will change how healthcare services are covered, delivered, and
reimbursed through expanded coverage of previously uninsured individuals and reduced government
healthcare spending, reform certain aspects of health insurance, expand existing efforts to tie
Medicare and Medicaid payments to performance and quality and strengthen fraud and abuse
enforcement. It is not clear at this time what all of the impacts of the Health Reform Law will be
and what effect the legislation will have on ASCs or the healthcare industry as a whole.
Implementation of the Health Reform Law could be delayed or even blocked due to court challenges
and efforts to repeal
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Item 1A. Risk Factors (continued)
or amend the law. Although some federal district courts have upheld the
constitutionality of the Health Reform Law, other courts
have held the requirement that individuals maintain health insurance or pay a penalty to be
unconstitutional and have either left the remainder of the law intact or struck down the law in its
entirety. It is unclear how these lawsuits will be resolved or what the outcome of Congressional
efforts to repeal or amend the law will be.
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, 2010 contained an intangible
asset designated as goodwill totaling approximately $894.5 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
19
Table of Contents
Item 1A. Risk Factors (continued)
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 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 78,000 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 Miami, 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, 2010, 204 leased space ranging from
1,000 to 24,000 square feet, with expected remaining lease terms ranging from one to 20 years.
Item 3. Legal Proceedings
Not applicable.
Item 4. [Removed and Reserved]
20
Table of Contents
PART II
Item 5. Market for Registrants 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 2009 and 2010, as reported on the Nasdaq Global Select Market:
1st | 2nd | 3rd | 4th | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
2009: |
||||||||||||||||
High |
$ | 24.03 | $ | 21.71 | $ | 22.65 | $ | 23.61 | ||||||||
Low |
$ | 12.23 | $ | 15.18 | $ | 18.95 | $ | 20.25 | ||||||||
2010: |
||||||||||||||||
High |
$ | 22.94 | $ | 23.30 | $ | 19.87 | $ | 21.68 | ||||||||
Low |
$ | 20.00 | $ | 17.76 | $ | 16.35 | $ | 17.07 |
At February 24, 2011, there were 204 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.
21
Table of Contents
Item 6. Selected Financial Data
Year Ended December 31, | |||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||
(Dollars in thousands, except per share data) | |||||||||||||||||||||
Consolidated Statement of Earnings Data: |
|||||||||||||||||||||
Revenues |
$ | 710,409 | $ | 658,223 | $ | 588,658 | $ | 506,493 | $ | 426,685 | |||||||||||
Operating expenses |
481,126 | 436,101 | 381,415 | 328,502 | 277,329 | ||||||||||||||||
Operating income |
229,283 | 222,122 | 207,243 | 177,991 | 149,356 | ||||||||||||||||
Interest expense |
13,371 | 7,647 | 9,704 | 9,461 | 7,314 | ||||||||||||||||
Earnings from continuing operations before income
taxes |
215,912 | 214,475 | 197,539 | 168,530 | 142,042 | ||||||||||||||||
Income tax expense |
34,324 | 35,067 | 32,472 | 26,450 | 22,010 | ||||||||||||||||
Net earnings from continuing operations |
181,588 | 179,408 | 165,067 | 142,080 | 120,032 | ||||||||||||||||
Discontinued operations: |
|||||||||||||||||||||
Earnings from operations of discontinued interests
in surgery centers, net of income tax expense |
1,640 | 2,644 | 2,632 | 6,511 | 10,356 | ||||||||||||||||
(Loss) gain on disposal of discontinued interests in
surgery centers, net of income tax |
(2,732 | ) | (702 | ) | (1,773 | ) | 1,712 | (463 | ) | ||||||||||||
Net (loss) gain earnings from discontinued operations |
(1,092 | ) | 1,942 | 859 | 8,223 | 9,893 | |||||||||||||||
Net earnings |
180,496 | 181,350 | 165,926 | 150,303 | 129,925 | ||||||||||||||||
Less net earnings attributable to noncontrolling interests |
130,671 | 129,202 | 118,880 | 106,128 | 92,186 | ||||||||||||||||
Net earnings attributable to AmSurg Corp.
common shareholders |
$ | 49,825 | $ | 52,148 | $ | 47,046 | $ | 44,175 | $ | 37,739 | |||||||||||
Amounts attributable to AmSurg Corp. common
shareholders: |
|||||||||||||||||||||
Earnings from continuing operations, net of tax |
$ | 51,947 | $ | 51,826 | $ | 48,600 | $ | 40,852 | $ | 33,784 | |||||||||||
Discontinued operations, net of tax |
(2,122 | ) | 322 | (1,554 | ) | 3,323 | 3,955 | ||||||||||||||
Net earnings attributable to AmSurg Corp.
common shareholders |
$ | 49,825 | $ | 52,148 | $ | 47,046 | $ | 44,175 | $ | 37,739 | |||||||||||
Basic earnings per common share: |
|||||||||||||||||||||
Net earnings from continuing operations attributable to
AmSurg Corp. common shareholders |
$ | 1.72 | $ | 1.69 | $ | 1.54 | $ | 1.33 | $ | 1.13 | |||||||||||
Net earnings attributable to AmSurg Corp. common
shareholders |
$ | 1.65 | $ | 1.71 | $ | 1.49 | $ | 1.44 | $ | 1.27 | |||||||||||
Diluted earnings per common share: |
|||||||||||||||||||||
Net earnings from continuing operations attributable to
AmSurg Corp. common shareholders |
$ | 1.69 | $ | 1.68 | $ | 1.52 | $ | 1.31 | $ | 1.11 | |||||||||||
Net earnings attributable to AmSurg Corp. common
shareholders |
$ | 1.62 | $ | 1.69 | $ | 1.47 | $ | 1.42 | $ | 1.24 | |||||||||||
Weighted average number of shares and share equivalents
outstanding (in thousands): |
|||||||||||||||||||||
Basic |
30,255 | 30,576 | 31,503 | 30,619 | 29,822 | ||||||||||||||||
Diluted |
30,689 | 30,862 | 31,963 | 31,102 | 30,398 | ||||||||||||||||
Operating and Other Financial Data: |
|||||||||||||||||||||
Continuing centers at end of year |
204 | 197 | 183 | 163 | 139 | ||||||||||||||||
Procedures performed during year |
1,276,231 | 1,215,784 | 1,085,941 | 930,845 | 779,383 | ||||||||||||||||
Same-center revenue (decrease) increase |
(2 | %) | 0 | % | 3 | % | 4 | % | 5 | % | |||||||||||
Cash flows provided by operating activities |
$ | 230,575 | $ | 232,584 | $ | 209,696 | $ | 182,916 | $ | 162,689 | |||||||||||
Cash flows used in investing activities |
(72,905 | ) | (112,792 | ) | (131,780 | ) | (179,368 | ) | (71,794 | ) | |||||||||||
Cash flows used in financing activities |
(152,900 | ) | (121,963 | ) | (76,321 | ) | (6,322 | ) | (91,308 | ) | |||||||||||
At December 31, | |||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||
(In thousands) | |||||||||||||||||||||
Consolidated Balance Sheet Data: |
|||||||||||||||||||||
Cash and cash equivalents |
$ | 34,147 | $ | 29,377 | $ | 31,548 | $ | 29,953 | $ | 20,083 | |||||||||||
Working capital |
89,393 | 80,161 | 85,497 | 83,792 | 66,591 | ||||||||||||||||
Total assets |
1,165,878 | 1,066,831 | 905,879 | 781,634 | 590,032 | ||||||||||||||||
Long-term debt and other long-term liabilities |
307,619 | 318,819 | 288,251 | 232,223 | 127,821 | ||||||||||||||||
Non-redeemable and redeemable noncontrolling interests (1) |
160,539 | 128,618 | 66,079 | 62,006 | 52,341 | ||||||||||||||||
AmSurg Corp. shareholders equity |
564,068 | 505,116 | 460,429 | 411,225 | 343,108 |
(1) | See Managements Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies. |
22
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Item 7. Managements 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, 2010, we owned a majority interest (51% or greater) in 204 ASCs. The following table
presents the number of procedures performed at our continuing centers in operation and changes in
the number of ASCs in operation, under development and under letter of intent for the years ended
December 31, 2010, 2009 and 2008. 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.
2010 | 2009 | 2008 | ||||||||||
Procedures |
1,276,231 | 1,215,784 | 1,085,941 | |||||||||
Continuing centers in operation, end of year |
204 | 197 | 183 | |||||||||
Average number of continuing centers in operation, during year |
200 | 188 | 167 | |||||||||
New centers added during year |
7 | 14 | 20 | |||||||||
Centers discontinued during year |
5 | 1 | 6 | |||||||||
Centers under development, end of year |
1 | 1 | 3 | |||||||||
Centers under letter of intent, end of year |
8 | 1 | 5 |
Of the continuing centers in operation at December 31, 2010, 140 centers performed gastrointestinal
endoscopy procedures, 37 centers performed ophthalmology surgery procedures, 19 centers performed
procedures in multiple specialties and eight centers performed orthopaedic procedures. We intend
to expand primarily through the acquisition and development of additional
single-specialty and multi-specialty ASCs and through future same-center growth. Our growth
targets for 2011 include the acquisition or development of 13 to 16 surgery centers. We expect our
same-center revenue to be flat to a 1% decline in 2011. Our expectation is primarily based on
reductions in Medicare reimbursement rates for 2011, 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 patients 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 payment
systems and the cost containment and utilization decisions of third-party payors. We derived
approximately 31%, 33% and 34% of our revenues in the years ended December 31, 2010, 2009 and
2008, 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.
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Table of Contents
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
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, beginning January 1, 2008; 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 78% of the procedures performed by our
surgery centers, and certain ophthalmology and pain procedures. Effective for fiscal year 2011 and
subsequent years, the Patient Protection and Affordable Care Act, as amended by the Health Care and
Education Reconciliation Act of 2010, or the Health Reform Law, provides for the annual CPI
increases applicable to ASCs to be reduced by a productivity adjustment, which will be based on
historical nationwide productivity gains. We estimate that our net earnings per share were
negatively impacted by the revised payment system by $0.05 in 2008, by an additional $0.07 in 2009
and an additional $0.06 in 2010. In November 2010, CMS announced final reimbursement rates for
2011 under the revised payment system, which reflect a 1.5% CPI increase and a 1.3% productivity
adjustment decrease. Based on our current procedure mix and payor mix volume, we believe the 2011
scheduled reduction in payment rates will reduce our net earnings per diluted share in 2011 by
approximately $0.05 as compared to 2010. The scheduled phase-in of the revised rates will be
completed in 2011, and reimbursement rates for our ASCs should be increased annually thereafter
based upon increases in the CPI. However, rates will also be subject to annual reductions based on
a productivity adjustment. There can be no assurance, that CMS will not further revise the payment
system, or that any annual CPI increases will be material.
The Health Reform Law represents significant change across the healthcare industry. The Health
Reform Law contains a number of provisions designed to reduce Medicare program spending, including
an annual productivity adjustment that will reduce payment updates to ASCs beginning in fiscal year
2011. However, the Health Reform Law also expands coverage of uninsured individuals through a
combination of public program expansion and private sector health insurance reforms. For example,
the Health Reform Law, as enacted, expands eligibility under existing Medicaid programs, imposes
financial penalties on individuals who fail to carry insurance coverage, creates affordability
credits for those not enrolled in an employer-sponsored health plan, requires each state to
establish a health insurance exchange and permits states to create federally funded, non-Medicaid
plans for low-income residents not eligible for Medicaid. The Health Reform Law also establishes a
number of private health insurance market reforms, including a ban on lifetime limits and
pre-existing condition exclusions, new benefit mandates, and increased dependent coverage.
Effective for plan years beginning on or after September 23, 2010, many health plans are required
to cover, without cost-sharing, certain preventive services designated by the U.S. Preventive
Services Task Force, including colonoscopies. Beginning
January 1, 2011, Medicare must also cover these preventive services without cost-sharing, and,
beginning in 2013, states that provide Medicaid coverage of these preventive services without
cost-sharing will receive a one percentage point increase in their federal medical assistance
percentage for these services.
Health insurance market reforms that expand insurance coverage may result in an increased volume
for certain procedures at our centers. However, many of these provisions of the Health Reform Law
will not become effective until 2014 or later, and these provisions may be amended or eliminated or
their impact could be offset by reductions in reimbursement under the Medicare program. More than
20 challenges to the Health Reform Law have been filed in federal courts. Some federal district
courts have upheld the constitutionality of the Health Reform Law or dismissed cases on procedural
grounds. Others have held the requirement that individuals maintain health insurance or pay a
penalty to be unconstitutional and have either found the Health Reform Law void in its entirety or
left the remainder of the law intact. These lawsuits are subject to appeal. Further, Congress is
considering bills that would repeal or revise the Health Reform Law.
Because of the many variables involved, including the laws complexity, lack of implementing
regulations or interpretive guidance, gradual implementation, pending court challenges, and
possible amendment or repeal, we are unable to predict the net effect of the reductions in Medicare
spending, the expected increases in revenues from increased procedure volumes, and numerous other
provisions in the law that may affect the Company. We are further unable to foresee how
individuals and employers will respond to the choices afforded them by the Health Reform Law.
Thus, we cannot predict the full impact of the Health Reform Law on the Company at this time.
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.
The Health Reform Law expands the RAC programs scope to include Medicaid claims by requiring all
states to establish programs to contract with RACs by December 31, 2010. In addition to RACs,
other contractors, such as Medicaid Integrity Contractors, perform payment audits to identify and
correct improper payments. 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.
24
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
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. Further,
the Health Reform Law required the Department of Health and Human Services, or HHS, to present a
plan to Congress by January 1, 2011 for implementing a value-based purchasing system that would tie
Medicare payments to ASCs to quality and efficiency measures. HHS has not yet publicly issued this
plan. The Health Reform Law also requires HHS to study whether to expand to ASCs its current
policy of not paying additional amounts for care provided to treat conditions acquired during an
inpatient hospital stay.
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. 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.
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.
We 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
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 is classified within financing
activities.
Upon the occurrence of various fundamental regulatory changes, we would be obligated under the
terms 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, 2010, 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
25
Table of Contents
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
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
patients 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, 2010, 2009 and 2008, we had no significant adjustments to our
allowances for contractual adjustments and bad debt expense related to prior periods. At December
31, 2010 and 2009, net accounts receivable reflected allowances for contractual adjustments of
$118.5 million and $100.1 million, respectively, and allowances for bad debt expense of $13.1
million and $12.4 million, respectively. The increase in our contractual allowance and allowances
for bad debt expense is primarily related to allowances established for new centers acquired and
increases in standard rates at existing centers during 2010. At December 31, 2010 and 2009, we had
31 and 32 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 centers 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 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, 2010, 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 an
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 2010 same-center group is comprised of 187 centers and experienced
a 2% revenue decline. We believe this decline is primarily related to the adverse economic
environment and high unemployment, which we believe has
26
Table of Contents
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
caused patients to delay or cancel surgical procedures. This trend was generally experienced
throughout our same-center base, without significant variations in any particular geography or
surgical specialty. Our same-center group in 2011 will be comprised of 197 centers, which
constitutes approximately 97% of our total number of centers. We expect flat to a 1% decline in
our same-center revenue for 2011 due to reductions in Medicare reimbursement rates for 2011, as
well as the continuing poor economic outlook and high unemployment rates, 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.
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 and are presented after net earnings. 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, and pre-tax earnings are presented before net earnings attributable to
noncontrolling interests have 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
40%. 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 are
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. We refinanced our revolving
credit facility in May 2010, which resulted in the payment of additional fees and has increased our
interest expense as a result of higher interest rates under our new credit facilities. See
Liquidity and Capital Resources.
27
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Item 7. Managements 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, 2010, 2009 and 2008:
2010 | 2009 | 2008 | ||||||||||
Revenues |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Operating expenses: |
||||||||||||
Salaries and benefits |
30.0 | 30.0 | 29.0 | |||||||||
Supply cost |
13.2 | 12.4 | 11.8 | |||||||||
Other operating expenses |
21.0 | 20.5 | 20.6 | |||||||||
Depreciation and amortization |
3.5 | 3.4 | 3.4 | |||||||||
Total operating expenses |
67.7 | 66.3 | 64.8 | |||||||||
Operating income |
32.3 | 33.7 | 35.2 | |||||||||
Interest expense |
1.9 | 1.2 | 1.6 | |||||||||
Earnings from continuing operations before income taxes |
30.4 | 32.5 | 33.6 | |||||||||
Income tax expense |
4.8 | 5.3 | 5.6 | |||||||||
Net earnings from continuing operations, net of income tax |
25.6 | 27.2 | 28.0 | |||||||||
Discontinued operations: |
||||||||||||
Net (loss) gain from discontinued operations |
(0.2 | ) | 0.3 | 0.2 | ||||||||
Net earnings |
25.4 | 27.5 | 28.2 | |||||||||
Less net earnings attributable to noncontrolling interests: |
||||||||||||
Net earnings from continuing operations |
18.2 | 19.4 | 19.8 | |||||||||
Net earnings from discontinued operations |
0.2 | 0.2 | 0.4 | |||||||||
Total net earnings attributable to noncontrolling interests |
18.4 | 19.6 | 20.2 | |||||||||
Net earnings attributable to AmSurg Corp. common shareholders |
7.0 | % | 7.9 | % | 8.0 | % | ||||||
Amounts attributable to AmSurg Corp. common shareholders: |
||||||||||||
Earnings from continuing operations, net of income tax |
7.3 | 7.8 | 8.3 | |||||||||
Discontinued operations, net of income tax |
(0.3 | ) | 0.1 | (0.3 | ) | |||||||
Net earnings attributable to AmSurg Corp. common shareholders |
7.0 | % | 7.9 | % | 8.0 | % | ||||||
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
The number of procedures performed in our ASCs increased by 60,447, or 5%, to 1,276,231 in 2010
from 1,215,784 in 2009. Revenues increased $52.2 million, or 8%, to $710.4 million in 2010 from
$658.2 million in 2009. The additional revenue growth over procedure growth is primarily due to a
higher level of acuity of procedure mix due to the type of centers acquired in 2009 and 2010. Our
same-center revenue declined approximately 2% during the period ended December 31, 2010, primarily
due to the adverse economic conditions and high unemployment, which we believe has resulted in
reduced patient visits and surgical procedures. The increase in procedure and revenue growth is
attributable to the additional centers acquired in 2009 and 2010 as follows:
| centers acquired or opened in 2009, which contributed $43.3 million of additional revenues due to having a full period of operations in 2010; and | ||
| centers acquired and opened in 2010, which generated $17.4 million in revenues. |
Salaries and benefits increased by 8% to $213.3 million in 2010 from $197.6 million in 2009.
Salaries and benefits as a percentage of revenues were 30% in both periods. Staff at newly
acquired and developed centers, as well as the additional staffing required at existing centers,
resulted in a 10% increase in salaries and benefits at our surgery centers in 2010. However, we
experienced a 1% decrease in salaries and benefits at our corporate offices during 2010 over 2009,
primarily due to lower bonus expense.
28
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
Supply cost was $94.1 million in 2010, an increase of $12.5 million, or 15%, over supply cost in
2009. This increase was primarily the result of additional procedure volume. Our average supply
cost per procedure in 2010 increased by approximately $7. This increase is related to greater use
of premium cataract lenses at our ophthalmology centers, the migration from reusable to disposable
supplies, the temporary increase in certain drug costs at our gastroenterology centers, and
procedures with greater acuity performed at our multi-specialty centers, which had a higher
weighted average supply cost.
Other operating expenses increased $14.3 million, or 11%, to $148.9 million in 2010 from $134.6
million in 2009. The additional expense in the 2010 period resulted primarily from:
| centers acquired or opened during 2009, which resulted in an increase of $6.9 million in other operating expenses; | ||
| an increase of $2.7 million in other operating expenses at our 2010 same-center group resulting primarily from general inflationary cost increases and additional procedure volume; and | ||
| centers acquired or opened during 2010, which resulted in an increase of $2.6 million in other operating expenses. |
Depreciation and amortization expense increased $2.6 million, or 11%, in 2010 from 2009, primarily
as a result of centers acquired in 2009 now having a full year of operations. In addition, the
Company recorded additional depreciation expense of approximately $1.1 million associated with the
acceleration of scheduled leasehold improvement depreciation at a center that will be relocated in
2011, prior to the expiration of its original expected lease term.
We anticipate further increases in operating expenses in 2011, 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,
2010, we had one center under development.
Interest expense increased $5.7 million, or 75%, to $13.4 million from $7.6 million in 2010. We
refinanced our revolving credit facility in May 2010, which resulted in an increase in interest
expense of approximately $5.5 million due to higher interest rates under our new credit agreements
and the write-off of remaining unamortized deferred financing costs. See Liquidity and Capital
Resources.
We recognized income tax expense of $34.3 million in 2010 compared to $35.1 million in 2009. Our
effective tax rate in 2010 was 15.9% 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 50% to 60% 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 2010, we sold our interest in one surgery center and classified five additional surgery
centers as discontinued in 2010, following managements assessment of limited growth opportunities
at these centers. In 2009, we disposed our interests in one surgery center, and classified one
surgery center as discontinued. 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 on the disposition of discontinued interests in surgery
centers of $1.1 million during 2010 and an after tax loss for the disposition of discontinued
interests in surgery centers of $1.9 million in 2009. The net earnings derived from the operations
of the discontinued surgery centers was $1.6 million for 2010 and $2.6 million for 2009.
Net earnings from continuing operations attributable to noncontrolling interests in 2010 increased
$2.1 million, or 2%, to $129.6 million from the comparable 2009 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 18.2% from 19.4%
during the 2009 period as a result of reduced center profit margins caused by lower same-center
revenue. The net earnings from discontinued operations attributable to noncontrolling interests
were $1.0 million and $1.6 million in 2010 and 2009, respectively.
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Revenues increased $69.6 million, or 12%, to $658.2 million in 2009 from $588.7 million in 2008.
The number of procedures performed in our ASCs increased by 129,843, or 12%, to 1,215,784 in 2009
from 1,085,941 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 reductions in
reimbursement from CMS, adverse economic conditions and high unemployment, our same-center revenue
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 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 $197.6 million in 2009 from $170.5 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 $81.6 million in 2009, an increase of $12.4 million, or 18%, 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 at our multispecialty and orthopaedic centers, which had
a higher weighted average cost.
Other operating expenses increased $13.0 million, or 11%, to $134.6 million in 2009 from $121.6
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 $2.3 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 Companys supplemental
employee retirement plan investments, which offset the corresponding increases in salary cost.
Depreciation and amortization expense increased $2.2 million, or 11%, 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.
Although our average debt outstanding was approximately 28% higher in 2009 over 2008, interest
expense decreased $2.1 million in 2009, or 21%, from 2008, due to a reduced average
interest rate in 2009 on our variable interest debt.
We recognized income tax expense of $35.1 million in 2009 compared to $32.5 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 managements 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 discontinued. 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 centers classified as discontinued during 2010. We recognized an after tax loss for the
disposition of discontinued interests in surgery centers of $702,000 during 2009 and $1.8 million
in 2008. The net earnings derived from the operations of the discontinued surgery centers was $2.6
million for 2009 and 2008, respectively.
Net earnings from continuing operations attributable to noncontrolling interests in 2009 increased
$11.1 million, or 10%, to $127.6 million from the comparable 2008 period, primarily as a result of
net earnings associated with surgery centers recently
30
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
added to operations. As a percentage of revenues, net earnings attributable to noncontrolling
interests decreased to 19.4% from 19.8% during the 2008 period as a result of reduced center profit
margins caused by lower same-center revenue. The net earnings from discontinued operations
attributable to noncontrolling interests were $1.6 million and $2.4 million in 2009 and 2008,
respectively.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 2010 and 2009 were $34.1 million and $29.4 million,
respectively. At December 31, 2010, we had working capital of $89.4 million, compared to $80.2
million at December 31, 2009. Operating activities for 2010 generated $230.6 million in cash flow,
which was comparable to cash flow generated from operating activities in 2009 of $232.6 million.
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 other partners, which the centers
are obligated to make on a monthly basis in accordance with each partnerships partnership or
operating agreement. Distributions to noncontrolling interests, which is considered a financing
activity, in the year ended December 31, 2010 and 2009, were $132.1 million and $130.1 million,
respectively. Distributions to noncontrolling interests increased $2.0 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, 2010 and 2009, our accounts receivable
represented 31 and 32 days of revenue outstanding, respectively.
During 2010, we had total acquisitions and capital expenditures of $73.0 million, which included:
| $53.7 million for acquisitions of interests in ASCs and related transactions; | ||
| $20.5 million for new or replacement property at existing centers, including $4.0 million in new capital leases; and | ||
| $2.8 million for centers under development. |
As of December 31, 2010, the Company had a purchase price payable of $3.9 million for an
acquisition completed immediately prior to the end of the year and funded in January 2011 through
borrowings under our revolving credit facility.
In December 2010, we entered into two separate agreements to purchase a controlling interest in two
centers for $21.3 million. The consummation of the acquisitions is contingent upon the
satisfaction of closing conditions customary for transactions of this type. We anticipate closing
these transactions in April 2011 and intend to fund the acquisitions through a combination of
operating cash flow and borrowings under our revolving credit facility.
During 2010, we had unfunded construction and equipment purchase commitments for centers under
development or under renovation of approximately $1.0 million, which we intend to fund through
additional borrowings of long-term debt, operating cash flow and capital contributions by our
partners. During 2010, we received $60,000 in proceeds from the sale of a surgery center and
$73,000 in capital contributions from our noncontrolling partners.
During 2010, we had net repayments on long-term debt of $19.3 million, and at December 31, 2010 we
had $188.0 million outstanding under our revolving credit agreement and $75.0 million of senior
secured notes outstanding. At December 31, 2010, we were in compliance with all covenants
contained in our revolving credit agreement and note purchase agreement.
We refinanced our revolving credit facility on May 28, 2010. Our revolving credit agreement
permits us to borrow up to $375.0 million to, among other things, finance our acquisition and
development projects and any future stock repurchase programs at an interest rate equal to, at our
option, the base rate plus 1.25% to 2.50%, or LIBOR plus 2.25% to 3.50%, or a combination thereof;
provides for a fee of 0.25% to 0.625% of unused commitments; and contains certain covenants
relating to the ratio of debt to net worth, operating performance and minimum net worth.
Borrowings under the revolving credit agreement mature in May 2015 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.
On May 28, 2010, we issued, pursuant to a note purchase agreement, $75.0 million of 6.04% senior
secured notes due May 29, 2020. The senior secured notes are pari passu with the indebtedness
under our revolving credit facility and require payment of
principal beginning in year four. The note purchase agreement governing the senior secured notes
contains covenants similar to the covenants contained in the revolving credit agreement.
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
Fees associated with the refinancing of our revolving credit facility, an increase in the
interest rate under our new revolving credit facility, and fixed rate senior secured notes
outstanding resulted in an increase in interest expense and a decrease in operating cash flow of
approximately $5.5 million 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, which we fully executed during 2008 and 2009, resulting in
the purchase of 1,347,752 shares. In October 2010, our board of directors approved a new stock
repurchase program for up to $40.0 million of our outstanding shares of common stock to be
purchased over the following 18 months. 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.
The following schedule summarizes all of our contractual obligations by period as of December 31,
2010 (in thousands):
Payments Due by Period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | ||||||||||||||||
Long-term debt, including
interest (1) |
$ | 329,391 | $ | 14,517 | $ | 32,763 | $ | 226,736 | $ | 55,375 | ||||||||||
Capital lease obligations,
including interest |
18,962 | 3,498 | 3,734 | 1,961 | 9,769 | |||||||||||||||
Operating leases, including
renewal option periods (2) |
404,982 | 35,385 | 67,739 | 64,451 | 237,407 | |||||||||||||||
Construction in progress
commitments |
1,008 | 1,008 | | | | |||||||||||||||
Liability for unrecognized tax
benefits |
8,434 | | 8,434 | | | |||||||||||||||
Purchase commitment |
25,152 | 25,152 | | | | |||||||||||||||
Total contractual cash
obligations |
$ | 787,929 | $ | 79,560 | $ | 112,670 | $ | 293,148 | $ | 302,551 | ||||||||||
(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 and note agreements prior to or on 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 2010 fiscal year was approximately $5.4 million. |
In
addition, as of February 24, 2011, we had available under our
revolving credit agreement $191.5
million for acquisition borrowings, of which we expect to use approximately $21.3 million to
acquire two centers in April 2011.
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 Financial Accounting Standards Board, or FASB, issued guidance that establishes
the FASB Accounting Standards 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 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. The adoption of this standard did not have a material impact
on our consolidated results of operations or financial condition.
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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.
Indebtedness outstanding pursuant to our revolving credit facility bears interest at a variable
rate indexed to the base rate or LIBOR plus the applicable margin. Indebtedness outstanding
pursuant to our senior secured notes bears interest of a fixed rate of 6.04%. 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 facility 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 at December 31,
2010, a 100 basis point interest rate change would impact our net earnings and cash flow by
approximately $900,000 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 2011.
As previously discussed, we refinanced our revolving credit facility and entered into a private
placement debt arrangement in May 2010. These new credit agreements provide for additional fees
and higher interest spreads. Accordingly, we expect our interest expense will increase and our
operating cash flow will decrease by approximately $3.5 million in 2011 due to the full year impact
of the refinancing.
The table below provides information as of December 31, 2010 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, | |||||||||||||||||||||||||||||||
2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | 2010 | |||||||||||||||||||||||||
Fixed rate |
$ | 5,801 | $ | 4,760 | $ | 8,655 | $ | 12,085 | $ | 61,235 | $ | 55,573 | $ | 148,109 | $ | 148,109 | ||||||||||||||||
Average interest
rate |
5.1 | % | 4.7 | % | 5.5 | % | 6.0 | % | 3.6 | % | 6.0 | % | ||||||||||||||||||||
Variable rate |
$ | 848 | $ | 840 | $ | 774 | $ | 375 | $ | 138,654 | $ | 263 | $ | 141,754 | $ | 150,935 | ||||||||||||||||
Average interest
rate |
4.9 | % | 5.0 | % | 5.1 | % | 4.0 | % | 3.0 | % | 3.9 | % |
The difference in maturities of long-term obligations and overall increase in total borrowings from
2009 to 2010 principally resulted from the refinancing of our revolving credit facility, or new
senior secured notes, and our borrowings associated with acquisitions of surgery centers. The
average interest rates on these borrowings at December 31, 2010 remained consistent as compared to
December 31, 2009. Included in the table above is $50.0 million of fixed rate debt set to mature
during 2015 which will revert to variable rate debt during the second quarter of 2011 due to the
maturity of the interest rate swap agreement that currently fixes the interest on that debt.
33
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
AmSurg Corp.
Nashville, Tennessee
We have audited the accompanying consolidated balance sheets of AmSurg Corp. and subsidiaries (the
Company) as of December 31, 2010 and 2009, 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, 2010. These financial statements are the responsibility of the Companys
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, 2010 and 2009, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2010, in
conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 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.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of December 31,
2010, based on the criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25,
2011 expressed an unqualified opinion on the Companys internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Nashville, Tennessee
February 25, 2011
February 25, 2011
34
Table of Contents
Item 8. Financial Statements and Supplementary Data (continued)
AmSurg Corp.
Consolidated Balance Sheets
December 31, 2010 and 2009
(Dollars in thousands)
Consolidated Balance Sheets
December 31, 2010 and 2009
(Dollars in thousands)
2010 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 34,147 | $ | 29,377 | ||||
Accounts receivable, net of allowance of $13,070 and $12,375, respectively |
67,617 | 66,886 | ||||||
Supplies inventory |
10,157 | 8,745 | ||||||
Deferred income taxes |
1,509 | 2,324 | ||||||
Prepaid and other current assets |
18,660 | 15,408 | ||||||
Current assets held for sale |
866 | 34 | ||||||
Total current assets |
132,956 | 122,774 | ||||||
Property and equipment, net |
119,167 | 120,158 | ||||||
Goodwill |
894,497 | 813,876 | ||||||
Intangible assets, net |
11,361 | 9,797 | ||||||
Long-term assets held for sale |
7,897 | 170 | ||||||
Long-term receivables |
| 56 | ||||||
Total assets |
$ | 1,165,878 | $ | 1,066,831 | ||||
Liabilities and Equity |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 6,648 | $ | 5,989 | ||||
Accounts payable |
15,291 | 14,821 | ||||||
Accrued salaries and benefits |
17,952 | 18,156 | ||||||
Other accrued liabilities |
3,136 | 3,208 | ||||||
Current income taxes payable |
| 402 | ||||||
Current liabilities held for sale |
536 | 37 | ||||||
Total current liabilities |
43,563 | 42,613 | ||||||
Long-term debt |
283,215 | 296,783 | ||||||
Deferred income taxes |
90,089 | 71,665 | ||||||
Other long-term liabilities |
24,404 | 22,036 | ||||||
Commitments and contingencies |
||||||||
Noncontrolling interests redeemable |
147,740 | 123,363 | ||||||
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, 31,039,770 and
30,674,525 shares outstanding, respectively |
171,522 | 163,729 | ||||||
Retained earnings |
393,061 | 343,236 | ||||||
Accumulated other comprehensive loss, net of income taxes |
(515 | ) | (1,849 | ) | ||||
Total AmSurg Corp. equity |
564,068 | 505,116 | ||||||
Noncontrolling interests non-redeemable |
12,799 | 5,255 | ||||||
Total equity |
576,867 | 510,371 | ||||||
Total liabilities and equity |
$ | 1,165,878 | $ | 1,066,831 | ||||
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 Earnings
Years Ended December 31, 2010, 2009 and 2008
(In thousands, except earnings per share)
Consolidated Statements of Earnings
Years Ended December 31, 2010, 2009 and 2008
(In thousands, except earnings per share)
2010 | 2009 | 2008 | ||||||||||
Revenues |
$ | 710,409 | $ | 658,223 | $ | 588,658 | ||||||
Operating expenses: |
||||||||||||
Salaries and benefits |
213,274 | 197,569 | 170,456 | |||||||||
Supply cost |
94,064 | 81,607 | 69,223 | |||||||||
Other operating expenses |
148,878 | 134,574 | 121,564 | |||||||||
Depreciation and amortization |
24,910 | 22,351 | 20,172 | |||||||||
Total operating expenses |
481,126 | 436,101 | 381,415 | |||||||||
Operating income |
229,283 | 222,122 | 207,243 | |||||||||
Interest expense |
13,371 | 7,647 | 9,704 | |||||||||
Earnings from continuing operations before income taxes |
215,912 | 214,475 | 197,539 | |||||||||
Income tax expense |
34,324 | 35,067 | 32,472 | |||||||||
Net earnings from continuing operations |
181,588 | 179,408 | 165,067 | |||||||||
Discontinued operations: |
||||||||||||
Earnings from operations of discontinued interests in surgery centers,
net of income tax |
1,640 | 2,644 | 2,632 | |||||||||
Loss on disposal of discontinued interests in surgery centers,
net of income tax |
(2,732 | ) | (702 | ) | (1,773 | ) | ||||||
Net (loss) gain from discontinued operations |
(1,092 | ) | 1,942 | 859 | ||||||||
Net earnings |
180,496 | 181,350 | 165,926 | |||||||||
Less net earnings attributable to noncontrolling interests: |
||||||||||||
Net earnings from continuing operations |
129,641 | 127,582 | 116,467 | |||||||||
Net earnings from discontinued operations |
1,030 | 1,620 | 2,413 | |||||||||
Total net earnings attributable to noncontrolling interests |
130,671 | 129,202 | 118,880 | |||||||||
Net earnings attributable to AmSurg Corp. common shareholders |
$ | 49,825 | $ | 52,148 | $ | 47,046 | ||||||
Amounts attributable to AmSurg Corp. common shareholders: |
||||||||||||
Earnings from continuing operations, net of income tax |
$ | 51,947 | $ | 51,826 | $ | 48,600 | ||||||
Discontinued operations, net of income tax |
(2,122 | ) | 322 | (1,554 | ) | |||||||
Net earnings attributable to AmSurg Corp. common shareholders |
$ | 49,825 | $ | 52,148 | $ | 47,046 | ||||||
Earnings per share-basic: |
||||||||||||
Net earnings from continuing operations attributable to AmSurg Corp.
common shareholders |
$ | 1.72 | $ | 1.69 | $ | 1.54 | ||||||
Net (loss) gain from discontinued operations attributable to AmSurg
Corp. common shareholders |
(0.07 | ) | 0.01 | (0.05 | ) | |||||||
Net earnings attributable to AmSurg Corp. common shareholders |
$ | 1.65 | $ | 1.71 | $ | 1.49 | ||||||
Earnings per share-diluted: |
||||||||||||
Net earnings from continuing operations attributable to AmSurg Corp.
common shareholders |
$ | 1.69 | $ | 1.68 | $ | 1.52 | ||||||
Net (loss) gain from discontinued operations attributable to AmSurg
Corp. common shareholders |
(0.07 | ) | 0.01 | (0.05 | ) | |||||||
Net earnings attributable to AmSurg Corp. common shareholders |
$ | 1.62 | $ | 1.69 | $ | 1.47 | ||||||
Weighted average number of shares and share equivalents outstanding: |
||||||||||||
Basic |
30,255 | 30,576 | 31,503 | |||||||||
Diluted |
30,689 | 30,862 | 31,963 |
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 Comprehensive Income
Years Ended December 31, 2010, 2009 and 2008
(In thousands)
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2010, 2009 and 2008
(In thousands)
2010 | 2009 | 2008 | ||||||||||
Net earnings |
$ | 180,496 | $ | 181,350 | $ | 165,926 | ||||||
Other comprehensive income, net of tax: |
||||||||||||
Unrealized gain (loss) on interest rate swap, net of tax |
1,334 | 1,002 | (1,414 | ) | ||||||||
Comprehensive income, net of tax |
181,830 | 182,352 | 164,512 | |||||||||
Less comprehensive income attributable to noncontrolling interests |
130,671 | 129,202 | 118,880 | |||||||||
Comprehensive income attributable to AmSurg Corp. common shareholders |
$ | 51,159 | $ | 53,150 | $ | 45,632 | ||||||
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 Changes in Equity
Years Ended December 31, 2010, 2009 and 2008
(In thousands)
Consolidated Statements of Changes in Equity
Years Ended December 31, 2010, 2009 and 2008
(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, 2008 |
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 expense 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 | ||||||||||||||||||||||||
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 benefit 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.
38
Table of Contents
Item 8. Financial Statements and Supplementary Data (continued)
AmSurg Corp.
Consolidated Statements of Changes in Equity (continued)
Years Ended December 31, 2010, 2009 and 2008
(In thousands)
Consolidated Statements of Changes in Equity (continued)
Years Ended December 31, 2010, 2009 and 2008
(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, 2009 |
30,674 | $ | 163,729 | $ | 343,236 | $ | (1,849 | ) | $ | 5,255 | $ | 510,371 | $ | 123,363 | ||||||||||||||||||
Issuance of restricted
common stock |
233 | | | | | | | |||||||||||||||||||||||||
Cancellation of restricted
common stock |
(25 | ) | (15 | ) | | | | (15 | ) | | ||||||||||||||||||||||
Stock options exercised |
158 | 2,583 | | | | 2,583 | | |||||||||||||||||||||||||
Share-based compensation |
| 4,869 | | | | 4,869 | | |||||||||||||||||||||||||
Tax benefit related to
exercise of stock options |
| 71 | | | | 71 | | |||||||||||||||||||||||||
Net earnings |
| | 49,825 | | 4,546 | 54,371 | 126,125 | $ | 180,496 | |||||||||||||||||||||||
Distributions to
noncontrolling interests, net
of capital contributions |
| | | | (4,844 | ) | (4,844 | ) | (127,193 | ) | ||||||||||||||||||||||
Purchase of noncontrolling
interests |
893 | | | (137 | ) | 756 | (1,046 | ) | ||||||||||||||||||||||||
Sale of noncontrolling interests |
| (608 | ) | | | 434 | (174 | ) | 614 | |||||||||||||||||||||||
Acquisitions and other
transactions impacting
noncontrolling
interests |
| | | | 7,545 | 7,545 | 25,877 | |||||||||||||||||||||||||
Gain on interest rate swap, net
of income tax expense of $860 |
| | | 1,334 | | 1,334 | | |||||||||||||||||||||||||
Balance at December 31, 2010 |
31,040 | $ | 171,522 | $ | 393,061 | $ | (515 | ) | $ | 12,799 | $ | 576,867 | $ | 147,740 | ||||||||||||||||||
See accompanying notes to the consolidated financial statements.
39
Table of Contents
Item 8. Financial Statements and Supplementary Data (continued)
AmSurg Corp.
Consolidated Statements of Cash Flows
Years Ended December 31, 2010, 2009 and 2008
(In thousands)
Consolidated Statements of Cash Flows
Years Ended December 31, 2010, 2009 and 2008
(In thousands)
2010 | 2009 | 2008 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net earnings |
$ | 180,496 | $ | 181,350 | $ | 165,926 | ||||||
Adjustments to reconcile net earnings to net cash provided by
operating activities: |
||||||||||||
Depreciation and amortization |
24,910 | 22,351 | 20,172 | |||||||||
Net loss on sale of long-lived assets |
4,243 | 455 | 922 | |||||||||
Share-based compensation |
4,869 | 4,068 | 4,710 | |||||||||
Excess tax benefit from share-based compensation |
(200 | ) | (32 | ) | (1,351 | ) | ||||||
Deferred income taxes |
18,247 | 14,703 | 14,729 | |||||||||
Increase (decrease) in cash and cash equivalents, net of effects of
acquisitions and dispositions, due to changes in: |
||||||||||||
Accounts receivable, net |
713 | 1,494 | 3,792 | |||||||||
Supplies inventory |
(541 | ) | (60 | ) | (83 | ) | ||||||
Prepaid and other current assets |
(3,364 | ) | (733 | ) | 2,344 | |||||||
Accounts payable |
(220 | ) | 1,289 | (1,904 | ) | |||||||
Accrued expenses and other liabilities |
168 | 6,666 | (487 | ) | ||||||||
Other, net |
1,254 | 1,033 | 926 | |||||||||
Net cash flows provided by operating activities |
230,575 | 232,584 | 209,696 | |||||||||
Cash flows from investing activities: |
||||||||||||
Acquisition of interests in surgery centers and related transactions |
(53,690 | ) | (95,826 | ) | (118,671 | ) | ||||||
Acquisition of property and equipment |
(19,275 | ) | (19,930 | ) | (18,379 | ) | ||||||
Proceeds from sale of interests in surgery centers |
60 | 1,298 | 3,812 | |||||||||
Repayment of notes receivable |
| 1,666 | 1,458 | |||||||||
Net cash flows used in investing activities |
(72,905 | ) | (112,792 | ) | (131,780 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from long-term borrowings |
176,619 | 137,178 | 157,787 | |||||||||
Repayment on long-term borrowings |
(195,960 | ) | (116,951 | ) | (114,788 | ) | ||||||
Distributions to noncontrolling interests |
(132,110 | ) | (130,855 | ) | (118,769 | ) | ||||||
Proceeds from issuance of common stock upon exercise of stock options |
2,583 | 201 | 9,970 | |||||||||
Repurchase of common stock |
| (12,587 | ) | (12,413 | ) | |||||||
Capital contributions and ownership transactions by noncontrolling interests |
224 | 1,036 | 582 | |||||||||
Excess tax benefit from share-based compensation |
200 | 32 | 1,351 | |||||||||
Financing cost incurred |
(4,456 | ) | (17 | ) | (41 | ) | ||||||
Net cash flows used in financing activities |
(152,900 | ) | (121,963 | ) | (76,321 | ) | ||||||
Net increase (decrease) in cash and cash equivalents |
4,770 | (2,171 | ) | 1,595 | ||||||||
Cash and cash equivalents, beginning of year |
29,377 | 31,548 | 29,953 | |||||||||
Cash and cash equivalents, end of year |
$ | 34,147 | $ | 29,377 | $ | 31,548 | ||||||
See accompanying notes to the consolidated financial statements.
40
Table of Contents
Item 8. Financial Statements and Supplementary Data (continued)
AmSurg Corp.
Notes to the Consolidated Financial Statements
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 Companys wholly owned subsidiaries are the
general partner or majority member. Consolidation of such limited partnerships and LLCs is
necessary as the Companys 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 Companys 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.
Ownership interests in subsidiaries held by parties other than the Company are identified and
generally presented in the consolidated financial statements within the equity section but separate
from the Companys equity. However, in instances in which certain redemption features that are not
solely within the control of the Company are present, classification of noncontrolling interests
outside of permanent equity is required. Consolidated net income attributable to the Company and
to the noncontrolling interests are 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. Certain transactions with noncontrolling interests are also classified within financing
activities in the statements of cash flows.
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 Companys
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, 2010, 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 Companys equity and are
classified as noncontrolling interests redeemable on the Companys consolidated balance sheets.
Center profits and losses are allocated to the Companys partners in proportion to their ownership
percentages and reflected in the aggregate as net earnings attributable to noncontrolling
interests. The partners of the Companys 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 Companys
partnerships are generally determined on a pre-tax basis. 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 Companys 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.
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, 2010, prepaid and other current assets were comprised of short-term investments of
$6,450,000, other prepaid expenses of $4,386,000, prepaid insurance expense of $3,402,000, other
current receivables of $2,063,000, current income tax receivable of $1,555,000 and other current
assets of $804,000. At December 31, 2009, prepaid and other current assets were comprised of
short-term investments of $4,544,000, other prepaid expenses of $3,930,000, prepaid insurance
expense of $3,412,000, other current receivables of $2,904,000, and other current assets of
$618,000.
41
Table of Contents
Item 8. Financial Statements and Supplementary Data (continued)
AmSurg Corp.
Notes to the Consolidated Financial Statements (continued)
Notes to the Consolidated Financial Statements (continued)
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, 2010, 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
At December 31, 2010, other long-term liabilities are comprised of deferred rent of $8,555,000,
tax-effected unrecognized benefits of $8,434,000 (see note 1(k)), purchase price obligation of
$3,895,000, unfavorable lease liability of $2,581,000, negative fair value of our interest rate
swap of $902,000 and other long-term liabilities of $37,000. At December 31, 2009, other long-term
liabilities are comprised of deferred rent of $7,544,000, tax-effected unrecognized benefits of
$8,383,000 (see note 1(k)), unfavorable lease liability of $2,959,000, negative fair value of our
interest rate swap of $3,095,000 and other long-term liabilities of $55,000.
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, 2010, 2009 and 2008, the Company derived approximately
31%, 33% 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 Companys operating expenses relate to the cost of revenues and the
delivery of care at the Companys 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 debt expense was approximately $16,945,000, $16,781,000 and $17,015,000 for the years
ended December 31, 2010, 2009 and 2008, 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.
42
Table of Contents
Item 8. Financial Statements and Supplementary Data
(continued)
AmSurg Corp.
Notes to the Consolidated Financial Statements (continued)
Notes to the Consolidated Financial Statements (continued)
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 Companys 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 Companys 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. Share-Based Compensation
Transactions in which the Company receives employee and non-employee services in exchange for the
Companys equity instruments or liabilities that are based on the fair value of the Companys
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 Companys net operating cash flows and increased its financing cash
flows by $200,000, $32,000 and $1,351,000 for the years ended December 31, 2010, 2009 and 2008,
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 adjust the estimated forfeiture rate to its actual
experience. The Company intends to retain its earnings to finance growth and development of the
business and does not expect to disclose or pay any cash dividends in the foreseeable future.
n. 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, 2010 and 2009 reflect allowances
for contractual adjustments of $118,503,000 and $100,088,000, respectively, and allowance for bad
debt expense of $13,070,000 and $12,375,000, respectively.
o. Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (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 was
effective for the Company on January 1, 2010. The adoption of this standard did not have an impact
on the Companys consolidated results of operations or financial condition.
43
Table of Contents
Item 8. Financial Statements and Supplementary Data
(continued)
AmSurg Corp.
Notes to the Consolidated Financial Statements (continued)
Notes to the Consolidated Financial Statements (continued)
p. Reclassifications
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). ASC 805 was
effective for the Company on January 1, 2009 and has been applied prospectively to business
combinations for which the acquisition date is on or after January 1, 2009. Upon adoption of ASC
805, there was no impact on the Companys consolidated results of operations and financial
condition for acquisitions previously completed. The adoption of ASC 805 did not have a material
effect on the Companys consolidated results of operations or cash flows.
In accordance with ASC 805, the Company accounts for its business combinations under the
fundamental requirements of the acquisition method of accounting and under the premise that an
acquirer be identified for each business combination. The acquirer is the entity that obtains
control of one or more businesses in the business combination and the acquisition date is the date
the acquirer achieves control. The assets acquired, liabilities assumed (including contingencies,
if any) and any noncontrolling interests in the acquired business at the acquisition date are
recognized at their fair values as of that date, and the direct costs incurred in connection with
the business combination are recorded and expensed separately from the business combination.
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 at
least a 51% controlling interests in 7 and 11 centers during 2010 and 2009, respectively. The
aggregate amount paid for the acquisitions was approximately $53,690,000 and $95,826,000 during
2010 and 2009, respectively, which was paid in cash and funded by a combination of operating cash
flow and borrowings under the Companys revolving credit agreement. In addition, the Company had a
purchase price payable of $3,895,000 for a December 31, 2010 acquisition, which, was reflected as
other long-term liabilities in the balance sheet as of December 31, 2010. 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 Companys business model.
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 2010 and 2009,
including post acquisition date adjustments recorded to finalize purchase price allocations, are as
follows (in thousands):
2010 | 2009 | |||||||
Acquisitions | Acquisitions | |||||||
Accounts receivable |
$ | 2,471 | $ | 4,603 | ||||
Prepaid and other current assets |
1,072 | 616 | ||||||
Property and equipment |
4,291 | 13,337 | ||||||
Accounts payable |
(946 | ) | (898 | ) | ||||
Other accrued liabilities |
(198 | ) | (955 | ) | ||||
Long-term debt |
(2,410 | ) | (9,876 | ) | ||||
Goodwill and other intangible assets (approximately $55,400 and $92,283 deductible
for tax purposes, respectively) |
86,852 | 152,227 | ||||||
Total fair value |
91,132 | 159,054 | ||||||
Less: Fair value attributable to noncontrolling interests |
33,547 | 63,228 | ||||||
Acquisition date fair value of total consideration transferred |
57,585 | 95,826 | ||||||
Less: Purchase price payable at December 31, 2010 and 2009, respectively |
(3,895 | ) | | |||||
Cash paid for acquisition of interests in surgery centers |
$ | 53,690 | $ | 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 $248,000 and $324,000
in acquisition related costs, primarily attorney fees for the years ended December 31, 2010 and
2009, respectively.
44
Table of Contents
Item 8. Financial Statements and Supplementary Data (continued)
AmSurg Corp.
Notes to the Consolidated Financial Statements (continued)
Notes to the Consolidated Financial Statements (continued)
Revenues and net earnings included in the years ended December 31, 2010 and 2009 associated
with these acquisitions are as follows (in thousands):
2010 | 2009 | |||||||
Revenues |
$ | 17,397 | $ | 10,327 | ||||
Net earnings |
5,358 | 3,721 | ||||||
Less: Net earnings attributable to noncontrolling interests |
2,708 | 2,264 | ||||||
Net earnings attributable to AmSurg Corp. common shareholders |
$ | 2,650 | $ | 1,457 | ||||
b. Pro Forma Information
The unaudited consolidated pro forma results for the years ended December 31, 2010 and 2009,
assuming all 2010 and 2009 acquisitions had been consummated on January 1, 2009, are as follows (in
thousands, except per share data):
2010 | 2009 | |||||||
Revenues |
$ | 728,284 | $ | 734,837 | ||||
Net earnings |
184,999 | 203,663 | ||||||
Amounts attributable to AmSurg Corp. common shareholders: |
||||||||
Net earnings from continuing operations |
53,462 | 60,267 | ||||||
Net earnings |
51,340 | 60,589 | ||||||
Net earnings from continuing operations per common share: |
||||||||
Basic |
$ | 1.77 | $ | 1.97 | ||||
Diluted |
$ | 1.74 | $ | 1.95 | ||||
Net earnings: |
||||||||
Basic |
$ | 1.70 | $ | 1.98 | ||||
Diluted |
$ | 1.67 | $ | 1.96 | ||||
Weighted average number of shares and share equivalents: |
||||||||
Basic |
30,255 | 30,576 | ||||||
Diluted |
30,689 | 30,862 |
c. Dispositions
The Company initiated the dispositions due to managements assessment of the limited growth
opportunities at these centers. Results of operations of the centers discontinued for the years
ended December 31, 2010, 2009 and 2008, are as follows (in thousands):
2010 | 2009 | 2008 | ||||||||||
For the year ended December 31: |
||||||||||||
Cash proceeds from disposal |
$ | 60 | $ | 400 | $ | 3,644 | ||||||
Net (loss) gain from discontinued operations |
(1,092 | ) | 1,942 | 859 | ||||||||
Net
(loss) gain from discontinued operations attributable to AmSurg Corp. |
(2,122 | ) | 322 | (1,554 | ) |
At December 31, 2010 and 2009, the Company held its interests in five and one center, respectively,
classified as discontinued. Centers classified as discontinued at December 31, 2010 will either be
sold in 2011 or closed as they fulfill their near-term lease obligations. The results of
operations of discontinued 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, 2010, 2009 and 2008 are as follows (in thousands):
2010 | 2009 | 2008 | ||||||||||
Revenues |
$ | 10,299 | $ | 12,243 | $ | 17,559 | ||||||
Earnings before income taxes |
2,033 | 3,305 | 3,237 | |||||||||
Net earnings |
1,640 | 2,644 | 2,632 |
45
Table of Contents
Item 8. Financial Statements and Supplementary Data (continued)
AmSurg Corp.
Notes to the Consolidated Financial Statements (continued)
Notes to the Consolidated Financial Statements (continued)
3. Property and Equipment
Property and equipment at December 31, 2010 and 2009 were as follows (in thousands):
2010 | 2009 | |||||||
Land and improvements |
$ | | $ | 164 | ||||
Building and improvements |
106,678 | 106,639 | ||||||
Movable equipment, software and software development costs |
154,317 | 143,990 | ||||||
Construction in progress |
8,154 | 2,521 | ||||||
269,149 | 253,314 | |||||||
Less accumulated depreciation |
(149,982 | ) | (133,156 | ) | ||||
Property and equipment, net |
$ | 119,167 | $ | 120,158 | ||||
The Company capitalized interest in the amount of $54,000, $66,000 and $96,000 for the years ended
December 31, 2010, 2009 and 2008, respectively. At December 31, 2010, the Company and its
partnerships had unfunded construction and equipment purchases of approximately $1,008,000 in order
to complete construction in progress. Depreciation expense for continuing and discontinued
operations for the years ended December 31, 2010, 2009 and 2008 was $25,279,000, $22,784,000 and
$21,185,000, respectively.
4. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the years ended December 31, 2010 and 2009 are
as follows (in thousands):
2010 | 2009 | |||||||
Balance, beginning of year |
$ | 813,876 | $ | 661,693 | ||||
Purchase price allocations |
86,539 | 152,594 | ||||||
Disposals |
(5,918 | ) | (411 | ) | ||||
Balance, end of year |
$ | 894,497 | $ | 813,876 | ||||
Amortizable intangible assets at December 31, 2010 and 2009 consisted of the following (in
thousands):
2010 | 2009 | |||||||||||||||||||||||
Gross | Gross | |||||||||||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||||||||||
Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||
Deferred financing cost |
$ | 4,516 | $ | (567 | ) | $ | 3,949 | $ | 2,780 | $ | (2,310 | ) | $ | 470 | ||||||||||
Customer and non-compete
agreements |
3,180 | (1,818 | ) | 1,362 | 3,180 | (1,618 | ) | 1,562 | ||||||||||||||||
Total amortizable
intangible assets |
$ | 7,696 | $ | (2,385 | ) | $ | 5,311 | $ | 5,960 | $ | (3,928 | ) | $ | 2,032 | ||||||||||
Amortization of intangible assets for the years ended December 31, 2010, 2009 and 2008 was
$1,184,000, $492,000 and $480,000, respectively. Included in amortization expense for the year
ended December 31, 2010 is $434,000 of previously unamortized deferred financing costs expensed in
conjunction with the refinancing of the revolving credit facility (see note 5). Estimated
amortization of intangible assets for the five years and thereafter subsequent to December 31,
2010, with a weighted average amortization period of 4.9 years, is $1,111,000, $1,111,000,
$1,108,000, $1,101,000, $598,000 and $282,000.
At December 31, 2010 and 2009, other non-amortizable intangible assets related to restrictive
covenant arrangements were $6,050,000 and $7,765,000, respectively.
46
Table of Contents
Item 8. Financial Statements and Supplementary Data (continued)
AmSurg Corp.
Notes to the Consolidated Financial Statements (continued)
Notes to the Consolidated Financial Statements (continued)
5. Long-term Debt
Long-term debt at December 31, 2010 and 2009 was comprised of the following (in thousands):
2010 | 2009 | |||||||
$375,000,000 credit agreement at base rate, or LIBOR plus 1.25% to 3.50%,
or a combination thereof (average rate of 3.0% at December 31, 2010), due
May 2015 |
$ | 188,000 | $ | 276,300 | ||||
Fixed rate senior secured notes (rate of 6.04%) |
75,000 | | ||||||
Other debt at an average rate of 4.6%, due through 2016 |
12,933 | 14,250 | ||||||
Capitalized lease arrangements at an average rate of 5.5%, due through 2026 |
13,930 | 12,222 | ||||||
289,863 | 302,772 | |||||||
Less current portion |
6,648 | 5,989 | ||||||
Long-term debt |
$ | 283,215 | $ | 296,783 | ||||
The Company refinanced its revolving credit facility on May 28, 2010. The new revolving credit
agreement permits the Company to borrow up to $375,000,000 to, among other things, finance its
acquisition and development projects and any future stock repurchase programs at an interest rate
equal to, at the Companys option, the base rate plus 1.25% to 2.50%, or LIBOR plus 2.25% to 3.50%,
or a combination thereof; provides for a fee of 0.25% to 0.625% of unused commitments; and contains
certain covenants relating to the ratio of debt to operating performance measurements, interest
coverage ratios and minimum net worth. Borrowings under the revolving credit agreement mature in
May 2015 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. The Company was in compliance with all
covenants contained in the revolving credit agreement at December 31, 2010.
On May 28, 2010, the Company issued, pursuant to a note purchase agreement, $75,000,000 of 6.04%
senior secured notes due May 28, 2020. The senior secured notes are pari passu with the
indebtedness under the Companys revolving credit facility and require payment of principal
beginning in year four. The note purchase agreement governing the senior secured notes contains
covenants similar to the covenants in the revolving credit agreement. The Company was in
compliance with all covenants contained in the note purchase agreement at December 31, 2010.
Certain partnerships included in the Companys 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 $43,649,000. 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, 2010 are $6,649,000, $5,600,000, $9,429,000, $12,460,000, $199,889,000 and
$55,836,000.
6. Derivative Instruments
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 Companys 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, 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, 2010 upon termination of the swap 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 $1,334,000 and $1,002,000 was included in
other comprehensive income in the years ended December 31, 2010 and 2009, respectively. A decrease
in the fair value of the interest rate swap, net of tax of $1,414,000 was included in other
comprehensive income for the year ended December 31, 2008. Accumulated other comprehensive loss,
net of income taxes, was $515,000 and $1,849,000 as of December 31, 2010 and 2009, respectively.
47
Table of Contents
Item 8. Financial Statements and Supplementary Data (continued)
AmSurg Corp.
Notes to the Consolidated Financial Statements (continued)
Notes to the Consolidated Financial Statements (continued)
The fair values of derivative instruments in the consolidated balance sheets as of December 31,
2010 and 2009 were as follows (in thousands):
Asset Derivatives December 31, | Liability Derivatives December 31, | |||||||||||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||||||
Balance Sheet | Fair | Balance Sheet | Fair | Balance Sheet | Fair | Balance Sheet | Fair | |||||||||||||||||||||||||
Location | Value | Location | Value | Location | Value | Location | Value | |||||||||||||||||||||||||
Derivatives
designated as hedging instruments |
Other | Other | Other | Other | ||||||||||||||||||||||||||||
assets, net |
$ | | assets, net |
$ | | long-term liabilities | $ | 902 | long-term liabilities | $ | 3,095 | |||||||||||||||||||||
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 inputs used by the Company to measure fair value are classified into the following fair value
hierarchy:
Level 1:
|
Quoted prices in active markets for identical assets or liabilities. | |
Level 2:
|
Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date. | |
Level 3:
|
Unobservable inputs that reflect managements best estimate of what market participants would use in pricing the asset or liability at the measurement date. |
The Company adopted the updated guidance of the FASB related to fair value measurements and
disclosures, which requires a reporting entity to disclose separately the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for
the transfers. In addition, in the reconciliation for fair value measurements using significant
unobservable inputs, or Level 3, a reporting entity should disclose separately information about
purchases, sales, issuances and settlements. The updated guidance also requires that an entity
should provide fair value measurement disclosures for each class of assets and liabilities and
disclosures about the valuation techniques and inputs used to measure fair value for both recurring
and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The
guidance was effective for the Company January 1, 2010, except for the disclosures about purchases,
sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements,
which are effective for fiscal years beginning after December 15, 2010 and for interim periods
within those fiscal years. Therefore, the Company has not yet adopted the guidance with respect to
the roll forward activity in Level 3 fair value measurements. The adoption of the updated guidance
for Levels 1 and 2 fair value measurements did not have an impact on the Companys consolidated
results of operations or financial condition.
In determining the fair value of assets and liabilities that are measured on a recurring basis at
December 31, 2010 and 2009, the Company utilized Level 2 inputs to perform such measurements
methods which were commensurate with the market approach (in thousands):
December 31, 2010 |
December 31, 2009 |
|||||||
Assets: |
||||||||
Supplemental executive retirement savings plan investments |
$ | 6,450 | $ | 4,544 | ||||
Liabilities: |
||||||||
Interest rate swap agreement |
$ | 902 | $ | 3,095 | ||||
The fair value of the supplemental executive retirement savings plan investments, which are
included in prepaid and other current assets, was determined using the calculated net asset values
obtained from the plan administrator and observable inputs of similar public mutual fund
investments. The fair value of the interest rate swap agreement, which is included in other
long-term liabilities, was determined by a valuation obtained from the financial institution that
is the counterparty to the interest rate swap agreement. The valuation, which represents the
amount that the Company would have paid as of December 31, 2010 upon termination of the agreement,
considered current interest rate swap rates, the critical terms of the agreement and interest rate
projections. There were no transfers to or from Levels 1 and 2 during the three and nine months
ended December 31, 2010.
48
Table of Contents
Item 8. Financial Statements and Supplementary Data (continued)
AmSurg Corp.
Notes to the Consolidated Financial Statements (continued)
Notes to the Consolidated Financial Statements (continued)
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 $148,109,000, was $150,935,000 at December 31, 2010. The fair value of
variable-rate long-term debt approximates its carrying value of $141,754,000 at December 31, 2010.
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. 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.
8. Leases
The Company has entered into various building and equipment capital and operating leases for its
surgery centers in operation and under development and for office space, expiring at various dates
through 2030. Future minimum lease payments, including payments during expected renewal option
periods, at December 31, 2010 were as follows (in thousands):
Capitalized | ||||||||
Year Ended | Equipment | Operating | ||||||
December 31, | Leases | Leases | ||||||
2011 |
$ | 3,498 | $ | 35,385 | ||||
2012 |
2,436 | 34,232 | ||||||
2013 |
1,298 | 33,507 | ||||||
2014 |
1,012 | 32,916 | ||||||
2015 |
949 | 31,535 | ||||||
Thereafter |
9,769 | 237,407 | ||||||
Total minimum rentals |
18,962 | $ | 404,982 | |||||
Less amounts representing interest at rates ranging from 3.8% to 9.7% |
5,032 | |||||||
Capital lease obligations |
$ | 13,930 | ||||||
At December 31, 2010, buildings and equipment with a cost of approximately $18,000,000 and
accumulated depreciation of approximately $4,027,000 were 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, 2010, 2009 and 2008 was approximately
$37,301,000, $35,401,000 and $32,782,000, respectively.
9. Shareholders Equity
a. Common Stock
In September 2008, the Companys Board of Directors authorized a stock repurchase program for up to
$25,000,000 of the Companys outstanding common stock over the following 12 months. During the
year ended December 31, 2008, the Company purchased 517,052 shares of the Companys common stock
for approximately $12,413,000, at an average price of $24 per share. During the year ended
December 31, 2009, the Company purchased 830,700 shares of the Companys 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 Companys Board of Directors in September 2008.
On April 22, 2009 the Companys Board of Directors approved an additional stock repurchase program
for up to $40,000,000 of the Companys shares of common stock over the following 18 months. This
plan expired in October 2010 with no shares having been purchased pursuant to the plan.
On October 20, 2010, the board of directors approved a new stock repurchase program for up to
$40,000,000 of the Companys shares of common stock over the following 18 months. As of December
31, 2010, no shares had been repurchased pursuant to this plan.
b. Shareholder Rights Plan
In 1999, the Companys Board of Directors adopted a shareholder rights plan and declared a
distribution of one stock purchase right for each outstanding share of the Companys common stock
to shareholders of record on December 16, 1999 and for each share of common stock issued
thereafter. The shareholder rights plan expired on December 2, 2009.
49
Table of Contents
Item 8. Financial Statements and Supplementary Data (continued)
AmSurg Corp.
Notes to the Consolidated Financial Statements (continued)
Notes to the Consolidated Financial Statements (continued)
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 in 2010
vests over a two year period. Restricted stock granted to outside directors prior to 2010 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 in 2010 vests over four years in three equal installments beginning on the second
anniversary of the date of grant. Restricted stock granted to employees prior to December 31,
2010, 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 Companys 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 2010 and 2009. At December 31, 2010, 2,760,250 shares were authorized for grant under
the 2006 Stock Incentive Plan and 1,488,039 shares were available for future equity grants,
including 751,878 shares available for issuance as restricted stock.
Other information pertaining to share-based activity for the years ended December 31, 2010, 2009
and 2008 was as follows (in thousands):
2010 | 2009 | 2008 | ||||||||||
Share-based compensation expense |
$ | 4,869 | $ | 4,068 | $ | 4,710 | ||||||
Fair value of shares vested |
1,647 | 5,382 | 6,523 | |||||||||
Cash received from option exercises |
2,583 | 201 | 9,970 | |||||||||
Tax benefit from option exercises |
200 | 34 | 1,549 |
As of December 31, 2010, the Company had total unrecognized compensation cost of approximately
$6,200,000 related to non-vested awards, which the Company expects to recognize through 2014 and
over a weighted-average period of 1.0 years.
Average outstanding share-based awards to purchase approximately 2,384,000, 2,457,000 and 907,000
shares of common stock that had an exercise price in excess of the average market price of the
common stock during the years ended December 31, 2010, 2009 and 2008, respectively, were not
included in the calculation of diluted securities under the treasury method for purposes of
determining diluted earnings per share due to their anti-dilutive impact.
A summary of the status of and changes for non-vested restricted shares for the three years ended
December 31, 2010, is as follows:
Weighted | ||||||||
Number | Average | |||||||
of | Exercise | |||||||
Shares | Price | |||||||
Non-vested shares at January 1, 2008 |
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 | |||||
Shares granted |
233,460 | 21.83 | ||||||
Shares vested |
(8,973 | ) | 20.45 | |||||
Shares forfeited |
(25,965 | ) | 22.21 | |||||
Non-vested shares at December 31, 2010 |
664,909 | $ | 22.16 | |||||
50
Table of Contents
Item 8. Financial Statements and Supplementary Data (continued)
AmSurg Corp.
Notes to the Consolidated Financial Statements (continued)
Notes to the Consolidated Financial Statements (continued)
A summary of stock option activity for the three years ended December 31, 2010 is summarized as
follows:
Weighted | ||||||||||||
Weighted | Average | |||||||||||
Number | Average | Remaining | ||||||||||
of | Exercise | Contractual | ||||||||||
Shares | Price | Term (in years) | ||||||||||
Outstanding at January 1, 2008 |
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 |
3,151,052 | $ | 22.22 | 5.0 | ||||||||
Options granted |
| | ||||||||||
Options exercised with total intrinsic value of $511,000 |
(157,750 | ) | 16.38 | |||||||||
Options terminated |
(91,313 | ) | 23.73 | |||||||||
Outstanding at December 31, 2010 with aggregate intrinsic value
of $2,411,000 |
2,901,989 | $ | 22.49 | 4.5 | ||||||||
Vested or expected to vest at December 31, 2010 with total
intrinsic value of $2,411,000 |
2,901,989 | $ | 22.49 | 4.5 | ||||||||
Exercisable at December 31, 2010 with total intrinsic value
of $2,411,000 |
2,434,647 | $ | 22.33 | 4.0 | ||||||||
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, 2010 exercised their options at the Companys
closing stock price on December 31, 2010.
The Company issued no options during the years ended December 31, 2010 and 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
year ended December 31, 2008 were $8.20, by applying the following assumptions:
Expected term/life of options in years |
5.1 | |||
Forfeiture rate |
3.0 | % | ||
Average risk-free interest rate |
2.7 | % | ||
Volatility rate |
31.9 | % | ||
Dividends |
|
51
Table of Contents
Item 8. Financial Statements and Supplementary Data (continued)
AmSurg Corp.
Notes to the Consolidated Financial Statements (continued)
Notes to the Consolidated Financial Statements (continued)
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, 2010: |
||||||||||||
Net earnings from continuing operations attributable to AmSurg Corp.
per common share (basic) |
$ | 51,947 | 30,255 | $ | 1.72 | |||||||
Effect of dilutive securities options and non-vested shares |
| 434 | ||||||||||
Net earnings from continuing operations attributable to AmSurg Corp.
per common share (diluted) |
$ | 51,947 | 30,689 | $ | 1.69 | |||||||
Net earnings attributable to AmSurg Corp. per common share (basic) |
$ | 49,825 | 30,255 | $ | 1.65 | |||||||
Effect of dilutive securities options and non-vested shares |
| 434 | ||||||||||
Net earnings attributable to AmSurg Corp. per common share (diluted) |
$ | 49,825 | 30,689 | $ | 1.62 | |||||||
For the year ended December 31, 2009: |
||||||||||||
Net earnings from continuing operations attributable to AmSurg Corp.
per common share (basic) |
$ | 51,826 | 30,576 | $ | 1.69 | |||||||
Effect of dilutive securities options and non-vested shares |
| 286 | ||||||||||
Net earnings from continuing operations attributable to AmSurg Corp.
per common share (diluted) |
$ | 51,826 | 30,862 | $ | 1.68 | |||||||
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) |
$ | 48,600 | 31,503 | $ | 1.54 | |||||||
Effect of dilutive securities options and non-vested shares |
| 460 | ||||||||||
Net earnings from continuing operations attributable to AmSurg Corp.
per common share (diluted) |
$ | 48,600 | 31,963 | $ | 1.52 | |||||||
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 | |||||||
52
Table of Contents
Item 8. Financial Statements and Supplementary Data (continued)
AmSurg Corp.
Notes to the Consolidated Financial Statements (continued)
Notes to the Consolidated Financial Statements (continued)
10. Income Taxes
Total income taxes expense (benefit) for the years ended December 31, 2010, 2009 and 2008 was
included within the following sections of the consolidated financial statements as follows (in
thousands):
2010 | 2009 | 2008 | ||||||||||
Income from continuing operations |
$ | 34,324 | $ | 35,067 | $ | 32,472 | ||||||
Discontinued operations |
(1,126 | ) | 907 | 2,141 | ||||||||
Shareholders equity |
(71 | ) | (2 | ) | (1,305 | ) | ||||||
Other comprehensive income (loss) |
860 | 646 | (911 | ) | ||||||||
Total |
$ | 33,987 | $ | 36,618 | $ | 32,397 | ||||||
Income tax expense from continuing operations for the years ended December 31, 2010, 2009 and 2008
was comprised of the following (in thousands):
2010 | 2009 | 2008 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 11,321 | $ | 16,742 | $ | 19,798 | ||||||
State |
3,347 | 4,367 | 3,980 | |||||||||
Deferred: |
||||||||||||
Federal |
16,760 | 11,805 | 7,296 | |||||||||
State |
2,896 | 2,153 | 1,398 | |||||||||
Income tax expense |
$ | 34,324 | $ | 35,067 | $ | 32,472 | ||||||
Income tax expense from continuing operations for the years ended December 31, 2010, 2009 and 2008
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):
2010 | 2009 | 2008 | ||||||||||
Statutory federal income tax |
$ | 75,569 | $ | 75,068 | $ | 69,139 | ||||||
Less federal income tax assumed directly by noncontrolling interests |
(45,374 | ) | (44,654 | ) | (40,783 | ) | ||||||
State income taxes, net of federal income tax benefit |
4,114 | 4,214 | 3,373 | |||||||||
Increase in valuation allowances |
222 | 327 | 564 | |||||||||
Interest related to unrecognized tax benefits |
(151 | ) | 2 | 57 | ||||||||
Other |
(56 | ) | 110 | 122 | ||||||||
Income tax expense |
$ | 34,324 | $ | 35,067 | $ | 32,472 | ||||||
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax
expense. Increases and (decreases) in interest obligations of $(191,000), $18,000 and $57,000 were
recognized in the consolidated statement of earnings for the years ended December 31, 2010, 2009
and 2008, respectively, resulting in a total recognition of interest obligations of approximately
$1,373,000 and $1,564,000 in the consolidated balance sheet at December 31, 2010 and 2009,
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, 2010, 2009 and 2008 is
as follows (in thousands):
2010 | 2009 | 2008 | ||||||||||
Balance at beginning of year |
$ | 6,766 | $ | 6,190 | $ | 5,569 | ||||||
Additions for tax positions of current year |
378 | 576 | 621 | |||||||||
Balance at end of year |
$ | 7,144 | $ | 6,766 | $ | 6,190 | ||||||
53
Table of Contents
Item 8. Financial Statements and Supplementary Data (continued)
AmSurg Corp.
Notes to the Consolidated Financial Statements (continued)
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 $362,000 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, 2010 and 2009 were as follows (in thousands):
2010 | 2009 | |||||||
Deferred tax assets: |
||||||||
Allowance for uncollectible accounts |
$ | 1,315 | $ | 1,137 | ||||
Accrued assets and other |
1,800 | 2,943 | ||||||
Valuation allowances |
(925 | ) | (1,066 | ) | ||||
Total current deferred tax assets |
2,190 | 3,014 | ||||||
Share-based compensation |
8,945 | 7,269 | ||||||
Interest on unrecognized tax benefits |
533 | 667 | ||||||
Accrued liabilities and other |
2,242 | 3,264 | ||||||
Operating and capital loss carryforwards |
4,155 | 3,875 | ||||||
Valuation allowances |
(4,045 | ) | (3,272 | ) | ||||
Total non-current deferred tax assets |
11,830 | 11,803 | ||||||
Total deferred tax assets |
14,020 | 14,817 | ||||||
Deferred tax liabilities: |
||||||||
Prepaid expenses |
681 | 690 | ||||||
Accrued liabilities and other |
| 203 | ||||||
Property and equipment, principally due to differences in depreciation |
2,255 | 1,594 | ||||||
Goodwill, principally due to differences in amortization |
99,664 | 81,671 | ||||||
Total deferred tax liabilities |
102,600 | 84,158 | ||||||
Net deferred tax liabilities |
$ | 88,580 | $ | 69,341 | ||||
The net deferred tax liabilities at December 31, 2010 and 2009 were recorded as follows (in
thousands):
2010 | 2009 | |||||||
| | | | |||||||
Current deferred income tax assets |
$ | 1,509 | $ | 2,324 | ||||
Non-current deferred income tax liabilities |
90,089 | 71,665 | ||||||
Net deferred tax liabilities |
$ | 88,580 | $ | 69,341 | ||||
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.
54
Table of Contents
Item 8. Financial Statements and Supplementary Data (continued)
AmSurg Corp.
Notes to the Consolidated Financial Statements (continued)
Notes to the Consolidated Financial Statements (continued)
11. Related Party Transactions
Certain surgery centers lease space from entities affiliated with 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 at
market rates 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, 2010, 2009 and 2008 were as follows (in
thousands):
2010 | 2009 | 2008 | ||||||||||
Operating leases |
$ | 26,373 | $ | 18,176 | $ | 14,235 | ||||||
Salaries and benefits |
61,524 | 60,298 | 64,132 | |||||||||
Billing fees |
11,387 | 9,589 | 9,007 | |||||||||
Medical advisory services |
2,245 | 1,989 | 1,836 |
The Company also reimburses their physician partners for operating expenses paid by the physician
partners to third party providers on the behalf of the surgery center. For the years ended
December 31, 2010, 2009 and 2008, reimbursed expenses were approximately 5% of other operating
expenses as reported in the accompanying consolidated statement of earnings. The Company believes
that the foregoing transactions are in its best interests.
It is the Companys 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 Companys 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 Companys contributions for the years ended December 31, 2010, 2009 and 2008 were
approximately $561,000, $525,000 and $479,000, 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, 2010, 2009 and 2008 were approximately
$234,000, $1,170,000 and $174,000, 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 Companys 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 Companys 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, 2010.
55
Table of Contents
Item 8. Financial Statements and Supplementary Data (continued)
AmSurg Corp.
Notes to the Consolidated Financial Statements (continued)
Notes to the Consolidated Financial Statements (continued)
On December 31, 2010, the Company entered into agreements to purchase a controlling interest in two
centers for $21,257,000. The consummation of each acquisition is contingent upon the satisfaction
of closing conditions customary for transactions of these types. The Company anticipates closing
this transaction in April 2011 and intends to fund the acquisition through a combination of
operating cash flow and borrowings under its revolving credit facility.
14. Supplemental Cash Flow Information
Supplemental cash flow information for the years ended December 31 2010, 2009 and 2008 is as
follows (in thousands):
2010 | 2009 | 2008 | ||||||||||
Cash paid during the year for: |
||||||||||||
Interest |
$ | 12,219 | $ | 7,854 | $ | 10,188 | ||||||
Income taxes, net of refunds |
16,776 | 19,336 | 19,297 | |||||||||
Non-cash investing and financing activities: |
||||||||||||
Increase (decrease) in accounts payable associated with acquisition of property
and equipment |
164 | (1,892 | ) | 2,098 | ||||||||
Capital lease obligations |
4,057 | 8,222 | 970 | |||||||||
Notes received for sale of a partnership interest |
| | 885 | |||||||||
Effect of acquisitions and related transactions: |
||||||||||||
Assets acquired, net of cash and adjustments |
94,686 | 170,783 | 134,512 | |||||||||
Liabilities assumed and noncontrolling interests |
(37,101 | ) | (74,957 | ) | (14,861 | ) | ||||||
Notes payable and other obligations |
(3,895 | ) | | (980 | ) | |||||||
Payment for interests in surgery centers and related transactions |
$ | 53,690 | $ | 95,826 | $ | 118,671 | ||||||
15. Subsequent Events
The Company assessed events occurring subsequent to December 31, 2010 for potential recognition and
disclosure in the consolidated financial statements. In February 2011, the Company, through a
wholly owned subsidiary acquired a majority interest in a surgery center for approximately
$3,800,000. Other than as previously described, no events have occurred that would require
adjustment to or disclosure in the consolidated financial statements.
56
Table of Contents
Item 8. Financial Statements and Supplementary Data (continued)
Quarterly Statement of Earnings Data (Unaudited)
The following table presents certain quarterly statement of earnings data for the years ended
December 31, 2009 and 2010. 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.
2009 | 2010 | |||||||||||||||||||||||||||||||
Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | |||||||||||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||||||||||||||
Revenues |
$ | 160,823 | $ | 166,122 | $ | 165,276 | $ | 166,002 | $ | 170,116 | $ | 177,498 | $ | 178,071 | $ | 184,724 | ||||||||||||||||
Earnings from
continuing
operations before
income taxes |
52,207 | 55,501 | 54,085 | 52,682 | 51,861 | 55,411 | 52,656 | 55,984 | ||||||||||||||||||||||||
Net earnings from
continuing
operations |
43,791 | 46,309 | 45,295 | 44,013 | 43,240 | 46,159 | 44,858 | 47,331 | ||||||||||||||||||||||||
Net earnings (loss)
from discontinued
operations |
524 | 544 | 1,027 | (153 | ) | 272 | 469 | 277 | (2,110 | ) | ||||||||||||||||||||||
Net earnings |
44,315 | 46,853 | 46,322 | 43,860 | 43,512 | 46,628 | 45,135 | 45,221 | ||||||||||||||||||||||||
Net earnings (loss)
attributable to
AmSurg Corp. common
shareholders: |
||||||||||||||||||||||||||||||||
Continuing |
12,413 | 13,531 | 13,153 | 12,729 | 12,686 | 12,965 | 13,074 | 13,222 | ||||||||||||||||||||||||
Discontinued |
203 | 49 | 650 | (580 | ) | 11 | 177 | 44 | (2,354 | ) | ||||||||||||||||||||||
Net earnings |
$ | 12,616 | $ | 13,580 | $ | 13,803 | $ | 12,149 | $ | 12,697 | $ | 13,142 | $ | 13,118 | $ | 10,868 | ||||||||||||||||
Diluted net
earnings from
continuing
operations per
common share |
$ | 0.40 | $ | 0.44 | $ | 0.43 | $ | 0.41 | $ | 0.41 | $ | 0.42 | $ | 0.43 | $ | 0.43 | ||||||||||||||||
Diluted net
earnings per common
share |
$ | 0.40 | $ | 0.44 | $ | 0.45 | $ | 0.40 | $ | 0.41 | $ | 0.43 | $ | 0.43 | $ | 0.35 |
57
Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Managements 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
managements 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, 2010.
The effectiveness of the Companys 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 Companys 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 |
58
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
AmSurg Corp.
Nashville, Tennessee
We have audited the internal control over financial reporting of AmSurg Corp. and subsidiaries (the
Company) as of December 31, 2010, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys 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 Managements Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the Companys 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 companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys 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 companys 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
companys 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, 2010, 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, 2010 of the Company and our report dated
February 25, 2011 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.
/s/ DELOITTE & TOUCHE LLP | ||||
Nashville, Tennessee | ||||
February 25, 2011 |
59
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, 2010. 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 19, 2011, 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
19, 2011, 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 19, 2011, 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 19, 2011,
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 19, 2011, 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 19, 2011, under the caption Stock Ownership and information with
respect to our equity compensation plans at December 31, 2010, set forth in our Definitive Proxy
Statement for the Annual Meeting of Shareholders to be held May 19, 2011, 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 19, 2011, 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 19, 2011, under the caption
Corporate Governance, is incorporated herein by reference.
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Item 14. Principal Accountant 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 19,
2011, under the caption Fees Billed to Us by Deloitte & Touche LLP During 2010 and 2009, 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:
Report of Independent Registered Public Accounting Firm
|
S-1 | |
Schedule II Valuation and Qualifying Accounts
|
S-2 | |
(All other schedules are omitted because they are not applicable or
not required, or because the required information is included in the consolidated financial statements or notes thereto.) |
(3) Exhibits: See the exhibit listing set forth below.
61
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 3.1 of the Current Report on Form 8-K, dated November 29, 2011) | |
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)) | |
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
|
Revolving Credit Agreement, dated as of May 28, 2010, 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 June 2, 2010) | |
10.3
|
Note Purchase Agreement, dated as of May 28, 2010 among AmSurg, The Prudential Life Insurance Company of America, and various other financial institutions (incorporated by reference to Exhibit 99.2 of the Current Report on Form 8-K, dated June 2, 2010) | |
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) | |
10.13*
|
Amended and Restated Supplemental Executive Retirement Savings Plan, as amended (Restated for SEC electronic purposes only and incorporated 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 Current Report on Form 8-K, filed on May 26, 2010) |
62
Table of Contents
(3) Exhibits (continued)
Exhibit | Description | |
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 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, dated May 26, 2010) | |
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*
|
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) | |
10.25*
|
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) | |
10.26*
|
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) | |
10.27
|
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 | |
Interactive data files pursuant to Rule 405 of Regulation S-T; (i) the Consolidated Balance Sheets at December 31, 2010 and December 31, 2009, (ii) the Consolidated Statements of Earnings for the years ended December 31, 2010, 2009 and 2008, (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2009 and 2008, (iv) the Consolidated Statements of Changes in Equity for the years ended December 31, 2010, 2009 and 2008 and (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008. | ||
* | Management contract or compensatory plan, contract or arrangement |
63
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, 2011 | 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
|
President, Chief Executive Officer and Director (Principal Executive Officer) | February 25, 2011 | ||
/s/ Claire M. Gulmi
|
Executive Vice
President, Chief
Financial Officer,
Secretary and Director (Principal Financial and Accounting Officer) |
February 25, 2011 | ||
/s/ Steven I. Geringer
|
Chairman of the Board | February 25, 2011 | ||
/s/ Thomas G. Cigarran
|
Director | February 25, 2011 | ||
/s/ James A. Deal
|
Director | February 25, 2011 | ||
/s/ Henry D. Herr
|
Director | February 25, 2011 | ||
/s/ Kevin P. Lavender
|
Director | February 25, 2011 | ||
/s/ Ken P. McDonald
|
Director | February 25, 2011 | ||
/s/ John W. Popp, Jr., M.D.
|
Director | February 25, 2011 |
64
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
AmSurg Corp.
Nashville, Tennessee
AmSurg Corp.
Nashville, Tennessee
We have audited the consolidated financial statements of AmSurg Corp. and subsidiaries (the
Company) as of December 31, 2010 and 2009, and for each of the three years in the period ended
December 31, 2010, and the Companys internal control over financial reporting as of December 31,
2010, and have issued our reports thereon dated February 25, 2011 which report expresses an
unqualified opinion and includes an explanatory paragraph concerning the adoption of the amended
provisions of ASC 805, Business Combinations; 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 Companys
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, 2011
February 25, 2011
S-1
Table of Contents
AmSurg Corp.
Schedule II Valuation and Qualifying Accounts
For the Years Ended December 31, 2010, 2009 and 2008
(In thousands)
Schedule II Valuation and Qualifying Accounts
For the Years Ended December 31, 2010, 2009 and 2008
(In thousands)
Additions | Deductions | |||||||||||||||||||
Balance at | Charged to | Charged to | Charge-off | Balance | ||||||||||||||||
Beginning of Period |
Cost and Expenses |
Other Accounts (1) |
Against Allowances |
at End of Period |
||||||||||||||||
Allowance for uncollectible
accounts included under the
balance sheet caption Accounts
receivable: |
||||||||||||||||||||
Year ended December 31, 2010 |
$ | 12,375 | $ | 17,211 | $ | 448 | $ | (16,964 | ) | $ | 13,070 | |||||||||
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 | |||||||||
(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