NATIONAL SURGERY CENTERS INC \DE\, S-1, 1996-09-27

NATIONAL SURGERY CENTERS INC \DE\
S-1, 1996-09-27
OFFICES & CLINICS OF DOCTORS OF MEDICINE

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 27, 1996

REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NATIONAL SURGERY CENTERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8011 36-3549627
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER)
IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION) 35 EAST WACKER DRIVE, SUITE 2800
CHICAGO, ILLINOIS 60601
TELEPHONE: (312) 553-4200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
E. TIMOTHY GEARY
CHAIRMAN OF THE BOARD OF DIRECTORS,
CHIEF EXECUTIVE OFFICER AND PRESIDENT
NATIONAL SURGERY CENTERS, INC.
35 EAST WACKER DRIVE, SUITE 2800
CHICAGO, ILLINOIS 60601
TELEPHONE: (312) 553-4200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
STEVEN E. DUCOMMUN, ESQ. J. VAUGHAN CURTIS, ESQ.
BELL, BOYD & LLOYD ALSTON & BIRD
70 WEST MADISON STREET 1201 WEST PEACHTREE STREET
CHICAGO, ILLINOIS 60602 ATLANTA, GEORGIA 30309-3424
TELEPHONE: (312) 372-1121 TELEPHONE: (404) 881-7000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share......... 3,162,500 $28.13 $88,961,125 $30,677
</TABLE>
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(1) Includes 412,500 shares of Common Stock subject to the Underwriters' over-
allotment option.
(2) Calculated in accordance with Rule 457(c) and based upon the average of
the high and low sale prices of National Surgery Centers, Inc. common
stock reported on the Nasdaq National Market on September 23, 1996.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
SEPTEMBER 27, 1996

2,750,000 Shares

National Surgery Centers, Inc.
LOGO
Common Stock

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Of the 2,750,000 shares of Common Stock offered hereby, 2,003,011 shares are
being sold by National Surgery Centers, Inc. (the "Company") and 746,989 shares
are being sold by certain stockholders of the Company (the "Selling
Stockholders"). The Company will not receive any of the proceeds from the sale
of shares of Common Stock by the Selling Stockholders. The Common Stock is
quoted on the Nasdaq National Market System (the "Nasdaq National Market")
under the symbol "NSCI." On September 23, 1996, the last reported sale price of
the Common Stock was $28.13.

--------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" APPEARING ON PAGES 7 THROUGH 10.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
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<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share...................... $ $ $ $
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Total(2)....................... $ $ $ $
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</TABLE>
(1) Before deducting expenses of the offering estimated at $400,000 payable by
the Company.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
412,500 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, and Proceeds to Company, will be $ ,
$ and $ , respectively. See "Underwriting."

--------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
, 1996.

Alex. Brown & Sons
INCORPORATED
Furman Selz

J.P. Morgan & Co.

THE DATE OF THIS PROSPECTUS IS , 1996.
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NATIONAL SURGERY CENTERS LOCATIONS

[MAP]

The Company's executive offices are located at 35 East Wacker Drive, Suite
2800, Chicago, Illinois, 60601 and its telephone number is (312) 553-4200.

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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND OTHER SELLING
GROUP MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE
WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE
"UNDERWRITING."
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus.

THE COMPANY

National Surgery Centers, Inc. owns and operates freestanding ambulatory
surgery centers that provide the medical and administrative support necessary
for physicians to perform non-emergency surgical procedures. The Company
operates a network of 30 surgery centers in 13 states and is currently
developing two new surgery centers. The Company provides alternate-site
settings for high-quality surgical care that is more cost effective than
hospital-based surgical care and that is increasingly preferred by physicians,
payors and patients.

In recent years, government programs, private insurance companies, managed
care organizations and self-insured employers have implemented various cost-
containment measures to limit the growth of health care expenditures. These
cost-containment measures, together with technological advances, have resulted
in a significant shift in the delivery of health care services away from
inpatient hospitals to more cost-effective alternate sites, including
freestanding ambulatory surgery centers. Industry sources estimate that in 1994
outpatient surgical procedures represented 64.7% of all surgical procedures
performed in the United States, compared with 31.3% in 1984, and that surgical
procedures performed in freestanding ambulatory surgery centers in 1994
comprised 19.0% of total outpatient surgery, compared with 7.9% in 1984. The
Company believes that surgery performed at a freestanding ambulatory surgery
center is generally less expensive than hospital-based ambulatory surgery for a
number of reasons, including lower facility development costs, more efficient
staffing and space utilization and a specialized operating environment focused
on cost containment.

The Company believes that many physicians prefer the efficiencies of
freestanding ambulatory surgery centers because they enhance physicians'
productivity by providing them with greater scheduling flexibility, more
consistent nurse staffing and faster turnaround time between cases, allowing
physicians to perform more surgeries in a defined period of time. In addition,
new technology and advances in anesthesia and the addition of overnight
recovery have significantly expanded the number and types of surgical
procedures that are being performed in ambulatory surgery centers.

The Company's objective is to establish a nationwide organization of
freestanding ambulatory surgery centers in secondary and other selected markets
by acquiring established centers and developing new centers. The Company seeks
to provide a broad range of high-quality surgical services and to collaborate
with other participants in local health care delivery systems. The key
components of the Company's strategy are as follows:

. Acquire established ambulatory surgery centers that are seeking
affiliation with an experienced operator having access to capital and
other resources;

. Focus on secondary and other selected markets where the Company can
establish a significant local presence or play an important role in the
development of local integrated delivery systems;

. Develop new ambulatory surgery centers in markets where attractive
acquisitions are not available or where the opportunity exists to
increase the Company's presence in its existing markets;

. Develop joint ventures with hospitals and other providers to increase
patient flow through joint marketing, access to managed care contracts
and participation in a broader network of health care providers; and

. Expand the range of services offered to physicians and payors by offering
state-of-the-art technology, administrative conveniences, flexible
pricing alternatives and cost-effective care.

3
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RECENT DEVELOPMENTS

Since January 1, 1996, the Company has acquired 15 freestanding ambulatory
surgery centers (including one center in which it acquired a minority interest)
in six separate transactions (the "Recent Acquisitions") and has reached an
agreement in principle to divest its interest in one center. The Recent
Acquisitions are located in seven states, had aggregate net revenue in 1995 of
approximately $15.8 million and performed 23,974 cases in 1995.

In January 1996, the Company acquired a multi-specialty surgery center in
Billings, Montana, which had 1995 net revenue of $1.7 million. In February
1996, the Company acquired a controlling interest in Endoscopy Center
Affiliates, Inc., which operates eight endoscopy centers which had 1995
combined net revenue of $4.8 million. In April 1996, the Company acquired an
interest in a multi-specialty surgery center in Kent, Ohio which had 1995 net
revenue of $1.2 million. In May 1996, the Company acquired interests in three
endoscopy centers which had 1995 combined net revenue of $4.8 million and a
multi-specialty surgery center in Houston, Texas, which had 1995 net revenue of
$3.3 million. In September 1996, the Company acquired a minority interest in a
multi-specialty surgery center in Humble, Texas and reached an agreement in
principle to sell its interest in a multi-specialty surgery center in Dallas,
Texas.

The Board of Directors of the Company declared a 3-for-2 stock split of the
Common Stock, which was effected as a stock dividend on May 31, 1996.

Since July 1996, the Company has converted $1.4 million of its convertible
subordinated notes into 97,293 shares of Common Stock and has issued notices
for redemption of $4.3 million principal amount of such notes, which would
result in the issuance of 362,112 additional shares.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company...... 2,003,011 shares
Common Stock offered by the Selling
Stockholders............................ 746,989 shares
Common Stock to be outstanding after the
offering................................ 11,058,099 shares(1)
Use of proceeds by the Company........... To repay certain indebtedness and for
general corporate purposes, including
possible future acquisitions and
development.
Nasdaq National Market symbol............ NSCI
</TABLE>
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(1) Includes 981,469 issued and outstanding shares of Non-Voting Common Stock,
par value $.01 per share (the "Non-Voting Common Stock") but excludes
options and warrants outstanding as of September 23, 1996 to purchase
1,236,773 shares of Common Stock at a weighted average exercise price of
$19.06 per share. Also excludes 495,771 shares of Common Stock reserved for
issuance upon conversion of the Company's convertible subordinated notes
issued in connection with acquisitions at a weighted average conversion
price of $13.81 per share. See "Description of Capital Stock" and Note 3 of
Notes to Consolidated Financial Statements.

4
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SUMMARY SELECTED CONSOLIDATED FINANCIAL AND CENTER DATA
(IN THOUSANDS, EXCEPT PER SHARE AND CENTER DATA)

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------- -----------------------------
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
1992 1993 1994 1995 1995(1) 1995 1996 1996(1)
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net revenue............ $18,894 $ 35,230 $41,707 $53,165 $71,483 $25,097 $35,911 $40,135
Writedown of goodwill.. -- 50,871 -- -- -- -- -- --
Operating income
(loss)(2)............. 2,827 (44,385) 7,566 10,237 13,501 5,015 7,843 8,419
Interest expense....... 1,778 4,016 4,186 4,139 5,362 2,193 1,297 1,231
Net income (loss)
before extraordinary
item(2)............... 2 (43,236) 1,493 3,099 4,241 1,282 3,293 3,502
Net income (loss) per
share before
extraordinary
item(2)(3)............ $ 0.00 $ (11.35) $ 0.35 $ 0.54 $ 0.55 $ 0.26 $ 0.35 $ 0.31
Fully diluted weighted
average number of
common shares
outstanding(3)........ 2,987 3,810 4,269 5,711 7,714 4,931 9,699 11,702
GENERAL CENTER DATA(4):
Centers................ 10 12 14 16 30 14 30 30
Cases(5)............... 22,234 38,113 43,419 53,460 79,963 25,161 38,576 44,863
Net revenue per
case(5)............... $ 850 $ 924 $ 961 $ 994 $ 894 $ 997 $ 931 $ 895
SAME CENTER DATA(6):
Net revenue growth..... n/a 22.8% 11.7% 12.6% -- 13.2% 16.0% --
Case growth............ n/a 12.3% 6.6% 9.1% -- 9.1% 13.9% --
Net revenue per case
growth................ n/a 9.4% 4.8% 3.2% -- 3.8% 1.8% --
Operating income
growth(7)............. n/a 45.4% 22.4% 17.8% -- 20.1% 23.1% --
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------
ACTUAL AS ADJUSTED(1)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments....... $ 8,558 $ 49,144
Working capital......................................... 9,644 53,336
Total assets............................................ 94,669 136,755
Total debt.............................................. 28,358 18,467
Shareholders' equity.................................... 51,600 103,968
</TABLE>
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(1) Gives effect to the following pro forma adjustments as if they had occurred
at the beginning of the period presented: (i) the issuance of 2,003,011
shares of Common Stock offered hereby by the Company at an assumed offering
price of $28.13 per share and the application of the net proceeds therefrom
and (ii) the consummation of the Recent Acquisitions as if they had
occurred on January 1, 1995. See "Use of Proceeds," "Unaudited Pro Forma
Consolidated Financial Statements" and "Recent Developments."
(2) Operating results for the year ended December 31, 1993 include certain non-
recurring charges of approximately $50.9 million ($43.8 million after tax
benefits), principally incurred in connection with the writedown of
goodwill. Excluding the non-recurring charge for writedown of goodwill and
related tax benefits, operating income, net income before extraordinary
item and net income per share before extraordinary item would have been
$6.5 million, $580,000 and $0.15, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Writedown of Goodwill" and Note 5 of Notes to Consolidated Financial
Statements.

5
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(3)Adjusted to reflect (i) the 1-for-3 stock exchange related to the Company's
reincorporation in Delaware effected in September 1995 and (ii) the 3-for-2
stock split in the form of a Common Stock dividend effected in May 1996.
(4) As of January 1, 1995, the Company closed its surgery center located in
Phoenix, Arizona. Accordingly, information related to this center is not
included in any subsequent periods.
(5) Excludes data from three centers in which the Company has a non-controlling
or minority ownership position.
(6) Same center data is calculated based on centers that the Company operated
for all of both the current and prior year periods.
(7) Excludes effects of goodwill writedown for the year ended December 31,
1993. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Writedown of Goodwill" and Note 5 of Notes to
Consolidated Financial Statements.

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

Certain statements in this Prospectus Summary and under the captions "Risk
Factors," "Recent Developments," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business," and elsewhere in
this Prospectus, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the Company's ability to: (i) implement successfully its
acquisition and development strategy; (ii) obtain financing on acceptable terms
to finance its growth strategy and to operate within the limitations imposed by
financing arrangements; (iii) continue to satisfy the participation
requirements of Medicare and Medicaid; (iv) continue to obtain managed care
contracts which reflect acceptable reimbursement rates; and (v) other factors
referenced in this Prospectus. See "Risk Factors."

Unless the context otherwise requires, references to the "Company" include
National Surgery Centers, Inc. and its subsidiaries. Except as otherwise
specified, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. See "Underwriting." All references herein
to numbers of shares and per share amounts have been adjusted to reflect (i)
the 1-for-3 stock exchange related to the Company's reincorporation in Delaware
effected in September 1995 and (ii) the 3-for-2 stock split in the form of a
Common Stock dividend effected in May 1996.

6
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RISK FACTORS

In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered by this Prospectus.

Acquisition and Development Strategy. The success of the Company's
acquisitions will be determined by numerous factors, including the Company's
ability to identify centers suitable for acquisition, to acquire and finance
such centers on acceptable terms and to integrate and operate such centers
profitably after acquisition. The ability to develop new surgery centers
successfully is influenced by a number of factors, including the
identification of suitable markets, the availability of interested joint
venture partners, physicians' use of the new surgery centers, implementation
of management systems that take advantage of marketing and cost saving
opportunities and the availability of financing to minimize the financial
impact of expenses associated with start-up surgery centers. In the Company's
experience, new surgery centers typically incur initial operating losses and
the timeframe within which such centers become profitable may vary. In
addition, the rapid development of new surgery centers requires a substantial
investment in working capital which may adversely affect the operating results
and financial condition of the Company. The Company intends to develop two to
four new centers and to acquire six to eight centers by the end of 1997. If
the Company is not able to operate a surgery center profitably, it may explore
various alternatives including selling or closing it or entering into a joint
venture with another party, any of which could result in a loss with respect
to that center and adversely affect the operating results and financial
condition of the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Business--Strategy" and "--Acquisition and Development
Programs."

Additional Financings. The Company's acquisition and development program
requires substantial capital resources. The operations of its existing centers
require ongoing capital expenditures for renovation and expansion and the
addition of costly medical equipment and technology utilized in the centers.
The Company expects that the net proceeds of this offering, cash generated
from operations and available credit borrowings will be adequate to provide
for the Company's cash requirements through the end of 1997, unless the rate
of acquisitions significantly increases beyond current expectations. No
assurances can be given that such proceeds, cash and borrowings will be
sufficient to provide for the Company's cash requirements beyond the end of
1997. The Company may incur indebtedness and may issue, from time to time debt
or equity securities, in connection with the acquisition of surgery centers.
There can be no assurance that sufficient financing will be available on terms
satisfactory to the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Business--Strategy."

Rapid Growth. Since 1991, the Company has pursued an aggressive growth
strategy. Of the Company's currently operating surgery centers, four were
acquired in 1991, four were acquired in 1992, two were acquired in 1993, three
were acquired in 1995 and 15 have been acquired in 1996 (including one in
which it acquired a minority interest). Additionally, two developed centers
were opened in 1994. The Company intends to develop two to four new centers
and acquire six to eight additional surgery centers by the end of 1997. This
rapid growth may place significant demands on the Company's financial and
management resources. There can be no assurance that the Company will be able
to manage this growth effectively or that losses at one or more of the
acquired or developed surgery centers will not adversely affect the Company's
financial condition or results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."

Reimbursement. The health care industry is experiencing a trend toward cost
containment as government and other third-party payors, who are the Company's
principal sources of revenue, seek to impose lower reimbursement rates and
negotiate reduced contract rates with service providers, generally in the form
of fixed rates for specified procedures. Government payors' reimbursement
rates are lower than the Company's standard charges and are non-negotiable.
Recent federal budget legislation

7
<PAGE>

decreased the aggregate amount of funds available for such reimbursement.
Reimbursement rates from managed care providers, such as health maintenance
organizations ("HMOs") and preferred provider organizations ("PPOs"), are
generally set according to contracts between the individual center and the
managed care provider. Such contracts typically define reimbursement by
specific procedure or group of procedures or as a percentage of standard
charges and are renegotiated from time to time. Reductions in reimbursement
rates by government or other third-party payors and the trend toward cost
containment may adversely affect the Company's operating results or financial
condition. While the Company currently satisfies the participation
requirements of Medicare and Medicaid, exclusion of the Company from such
programs would adversely affect the Company's operating results or financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Introduction" and "Business--Government Health Care
Regulation."

Managed Care. Although the Company believes that, because it is a high-
quality, cost-effective provider of ambulatory surgery services, it will be
able to continue serving enrollees in managed care plans, there can be no
assurance that it will be able to do so. The future inability of the Company
to obtain managed care contracts in its markets may adversely affect the
Company's operating results or financial condition. There can be no assurance
that the Company will be able to obtain managed care contracts at each of its
centers. In addition, federal and state legislative proposals have been
introduced that could substantially increase the number of Medicare and
Medicaid recipients enrolled in HMOs and other managed care plans. The Company
derives a substantial portion of its revenue from Medicare and Medicaid. In
the event such proposals are adopted, there can be no assurance that the
Company will be able to obtain contracts from HMOs and other managed care
plans serving Medicare and Medicaid enrollees.

Government Health Care Regulation. The Company and its surgery centers are
subject to extensive and changing federal, state and local regulations.
Federal law prohibits the offer, payment, solicitation or receipt of any form
of remuneration in return for the referral of Medicare or Medicaid eligible
patients or in return for the purchase, lease or order of items or services
that are covered by Medicare or Medicaid. Federal law also prohibits certain
financial relationships between physicians and other health care providers.
These self-referral statutes are broad and the full extent of their
application is not known. The most recent of such federal self-referral
statutes prohibits a physician from referring Medicare or Medicaid patients to
an entity providing "designated health services," as specifically defined in
that statute, where the physician has a prohibited financial relationship with
such entity. Ambulatory surgery centers are not among such designated health
services. In addition, many states have adopted self-referral laws. The
Company's ownership interest in a surgery center typically is through a wholly
owned subsidiary of the Company that is the general partner of a limited
partnership that owns and operates the center. Generally, the limited partners
are surgeons who practice in the community where the surgery center is
located. Although the Company believes that its operations and structure do
not violate the various laws referred to above, there can be no assurance that
its activities will not be challenged by regulatory authorities. If such a
challenge is successful, it could have a material adverse effect on the
Company. In addition to the adverse consequences of non-compliance with these
regulations, the costs of compliance with such regulations are, and are likely
to remain, significant. It is not possible to predict accurately the content
of future legislation or regulation affecting the health care industry or its
impact on the Company's ability to develop or acquire new surgery centers or
to operate its existing surgery centers in the manner in which they are
currently operated. See "Business--Government Health Care Regulation."

Holding Company Structure. The Company is a holding company that derives
substantially all of its operating income and cash flows from its subsidiaries
and partnerships, although the Company can, subject to applicable state laws
and the terms of its limited partnership agreements, control the timing and
amount of dividends paid by its subsidiaries and distributions made by its
majority-owned partnerships. Although the Company receives some management
fees directly, it relies on dividends from its subsidiaries and distributions
from its partnerships to generate the funds necessary to meet its obligations.
Claims of creditors of the Company's subsidiaries or partnerships will
generally have priority as to the assets of such subsidiaries or partnerships
over the claims of the Company.

8
<PAGE>

Insurance/Professional Liability. The Company's surgery centers are exposed
to the risk of professional liability claims. Claims of this nature, if
successful, could result in substantial damage awards to the claimants that
may exceed the limits of any applicable insurance coverage. Although the
Company maintains liability insurance which it believes to be sufficient in
scope and amount, there can be no assurance that such insurance will continue
to be available to the Company at acceptable rates or that successful
liability claims asserted against the Company or its subsidiaries will not
have a material adverse effect on the Company's operating results or financial
condition.

Competition. The health care industry, in general, and the ambulatory
surgery business, in particular, are highly competitive and subject to
continual changes in the manner in which services are delivered and providers
are selected. The Company competes for patients and managed care contracts
principally with hospitals and other freestanding surgery centers, some of
which are larger and have greater resources than the Company. There can be no
assurance that levels of competition will not increase or that such
competition will not have a material adverse effect on the Company's business.
See "Business--Competition."

Dependence on Senior Management. The Company depends on a limited number of
key personnel, including E. Timothy Geary and John G. Rex-Waller for the
management of the Company and the implementation of its business strategy. The
loss of services of certain key employees, including Messrs. Geary or Rex-
Waller, could have a material adverse effect on the Company. The Company does
not maintain key man life insurance policies on any of its officers. See
"Management."

Common Stock Eligible for Future Sale. Following completion of this
offering, the Company will have outstanding 11,058,099 shares of Common Stock
and Non-Voting Common Stock, warrants and options to purchase 1,236,773 shares
of Common Stock and notes convertible into 495,771 shares of Common Stock. The
3,450,000 shares issued in the Company's initial public offering in November
1995 and the 2,750,000 shares of Common Stock offered hereby are currently and
will be eligible for immediate sale in the public market without restriction,
other than by an "affiliate" of the Company, as that term is defined in the
Securities Act of 1933, as amended (the "Securities Act"). All remaining
shares of Common Stock, were issued and sold by the Company in private
transactions, are issuable upon exercise of warrants and options, or are
issuable upon conversion of convertible subordinated notes and are eligible
for sale in the public market, at prescribed times subject to compliance with
an exemption from the registration requirements of the Securities Act, such as
Rule 144 or Rule 144A. In addition, certain existing stockholders have the
right to require the Company to register their Common Stock under the
Securities Act from time to time. The Company and holders of an aggregate of
2,157,855 shares of Common Stock and Non-Voting Common Stock, holders of
options and warrants to purchase 173,247 shares and notes convertible into
27,479 shares of Common Stock (including all shares beneficially owned by the
Company's directors and officers), have agreed that they will not sell any
shares of Common Stock or Non-Voting Common Stock held by them for a period of
90 days from the date of this Prospectus without the prior written consent of
Alex. Brown & Sons Incorporated. No predictions can be made as to the effect,
if any, that market sales of such shares or the availability of such shares
for sale will have on the market price for shares of Common Stock. Sales of
substantial amounts of shares of Common Stock in the public market following
this offering could adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of equity securities. See "Shares Eligible for Future Sale" and
"Underwriting."

Effect of Certain Charter and Bylaw Provisions. Certain provisions of the
Company's Charter and Bylaws may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders. See "Description of Capital Stock."

Absence of Dividends. The Company has never declared or paid and does not
intend to pay cash dividends on the Common Stock in the foreseeable future and
anticipates that it will retain any future earnings to finance its growth and
operations. In addition, the Company's agreement with its senior lender

9
<PAGE>

contains a minimum net worth covenant and other limitations on the payment of
cash dividends. See "Dividend Policy" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

Possible Conflicts of Interest. Two of the general partners of Welsh,
Carson, Anderson & Stowe V, L.P. ("WCAS V") and WCAS Capital Partners II, L.P.
("WCAS II") are directors of the Company. WCAS V and WCAS II are also
investors in and have affiliates serving as directors of other companies in
the health care industry, some of which may compete with the Company.
Affiliates of WCAS V and WCAS II serving as directors of the Company and such
other companies could be confronted with conflicts of interest in performing
their duties as directors. There can be no assurance that such potential
conflicts of interest will not adversely affect the Company. See "Management"
and "Principal and Selling Stockholders."

RECENT DEVELOPMENTS

Since January 1, 1996 the Company has acquired 15 freestanding ambulatory
surgery centers (including one center in which it acquired a minority
interest) in six separate transactions and has reached an agreement in
principle to divest its interest in one center. The Recent Acquisitions are
located in seven states, had aggregate net revenue of approximately $15.8
million and performed 23,974 cases in 1995. Each of these acquisitions (except
for the center in which a minority interest was acquired) have been accounted
for using the purchase method of accounting. The acquisitions summarized below
should be read in conjunction with the Unaudited Pro Forma Consolidated
Financial Statements:

. Effective January 1, 1996 the Company purchased 100% of the outstanding
stock of Northern Rockies Surgicenter, Inc., a multi-specialty ambulatory
surgery center located in Billings, Montana which had 1995 net revenue of
$1.7 million.

. On February 23, 1996, the Company paid $1.8 million and assumed $4.5
million in guarantees for a controlling interest in and subsequently paid
$200,000 to acquire the remaining interest of Endoscopy Center
Affiliates, Inc. ("ECA"). ECA, which had 1995 combined net revenue of
$4.8 million, operates eight endoscopy centers specializing in
gastroenterological procedures.

. On April 9, 1996, the Company acquired an 84% interest in Western Reserve
Surgery Center, L.P., a multi-specialty ambulatory surgery center located
in Kent, Ohio, which had 1995 net revenue of $1.2 million.

. Effective May 1, 1996, the Company paid $4.1 million for all of the
capital stock of the general partners (with ownership percentages ranging
from 60% to 66%) of three endoscopy centers specializing in
gastroenterological procedures located in Atlanta, Georgia and Miami and
Sarasota, Florida which had 1995 combined net revenue of $4.8 million.

. Effective May 1, 1996, the Company paid $4.2 million for a 61% interest
in Westside Surgery Center, Ltd., a multi-specialty ambulatory surgery
center located in Houston, Texas, which had 1995 net revenue of $3.3
million.

. On September 6, 1996, the Company purchased a ten percent interest in
Northeast Surgery Center, Ltd., a multi-specialty ambulatory surgery
center located in Humble, Texas.

. The Company has reached an agreement in principle to sell its interest in
a multi-specialty surgery center in Dallas, Texas, which sale shall be
effective as of September 1, 1996.

On April 18, 1996, the Board of Directors of the Company declared a 3-for-2
stock split for all holders of record of the Company's Common Stock on May 15,
1996, which was effected as a stock dividend on May 31, 1996.

On June 25, 1996 WCAS V and WCAS II exercised warrants to purchase Non-
Voting Common Stock in the amount of 325,546 shares. On September 20, 1996,
BankAmerica Investment Corporation exercised a warrant to purchase 146,989
shares of Common Stock.

Since July 1996, the Company has converted $1.4 million of its convertible
subordinated notes into 97,293 shares of Common Stock and issued redemption
notices with respect to $4.3 million principal amount of such notes, which
would result in the issuance of 362,112 additional shares. These convertible
subordinated notes have an average interest rate of 8.5 percent.

10
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from this offering are estimated to be
approximately $53.1 million ($64.2 million if the Underwriters' over-allotment
option is exercised in full) based upon an assumed offering price of $28.13
per share.

The Company will use $1.2 million of the net proceeds to repay indebtedness
of that amount owed to Dr. Donald E. Linder, a director of the Company. This
debt bears a 7.5% interest rate and is due June 24, 1997. The Company is
currently negotiating the prepayment of certain loans and capital leases,
which by their terms are not prepayable. The $3.5 million in loans have
interest rates ranging from 10.5% to 13.25%, with an effective average
interest rate of 11.5%, and mature through July 2002. The $5.2 million of
capital leases have imputed interest rates ranging from 9.0% to 13.4%, with an
effective average interest rate of 11.6%, and mature through February 2001.
There can be no assurance that a mutually satisfactory arrangement will be
made for the prepayment of such loans and capital leases. The Company could
incur an extraordinary charge to earnings reflecting such prepayments of
approximately $1.2 million, with related tax benefits of $391,000. The Company
will use the remaining net proceeds from this offering for general corporate
purposes, which may include future acquisitions and the development of surgery
centers. Although the Company is engaged in preliminary discussions with
numerous potential acquisition candidates, none of such acquisitions is
currently probable. There can be no assurance that any acquisition by the
Company can be consummated on favorable terms, if at all, or that any
acquisition, if completed, will be successful. As a result, the Company is
currently unable to estimate the amount of net proceeds to be allocated either
to acquisitions or to the development of surgery centers. See "Business--
Strategy." Until used as described, the Company will invest the net proceeds
of this offering in short-term investment-grade, interest-bearing securities.

The Company will not receive any of the proceeds from the sale of shares of
Common Stock offered by the Selling Stockholders. See "Principal and Selling
Stockholders."

PRICE RANGE OF COMMON STOCK

The Common Stock of the Company has been included for quotation in the
Nasdaq National Market under the symbol "NSCI" since the Company's initial
public offering of Common Stock on November 10, 1995. Prior to that time,
there was no public market for the Common Stock. The following tables set
forth the high and low closing prices for the Common Stock for the periods
indicated as reported by the Nasdaq National Market:

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Fourth Quarter(1)(2)........................................... $15.33 $12.17
YEAR ENDED DECEMBER 31, 1996
First Quarter(1)............................................... $22.00 $14.33
Second Quarter(1).............................................. 31.50 18.67
Third Quarter(3)............................................... 30.25 23.00
</TABLE>
- --------
(1) Adjusted to reflect the 3-for-2 stock split of the Company's Common Stock
effected in May 1996.
(2) Represents trading of the Common Stock from November 10, 1995 to December
31, 1995.
(3) Represents trading through September 23, 1996.

On September 23, 1996, the last reported sale price of the Common Stock on
the Nasdaq National Market was $28.13 per share. At September 20, 1996, there
were approximately 190 holders of record.

DIVIDEND POLICY

The Company has never declared or paid nor does it intend to declare or pay
cash dividends on the Common Stock for the foreseeable future, but intends
instead to retain future earnings to finance expansion and operations. Certain
financial covenants in the Company's loan agreement with Bank of America,
Illinois N.A. could limit the ability of the Company to pay dividends or make
other distributions on the Common Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

11
<PAGE>

CAPITALIZATION

The following table sets forth as of June 30, 1996 (i) the capitalization of
the Company and (ii) the capitalization of the Company, as adjusted to reflect
the sale of the shares of Common Stock offered hereby by the Company and the
application of the net proceeds therefrom, all as if they occurred on June 30,
1996:

<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------
ACTUAL(1) AS ADJUSTED(2)
--------- --------------
(IN THOUSANDS)
<S> <C> <C>
Current installments of long-term debt................ $ 8,698 $ 5,983
======== ========
Long-term debt, less current installments............. $ 19,660 $ 12,484
Shareholders' equity:
Preferred stock, $.01 par value per share,
10,000,000 shares authorized; no shares issued and
outstanding........................................ -- --
Non-voting common stock, $.01 par value per share,
10,000,000 shares authorized; 1,307,016 shares
issued and outstanding; 1,307,016 shares issued and
outstanding, as adjusted(3)........................ 13 13
Common stock, $.01 par value per share, 20,000,000
shares authorized; 7,479,660 shares issued and
outstanding; 9,482,671 issued and outstanding, as
adjusted(4)(5)..................................... 75 95
Additional paid-in-capital.......................... 87,897 141,004
Accumulated deficit(6).............................. (36,385) (37,144)
-------- --------
Total shareholders' equity........................ 51,600 103,968
-------- --------
Total capitalization............................ $ 71,260 $116,452
======== ========
</TABLE>
- --------
(1) Gives effect to the consummation of the Recent Acquisitions. See "Recent
Developments."
(2) Gives effect to the application of the net proceeds from the sale of
2,003,011 shares of Common Stock offered hereby by the Company at an
assumed public offering price of $28.13 per share. See "Use of Proceeds."
(3) Non-Voting Common Stock is held by J.P. Morgan Capital Corporation, a
wholly owned subsidiary of J.P. Morgan & Co. Incorporated, WCAS Capital
Partners II, L.P. and Welsh, Carson, Anderson and Stowe L.P. See "Certain
Transactions" and "Principal and Selling Stockholders."
(4) Excludes certain warrants for 146,989 shares of Common Stock exercised on
September 20, 1996 and 97,293 shares of Common Stock issued upon
conversion of certain convertible subordinated notes. See "Recent
Developments."
(5) Excludes options and warrants outstanding on the date hereof to purchase
1,236,773 shares of Common Stock at a weighted average exercise price of
$19.06 per share. Also excludes 495,771 shares of Common Stock reserved
for issuance upon conversion of certain notes issued in connection with
acquisitions at a weighted average conversion price of $13.81 per share.
(6) Pro forma as adjusted to include a non-recurring extraordinary charge of
$759,000, net of a tax benefit of $391,000, related to the repayment of
$9.9 million principal amount of the Company's loans and capital leases.
See "Use of Proceeds."

12
<PAGE>

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The following Unaudited Pro Forma Consolidated Statements of Operations for
the year ended December 31, 1995, and for the six months ended June 30, 1996
and Consolidated Balance Sheets at June 30, 1996, are based on the historical
consolidated financial statements of the Company. The Unaudited Pro Forma
Consolidated Statements of Operations are adjusted as if the following events
occurred on January 1, 1995 while the Unaudited Pro Forma Consolidated Balance
Sheet is adjusted as if the following events occurred at June 30, 1996: (i)
consummation of the Recent Acquisitions (except that all Recent Acquisitions
other than Northeast Surgery Center, Ltd. are included in the historical June
30, 1996 balance sheet) and (ii) receipt of the net proceeds payable to the
Company in this offering and the application thereof, based upon an assumed
public offering price of $28.13 per share. The Unaudited Pro Forma
Consolidated Statements combine the historical financial information of the
Company with the historical financial information of the Recent Acquisitions
as appropriate, using the purchase method of accounting. These Unaudited Pro
Forma Consolidated Financial Statements are not necessarily indicative of the
operating results that would have been achieved had the Recent Acquisitions
occurred at the beginning of each period presented nor do they purport to
indicate the results of future operations. These Unaudited Pro Forma
Consolidated Financial Statements are based on the assumptions set forth in
the notes to such statements and should be read in conjunction with the
related consolidated financial statements of the Company and notes thereto
included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 SIX MONTHS ENDED JUNE 30, 1996
----------------------------------------------- -----------------------------------------------
RECENT AS RECENT AS
HISTORICAL ACQUISITIONS(1) OFFERING ADJUSTED HISTORICAL ACQUISITIONS(1) OFFERING ADJUSTED
---------- --------------- -------- -------- ---------- --------------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
OPERATIONS:
Net revenue............. $53,165 $18,318 $ -- $71,483 $35,911 $4,224 $ -- $40,135
Costs and expenses:
Operating expenses..... 36,982 12,206 -- 49,188 23,765 2,835 -- 26,600
General and
administrative
expenses.............. 2,365 350 -- 2,715 1,623 115 -- 1,738
Depreciation and
amortization.......... 3,581 2,498(2) -- 6,079 2,680 698(2) -- 3,378
------- ------- ----- ------- ------- ------ ------ -------
Total costs and
expenses............. 42,928 15,054 -- 57,982 28,068 3,648 -- 31,716
------- ------- ----- ------- ------- ------ ------ -------
Operating income....... 10,237 3,264 -- 13,501 7,843 576 -- 8,419
Other (income) expense:
Interest expense....... 4,139 2,199(3) (976)(6) 5,362 1,297 491(3) (557)(6) 1,231
Interest income........ (278) (29) -- (307) (219) -- -- (219)
Minority interests..... 1,382 1,066(4) -- 2,448 1,517 429(4) -- 1,946
Other, net............. (86) (898) -- (984) (153) (136) -- (289)
------- ------- ----- ------- ------- ------ ------ -------
Total other (income)
expense.............. 5,157 2,338 (976) 6,519 2,442 784 (557) 2,669
------- ------- ----- ------- ------- ------ ------ -------
Net income before taxes
and extraordinary item. 5,080 926 976 6,982 5,401 (208) 557 5,750
Provision (benefit) for
income taxes........... 1,981 370(5) 390(5) 2,741 2,108 (83)(5) 223(5) 2,248
------- ------- ----- ------- ------- ------ ------ -------
Net income (loss) before
extraordinary item..... 3,099 556 586 4,241 3,293 (125) 334 3,502
Early extinguishment of
debt, net.............. (253) -- -- (253) -- -- (759)(7) (759)
------- ------- ----- ------- ------- ------ ------ -------
Net income (loss)....... $ 2,846 $ 556 $ 586 $ 3,988 $ 3,293 $ (125) $ (425) $ 2,743
======= ======= ===== ======= ======= ====== ====== =======
Net income per share
before extraordinary
item................... $ 0.54 -- $0.29 $ 0.55 $ 0.35 -- $ 0.17 $ 0.31
Net income (loss) per
share.................. $ 0.50 -- $0.29 $ 0.52 $ 0.35 -- $(0.21) $ 0.25
Fully diluted weighted
average number of
common shares
outstanding............ 5,711 -- 2,003 7,714 9,699 -- 2,003 11,702
</TABLE>

The accompanying notes on the following page are an integral part of the
Unaudited Pro Forma Consolidated Financial Statements.

13
<PAGE>

<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------------------------------
RECENT AS
HISTORICAL ACQUISITIONS(8) OFFERING ADJUSTED
---------- --------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEETS:
ASSETS
Current assets:
Cash and cash
equivalents.............. $ 8,308 $(1,500) $42,086(9)(10) $ 48,894
Short-term investments.... 250 -- -- 250
Accounts receivable, net.. 13,221 -- -- 13,221
Other current assets...... 4,405 -- -- 4,405
-------- ------- ------- --------
Total current assets.... 26,184 (1,500) 42,086 66,770
-------- ------- ------- --------
Property and equipment,
net...................... 34,237 -- -- 34,237
Excess of purchase price
over net assets acquired,
net...................... 28,202 -- -- 28,202
Other assets.............. 6,046 1,500 -- 7,546
-------- ------- ------- --------
$ 94,669 $ -- $42,086 $136,755
======== ======= ======= ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of
long-term debt........... $ 8,698 $ -- $(2,715)(10) $ 5,983
Accounts payable and
accrued expenses......... 7,842 -- (391)(7) 7,451
-------- ------- ------- --------
Total current
liabilities............ 16,540 -- (3,106) 13,434
-------- ------- ------- --------
Long-term debt, less
current installments...... 19,660 -- (7,176)(10) 12,484
Other long-term
liabilities............... 493 -- -- 493
Minority interests......... 6,376 -- -- 6,376
Shareholders' equity:
Preferred stock........... -- -- -- --
Non-voting common stock... 13 -- -- 13
Common stock.............. 75 -- 20(9) 95
Additional paid-in-
capital.................. 87,897 -- 53,107(9) 141,004
Accumulated deficit....... (36,385) -- (759)(7) (37,144)
-------- ------- ------- --------
Total shareholders'
equity................. 51,600 -- 52,368 103,968
-------- ------- ------- --------
$ 94,669 $ -- $42,086 $136,755
======== ======= ======= ========
</TABLE>
- --------
(1) Reflects the historical net revenue and operating expenses of the Recent
Acquisitions on a consolidated basis as if the Recent Acquisitions had
occurred on January 1, 1995.
(2) Includes incremental amortization of goodwill as a result of the Recent
Acquisitions.
(3) Reflects additional interest expense attributable to debt issued, assumed
or incurred as a direct result of the Recent Acquisitions.
(4) Includes adjustment for limited partners' ownership share of earnings of
the operating limited partnerships.
(5) Includes an adjustment to reflect income tax expense at an assumed
effective tax rate of 40.0%.
(6) Reflects an adjustment to reduce interest expense relating to the use of
the proceeds of this offering received by the Company.
(7) Represents non-recurring extraordinary charge of $759,000, net of a tax
benefit of $391,000, related to the prepayment of $9.9 million principal
amount of certain loans and capital leases. See "Use of Proceeds."
(8) Reflects the minority ownership investment in Northeast Surgery Center,
Ltd. as if the investment had occurred on June 30, 1996.
(9) Adjustments for this offering include the issuance of 2,003,011 shares of
Common Stock offered hereby by the Company, at an assumed public offering
price of $28.13 per share, and receipt and application of the net proceeds
therefrom. See "Use of Proceeds."
(10) Reflects cash payment of $9.9 million for prepayment of certain loans and
capital leases and $1.2 million of prepayment penalties.

14
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following balance sheet data at December 31, 1994 and 1995, and the
statements of operations data for the years ended December 31, 1993, 1994 and
1995, have been derived from the consolidated financial statements that have
been audited by Ernst & Young LLP, independent auditors, whose report thereon
appears elsewhere in this Prospectus. The balance sheet data at December 31,
1991, 1992 and 1993 and June 30, 1995, and the statement of operations data
for the year ended December 31, 1992 and the six-month period ended June 30,
1995 have been derived from audited consolidated financial statements not
included in this Prospectus. The statement of operations data for the year
ended December 31, 1991 is unaudited. The balance sheet data at June 30, 1996,
and the statements of operations data for the six-month periods then ended,
are derived from unaudited consolidated financial statements that, in the
opinion of the Company, reflect all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the financial
position and results of operations of the Company for these periods. The
statements of operations data for the interim periods are not necessarily
indicative of results for subsequent periods or the full year. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and with the
consolidated financial statements of the Company and notes thereto presented
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------ ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND CENTER DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net revenue............ $ 1,296 $18,894 $35,230 $41,707 $53,165 $25,097 $35,911
Writedown of
goodwill(1)........... -- -- 50,871 -- -- -- --
Operating income
(loss)(1)............. (316) 2,827 (44,385) 7,566 10,237 5,015 7,843
Interest expense....... 92 1,778 4,016 4,186 4,139 2,193 1,297
Income (loss) before
income taxes and
extraordinary item(1). (415) 319 (49,463) 2,511 5,080 2,125 5,401
Net income (loss)
before extraordinary
item(1)............... (417) 2 (43,236) 1,493 3,099 1,282 3,293
Net income (loss) per
share before
extraordinary
item(1)(2)............ $ (0.35) $ 0.00 $(11.35) $ 0.35 $ 0.54 $ 0.26 $ 0.35
Fully diluted weighted
average number of
common shares
outstanding(2)........ 1,179 2,987 3,810 4,269 5,711 4,931 9,699
GENERAL CENTER DATA(3):
Centers................ 4 10 12 14 16 14 30
Cases(4)............... 1,837 22,234 38,113 43,419 53,460 25,161 38,576
Net revenue per
case(4)............... $ 706 $ 850 $ 924 $ 961 $ 994 $ 997 $ 931
SAME CENTER DATA(5):
Net revenue growth..... n/a n/a 22.8% 11.7% 12.6% 13.2% 16.0%
Case growth............ n/a n/a 12.3% 6.6% 9.1% 9.1% 13.9%
Net revenue per case
growth................ n/a n/a 9.4% 4.8% 3.2% 3.8% 1.8%
Operating income
growth(6)............. n/a n/a 45.4% 22.4% 17.8% 20.1% 23.1%
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------ ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term
investments........... $ 1,817 $ 5,265 $ 2,852 $ 4,478 $22,843 $ 5,041 $ 8,558
Working capital........ 2,689 4,845 2,789 6,300 22,145 6,777 9,644
Total assets........... 24,586 87,046 49,393 56,954 82,287 58,008 94,669
Total debt............. 7,863 41,559 44,426 42,711 24,074 41,887 28,358
Shareholders' equity
(deficit)............. 15,191 39,950 (3,134) 6,724 48,192 8,332 51,600
</TABLE>

The accompanying notes on the following page are an integral part of the
Selected Consolidated Financial Data.

15
<PAGE>

- --------
(1) Operating results for the year ended December 31, 1993, include a non-
recurring charge of approximately $50.9 million ($43.8 million after tax
benefit), principally incurred in connection with the writedown of
goodwill. Excluding the non-recurring charge for writedown of goodwill and
related tax benefit, operating income, net income before extraordinary
item and net income per share before extraordinary item would have been
$6.5 million, $580,000 and $0.15, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Writedown of Goodwill" and Note 5 of Notes to Consolidated Financial
Statements.
(2) Adjusted to reflect (i) the 1-for-3 stock exchange related to the
Company's reincorporation in Delaware effected in September 1995 and (ii)
the 3-for-2 stock split in the form of a Common Stock dividend effected in
May 1996.
(3) As of January 1, 1995, the Company closed its surgery center located in
Phoenix, Arizona. Accordingly, information related to this center is not
included in any subsequent periods.
(4) Excludes data from two centers in which the Company has a non-controlling
or minority ownership position.
(5) Same center data is calculated based on centers that the Company operated
for all of both the current and prior year periods.
(6) Excludes effects of goodwill writedown for the year ended December 31,
1993. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Writedown of Goodwill" and Note 5 of Notes to
Consolidated Financial Statements.

16
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

The Company's growth has resulted primarily from the acquisition and
development of ambulatory surgery centers. Since 1991, the Company has
completed the acquisition of 29 ambulatory surgery centers, including two
centers in which the Company has a minority ownership position and one center
that has subsequently been closed, developed two new centers in which it has
majority equity ownership and developed centers for other health care
providers, including one hospital. The Company's acquisitions have been funded
with cash, debt, convertible notes and shares of Common Stock. Additionally,
the Company has increased surgical capacity at existing centers by adding
operating rooms and has expanded its ability to perform higher acuity and more
complex cases by offering extended recovery in eleven of its centers.

The Company's principal source of revenue is a facility fee charged for
surgical procedures performed in its surgery centers. This fee varies
depending on the procedure, but usually includes all charges for operating
room usage, special equipment usage, supplies, recovery room usage, nursing
staff and medications. Facility fees do not include the charges of the
patient's surgeon, anesthesiologist or other attending physicians, which are
billed directly by such physicians. An additional fee is typically charged for
extended recovery care, where available. This fee generally includes a flat
fee for post-operative care and may include itemized amounts for medications
and other supplies.

The Company receives payments for services rendered to patients from private
insurers, HMOs, PPOs, the patients directly and governmental payors, including
Medicare and Medicaid. In many instances, the Company has agreed with certain
payors to provide services at discounted prices. The Company charges for
services rendered on a fee-for-service basis although it is considering, and
may in the future enter into capitation agreements with payors whereby the
Company may share some of the financial risk of delivering health care
services. The sources and amounts of the Company's revenues derived from its
surgery centers are determined by a number of factors, including the number of
patient procedures performed, the mix of patient procedures and the rates of
reimbursement among payor categories. Generally, private insurance
reimbursement is greater than HMO/PPO reimbursement which, in turn, is greater
than Medicare and Medicaid reimbursement. Changes in the Company's payor mix
can significantly affect its profitability. The following table provides
certain information concerning the Company's payor mix during the periods
indicated:

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------- ----------------
PAYOR 1993 1994 1995 1995 1996
----- ----- ----- ----- ------- -------
(PERCENTAGE OF GROSS REVENUE)
<S> <C> <C> <C> <C> <C>
Medicare/Medicaid....................... 37.7% 39.7% 38.4% 39.3% 38.4%
HMO/PPO................................. 21.5 22.7 27.2 26.4 29.2
Private insurance, discounted fee for
service and other...................... 40.8 37.6 34.4 34.3 32.4
----- ----- ----- ------- -------
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ======= =======
</TABLE>

The Company has experienced a trend in which an increasingly large portion
of its reimbursement is received from HMO/PPOs. A continuing trend of
increased dependence on this category of payors could have an adverse effect
on the Company's profitability. However, the Company's management expects to
be able to offset lower reimbursement rates by continuing to increase
operating efficiencies and the number of higher-acuity cases performed in its
centers.

The Company's profitability may be affected in future periods by the
development of new centers. The operating margins for developed centers tend
to be below the Company's average during the first

17
<PAGE>

years of operation. Several of the endoscopy centers acquired by the Company
during the first and second quarters of 1996 and two centers developed by the
Company in the third quarter of 1994 have been in operation for less than two
years and currently have and are likely to have margins below the Company
average.

The Company's endoscopy centers typically have net revenue per case which
are approximately one-half of the net revenue per case of a multi-specialty
surgery center. Accordingly, the Company's overall net revenue per case will
decline in future periods as the acquired endoscopy centers are reflected in
such operating results.

RESULTS OF OPERATIONS

The following table sets forth certain consolidated financial data as a
percentage of net revenue for the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------- ------------------
(UNAUDITED)
1993 1994 1995 1995 1996
------ ----- ----- ----- -----------
(PERCENTAGE OF NET REVENUE)
<S> <C> <C> <C> <C> <C>
Net revenue.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Operating expenses................. 67.0 71.1 69.6 68.8 66.2
General and administrative
expenses.......................... 6.0 4.6 4.4 4.5 4.5
Depreciation and amortization
expense........................... 8.6 6.2 6.7 6.7 7.5
Writedown of goodwill.............. 144.4 -- -- -- --
------ ----- ----- ----- -----
Total costs and expenses......... 226.0 81.9 80.7 80.0 78.2
------ ----- ----- ----- -----
Operating income (loss).............. (126.0) 18.1 19.3 20.0 21.8
------ ----- ----- ----- -----
Other (income) expense:
Interest expense................... 11.4 10.0 7.8 8.7 3.6
Interest income.................... (0.3) (0.4) (0.5) (0.4) (0.6)
Minority interests................. 3.3 2.5 2.6 2.6 4.2
Other, net......................... -- -- (0.1) 0.6 (0.4)
------ ----- ----- ----- -----
Total other expense.............. 14.4 12.1 9.8 11.5 6.8
------ ----- ----- ----- -----
Income (loss) before income taxes and
extraordinary item.................. (140.4) 6.0 9.5 8.5 15.0
Provision for income taxes........... (17.7) 2.4 3.7 3.4 5.8
------ ----- ----- ----- -----
Income (loss) before extraordinary
item................................ (122.7) 3.6 5.8 5.1 9.2
Early extinguishment of debt, net of
tax effects......................... -- (0.9) (0.5) -- --
------ ----- ----- ----- -----
Net income (loss).................... (122.7)% 2.7% 5.3% 5.1% 9.2%
====== ===== ===== ===== =====
</TABLE>

SIX MONTHS ENDED JUNE 30, 1995 AND 1996

Net Revenue. Net revenue is net of provisions for contractual adjustments
and doubtful accounts. Net revenue increased 43.1% from $25.1 million for the
six-month period ended June 30, 1995 to $35.9 million for the comparable
period of 1996. Overall net revenue per case declined 6.6% from $997 to $931,
primarily due to the inclusion of eleven specialty endoscopy centers acquired
during 1996. Separately, net revenue per case for the six-month period ended
June 30, 1996 was $1,014 for the multi-specialty centers and $471 for the
specialty endoscopy centers. Same center net revenue increased 16.0% due to a
13.9% increase in cases combined with a 1.8% increase in net revenue per case
from $997 to $1,016. Of the remaining increase in net revenue, $2.3 million
and $4.5 million resulted from centers acquired in 1995 and 1996,
respectively. Overall payor mix, as a percentage of gross revenue, changed
with private insurance and discounted fee for service decreasing from 34.3% to
32.4%, HMO/PPO increasing from 26.4% to 29.2% and Medicare/Medicaid decreasing
from 39.3% to 38.4% from the six-month period ended June 30, 1995 to the
comparable period of 1996.

18
<PAGE>

Operating Expenses. Operating expenses include salaries and benefits, drugs
and medical supplies, utilities, marketing and maintenance costs and rent
expense of centers. Operating expenses increased 37.6% from $17.3 million for
the six-month period ended June 30, 1995 to $23.8 million in the comparable
period of 1996. Of this increase in operating expenses, $4.2 million resulted
from centers acquired in 1995 and 1996. As a percentage of net revenue,
operating expenses decreased from 68.8% for the six-month period ended June
30, 1995 to 66.2% for the comparable period of 1996.

General and Administrative Expenses. General and administrative expenses
include only corporate-level expenses and do not include any center-level
administrative expenses. General and administrative expenses increased 42.9%
from $1.1 million for the six-month period ended June 30, 1995 to $1.6 million
for the comparable period of 1996. As a percentage of net revenue, general and
administrative expenses remained constant at 4.5% for both six-month periods
ended June 30, 1995 and 1996. The Company believes that as same center cases
and revenues increase and if, as the Company anticipates, additional
acquisitions are made or centers are developed, further leverage of existing
management will occur and general and administrative expenses will continue to
decline as a percentage of net revenues.

Depreciation and Amortization Expense. Depreciation and amortization expense
increased 59.5% from $1.7 million for the six-month period ended June 30, 1995
to $2.7 million for the comparable period of 1996. Of this increase in
depreciation and amortization expense, $719,000 resulted from centers acquired
in 1995 and 1996. As a percentage of net revenue, depreciation and
amortization expense increased from 6.7% for the six-month period ended June
30, 1995 to 7.5% for the comparable period of 1996.

Interest Expense. Interest expense decreased 40.9% from $2.2 million for the
six-month period ended June 30, 1995 to $1.3 million for the comparable period
of 1996. The decrease in interest expense was primarily the result of the
repayment of $20.0 million of subordinated debt in November 1995 with proceeds
from the Company's initial public offering. As a percentage of net revenue,
interest expense decreased from 8.7% for the six-month period ended June 30,
1995 to 3.6% for the comparable period of 1996.

Minority Interests. Minority interests include the limited partners'
ownership share in the earnings (losses) of the operating center partnership.
Minority interests increased 133.4% from $650,000 for the six-month period
ended June 30, 1995 to $1.5 million for the comparable period of 1996. Of this
increase, $305,000 is attributable to centers acquired in 1995 and 1996 with
the remaining increase resulting from improved center operating performance.
As a percentage of net revenue, minority interests increased from 2.6% for the
six-month period ended June 30, 1995 to 4.2% for the comparable period of
1996.

Provision for Income Taxes. Provision for income taxes increased 150.1% from
$843,000 for the six-month period ended June 30, 1995 to $2.1 million for the
comparable period of 1996. The effective tax rate decreased from 39.7% for the
six-month period ended June 30, 1995 to 39.0% for the comparable period of
1996, primarily due to the effects of tax-exempt interest income from short-
term investments.

Net Income. Net income increased from $1.3 million for the six-month period
ended June 30, 1995 to $3.3 million for the comparable period of 1996. As a
percentage of net revenue, net income increased from 5.1% for the six-month
period ended June 30, 1995 to 9.2% for the comparable period of 1996.

YEARS ENDED DECEMBER 31, 1994 AND 1995

Net Revenue. Net revenue increased 27.5% from $41.7 million in 1994 to $53.2
million in 1995. Same center net revenue increased 12.6% due to a 9.1%
increase in cases combined with a 3.2% increase in net revenue per case from
$957 to $988. Of the remaining increase in net revenue, $5.5 million resulted
from the development of two surgery centers that opened in the third quarter
of 1994 and $1.5 million resulted from centers acquired in 1995. Effective
January 1, 1995, the Company closed its surgery center in Phoenix, Arizona
which had revenue of $450,000 in 1994. Overall payor mix, as a percentage of
gross revenue, changed with private insurance and discounted fee for service
decreasing from 37.6% to 34.4%, HMO/PPO increasing from 22.7% to 27.2% and
Medicare/Medicaid decreasing from 39.7% to 38.4% from 1994 to 1995.

Operating Expenses. Operating expenses increased 24.7% from $29.6 million in
1994 to $37.0 million in 1995. Of the increase in operating expenses, $4.4
million resulted from the two developed centers. As a percentage of net
revenue, operating expenses decreased from 71.1% in 1994 to 69.6% in 1995.

19
<PAGE>

Excluding the two development surgery centers, operating expenses as a
percentage of net revenue would have decreased from 68.6% in 1994 to 66.1% in
1995.

General and Administrative Expenses. General and administrative expenses
increased 23.2% from $1.9 million in 1994 to $2.4 million in 1995. As a
percentage of net revenue, general and administrative expenses decreased from
4.6% in 1994 to 4.4% in 1995.

Depreciation and Amortization Expense. Depreciation and amortization expense
increased 39.2% from $2.6 million in 1994 to $3.6 million in 1995. Of the
increase in depreciation and amortization expense, $672,000 resulted from the
two development centers and includes deferred development costs which are
being amortized over a two-year period. As a percentage of net revenue,
depreciation and amortization expense increased from 6.2% in 1994 to 6.7% in
1995.

Interest Expense. Interest expense decreased 1.1% from $4.2 million in 1994
to $4.1 million in 1995. The decrease in interest expense was primarily the
result of the repayment of the $20.0 million subordinated debt in November
1995 with proceeds from the public offering. As a percentage of net revenue,
interest expense decreased from 10.0% in 1994 to 7.8% in 1995.

Minority Interests. Minority interests increased 34.6% from $1.0 million in
1994 to $1.4 million in 1995. As a percentage of net revenue, minority
interests increased from 2.5% in 1994 to 2.6% in 1995.

Provision for Income Taxes. Provision for income taxes increased 94.6% from
$1.0 million in 1994 to $2.0 million in 1995. The effective tax rate decreased
from 40.5% for 1994 to 39.0% for 1995.

Extraordinary Charge. In 1994, the Company incurred an extraordinary charge
of $373,000 related to the accelerated amortization of unaccreted discount and
loan issuance costs of $565,000, net of related tax benefits of $192,000 in
connection with the renegotiation of the Company's acquisition line of credit.
In 1995, the Company incurred an extraordinary charge of $253,000 related to
accelerated amortization of unaccreted discount and loan issuance costs of
$383,000, net of related tax benefits of $130,000 in connection with the
Company's early repayment of $20.0 million subordinated debt.

Net Income. Net income increased 154.1% from $1.1 million in 1994 to $2.8
million in 1995. As a percentage of net revenue, net income increased from
2.7% in 1994 to 5.3% in 1995.

YEARS ENDED DECEMBER 31, 1993 AND 1994

Net Revenue. Net revenue increased 18.4% from $35.2 million in 1993 to $41.7
million in 1994. Of the increase in net revenue, $1.4 million resulted from
the development of two surgery centers which opened in July 1994 and $3.9
million resulted from an increase in same center business. Same center net
revenue increased 11.7% due to a 6.6% increase in cases combined with a 4.8%
increase in net revenue per case from $929 to $974. Overall payor mix, as a
percentage of gross revenue, changed with private insurance and discounted fee
for service decreasing from 40.8% to 37.6%, Medicare/Medicaid increasing from
37.7% to 39.7% and HMO/PPO increasing from 21.5% to 22.7% from 1993 to 1994.

Operating Expenses. Operating expenses increased 25.7% from $23.6 million in
1993 to $30.0 million in 1994. Of the increase in operating expenses, 8.3%, or
$2.0 million, resulted from the two development centers. As a percentage of
net revenue, operating expenses increased from 67.0% in 1993 to 71.1% in 1994.
Excluding the two development centers which opened in July 1994, operating
expenses as a percentage of net revenue would have increased 17.2% from 67.0%
in 1993 to 68.6% in 1994.

General and Administrative Expenses. General and administrative expenses
decreased 9.2% from $2.1 million in 1993 to $1.9 million in 1994. Principally
as a result of increased leverage of corporate level expenses, general and
administrative expenses as a percentage of net revenue decreased from 6.0% in
1993 to 4.6% in 1994.

Depreciation and Amortization Expense. Depreciation and amortization expense
decreased 15.0% from $3.0 million in 1993 to $2.6 million in 1994. As a result
of the writedown of goodwill in 1993, amortization expense was reduced;
however, this was offset by depreciation and amortization at the development
centers which opened in August 1994. As a percentage of net revenue,
depreciation and amortization expenses decreased from 8.6% in 1993 to 6.2% in
1994. See Note 5 of Notes to Consolidated Financial Statements and "--
Writedown of Goodwill."

20
<PAGE>

Interest Expense. Interest expense increased 4.2% from $4.0 million in 1993
to $4.2 million in 1994. The increase in interest expense was attributable in
part to additional capital lease debt and other debt issued related to the two
development centers and slightly higher interest rates on variable interest
debt. This increase in interest expense was offset by repayment of scheduled
debt maturities and acquisition-related debt with proceeds from a private
equity placement in August 1994. As a percentage of net revenue, interest
expense decreased from 11.4% in 1993 to 10.0% in 1994.

Minority Interests. Minority interests decreased 10.9% from $1.2 million in
1993 to $1.0 million in 1994. Of the decrease in minority interests, $321,000
in minority interests reductions related to limited partners' share of losses
at the two development centers which was offset by an increase of $195,000
from improved operating performance at same center partnerships or centers
acquired and partnerships formed in 1993 and 1994. As a percentage of net
revenue, minority interests decreased from 3.3% in 1993 to 2.5% in 1994.

Provision for Income Taxes. Provision for income taxes increased from a
benefit of $6.2 million in 1993 to a provision of $1.0 million in 1994. The
income tax benefit in 1993 relates to the writedown of $50.9 million in
goodwill. The effective tax rate increased from a benefit of 12.6% for 1993 to
a provision of 40.5% for 1994. See "--Writedown of Goodwill."

Extraordinary Charge. The Company incurred an extraordinary charge of
$373,000 related to the accelerated amortization of unaccreted discount and
loan issuance costs of $565,000, net of related tax benefits of $192,000 in
connection with the renegotiation of the Company's acquisition line of credit
in August 1994.

Net Income (Loss). Net income (loss) increased from a loss of $43.2 million
in 1993 to net income of $1.1 million in 1994. As a percentage of net revenue,
net income (loss) increased from a loss of 122.7% in 1993 to income of 2.7% in
1994.

SUMMARY OF OPERATIONS BY QUARTER (UNAUDITED)

The following table presents summarized unaudited quarterly operating
results for the periods from January 1, 1994 to June 30, 1996. The Company
believes that all necessary adjustments have been included to present fairly
the following selected information when read in conjunction with the Company's
consolidated financial statements and related notes thereto. Future quarterly
results may fluctuate depending on a number of factors, including the timing
of acquisitions, the development of surgery centers, fluctuations in the
Company's business affected by seasonal changes in the number and type of
surgeries, variations in the cost of services and the timing of price changes.
Results of operations for any particular quarter are not necessarily
indicative of results of operations for a full year or any other quarter.

<TABLE>
<CAPTION>
1996 QUARTER
1994 QUARTER ENDED 1995 QUARTER ENDED ENDED
--------------------------------- --------------------------------- ---------------
MAR 31 JUN 30 SEP 30(1) DEC 31 MAR 31 JUN 30 SEP 30 DEC 31(2) MAR 31 JUN 30
------- ------- --------- ------- ------- ------- ------- --------- ------- -------
(IN THOUSANDS, EXCEPT CASES AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cases................... 10,171 10,822 10,860 11,566 11,965 13,196 13,610 14,689 16,318 22,258
Net revenue............. $ 9,674 $10,162 $10,427 $11,444 $11,979 $13,118 $13,391 $14,677 $16,159 $19,752
Operating income........ 1,896 2,373 1,528 1,769 2,214 2,801 2,400 2,822 3,252 4,591
Net income before
extraordinary item..... 302 617 194 380 510 772 535 1,282 1,455 1,838
Net income per share
before extraordinary
item................... $ 0.08 $ 0.16 $ 0.04 $ 0.08 $ 0.10 $ 0.16 $ 0.11 $ 0.18 $ 0.16 $ 0.20
</TABLE>
- --------
(1) Operating results subsequent to this quarter were impacted by start-up
losses at two development centers that opened in July 1994.
(2) Includes non-recurring other income of $436,000 or $0.04 per share,
arising primarily from gain on sale of limited partnership interests in
certain centers.

21
<PAGE>

SEASONALITY

The Company's business experiences some degree of seasonality because
patients have some degree of discretion in scheduling elective surgery.
Accordingly, surgical procedures at the Company's centers are lower in the
first and third quarter. The first quarter tends to be lower due to beginning
of the year deductibles while the third quarter reflects the effects of
vacations taken by both patients and physicians. Although the Company's growth
and development of centers may obscure the effects of seasonality in the
Company's financial results, the Company's first and third quarters generally
reflect lower net revenue on a same center basis when compared to the
Company's second and fourth quarters. For example, for the centers owned and
operated during the entire twelve months of 1995, but excluding the two
centers developed in 1994, net revenue for the first, second, third and fourth
quarters was 24.1%, 25.4%, 24.7% and 25.8%, respectively, as a percentage of
net revenue for the year.

WRITEDOWN OF GOODWILL

The value of goodwill is equal to the excess of purchase price over the net
assets acquired and is recorded at cost at the date of acquisition. The
Company amortizes goodwill, including any excess arising from earnout
payments, on a straight-line basis over a 40-year period in accordance with
the provisions of Accounting Principles Board Opinion No. 17. The Company
believes that the life of the core businesses acquired and the delivery of
ambulatory outpatient surgery will exceed 40 years as industry trends and
improved technology allow a wider variety of outpatient procedures to be
performed in an ambulatory surgery center.

From late 1991 through 1992 the Company acquired ten centers. During this
period, the purchase prices for surgery centers had escalated to record high
multiples of earnings due to the large amount of capital available to
potential buyers, the increased number of new buyers in the market and the
relatively low cost of capital to the publicly traded buyers. In 1993, in part
due to uncertainty of health care reform, market multiples declined. As a
result of this uncertainty, the Company carefully reviewed the recoverability
of certain long-lived assets, determined the extent of impairment on certain
amounts recorded as goodwill, and recorded a $50.9 million non-cash writedown
to estimated fair value for the year ended December 31, 1993.

In determining impairment of goodwill, the Company's management calculated
estimated cash flow for each related asset over its remaining economic life,
but not exceeding forty years. The Company prepared a detailed five year
operating cash flow projection and estimated a terminal value in year six.
These operating cash flow projections were based on the estimated after tax
operating performance of each related asset less estimated capital
expenditures required to maintain and continue growth. The cash flows were
assumed to be realized in installments over the six year period and were then
discounted at a 25% discount rate to determine the fair market value. The 25%
after tax discount rate was computed based on a blended weighted average rate
of return expected by the Company's debt and equity investors. The calculated
fair market value was then reduced by any fair market value associated with
related tangible assets to determine the fair market value of the intangible
assets. The net carrying value of the intangible assets was then adjusted to
its fair market value.

Of the $50.9 million writedown of goodwill recorded during the fourth
quarter of 1993, $11.1 million was attributable to surgery centers acquired in
1991; $39.0 million was attributable to centers acquired in 1992; and $760,000
was attributable to a center acquired at the beginning of 1993 in which the
Company had entered into a definitive agreement in 1992, but which was subject
to state regulatory approval. Additionally, the $50.9 million writedown of
goodwill included $30.6 million associated with centers in which two members
of the Company's board of directors were affiliated.

The Company continues to evaluate whether events and circumstances have
occurred subsequent to a center's acquisition that may indicate that the
remaining balance of goodwill may not be recoverable or

22
<PAGE>

that the remaining useful life may warrant revision. When external factors
indicate that goodwill should be evaluated for possible impairment, the
Company uses an estimate of the related acquired business' discounted cash
flows over the remaining life of the goodwill and compares it to the business'
goodwill balance to determine whether the goodwill is recoverable or if
impairment exists. If such impairment exists, an adjustment is made to the
carrying value of the asset.

PROVISION FOR INCOME TAXES

The Company's provision for income taxes in 1993 reflected the availability
of certain net operating loss carryforwards available to offset a portion of
taxable income for financial reporting purposes. The Company adopted Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes in
1992.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash flow from operations increased from $1.4 million in 1993
to $7.6 million in 1995. Cash flow from operations increased from $3.6 million
for the six-month period ended June 30, 1995 to $4.9 million for the
comparable period of 1996. During the period from January 1, 1993 through June
30, 1996, in addition to cash flow from operations of $14.6 million,
acquisition expenditures of $23.1 million, purchases of property and equipment
of $15.4 million and debt repayments of $35.9 million have been financed
through a combination of $48.6 million net issuances of capital stock, and net
borrowings of $8.3 million.

The Company expects that its principal use of funds in the near future will
be in connection with the acquisition and development of surgery centers,
working capital requirements, debt repayments and purchases of property and
equipment. The Company expects that cash and cash equivalents from operations,
the proceeds from this offering and available credit borrowings will be
adequate to provide for the Company's cash requirements through 1997, unless
the rate of acquisitions significantly increases beyond current expectations.
No assurances can be given that such proceeds, cash and borrowings will be
sufficient to provide for the Company's cash requirements beyond 1997. At June
30, 1996, the Company had working capital of $9.6 million, including cash and
cash equivalents and short-term investments of $8.6 million.

The Company's amended and restated loan agreement ("Loan Agreement")
provides for revolving and term loans of up to $20.0 million, to be used by
the Company for acquisitions and development of surgery centers and related
businesses. As of June 30, 1996, no amount was outstanding under the Loan
Agreement. Loans under the Loan Agreement are secured by substantially all the
assets of the Company (including the capital stock or partnership units of the
Company's subsidiaries) and mature on June 30, 2000. Loans under the Loan
Agreement are denominated at the Company's option as either Eurodollar
Tranches (loans bearing interest at a rate 1.5% above the London Interbank
Offered Rate) or Base Rate Tranches (loans bearing interest at 0.5% above the
prime rate for U.S. commercial loans) subject to adjustment in certain
circumstances.

23
<PAGE>

BUSINESS

The Company owns and operates freestanding ambulatory surgery centers that
provide the medical and administrative support necessary for physicians to
perform non-emergency surgical procedures. The Company operates a network of
30 surgery centers in 13 states and is currently developing two new surgery
centers. The Company provides alternate-site settings for high-quality
surgical care that is more cost effective than hospital-based surgical care
and that is increasingly preferred by physicians, payors and patients.

INDUSTRY OVERVIEW

The Company believes that overall health care expenditures will continue to
increase with the aging of the population and the extension of health care
coverage to previously uninsured groups. In recent years, government programs,
private insurance companies, managed care organizations and self-insured
employers have implemented various cost-containment measures to limit the
growth of health care expenditures. These cost-containment measures, together
with technological advances, have resulted in a significant shift in the
delivery of health care services away from traditional inpatient hospitals to
more cost-effective alternate sites, including ambulatory surgery centers.

Industry sources estimate that in 1994 outpatient surgical procedures
represented 64.7% of all surgical procedures performed in the United States,
compared with 31.3% in 1984, and that surgical procedures performed in
freestanding ambulatory surgery centers comprised 19.0% of total outpatient
surgery, compared with 7.9% in 1984. As of May 1996, there were approximately
2,340 surgery centers in the U.S., of which approximately 130 were owned by
hospitals and approximately 510 were owned by corporate chains. The remaining
approximately 1,700 centers were independently owned, primarily by physicians.

Managed care organizations with significant numbers of covered lives are
seeking to direct large numbers of patients to high-quality, low-cost
providers and provider groups. In order to compete for the growing number of
managed care patients, hospitals, physicians and other providers, including
alternate-site outpatient providers, are forming integrated delivery systems
or provider joint ventures. The Company believes that there will be
opportunities for well-positioned ambulatory surgery centers to participate in
the development of these delivery systems and joint ventures.

The Company believes that the following factors contribute to the continued
growth of ambulatory surgery:

Cost-Effective Alternative. Ambulatory surgery is generally less expensive
than hospital inpatient surgery. In addition, the Company believes that
surgery performed at a freestanding ambulatory surgery center is generally
less expensive than hospital-based ambulatory surgery for a number of reasons,
including lower facility development costs, more efficient staffing and space
utilization and a specialized operating environment focused on cost
containment.

Managed Care. The Company believes managed care enrollment will continue to
increase and that managed care organizations will seek high-quality, cost-
effective health care services for their enrollees. As a result, the Company
believes that interest in ambulatory surgery will grow as capitation and other
reimbursement arrangements shift the risk for health care costs from
traditional payors to providers such as hospitals and physician groups.
"Capitation" is a reimbursement arrangement in which a health care provider
receives a fixed payment per member per month for the provision of defined
health care services to members of a managed care plan.

Physician and Patient Preference. The Company believes that many physicians
prefer freestanding ambulatory surgery centers. The Company believes that such
centers enhance physicians' productivity by providing them with greater
scheduling flexibility, more consistent nurse staffing and faster turnaround

24
<PAGE>

time between cases, allowing physicians to perform more surgeries in a defined
period of time. In contrast, hospitals generally serve a broader group of
physicians, including those involved with emergency procedures that must be
given priority over scheduled non-emergency procedures, resulting in postponed
or delayed surgeries. Additionally, many physicians choose to perform surgery
in an ambulatory surgery center because their patients prefer the simplified
admissions and discharge procedures and the less institutional atmosphere.

New Technology. New technology and advances in anesthesia, which have been
increasingly accepted by physicians, have significantly expanded the types of
surgical procedures that are being performed in ambulatory surgery centers.
Lasers, enhanced endoscopic techniques and fiber optics have reduced the
trauma and recovery time of 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.

Extended Recovery. In recent years, some states have permitted extended
recovery in ambulatory surgery centers. While states typically restrict the
time period a patient may remain in an ambulatory surgery center after
surgery, a number of states, including seven states in which the Company
operates, allow extended recovery stays of up to 24 hours. Longer recovery
stays are being considered in some states. Extended recovery significantly
increases the types of procedures that can be performed in ambulatory surgery
centers.

STRATEGY

The Company's objective is to establish a nationwide network of ambulatory
surgery centers in secondary and other selected markets by acquiring
established centers and developing new centers. The Company seeks to provide a
broad range of high-quality surgical services and to collaborate with other
participants in the health care delivery system. The key components of the
Company's strategy are as follows:

Acquire Established Ambulatory Surgery Centers. The Company plans to
continue acquiring established ambulatory surgery centers. The ambulatory
surgery center industry is highly fragmented and is consolidating due to the
increasing complexity of the regulatory and business aspects of health care,
the growing influence of managed care, the rising cost of technology and the
need for capital. In addition, physician operators of surgery centers are
experiencing increasing practice demands. The Company believes that a
significant opportunity exists to acquire ambulatory surgery centers that are
seeking affiliation with experienced operators having access to capital and
other resources. The Company's goal is to acquire six to eight additional
ambulatory surgery centers by the end of 1997.

Focus on Secondary and Other Selected Markets. The Company plans to focus on
those markets where, either directly or through affiliation with physicians,
payors or hospitals, it can establish a significant local presence or play an
important role in the development of local integrated delivery systems. The
Company generally views secondary markets as those metropolitan areas with
fewer than 250,000 residents and one or two hospitals. The Company believes
that in secondary markets its centers can more easily achieve the scale that
allows them to become a significant local health care provider and a more
attractive partner in local integrated delivery systems.

Develop New Ambulatory Surgery Centers. The Company plans to develop new
ambulatory surgery centers in selected markets. The Company pursues new center
development in markets where attractive acquisitions are not available or
where the opportunity exists to increase the Company's presence in its
existing markets. In the future, the Company's new center development efforts
will generally be undertaken in partnership with physicians, hospitals and
other local health care participants. The Company believes that such
partnerships minimize the time required to become an established provider. The
Company's goal is to develop two to four additional ambulatory surgery centers
by the end of 1997.

25
<PAGE>

Develop Joint Ventures with Hospitals and Other Providers. The Company has
established two hospital joint ventures and is exploring additional alliances
in selected markets. The Company believes that such ventures increase patient
flow through joint marketing, access to managed care contracts and
participation in a broader network of health care providers. As part of its
joint venture strategy, the Company intends to manage the surgery centers in
which it and other health care providers have an equity interest.

Expand Range of Services. The Company plans to continue to increase the
number and types of surgeries performed at its centers. The Company is
committed to adding programs and services for physicians and payors by
providing state-of-the-art technology, administrative conveniences, flexible
pricing alternatives and cost-effective care. The Company is also committed to
offering extended recovery services wherever possible, enabling its centers to
accommodate a wider range of higher-acuity procedures.

ACQUISITION AND DEVELOPMENT PROGRAMS

Acquisition Program

The Company typically targets for acquisition ambulatory surgery centers
that meet certain criteria, including market demographics, size,
profitability, specialty mix, prominence within the local medical community,
access to payors and opportunities for growth. The Company principally targets
physician-owned ambulatory surgery centers. The Company believes that due to
the increasing complexity of the regulatory and business aspects of health
care, physicians are increasingly seeking affiliation with experienced
ambulatory surgery center operators having access to capital and other
resources. Approximately 48% of the approximately 1,700 physician-owned
ambulatory surgery centers in the United States are smaller centers performing
fewer than 1,000 cases per year and are often single specialty centers. The
Company believes that, although some of these smaller centers represent
acquisition opportunities, the remaining approximately 880 centers represent
the more likely universe of acquisition candidates and that in excess of 200
of these centers meet the Company's acquisition criteria. In addition, the
Company may also target for acquisition ambulatory surgery centers operated by
multi-market chains. The Company has acquired 30 centers to date (including
one center in which the Company acquired a minority interest). The Company's
goal is to acquire six to eight centers by the end of 1997. The Company is
currently in various levels of discussion with additional centers regarding
possible acquisition. There can be no assurance that the Company will be able
to acquire additional surgery centers or, if acquired, that they can be
operated profitably. See "Risk Factors--Acquisition and Development Strategy"
and "--Additional Financings" and "Recent Developments."

Development Program

The Company develops new centers in markets where attractive acquisitions
are not available or where the Company seeks to increase its presence in
markets in which it already operates. In its development efforts, the Company
targets markets that have attractive size and demographic characteristics and
a high level of interest on the part of local physicians, hospitals or payors.
Historically, the Company's development strategy was based on a structure
involving majority Company ownership through joint venture arrangements with
local physicians. The Company's development strategy also includes joint
venture arrangements with local hospitals, physicians and other providers. In
some cases, this may include instances of minority ownership by the Company.
In light of the Company's experience and the slower than anticipated startup
of the development centers opened by the Company in 1994, the Company believes
that this broadened development strategy will provide greater access to
patients and minimize the time required to become an established provider.

The Company has developed six new ambulatory surgery centers since 1987,
including four ambulatory surgery centers that were developed for hospitals,
large group medical practices and other health care providers. The Company
intends to develop two to four new ambulatory surgery centers by the end of
1997. There can be no assurance that the Company will be able to develop
additional surgery

26
<PAGE>

centers or, if developed, that they can be operated profitably. See "Risk
Factors--Acquisition and Development Strategy" and "--Additional Financings."

OPERATION OF SURGERY CENTERS

The Company operates a network of 30 surgery centers in 13 states and is
currently developing two new surgery centers. Of the Company's existing
surgery centers, 19 are multi-specialty centers and eleven are endoscopy
centers. The Company's surgery center network has a total of 90 operating
rooms and 43 treatment rooms. The Company's surgery centers are typically
owned through limited or general partnerships in which a wholly owned
subsidiary of the Company owns a general partnership interest and is the
managing general partner of the surgery center. Local physicians and the
subsidiary generally own the limited partnership interests and, in two
instances, hospitals also own limited partnership interests. See "Risk
Factors--Holding Company Structure."

The Company's typical multi-specialty surgery center is a freestanding
facility with three to five fully equipped operating rooms, one or two
treatment rooms and ancillary areas for reception, pre-operative preparation,
recovery and administration. The Company's typical endoscopy center, which
performs primarily gastroenterological procedures, has two treatment rooms and
ancillary areas for reception, pre-operative preparation, recovery and
administration and may also have an operating room. The Company's surgery
centers are generally located in close proximity to physicians' offices. Each
of the Company's surgery centers is available for use only by licensed
physicians who have been approved by the center's medical credentialling
committee.

The following table sets forth information regarding each of the centers
operated by the Company:

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF EXTENDED
YEAR PERCENTAGE OPERATING TREATMENT RECOVERY
LOCATION OPENED OWNERSHIP(1) ROOMS ROOMS SERVICE
- -------- ------ ------------ --------- --------- --------
<S> <C> <C> <C> <C> <C>
Miami, FL...................... 1976 60.0% 4 3
Bremerton, WA.................. 1977 89.0 3 1 X
Billings, MT................... 1982 100.0 4 --
Fayetteville, NC............... 1982 50.2 9 -- X
Provo, UT...................... 1982 100.0 5 --
Greensboro, NC................. 1982 80.3 2 --
Elizabethtown, KY.............. 1983 79.5 3 1 X
Greensboro, NC................. 1983 100.0 11 3 X
Norman, OK..................... 1983 90.0 4 1 X
Somerset, KY................... 1984 87.5 2 1 X
Atlanta, GA.................... 1985 66.0 3 --
Bakersfield, CA................ 1986 89.0 2 1
Seattle, WA.................... 1988 43.5 7 -- X
Brownsville, TX................ 1991 59.0 4 1
Las Vegas, NV.................. 1991 20.0 2 1
Oxnard, CA..................... 1991 85.0 4 1
San Diego, CA.................. 1993 58.3 -- 3
Houston, TX.................... 1993 60.8 3 1 X
Las Vegas, NV.................. 1994 75.0 4 3 X
Santa Monica, CA............... 1994 88.9 5 3 X
Kent, OH....................... 1994 84.0 2 1
Sarasota, FL................... 1994 60.0 1 2
Long Beach, CA................. 1994 50.0 -- 3
Newport Beach, CA.............. 1994 70.0 -- 2
Humble, TX..................... 1995 10.0 4 2 X
Indianapolis, IN............... 1995 51.0 1 2
Ft. Worth, TX.................. 1995 51.0 -- 2
Chula Vista, CA................ 1995 51.0 -- 2
Thousand Oaks, CA.............. 1995 80.0 -- 2
Cincinnati, OH................. 1996 51.0 1 1
</TABLE>
- --------
(1) Includes general partnership and limited partnership interests.

27
<PAGE>

The Company provides services to a wide range of specialties including:
ophthalmology, orthopedic surgery, otorhinolaryngology (ear, nose and throat),
gynecology, general surgery, gastroenterology, anesthesiology, neurosurgery,
oral surgery, plastic surgery, podiatry and urology. Medicare currently
approves over 2,400 types of surgical procedures that may be performed in
ambulatory surgery centers, up from 1,500 types in 1992. Common procedures
performed in the Company's surgery centers include knee and shoulder
arthroscopy, laparoscopy, hernia repair, tubal ligations and removal of
cataracts.

Eleven of the Company's surgery centers currently provide for extended
recovery stays. The Company intends to offer extended recovery services at
certain of its facilities if permitted by state law. The Company's ability to
develop such recovery care facilities is dependent on state regulatory
environments. Extended recovery capability generally permits higher acuity and
higher revenue procedures to be performed, including the following:

<TABLE>
<CAPTION>
SPECIALTY HIGHER ACUITY PROCEDURES
--------- ------------------------
<S> <C>
Orthopedic surgery Anterior cruciate ligament repair, shoulder surgery, total
knee replacements, micro discectomies and laminectomies
(back surgery)
Gynecology Laparascopically assisted vaginal hysterectomies
General surgery Laparascopically assisted hernia repair and laparascopic
cholecystectomy
</TABLE>

After a physician determines that surgery is necessary and can be
appropriately performed in an ambulatory surgery center, the physician and
patient schedule the surgery and, if appropriate, request extended recovery
services. The surgery center's staff subsequently contacts the patient by
telephone to obtain payor and other patient information and to ensure that the
patient has arranged to be transported home following the recovery period.
Patients generally arrive at the center approximately one hour before
scheduled surgery to allow time for admission and a review of their medical
history. A local or general anesthetic is administered and the surgery is
performed. After surgery, patients generally spend three hours in the recovery
area before being discharged by the center's anesthesiologist or being
transferred to the surgery center's extended recovery area.

The Company's multi-specialty surgery centers generally employ a staff of
between 15 and 30 and its endoscopy centers generally employ a staff of
between five and 15, depending on the size of the facility and the volume of
cases. The staff includes a center administrator, a business manager, a
clinical director, registered nurses, operating room technicians and clerical
workers. The center administrator is responsible for general oversight of the
center's operations, including liaison with physicians and coordination of
marketing efforts and reports to a regional or corporate vice president. The
business manager is responsible for the center's financial records and patient
billing and collections. The clinical director is responsible for providing
leadership and coordination for the professional and support staff and
ensuring efficient scheduling and staffing for the physicians.

The Company provides each of its surgery centers with a full range of
financial, marketing and operating services as well as data processing support
both for internal operational control and for the orderly conduct of business
office functions. This includes a financial reporting and accounting package,
a billing and accounts receivable system, inventory and accounts payable
systems and a patient record-keeping system. Corporate management also
supports local marketing activities, including the analysis of market
conditions and patient utilization patterns and the development of prices and
services which are competitive with those offered by other local health care
providers. The Company, where appropriate, executes master agreements for
purchasing equipment and supplies enabling each center to realize the
economies of scale available through volume purchases. In addition, the
Company provides support for Medicare certification, local regulatory
licensure and accreditation efforts.

28
<PAGE>

QUALITY ASSURANCE

The Company's surgery centers implement quality assurance procedures to
ensure a high level of care provided at the surgery centers. Each center has a
medical advisory committee comprised of three to ten physicians that reviews
the professional credentials of physicians applying for medical staff
privileges at the center. In addition, each center has a medical director who
supervises and is responsible for the quality of medical care provided at the
center. The medical director, who is generally a practicing surgeon or
anesthesiologist, reports directly to the center's medical advisory committee.
The center administrator or clinical director, in conjunction with the medical
director, reviews and monitors surgical outcomes along with procedures
performed and the quality of the logistical, medical and technological support
provided to the physician. In addition, the patient is contacted by a center
nurse on the day following discharge to check on the patient's condition and
to survey the patient as to the quality of care provided. The Company believes
that this direct, systematic feedback from both physician and patient is an
effective way to monitor the level of care at each center. All of the
Company's centers are Medicare certified, which is required to obtain Medicare
reimbursement. Nine of its surgery centers are approved by either the Joint
Commission for Accreditation of Health Care Organizations ("JCAHO") or the
Accrediting Association of Ambulatory Health Care ("AAAHC"), which are
industry-based, self-regulatory organizations which grant accreditation of
surgery centers based on established criteria as an additional indication of a
center's quality. The Company is seeking accreditation in all of its centers
that have not been approved by either the JCAHO or the AAAHC.

MARKETING

Marketing activities directed at physicians and other health care providers
are coordinated locally by the individual center and are supplemented by
corporate management. These activities generally emphasize advantages offered
by the Company's surgery centers, such as the proximity of surgery centers to
physicians' offices, the ability to schedule consecutive cases without
preemption by inpatient or emergency procedures, the rapid turnaround time
between cases, the high technical capability and low turnover and consistency
of nurse staffing, state-of-the-art surgical equipment and the simplified
administrative procedures. A target list of physicians is developed at each
local surgery center. Although the center administrator is the primary point
of contact, physicians who utilize the Company's surgery centers are important
sources of recommendation to other physicians regarding the benefits of using
the Company's surgery centers. The Company periodically reviews each center's
physician marketing list and its progress in contacting and successfully
attracting local physicians.

The Company also markets its surgery centers directly to payors, including
HMOs, PPOs, other managed care organizations, employers and other payor-
groups. Payor-group marketing activities conducted by the Company's management
and center administrators emphasize the high quality of care, cost advantages
and convenience of the Company's surgery centers and are focused on making
each center an approved provider under local managed care plans. In addition,
the Company is pursuing relationships with physician groups in its markets in
order to promote jointly its surgery centers and the physician groups to
payors. In some instances, this may involve invoicing the centers' charges, on
a case rate basis, with the surgeon, anesthesiologist, lab, x-ray and
pathology charges combined to provide the payor with one all-inclusive bill to
cover an episode of care.

COMPETITION

In each of its markets, the Company competes principally with hospitals and
other operators of freestanding surgery centers to attract physicians and
patients to its ambulatory surgery centers and for inclusion in managed care
programs. In developing new surgery centers and acquiring existing surgery
centers the Company competes with other surgery center companies and local
hospitals. In competing for physicians and patients, important competitive
factors are convenience, cost, quality of service, physician loyalty and
reputation. Hospitals have many competitive advantages in attracting
physicians and

29
<PAGE>

patients, including established standing in the community, historical
physician loyalty and convenience for physicians making rounds or performing
inpatient surgery in the hospital. However, the Company believes that many
physicians prefer to utilize and affiliate with freestanding ambulatory
surgery centers due to greater scheduling flexibility, more consistent nurse
staffing and faster turnaround time between cases, thereby allowing a
physician to perform more surgeries in a defined period of time.

GOVERNMENT HEALTH CARE REGULATION

Health Care Reform

In recent years, a variety of legislative proposals designed to change
access to and payment for health care services in the United States have been
introduced. Although no major health reform proposals have been passed by
Congress to date, other proposed health care reform legislation, including the
regulation of patient referral practices, reimbursement of health care
providers, formation and operation of physician joint ventures and tort
reform, has been and may be considered by Congress and the legislatures of
many of the states in which the Company operates. No predictions can be made
as to whether health care reform legislation or similar legislation will be
enacted or, if enacted, its effect on the Company. Any federal or state
legislation prohibiting, among other things, the referral to or treatment of
patients at surgery centers by health care providers with an investment
interest in the surgery centers may have a material adverse effect on the
Company. In the event that Federal or state regulations prohibit the ownership
of surgery centers by physicians, the Company would seek to purchase the
interests held by its limited partner physicians. Some of the Company's
limited partnership agreements contain a provision which allows the Company to
purchase the interest of each limited partner for an amount equal to a
multiple of the partner's allocation of taxable income in the most recent
calendar year. The Company may, at its option, issue cash, notes, or stock,
including unregistered stock, to purchase such limited partners' interests.
The Company believes that it would be able to buy out all of its limited
partners if required.

Regulatory Environment

The Company's surgery centers and the physicians utilizing its centers are
subject to numerous regulatory, accreditation and certification requirements,
including requirements related to licensure, certificate of need,
reimbursement from insurance companies and other private third-party payors,
Medicare and Medicaid participation and reimbursement, and utilization and
quality review organizations. The grant and renewal of these licenses,
certifications and accreditations are based upon governmental and private
regulatory agency inspections, surveys, audits, investigations or other
reviews, including self-reporting requirements. An adverse review or
determination by any regulatory authority could result in denial of a center's
plan of development or proposed expansion of facilities or services, the loss
or restriction of licensure by a center or one of its practitioners, or loss
of center certification or accreditation. A regulatory authority could also
reduce, delay or terminate reimbursement to a center or require repayment of
reimbursement received. The loss, denial or restriction of any such licensure,
accreditation, certification (including certificates of need or exemption
therefrom) or reimbursement through changes in the regulatory requirements, an
enforcement action, or otherwise, could have a material adverse effect on the
Company.

Federal Fraud and Abuse Statute. Under the Medicare and Medicaid programs,
the federal government enforces a federal statute (the "Fraud and Abuse
Statute") that prohibits the offer, payment, solicitation or receipt of any
remuneration, directly or indirectly, overtly or covertly, in cash or in kind
to induce or in exchange for (i) the referral of patients covered by the
programs or (ii) the leasing, purchasing, ordering, or arranging for or
recommending the lease, purchase, or order of any item, good, facility or
service covered by the programs. The federal courts have held that an
arrangement violates the Fraud and Abuse Statute if one purpose of a
transaction which results in the payment of remuneration (including the
distribution of profits) is to induce the referral of patients covered by the
Medicare and Medicaid programs, even if another purpose of the payment is to
compensate an individual for

30
<PAGE>

professional services. Violations of such statute can result in criminal
penalties, civil monetary penalties and exclusion from the Medicare and
Medicaid programs. In an attempt to clarify which arrangements are exempt from
program exclusion, civil sanctions or criminal prosecution under the Fraud and
Abuse Statute, the Department of Health and Human Services published in 1991 a
set of "safe harbor" regulations outlining practices that are deemed not to
violate the Fraud and Abuse Statute. Although compliance with one of the safe
harbors assures participants that an arrangement does not violate the Fraud
and Abuse Statute, failure of an arrangement to fit within a safe harbor
provision does not necessarily mean that arrangement violates the Fraud and
Abuse Statute. Although the Company has determined that the current ownership
structure of its surgery centers does not fit within any of the safe harbors
applicable to investments in health care providers by physicians who are in a
position to make or influence referrals, it believes that its arrangements
with physicians do not fall within the activities prohibited by the Fraud and
Abuse Statute. However, no assurances can be given that regulatory authorities
might not assert a contrary position or that new laws, or the interpretation
of existing laws, might not adversely affect relationships established by the
Company with physicians or other health care providers or result in the
imposition of penalties on the Company or its facilities.

"Stark Laws." The Company's surgery centers and their physicians, dentists
and podiatrists are also subject to the Ethics in Patient Referrals Act of
1989 (the "Stark Law"). Unless excepted, a physician, dentist or podiatrist
may not make a referral of a Medicaid or Medicare patient to any clinical
laboratory services provider with whom he or she has a financial relationship
(either investment or compensation) for such restricted services and any
provider who accepts such a referral may not bill for the service provided
pursuant to the referral. Sanctions for violating the Stark Law can include
civil monetary penalties and exclusion from Medicare and Medicaid. Unlike the
Fraud and Abuse Statute in which an activity may fall outside a safe harbor
and still not violate the law, a referral under the Stark Law that does not
fall within an exception is strictly prohibited. In August 1993, Congress
passed legislation ("Stark II") that, effective January 1, 1995, expanded the
self-referral ban to include a number of health care services provided by
entities with which the physicians may have an ownership interest or a
financial relationship, although it does not specifically prohibit referrals
by physicians with an ownership interest in, or financial relationship with,
an ambulatory surgery center, provided that the surgery services are not
provided as "outpatient hospital services." Ambulatory surgery is not included
in the list of restricted services and the Company does not believe that
ambulatory surgery is subject to the Stark Law restrictions.

AMA Restrictions. In June 1994, the American Medical Association severely
restricted the ability of physicians to refer to entities in which such
physicians have an ownership interest, except when the physician directly
provides care or services at a facility that is an extension of the
physician's practice and in very limited circumstances such as in rural areas
where there is lack of available capital from non-physician sources. If the
American Medical Association changes its ethical requirements to preclude all
referrals by physicians, physician referrals to the Company's ambulatory
surgery centers could be adversely affected. It is possible that a prohibition
on physician ownership could adversely affect the Company's future operations,
although the Company believes that the majority of physicians would continue
to perform surgery at the surgery centers even if they were no longer limited
partners.

State Anti-Referral Laws. In addition to the federal Fraud and Abuse Statute
and the Stark Laws, certain states in which the Company operates have enacted
similar patient referral legislation. The Company believes its surgery
centers' operations are consistent with applicable statutes of the states in
which they operate because either the state statute (i) excludes from the
definition of referral the recommendation by a health care provider that a
patient utilize the types of services provided at the center, (ii) exempts
health care provider investors who directly provide services at the facility
and are personally involved in the rendering of care to the referred patient
or (iii) does not encompass the provider specialty or services rendered at the
center.

Infectious Waste. As generators of infectious waste, the Company's surgery
centers are required to satisfy all federal, state and local waste disposal
requirements. If any regulatory agency finds a center to

31
<PAGE>

be in violation of waste laws, penalties and fines may be imposed for each day
of violation, and the affected center could be forced to cease operations. The
Company believes its surgery centers dispose of such waste properly.

EMPLOYEES

As of September 20, 1996, the Company had 484 full-time employees, 19 of
whom were corporate personnel. The remaining full-time employees, most of whom
are nurses and office personnel, work at the surgery centers. None of the
Company's employees is covered by a collective bargaining agreement. The
Company considers relations with its employees to be good.

PROPERTIES

The Company's surgery centers range from 2,000 to 26,000 square feet, with
the typical multi-specialty surgery center occupying approximately 13,000
square feet and the typical endoscopy center occupying approximately 4,000
square feet. The Company's surgery centers typically lease their facilities
pursuant to long-term lease agreements expiring from 1998 to 2020, most of
which contain options to extend the lease period for up to ten additional
years. The Company's principal executive offices are situated in approximately
5,200 square feet located at 35 East Wacker Drive, Suite 2800, Chicago,
Illinois 60601. The Company leases this property and the current lease expires
in 1997. See "--Operation of Surgery Centers" above for a list of the
Company's surgery centers.

LITIGATION

The Company is party to certain claims and litigation in the ordinary course
of business. The Company is not involved in any legal proceeding that it
believes will result, individually or in the aggregate, in a material adverse
effect upon its financial condition or results of operations.

INSURANCE

The Company maintains medical malpractice insurance under one insurance
policy in the amount of $1.0 million per occurrence and $3.0 million in the
aggregate, with retention limits of $100,000 per occurrence and $200,000 in
the aggregate. In addition, the Company maintains excess medical malpractice
and general liability insurance in the amount of $25.0 million.

32
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
E. Timothy Geary........ 45 Chairman of the Board of Directors, Chief Executive
Officer
and President
John G. Rex-Waller...... 43 Executive Vice President, Secretary, Treasurer and
Director
Bryan S. Fisher......... 38 Chief Financial Officer, Vice President and
Controller
Richard D. Pence........ 41 Vice President--Operations
Dennis D. Solheim....... 44 Vice President--Development
Dennis J. Zamojski...... 38 Vice President--Operations
John K. Carlyle(1)...... 41 Director
Russell L. Carson....... 53 Director
John T. Henley, Jr., 49 Director
M.D.(1)................
Donald E. Linder, 48 Director
M.D.(2)................
Rocco A. Ortenzio....... 63 Director
Andrew M. Paul(1)(2).... 40 Director
</TABLE>
- --------
(1)Member of Compensation Committee.
(2)Member of Audit Committee.

Mr. Geary has served as the Company's Chief Executive Officer, President and
Chairman of the Board since its founding in 1987. Mr. Geary served as a Vice
President of Operations and Development, respectively, with Medical Care
International, Inc. ("Medical Care"), a large owner and operator of
freestanding ambulatory surgery centers, from 1983 to 1987. Mr. Geary is a
graduate of the College at the University of Chicago and the University of
Chicago Graduate School of Business. Mr. Geary serves on the Board of
Directors of the Federated Ambulatory Surgery Association ("FASA"), an
industry association.

Mr. Rex-Waller has served as a director, Secretary and Treasurer of the
Company since 1991; as its Chief Financial Officer from 1991 to 1995; and as
its Executive Vice President since 1996. Mr. Rex-Waller was a Senior Vice
President-Corporate Finance with Dean Witter Reynolds Inc. from 1984 to 1991.
Mr. Rex-Waller is a graduate of the University of Chicago Graduate School of
Business, attended Hertford College, Oxford as a Rhodes Scholar and has an
undergraduate degree in Civil Engineering from the University of Cape Town.

Mr. Fisher joined the Company in 1991 as Controller, has served as a Vice
President of the Company since 1993, and as the Company's Chief Financial
Officer since 1996. Mr. Fisher was an accounting manager and Assistant
Controller for Medical Care from 1989 to 1991 and, prior to that, an auditor
for KPMG Peat Marwick from 1984 to 1989. Mr. Fisher is a graduate of Brigham
Young University and is a certified public accountant.

Mr. Pence joined the Company as a Vice President in 1991. Mr. Pence was a
Vice President and, previously Controller, for Medical Care from 1982 to 1991.
Mr. Pence is a graduate of the University of Alabama and the Masters of
Business Administration program of Southern Methodist University.

Mr. Solheim joined the Company as Project Manager in 1988 and has served as
a Vice President of the Company since 1991. Mr. Solheim was a Regional
Director for Medical Care from 1983 to 1988. Mr. Solheim is a graduate of Iowa
State University.

Mr. Zamojski joined the Company as a Vice President in 1992. Mr. Zamojski
was a Vice President with Medical Care from 1983 to 1992. Mr. Zamojski is a
graduate of the nursing program of Erie Community College, the State
University of New York and the Masters of Health Care Administration program
of the Medical College of Virginia/Virginia Commonwealth University.

33
<PAGE>

Mr. Carlyle has served as a director of the Company since 1991. Mr. Carlyle
has served as the President since 1990 and as Chief Executive Officer and a
director since 1992 of OccuSystems, Inc. ("OccuSystems"), a physician practice
management company. Prior to joining OccuSystems, Mr. Carlyle was a Senior
Vice President and the Chief Financial Officer of Medical Care.

Mr. Carson has served as a director of the Company since 1991. Mr. Carson is
a general partner in WCAS II and WCAS V, investment firms that specialize in
the health care industry. WCAS II and WCAS V have several general partners in
common and are operated by a related group of investors. Mr. Carson has served
as the Chairman of the Board of Quorum Health Group, Inc. ("Quorum"), an owner
and operator of acute-care hospitals, since 1989. Mr. Carson also serves on
the Board of Directors of American Oncology Resources, Inc. ("AOR"), a
provider of outpatient cancer treatment services; Health Management Systems,
Inc., a provider of accounts receivable management services to hospitals; and
Steris Corporation, a manufacturer of health care capital equipment.

Dr. Henley has served as a director of the Company since 1991. Dr. Henley
has served as the Medical Director and Manager of Fayetteville Ambulatory
Surgery Center, L.P., an affiliate of the Company, since 1982 and 1985,
respectively. Dr. Henley is a past president of FASA and is a practicing
surgeon.

Dr. Linder has served as a director of the Company since 1992. Dr. Linder
was the founder and served as the Medical Director of the Surgical Center of
Greensboro, an affiliate of the Company, from 1983 to 1994. Dr. Linder is the
President of FASA.

Mr. Ortenzio has served as a director of the Company since 1991. Mr.
Ortenzio was the Chairman of the Board and Chief Executive Officer of
Continental Medical Systems from 1986 to 1995. Mr. Ortenzio serves on the
Board of Directors of PNC Bank, N.A., and Quorum.

Mr. Paul has served as a director of the Company since 1991. Mr. Paul is a
general partner of WCAS V and WCAS II. Mr. Paul has been employed by WCAS V
since 1984. Mr. Paul also serves as a director of AOR; Housecall Medical, a
home health care provider; Lincare Holdings, Inc., a provider of home oxygen
services; Medcath Incorporated, a provider of cardiology and cardiovascular
services; and Emcare Holdings, Inc., a provider of physician management
services in hospital emergency departments and related urgent care centers.

The number of Directors on the Board is currently fixed at eight. The
Company's Charter divides the Company's Board of Directors into three classes.
The members of each class of Directors serve for staggered three-year terms.
The Board is composed of two Class I Directors (Mr. Rex-Waller and Dr.
Henley), three Class II Directors (Mr. Ortenzio, Mr. Carlyle and Mr. Paul) and
three Class III Directors (Mr. Geary, Mr. Carson and Dr. Linder), whose
initial terms will expire upon the election and qualification of Directors at
the annual meeting of stockholders held following the years ending December
31, 1998, 1996 and 1997, respectively. At each annual meeting of stockholders,
Directors will be elected for a term of three years. See "Description of
Capital Stock--Certain Charter and By-Law Provisions." Directors hold office
until their successors are elected and qualified. Officers serve at the
discretion of the Board. Messrs. Geary, Rex-Waller, Fisher, Pence, Solheim and
Zamojski each have an employment agreement with the Company. See "--Employment
Agreements."

34
<PAGE>

EXECUTIVE COMPENSATION

The following table provides certain summary information concerning the
compensation paid or accrued during the years ended December 31, 1994 and 1995
to the Company's Chief Executive Officer and the four other most highly
compensated executive officers of the Company (collectively, the "Named
Executive Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-----------------------
ANNUAL
COMPENSATION AWARDS
----------------- -----------------------
RESTRICTED SECURITIES
STOCK UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) AWARDS($)(2) OPTIONS(#)
--------------------------- ---- -------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C>
E. Timothy Geary................. 1995 $190,000 $55,000 $ -- 112,500
Chairman of the Board, President 1994 169,950 28,839 -- --
and Chief Executive Officer
John G. Rex-Waller............... 1995 150,000 45,000 -- 82,500
Executive Vice President, 1994 135,950 21,629 -- --
Secretary and Treasurer
Richard D. Pence................. 1995 110,000 35,000 -- 45,000
Vice President--Operations 1994 103,000 13,822 -- --
Dennis D. Solheim................ 1995 110,000 42,209 -- 45,000
Vice President--Development 1994 100,000 10,210 -- --
Dennis J. Zamojski............... 1995 110,000 35,000 -- 82,500
Vice President--Operations 1994 92,700 21,629 63,750 7,500
</TABLE>
- --------
(1) The entire amount of the bonuses set forth were accrued in the fiscal year
ended but paid in subsequent fiscal year, except for $3,000 and $7,209
paid to Dennis D. Solheim during 1994 and 1995, respectively.
(2) Mr. Zamojski was awarded 7,500 shares of restricted Common Stock in August
1994, of which half will vest on January 1, 1997, and the other half will
vest on January 31, 1998, subject to accelerated vesting upon the
occurrence of certain conditions.

35
<PAGE>

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth individual grants of stock options made to
the Named Executive Officers during the fiscal year ended December 31, 1995:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
RATES OF STOCK
PRICE
APPRECIATION
FOR OPTION
INDIVIDUAL GRANTS TERM(1)
--------------------------------------------- -----------------
NUMBER OF PERCENT OF
SECURITIES TOTAL GRANTED
UNDERLYING TO COMPANY EXERCISE
OPTIONS EMPLOYEES OR BASE EXPIRATION
NAME GRANTED IN FISCAL YEAR PRICE DATE 5% 10%
- ---- ---------- -------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
E. Timothy Geary........ 112,500 20.5% $12.50 11/15/2000 $388,521 $858,530
John G. Rex-Waller...... 82,500 15.0 12.50 11/15/2000 284,915 629,588
Richard D. Pence........ 45,000 8.2 12.50 11/15/2000 155,408 343,412
Dennis D. Solheim....... 45,000 8.2 12.50 11/15/2000 155,408 343,412
Dennis J. Zamojski...... 82,500 15.0 12.50 11/15/2000 284,915 629,588
</TABLE>

OPTION GRANTS IN LAST FISCAL YEAR

- --------
(1) These amounts represent certain assumed annual rates of appreciation
calculated from the exercise price, as required by the rules of the
Securities and Exchange Commission. Actual gains, if any, on stock option
exercises and Common Stock holdings are dependent on the future
performance of the Common Stock. There can be no assurance that the
amounts reflected in this table will be achieved.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

The following table sets forth for the Named Executive Officers the fiscal
year-end value of unexercised options. There were no exercises of stock
options by the Named Executive Officers during the fiscal year ended December
31, 1995.

AGGREGATE OPTIONS AND VALUES

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR-END FISCAL YEAR-END(1)
------------------------- ------------------------- ---
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
E. Timothy Geary........ 4,998 117,503 $26,656 $345,430
John G. Rex-Waller...... 4,998 87,503 26,656 260,430
Richard D. Pence........ 4,998 50,003 26,656 154,180
Dennis D. Solheim....... 4,998 50,003 26,656 154,180
Dennis J. Zamojski...... 11,249 88,752 76,865 276,472
</TABLE>
- --------
(1) Based on the closing price of the Common Stock of $15.33 per share on the
Nasdaq National Market on December 31, 1995.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with each of Messrs.
Geary, Rex-Waller, Solheim, Pence and Zamojski. The employment agreements
provide for a term of employment of one year, and are automatically extended
for an additional year if the Company has not given the employee notice at
least 60 days prior to the end of the term of the Company's wish to terminate
such agreement. In the event that the Company terminates any such employment
agreement prior to the end of its term because of the disability or death of
the employee, the Company is obligated to pay the employee the remaining
salary that would have been payable to the employee had the agreement
continued for the balance of the

36
<PAGE>

term. In addition, if the Company terminates an employee without "cause" or if
the employee elects to terminate his employment with the Company because of
certain material changes to the employee's employment or there is a change in
control of the Company (as defined in the employment agreement) the employee
will receive a lump sum payment in an amount equal to the sum of (i) the
employee's annual base salary and (ii) the annual bonus paid to the employee
for the last full fiscal year, exclusive of any tax imposed pursuant to
Section 4999 of the Internal Revenue Code, as amended.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION; DIRECTOR'S
COMPENSATION

The following persons served as members of the Compensation Committee of the
Board of Directors during the year ended December 31, 1995: John K. Carlyle;
John T. Henley, Jr., M.D.; and Andrew M. Paul. None of the members of the
Compensation Committee is an employee of the Company. The Directors are not
compensated by the Company for their services, although their expenses are
reimbursed.

Dr. John T. Henley, Jr., a director of the Company, is a practicing
physician in Fayetteville, North Carolina and has been an affiliate of the
Company since November 1991. Dr. Henley is a 50% shareholder of Physicians
Ambulatory Management Corporation ("PAM") which, pursuant to a management
agreement, co-manages the day-to-day operations of Fayetteville Ambulatory
Surgery Center Limited Partnership ("FASCLP"). In 1991, at the time of the
Company's acquisition of FASCLP and in order to facilitate the acquisition of
the center, PAM agreed to restructure its then existing management agreement
on essentially the same economic terms, and the Company (i) paid cash equal to
$550,000 to PAM; (ii) issued to PAM a $275,000 principal amount convertible
subordinated note; (iii) issued to Dr. Henley 8,594 shares of the Common Stock
(which were subsequently repurchased in December 1994 for cash of $68,752 and
convertible notes of $68,752); and (iv) subsequently paid to PAM $310,000 in
cash, based upon the financial performance of FASCLP for the year ending
December 31, 1992. During 1995, the Company paid $163,000 to PAM pursuant to
the management agreement.

No executive officer of the Company served as a member of the compensation
committee or as a director of any other entity, any of whose executive
officers serves on the Compensation Committee or is a director of the Company.

STOCK OPTION AND PURCHASE PLANS

Restricted Stock Grant

At December 31, 1995, there were an aggregate of 15,000 shares of restricted
Common Stock worth $127,500 held by the executive officers of the Company.
Dividends will be paid on the restricted stock if paid on the Common Stock.

In August 1994, the Company granted 7,500 shares of Common Stock to Mr.
Zamojski. The shares are subject to vesting based on a change of control or
minimum market price of the Common Stock. The Company determined that the fair
market value of the shares of Common Stock on the date of the grant was $8.50
per share and Mr. Zamojski is not obligated to make any payments to obtain
such shares.

Amended and Restated 1992 Stock Option Plan

The objectives of the Company's Amended and Restated 1992 Stock Option Plan
(the "Stock Option Plan") are to develop and retain management and to provide
certain present and future executives and key personnel of the Company a
favorable opportunity to become holders of Common Stock, thereby giving them a
stake in the growth of the Company and encouraging the continuance of their
services with the Company.

The Stock Option Plan was adopted by the Board of Directors in January 1992,
amended and restated by the Board of Directors in August 1995 and approved by
the Company's stockholders in September

37
<PAGE>

1995. The Stock Option Plan provides for the grant of options to acquire up to
1,500,000 shares of Common Stock, in such amounts, on such terms and to such
officers and other key employees as the administrators of the Stock Option
Plan may select. The Stock Option Plan is administered by the Compensation
Committee of the Board of Directors (the "Committee"), which is composed of no
fewer than two disinterested directors and provides that all of the options
shall have a per share exercise price equal to or greater than the fair market
value of the Common Stock on the date of such grant, as determined by the
Committee. Options granted under the Stock Option Plan become fully
exercisable no later than the fourth anniversary of the date of grant and no
option may have a term in excess of ten years from the date of grant. Options
granted under the Stock Option Plan typically become exercisable as to one-
fourth of the grant on each of the first, second, third and fourth anniversary
of the date of grant. Any options previously granted under the Stock Option
Plan shall become immediately exercisable upon a change in control of the
Company, which includes, among other events, an acquisition by which any
corporation or person becomes the beneficial owner of at least 51% of the
Common Stock .

Options to purchase a total of 1,204,078 shares have been granted under the
Stock Option Plan at exercise prices ranging from $8.50 per share to $27.50
per share. In 1996, the Compensation Committee granted to employees five-year
options to purchase 566,800 shares of Common Stock, including grants, at an
exercise price per share of $27.50, to Named Executive Officers for the
following number of shares: Mr. Geary--130,000; Mr. Rex-Waller--90,000; Mr.
Pence--75,000; Mr. Solheim--65,000; and Mr. Zamojski--65,000.

Employee Stock Purchase Plan

The Board of Directors of the Company has adopted, and the stockholders of
the Company have approved, the Employee Stock Purchase Plan (the "Stock
Purchase Plan") which is administered by the Compensation Committee. Under the
Stock Purchase Plan, a total of 750,000 shares of Common Stock are reserved
for issuance upon the exercise of one-year options which may be granted under
the Stock Purchase Plan. The Stock Purchase Plan is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code.
Generally, all persons who are employed by the Company on a full-time basis
and have been employed for at least six months, except holders of five percent
or more of the Common Stock, are eligible to participate in the Stock Purchase
Plan. The Stock Purchase Plan permits eligible employees to purchase Common
Stock, through payroll deductions (which may not exceed the lesser of $10,000
or ten percent of an employee's annual compensation), at 85% of the fair
market value of the Common Stock at the time the option is granted or at the
time the option is exercised, whichever is lower. An employee's options are
exercised automatically on the last business day of each quarter during which
he or she has options outstanding for such number of shares of Common Stock as
may be purchased with the accumulated payroll deductions of the employee on
that date. Employees may terminate their participation in the Stock Purchase
Plan at any time and their participation ends automatically upon termination
of employment with the Company. A total of 36,082 shares have been issued
under the Employee Stock Purchase Plan, all of which have been purchased at a
price of $10.20 per share.

38
<PAGE>

CERTAIN TRANSACTIONS

Management Agreement. Dr. John T. Henley, Jr., a director of the Company,
has received various amounts from the Company in a restructuring of
partnership interests in FASCLP and received fees in 1995 under a management
agreement. See "Compensation Committee Interlocks and Insider Participation;
Director's Compensation."

Subordinated Notes. As part of the consideration for the acquisition of the
Greensboro Surgical Center in 1992, the Company issued to Dr. Donald E.
Linder, the owner of the center and currently a member of the Company's Board
of Directors, a $6.0 million subordinated note with an interest rate of 7.5%
as partial consideration for the acquisition of the center. The note is
payable in equal annual installments through June 24, 1997. During 1995, Dr.
Linder received principal and interest payments of $1.4 million. As of June
30, 1996, the outstanding principal amount, together with accrued interest,
was $1.2 million. This note will be repaid with the proceeds of this offering.
See "Use of Proceeds."

In June, October and December 1992, the Company issued an aggregate of $20.0
million principal amount of 10.5% Senior Subordinated Notes, in the amounts of
$10.0 million, $5.5 million and $4.5 million, respectively, and maturing ten
years from date of issuance to WCAS II, of which Messrs. Paul and Carson,
directors of the Company, are general partners. In November 1995, the Company
fully extinguished the Senior Subordinated Notes by applying net proceeds
received by the Company in its initial public offering.

Dr. John T. Henley, Jr., a director of the Company, and two affiliated
companies have indicated that, effective October 14, 1996, they will convert
convertible subordinated notes of the Company into shares of Common Stock at a
conversion price of $10.50 per share. Dr. Henley will receive 27,479 shares of
Common Stock as a result of these conversions.

Unsecured Note. In March 1992, the Company received an unsecured promissory
note from Mr. Dennis D. Solheim, the Vice President of Development of the
Company, bearing interest at the prime rate, for an original principal amount
of $49,500, maturing three years from date of issuance. In March 1995, the
Company extended the promissory note for an additional two-year period.
Additionally, in May 1995 the Company received an additional unsecured
promissory note from Mr. Solheim bearing interest at the prime rate, for an
original amount of $31,875, maturing two years from the date of issuance. In
May 1996, Mr. Solheim repaid all indebtedness and accrued interest to the
Company owed under such promissory notes.

Exercise of Warrants. On June 25, 1996 WCAS V and WCAS II exercised warrants
to purchase Non-Voting Common Stock in the amount of 325,546 shares. Messrs.
Carson and Paul, both of whom are directors of the Company, are general
partners of WCAS V and WCAS II, which entities were stockholders of the
Company prior to the distribution of the Common Stock to their partners
following this exercise.

Lease. The Company leases one of its centers from Surgical Center Investors,
Ltd., a partnership controlled by Dr. Linder. The lease provides for annual
base rental payments of $292,000 through January 31, 1999 and $348,000 from
February 1, 1999 through January 31, 2004. In addition to the minimum annual
rental payments, the lease provides for a percentage rental based on gross
receipts subject to certain minimum exclusions. In 1995, the Company paid an
aggregate of $1.0 million in rental payments to Surgical Center Investors,
Ltd.

Sale of Common Stock and Non-Voting Common Stock. On August 18, 1994, the
Company entered into a Stock Purchase Agreement with J.P. Morgan Capital
Corporation ("JPMCC") pursuant to which it sold to JPMCC 200,000 shares of
Common Stock and 976,470 shares of Non-Voting Common Stock at a price of $8.50
per share. The Company also agreed in a Registration Rights Agreement to
provide JPMCC and certain other stockholders with certain rights with respect
to registration of the shares purchased under the Securities Act. JPMCC, a
stockholder of the Company, is an indirect wholly owned subsidiary of J.P.
Morgan & Co. Incorporated, which indirectly owns 100% of the capital stock of
J.P. Morgan Securities Inc., one of the Representatives of the Underwriters.
J.P. Morgan Securities Inc. will receive customary compensation for its
services as an underwriter. J.P. Morgan Securities Inc. was a co-managing
underwriter

39
<PAGE>

of the Company's initial public offering of 3,450,000 shares of Common Stock in
November 1995. In the initial public offering, the Company paid underwriting
and related fees to J.P. Morgan Securities Inc. in the amount of $522,679. See
""Principal and Selling Stockholders,'' ""Shares Eligible for Future Sale--
Registration Rights'' and ""Underwriting.''

40
<PAGE>

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of September 23, 1996 by: (i) each stockholder
known by the Company to be the beneficial owner of more than five percent of
the outstanding Common Stock; (ii) each director; (iii) each Named Executive
Officer; (iv) all directors and executive officers as a group; and (v) each
Selling Stockholder. The Company believes that each person or entity named
below has sole voting and investment power with respect to all shares shown as
beneficially owned by such person or entity subject to community property laws
where applicable and the information set forth in the footnotes to the table
below.

<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON
STOCK BENEFICIALLY STOCK BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING(1) OFFERING(1)
--------------------- ---------------------
PERCENTAGE PERCENTAGE
OF SHARES OF
NUMBER OF OUTSTANDING TO BE NUMBER OF OUTSTANDING
NAME SHARES SHARES OFFERED SHARES SHARES
---- --------- ----------- ------- --------- -----------
<S> <C> <C> <C> <C> <C>
E. Timothy Geary(2)....... 268,275 3.3% -- 268,275 2.7%
John G. Rex-Waller(3)..... 123,168 1.5% -- 123,168 1.2%
Richard D. Pence.......... 67,540 * -- 67,540 *
Dennis D. Solheim......... 88,498 1.1% -- 88,498 *
Dennis J. Zamojski........ 35,559 * -- 35,559 *
John K. Carlyle........... 9,532 * -- 9,532 *
Russell L. Carson......... 117,049 1.5% -- 117,049 1.2%
John T. Henley, Jr.,
M.D.(4).................. 28,478 * -- 28,478 *
Donald E. Linder, M.D.(5). 720,122 8.9% -- 720,122 7.1%
5500 Old Brandt Trace
Greensboro, NC 07405
Rocco A. Ortenzio......... 2,500 * -- 2,500 *
Andrew M. Paul............ 15,040 * -- 15,040 *
CMS Capital Corporation... 324,999 4.0% 100,000 224,999 2.2%
600 Wilson Lane
Mechanicsburg, PA 17055
J.P. Morgan Capital
Corporation(6)........... 424,927 5.0% 500,000 530,349 5.0%
60 Wall Street
New York, NY 10260
BankAmerica Investment
Corporation.............. 146,989 1.8% 146,989 -- --
231 South LaSalle Street
Chicago, IL 60697
All directors and
executive officers as a
group (12 persons)....... 1,505,099 18.1% -- 1,505,099 14.6%
</TABLE>
- --------
* Less than one percent.
(1) Includes shares directly owned and, in the case of individuals and all
directors and officers as a group, includes shares of Common Stock subject
to options which were exercisable within 60 days, as follows: Mr. Geary--
35,622; Mr. Rex-Waller--28,122; Mr. Pence--18,747; Mr. Solheim--18,747;
Mr. Zamojski--34,998; and all executive officers and directors as a group
(including such individuals)--

41
<PAGE>

164,487. Such shares are deemed to be outstanding for the purposes of
computing the percentage ownership of the individual holding such shares,
but are not deemed outstanding for purposes of computing the percentage of
any other person shown on the table.
(2) Includes 2,997 shares held in trusts for the children of Mr. Geary. Mr.
Geary disclaims beneficial ownership of such shares.
(3) Includes 3,750 shares held in trusts for the children of Mr. Rex-Waller.
Mr. Rex-Waller disclaims beneficial ownership of such shares.
(4) Includes 27,479 shares to be received upon conversion of the Company's
convertible subordinated notes.
(5) Includes 49,999 shares held in trust. Dr. Linder disclaims beneficial
ownership of such shares.
(6) Shares beneficially owned prior to the offering includes 229,927 shares of
Non-Voting Common Stock that are immediately convertible into shares of
Common Stock. In addition, J.P. Morgan Capital Corporation owns 751,542
shares of Non-Voting Common Stock and has rights to acquire 8,760 shares
of Common Stock issuable resulting from anti-dilution adjustment events
which accrued prior to November 9, 1995. While shares of Non-Voting Common
Stock are convertible into the same number of shares of Common Stock, when
such shares of Non-Voting Common Stock are held by an entity or an entity
with an affiliate which is regulated by the Bank Holding Company Act of
1956 or Regulation Y thereunder, any conversion is prohibited to the
extent required to ensure compliance with such laws. The number of shares
beneficially owned after the offering does not include 154,880 shares of
Non-Voting Common Stock which are not immediately convertible into shares
of Common Stock.

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, $.01 par value per share, 10,000,000 shares of Non-Voting Common
Stock, $.01 par value per share, and 10,000,000 shares of Preferred Stock,
$.01 par value per share (the "Preferred Stock"). Upon completion of this
offering, 10,576,630 shares of Common Stock will be issued and outstanding and
481,469 shares of Non-Voting Common Stock will be issued and outstanding. The
following description is a summary and is qualified in its entirety by
reference to the provisions of the Company's Certificate of Incorporation (the
"Certificate") and its Bylaws (the "Bylaws").

COMMON STOCK

Except as required by law or by the Certificate, holders of Common Stock are
entitled to one vote for each share held of record on all matters submitted to
a vote of the stockholders. Holders of a majority of the shares of Common
Stock represented at a meeting can elect directors. Holders of Common Stock
and Non-Voting Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. In the event of a liquidation, dissolution, or winding up of the
business of the Company, holders of the Common Stock and Non-Voting Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities. All outstanding shares of Common Stock are, and the Common Stock
to be outstanding upon consummation of this offering will be, fully paid and
non-assessable. See "Dividend Policy" and "Risk Factors--Effect of Certain
Charter and Bylaw Provisions."

NON-VOTING COMMON STOCK

Holders of Non-Voting Common Stock are not entitled to vote on any matters
submitted to a vote of stockholders of the Company except (i) as a class with
respect to any amendment to the Certificate which would adversely affect the
rights of holders of Non-Voting Common Stock and (ii) as otherwise required by
law. The Non-Voting Common Stock is identical to the Common Stock in all other
respects except with

42
<PAGE>

respect to voting and conversion rights and the holders of Non-Voting Common
Stock are entitled to share ratably with the holders of Common Stock in the
payment of dividends and the distribution of assets of the Company in the
event of any liquidation, dissolution, or winding up of the Company. In
addition, shares of Non-Voting Common Stock may be converted at any time, at
the option of the holder, into shares of Common Stock on a one-for-one basis,
except that (i) no holder of shares of Non-Voting Common Stock may convert any
such shares to the extent that, as a result, the holder and its affiliates,
directly or indirectly, would own, control or have the power to vote a greater
number of shares of Common Stock than the holder and its affiliates would be
permitted to own, control or have the power to vote under the Bank Holding
Company Act of 1956, as amended, or Regulation Y thereunder and (ii) WCAS II
and WCAS V may not convert any such shares issued to them upon exercise of
certain warrants granted to them by the Company except upon the transfer of
such shares to an unaffiliated third party.

Conversion of the Non-Voting Common Stock into shares of Common Stock will
result in a decrease in the voting power of the holders of the Common Stock.

PREFERRED STOCK

The Board of Directors has the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series. However, pursuant to the
Certificate, the holders of Preferred Stock are not entitled to cumulative
voting rights with respect to the election of directors. The issuance of
Preferred Stock could adversely affect the voting power of holders of Common
Stock and could have the effect of delaying, deferring or preventing a change
in control of the Company. The Company has no present plan to issue any shares
of Preferred Stock.

DELAWARE GENERAL CORPORATION LAW

The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law ("Section 203"). Pursuant to Section 203,
with certain exceptions, a Delaware corporation may not engage in any of a
broad range of business combinations such as mergers, consolidations and sales
of assets, with an "interested stockholder" for a period of three years from
the date that such person became an interested stockholder unless (i) the
transaction which resulted in the person's becoming an interested stockholder,
or the business combination, has been approved by the board of directors of
the corporation, (ii) upon consummation of the transaction which results in
the stockholder becoming an interested stockholder, the interested stockholder
owns 85% or more of the voting stock of the corporation outstanding at the
time the transaction commenced (other than certain excluded shares), or (iii)
on or after such date, the business combination is approved by the
corporation's board of directors and by holders of at least two-thirds of the
corporation's outstanding voting stock, excluding shares owned by the
interested stockholder, at a meeting of stockholders. Under Section 203, an
"interested stockholder" is defined as any person, other than the corporation
and any direct or indirect majority-owned subsidiaries of the corporation,
that is (i) the owner of 15% or more of the outstanding voting stock of the
corporation or (ii) an affiliate or associate of the corporation and the owner
of 15% or more of the outstanding voting stock of the corporation at any time
within the three-year period immediately prior to the date on which it is
sought to be determined whether such person is an interested stockholder.

Under certain circumstances, Section 203 makes it more difficult for a
person who would be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period. The provisions of
Section 203 may encourage persons interested in acquiring the Company to
negotiate in advance with the Company's Board of Directors because the
stockholder approval requirement would be avoided if a majority of the
Company's directors then in office approve either the

43
<PAGE>

business combination or the transaction which results in the person becoming
an interested stockholder. Such provisions also may have the effect of
preventing changes in control of the Company. It is possible that such
provisions could make it more difficult to accomplish transactions that
stockholders may otherwise deem to be in their best interests.

CERTAIN CHARTER AND BYLAW PROVISIONS

The Certificate requires that any action permitted to be taken by
stockholders of the Company must be effected at a duly-called annual or
special meeting of stockholders and will not be able to be effected by a
consent in writing. Also, the stockholders are not permitted to call a special
meeting. The Board of Directors is comprised of a classified board where only
one-third (or as nearly equal thereto as possible) of the directors are
eligible for election in any given year. The Certificate also authorizes the
Board of Directors to adopt, amend or repeal the Bylaws. These provisions may
have the effect of deterring hostile takeovers or delaying changes in control
or management of the Company.

The Bylaws permit the stockholders to adopt, amend or repeal the Bylaws. The
Bylaws also establish an advance notice procedure with regard to the
nomination, other than by or at the direction of the Board of Directors, of
candidates for election as directors and with regard to certain matters to be
brought before an annual meeting of stockholders of the Company. In addition,
the Bylaws provide that the business permitted to be conducted at any annual
or special meeting of stockholders will be limited to business properly
brought before the meeting. These provisions may have the effect of deterring
hostile takeovers or delaying changes in control or management of the Company.

TRANSFER AGENT

The transfer agent and registrar for the Common Stock is Harris Trust and
Savings Bank of Chicago, Illinois.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have outstanding
11,058,099 shares of Common Stock and Non-Voting Common Stock outstanding
(11,470,599 shares if the Underwriters' over-allotment option is exercised in
full), warrants and options to purchase 1,236,773 shares of Common Stock and
notes convertible into 495,771 shares of Common Stock. Of such shares,
10,102,335 shares (including the shares to be sold in this offering) are
freely tradeable (other than by an "affiliate" of the Company as such term is
defined in the Securities Act). All other shares of Common Stock were issued
and sold by the Company in private transactions ("Restricted Shares") and may
be sold in the public market at prescribed times in accordance with an
exemption from the Securities Act, such as Rule 144 or Rule 144A thereunder.
Of the Restricted Shares, 746,981 shares of Common Stock may currently be sold
under Rule 144, an additional 87,381 shares of Common Stock will become
eligible for sale under Rule 144 during the remainder of 1996 and an
additional 100,130 shares of Common Stock will become eligible for sale under
Rule 144 during 1997. The Company and holders of an aggregate of 2,157,855
shares of Common Stock and Non-Voting Common Stock, holders of options and
warrants to purchase 173,247 shares and notes convertible into 27,479 shares
of such Common Stock (including all shares owned by the Company's officers and
directors) have agreed that they will not sell any shares of Common Stock or
Non-Voting Common Stock currently or subsequently held by them prior to the
expiration of 90 days from the date of this Prospectus without the prior
written consent of Alex. Brown & Sons Incorporated.

In general, under Rule 144 and subject to the 90-day restriction, a holder
of Restricted Shares who beneficially owns shares that were not acquired from
the Company or an affiliate of the Company within the previous two years (one
year under certain proposed amendments to Rule 144) would be entitled to sell,
within any three-month period a number of shares that does not exceed the
greater of (i) one percent

44
<PAGE>

of the then outstanding shares of Common Stock or (ii) the average weekly
trading volume of the Common Stock on the Nasdaq National Market System during
the four calendar weeks immediately preceding the date on which notice of the
sale is filed with the Securities and Exchange Commission. Sales pursuant to
Rule 144 are also subject to certain other requirements relating to manner of
sale, notice and the availability of current public information about the
Company. A person who is deemed not to have been an affiliate of the Company
at any time during the three months immediately preceding a sale and who
beneficially owns shares that were not acquired from the Company or an
affiliate of the Company within the past three years (two years under certain
proposed amendments to Rule 144) is entitled to sell such shares under Rule
144(k) without regard to the foregoing limitations. Rule 144A under the
Securities Act permits the immediate sale by the holders of Restricted Shares
issued prior to completion of the initial public offering of all or a portion
of their shares to certain "qualified institutional buyers" as defined in Rule
144A.

The Company has registered under the Securities Act all shares reserved for
issuance under the Stock Option Plan and the Stock Purchase Plan. See
"Management--Stock Option Plans." All shares purchased in the future under
such plan will be available for resale in the public market without
restriction, except that affiliates must comply with the provisions of Rule
144 other than the holding period requirement.

REGISTRATION RIGHTS

Holders of 666,988 shares of Common Stock and 990,229 shares of Non-Voting
Common Stock (collectively, "Registrable Shares") have certain rights,
including demand and piggyback rights, with respect to registration under the
Securities Act. These rights are subject to certain conditions and
limitations, including the right of the underwriters of an offering to limit
the number of shares included in such registration. The Company is obligated
to bear all the expenses in connection with the registration of the
Registrable Shares, except underwriting discounts and commissions and fees and
disbursements of legal counsel to holders thereof. Of the shares of Common
Stock offered hereby, 746,989 of such shares are being offered by Selling
Stockholders pursuant to the exercise of such registration rights.

45
<PAGE>

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters") through their Representatives,
Alex. Brown & Sons Incorporated, Furman Selz LLC and J.P. Morgan Securities
Inc. have severally agreed to purchase from the Company and the Selling
Stockholders, the following respective numbers of shares of Common Stock at
the public offering price less the underwriting discounts and commissions set
forth on the cover page of this Prospectus:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated.......................................
Furman Selz LLC.......................................................
J.P. Morgan Securities Inc............................................
---------
Total................................................................. 2,750,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares
are purchased.

The Company and the Selling Stockholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain other dealers. After the public offering, the offering price and other
selling terms may be changed by the Representatives of the Underwriters.

The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 412,500
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the above table bears to 2,750,000, and the Company
will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of Common Stock offered hereby. If
purchased, the Underwriters will offer such additional shares on the same
terms as those on which the 2,750,000 shares are being offered.

The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.

The Company and holders of approximately 2,157,855 shares of Common Stock
and Non-Voting Common Stock, holders of options and warrants to purchase
173,247 shares and notes convertible into 27,479 shares of Common Stock have
agreed not to offer, sell or otherwise dispose of any shares of Common Stock
or Non-Voting Common Stock for a period of 90 days after the date of this
Prospectus without the prior written consent of Alex. Brown & Sons
Incorporated on behalf of the Representatives of the Underwriters.

In connection with this offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market may engage in passive market
making on the Nasdaq National Market in accordance with Rule 10b-6A under the
Securities and Exchange Act of 1934, as amended, during the two business day
period before the commencement of the offers or sales of the Common Stock. The
passive market making transactions must

46
<PAGE>

comply with applicable volume and price limits and be identified as such. In
general, a passive market maker may display its bid at a price not in excess
of the highest independent bid for such security; if all independent bids are
lowered before the passive market maker's bid, however, such bid must then be
lowered when certain purchase limits are exceeded.

JPMCC, an affiliate of J.P. Morgan Securities Inc., will be a Selling
Stockholder in the offering and will receive more than ten percent of the
proceeds of the offering. The provisions of Section (c)(8) of the Corporate
Financing Rule under Section 44 of Article III of the Rules of Fair Practice
of the National Association of Securities Dealers, Inc. apply to this
offering. Accordingly, this offering is being conducted in accordance with the
applicable provisions of Schedule E of the bylaws of the National Association
of Securities Dealers, Inc.

LEGAL MATTERS

The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Bell, Boyd & Lloyd, Chicago, Illinois.
Alston & Bird, Atlanta, Georgia will pass on certain legal matters for the
Underwriters in connection with this offering.

EXPERTS

The consolidated financial statements of National Surgery Centers, Inc. at
December 31, 1994 and 1995, and for each of the three years in the period
ended December 31, 1995, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.

The financial statements of Endoscopy Center Affiliates, Inc. at December
31, 1994 and 1995 and at February 23, 1996 and for each of the years ended
December 31, 1993, 1994 and 1995 and for the period ended February 23, 1996
included in this Prospectus and elsewhere in the Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.

The financial statements of the combined and consolidated financial
statements of Surgex-Atlanta, Inc.; Surgex-Miami, Inc.; and Surgex-Sarasota,
Inc. at December 31, 1995 and for the year then ended appearing in this
Prospectus and Registration Statement have been audited by Habif, Arogeti &
Wynne, P.C., independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon such authority of such firm as experts
in accounting and auditing.

The financial statements of Westside Surgery Center, Ltd. at December 31,
1995 and for the year then ended appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.

47
<PAGE>

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. As used herein, the term "Registration Statement" means
the initial Registration Statement and any and all amendments thereto. This
Prospectus omits certain information contained in the Registration Statement
as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits
thereto. Statements herein concerning the contents of any contract or other
document are not necessarily complete and in each instance reference is made
to such contract or other document filed with the Commission as an exhibit to
the Registration Statement, or otherwise, each such statement being qualified
by and subject to such reference in all respects.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports
and other information with the Commission. Reports, registration statements,
proxy statements and other information filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, and at the Commission's Regional Offices: 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, New York, New York 10048. Copies of such materials can be obtained at
prescribed rates from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549.

Such reports and other information, including the Registration Statement and
the exhibits and schedules thereto, are also available on the Commission's Web
site at http://www.sec.gov.

48
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NATIONAL SURGERY CENTERS, INC. AND SUBSIDIARIES
Report of Independent Auditors........................................... F-3
Consolidated Balance Sheets as of December 31, 1994 and 1995............. F-4
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1995.......................................... F-5
Consolidated Statements of Shareholders' Equity (Deficit) for each of the
three years in the period ended December 31, 1995....................... F-6
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1995.......................................... F-7
Notes to Consolidated Financial Statements............................... F-8
NATIONAL SURGERY CENTERS, INC. AND SUBSIDIARIES--Interim Financial
Statements (Unaudited)
Consolidated Balance Sheet as of June 30, 1996 (Unaudited)............... F-18
Consolidated Statements of Income for the six-month periods ended June
30, 1995 and June 30, 1996 (Unaudited).................................. F-19
Consolidated Statement of Shareholders' Equity for the six-month period
ended
June 30, 1996 (Unaudited)............................................... F-20
Consolidated Statements of Cash Flows for the six-month periods ended
June 30, 1995 and
June 30, 1996 (Unaudited)............................................... F-21
Notes to Consolidated Financial Statements (Unaudited)................... F-22
ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES
Report of Independent Public Accountants................................. F-23
Consolidated Balance Sheets as of December 31, 1994 and 1995 and February
23, 1996................................................................ F-24
Consolidated Statements of Operations for the years ended December 31,
1993, 1994 and 1995 and the period ended February 23, 1996.............. F-25
Consolidated Statements of Stockholders' Deficit for the years ended
December 31, 1993, 1994 and 1995 and the period ended February 23, 1996. F-26
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994 and 1995 and the period ended February 23, 1996.............. F-27
Notes to Consolidated Financial Statements............................... F-28
SURGEX-ATLANTA, INC.; SURGEX-MIAMI, INC.; AND SURGEX-SARASOTA, INC. AND
EACH OF THEIR SUBSIDIARIES
Independent Auditors' Report............................................. F-35
Combined and Consolidated Balance Sheet as of December 31, 1995.......... F-36
Combined and Consolidated Statement of Income for the year ended December
31, 1995................................................................ F-37
Combined and Consolidated Statement of Changes in Shareholders' Equity
for the year ended December 31, 1995.................................... F-38
Combined and Consolidated Statement of Cash Flows for the year ended
December 31, 1995....................................................... F-39
Notes to Combined and Consolidated Financial Statements.................. F-40
SURGEX-ATLANTA, INC.; SURGEX-MIAMI, INC.; AND SURGEX-SARASOTA, INC. AND
EACH OF THEIR SUBSIDIARIES--Interim Financial Statements (Unaudited)
Combined and Consolidated Balance Sheet as of April 30, 1996 (Unaudited). F-45
Combined and Consolidated Statement of Income for the period ended April
30, 1996 (Unaudited).................................................... F-46
Combined and Consolidated Statement of Changes in Shareholders' Equity
for the period ended April 30, 1996 (Unaudited)......................... F-47
Combined and Consolidated Statement of Cash Flows for the period ended
April 30, 1996.......................................................... F-48
Notes to Combined and Consolidated Financial Statements (Unaudited)...... F-49
</TABLE>

F-1
<PAGE>

<TABLE>
<S> <C>
WESTSIDE SURGERY CENTER, LTD.
Report of Independent Auditors........................................... F-50
Balance Sheets as of December 31, 1995 and April 30, 1996................ F-51
Statements of Income for the year ended December 31, 1995 and the four-
month period ended April 30, 1996....................................... F-52
Statements of Changes in Partners' Equity for the year ended December 31,
1995 and
the four-month period ended April 30, 1996.............................. F-53
Statements of Cash Flows for the year ended December 31, 1995 and the
four-month period ended April 30, 1996.................................. F-54
Notes to Financial Statements............................................ F-55
</TABLE>

F-2
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
National Surgery Centers, Inc.

We have audited the accompanying consolidated balance sheets of National
Surgery Centers, Inc. and Subsidiaries as of December 31, 1995 and 1994 and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of National Surgery Centers, Inc. and Subsidiaries at December 31, 1995 and
1994, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.

Ernst & Young LLP

Chicago, Illinois
February 2, 1996, except for Note 11
as to which the date is May 31, 1996

F-3
<PAGE>

NATIONAL SURGERY CENTERS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------- -------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 4,478 $14,653
Short-term investments..................................... -- 8,190
Accounts receivable (less allowance for uncollectible
accounts of $1,098 and $1,167)............................ 6,982 8,764
Inventories................................................ 1,992 2,154
Prepaid expenses........................................... 654 581
Other current assets....................................... 117 259
------- -------
14,223 34,601
------- -------
Property and equipment....................................... 25,720 32,310
Less accumulated depreciation and amortization............. (4,026) (6,758)
------- -------
21,694 25,552
------- -------
Other assets:
Excess of purchase price over net assets acquired (less
accumulated amortization of $912 and $1,295).............. 13,760 16,446
Deferred income taxes...................................... 5,777 4,425
Deferred development costs (less accumulated amortization
of $280 and $591)......................................... 491 180
Other long-term assets..................................... 1,009 1,083
------- -------
21,037 22,134
------- -------
$56,954 $82,287
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Current installments of long-term debt..................... $ 4,511 $ 7,069
Accounts payable and accrued expenses...................... 3,412 5,387
------- -------
7,923 12,456
------- -------
Long-term debt, less current installments:
Long-term debt............................................. 10,886 11,028
Subordinated debt.......................................... 19,625 --
Convertible notes.......................................... 7,689 5,977
------- -------
38,200 17,005
------- -------
Other long-term liabilities.................................. 168 449
Minority interests........................................... 3,939 4,185
Shareholders' equity (deficit):
Preferred stock, $.01 par value; authorized 10,000,000
shares; no shares issued and outstanding.................. -- --
Non-voting common stock, $.01 par value (no par value for
1994); authorized 10,000,000 shares; issued and
outstanding 1,952,941 and 654,313 shares.................. 8,232 6
Common stock, $.01 par value (no par for 1994); authorized
20,000,000 shares; issued and outstanding 7,892,511 and
4,971,118 shares.......................................... 41,016 50
Additional paid-in-capital................................. -- 87,814
Accumulated deficit........................................ (42,524) (39,678)
------- -------
6,724 48,192
------- -------
$56,954 $82,287
======= =======
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.

F-4
<PAGE>

NATIONAL SURGERY CENTERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Net revenue...................................... $ 35,230 $ 41,707 $ 53,165
Operating expenses............................... 23,595 29,648 36,982
General and administrative expenses.............. 2,121 1,920 2,365
Depreciation and amortization expense............ 3,028 2,573 3,581
Writedown of goodwill............................ 50,871 -- --
-------- -------- --------
Operating income (loss)........................ (44,385) 7,566 10,237
Interest expense................................. (4,016) (4,186) (4,139)
Interest income.................................. 109 180 278
Minority interests............................... (1,153) (1,027) (1,382)
Other, net....................................... (18) (22) 86
-------- -------- --------
Income (loss) before income taxes and
extraordinary item.............................. (49,463) 2,511 5,080
Provision (benefit) for income taxes............. (6,227) 1,018 1,981
-------- -------- --------
Income (loss) before extraordinary item.......... (43,236) 1,493 3,099
Early extinguishment of debt, net of income tax
benefits of $192 in 1994 and $130 in 1995....... -- (373) (253)
-------- -------- --------
Net income (loss)................................ $(43,236) $ 1,120 $ 2,846
======== ======== ========
Income (loss) per common share:
Primary:
Before extraordinary item...................... $ (11.35) $ 0.35 $ 0.57
Extraordinary item............................. -- (0.09) (0.05)
-------- -------- --------
Net income (loss).............................. $ (11.35) $ 0.26 $ 0.52
======== ======== ========
Fully diluted:
Before extraordinary item...................... $ (11.35) $ 0.35 $ 0.54
Extraordinary item............................. -- (0.09) (0.04)
-------- -------- --------
Net income (loss).............................. $ (11.35) $ 0.26 $ 0.50
======== ======== ========
Weighted average number of common and common
equivalent shares outstanding:
Primary........................................ 3,810 4,269 5,457
Fully diluted.................................. 3,810 4,269 5,711
</TABLE>

The Notes to Consolidated Financial Statements are an integral part of these
statements.

F-5
<PAGE>

NATIONAL SURGERY CENTERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK
---------------------------
AMOUNT
----------------- ADDITIONAL TOTAL
NUMBER NON- PAID-IN ACCUMULATED EQUITY
OF SHARES VOTING VOTING CAPITAL DEFICIT (DEFICIT)
--------- -------- ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1993................... 7,622 $ 40,358 $ -- $ -- $ (408) $ 39,950
Net loss.............. -- -- -- -- (43,236) (43,236)
Stock issued in
connection with
acquisition.......... 4 30 -- -- -- 30
Repurchase of stock... (34) (15) -- -- -- (15)
Issuance of warrants.. -- 137 -- -- -- 137
------ -------- ------- ------- -------- --------
Balance at December 31,
1993................... 7,592 40,510 -- -- (43,644) (3,134)
Net income............ -- -- -- -- 1,120 1,120
Stock issued, net of
issuance costs....... 2,476 2,093 8,232 -- -- 10,325
Stock issued in
connection with
acquisition.......... 35 280 -- -- -- 280
Repurchase of stock... (257) (2,055) -- -- -- (2,055)
Issuance of warrants.. -- 188 -- -- -- 188
------ -------- ------- ------- -------- --------
Balance at December 31,
1994................... 9,846 41,016 8,232 -- (42,524) 6,724
Net income............ -- -- -- -- 2,846 2,846
Stock issued, net of
issuance costs....... 74 318 -- -- -- 318
Exercise of stock
options.............. 7 29 -- -- -- 29
Issuance of warrants.. -- -- -- 2 -- 2
1-for-3 stock
exchange............. (6,618) -- -- -- -- --
Change in par value... -- (41,336) (8,226) 49,562 -- --
Stock issued, net of
issuance costs....... 2,300 23 -- 38,007 -- 38,030
Stock issued in
connection with
acquisition.......... 15 -- -- 225 -- 225
Exercise of stock
options.............. 1 -- -- 18 -- 18
------ -------- ------- ------- -------- --------
Balance at December 31,
1995................... 5,625 $ 50 $ 6 $87,814 $(39,678) $ 48,192
====== ======== ======= ======= ======== ========
</TABLE>

The Notes to Consolidated Financial Statements are an integral part of these
statements.

F-6
<PAGE>

NATIONAL SURGERY CENTERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1993 1994 1995
-------- ------- --------
<S> <C> <C> <C>
Operating activities:
Net income (loss)............................... $(43,236) $ 1,120 $ 2,846
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization expense......... 3,028 2,573 3,581
Minority interests............................ 1,153 1,027 1,382
Distributions to minority interests........... (929) (964) (1,343)
Deferred income taxes......................... (6,650) 829 1,480
Extraordinary charges......................... -- 565 383
Writedown of goodwill......................... 50,871 -- --
Change in assets and liabilities, net of
entities acquired:
Accounts receivable........................... (951) (1,683) (1,266)
Inventories................................... (376) (489) 17
Prepaid expenses.............................. (311) (116) 102
Other current assets.......................... 108 (30) (142)
Other assets.................................. (399) (1,076) (213)
Accounts payable and accrued expenses......... (1,037) (1,080) 1,531
Other......................................... 87 177 (793)
-------- ------- --------
Net cash provided by operating activities... 1,358 853 7,565
-------- ------- --------
Investing activities:
Payments for entities acquired, net of cash
acquired....................................... (5,350) (1,426) (2,489)
Purchases of property and equipment............. (3,885) (5,324) (3,255)
Purchases of short-term investments............. -- -- (8,190)
Proceeds from sale of property and equipment.... 2,952 1,541 26
Proceeds from sale of partnership interests..... 528 926 903
-------- ------- --------
Net cash used in investing activities....... (5,755) (4,283) (13,005)
-------- ------- --------
Financing activities:
Proceeds from issuance of long-term debt........ 4,433 3,858 --
Payments on long-term debt...................... (2,491) (7,844) (22,782)
Proceeds from issuance of common stock, net of
issuance costs................................. -- 10,175 38,348
Repurchase of common stock...................... (15) (1,138) --
Proceeds from issuance of warrants and options.. 57 5 49
-------- ------- --------
Net cash provided by financing activities... 1,984 5,056 15,615
-------- ------- --------
Net increase (decrease) in cash and cash
equivalents...................................... (2,413) 1,626 10,175
Cash and cash equivalents at beginning of year.... 5,265 2,852 4,478
-------- ------- --------
Cash and cash equivalents at end of year.......... $ 2,852 $ 4,478 $ 14,653
======== ======= ========
Non-cash transactions:
Common stock issued in acquisitions, contingent
payments and other............................. $ 30 $ 430 $ 225
Long-term debt issued in acquisitions and
contingent payments............................ 527 -- 750
Liabilities assumed in acquisitions............. 1,944 -- 3,277
Capital lease obligations....................... -- 2,094 574
Convertible notes issued in common stock
repurchase..................................... -- 917 --
Convertible notes cancelled..................... -- 760 --
Issuance of warrants............................ -- 183 --
</TABLE>

The Notes to Consolidated Financial Statements are an integral part of these
statements.

F-7
<PAGE>

NATIONAL SURGERY CENTERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company--National Surgery Centers, Inc. and Subsidiaries (the "Company")
acquires, develops and manages ambulatory surgery centers. Many of the
Company's surgery centers are operated in partnership with physicians or other
health care providers.

Principles of Consolidation--The consolidated financial statements include
all accounts of the Company and its wholly owned subsidiaries and majority
owned partnerships. All significant intercompany balances and transactions
have been eliminated in consolidation.

Net Revenue--Net revenue consists of charges by the Company's centers at
established billing rates for services which generally include all fees for
operating room, recovery room, supplies and medications. Net revenue is net of
provisions for contractual adjustments and doubtful accounts.

Excess of Purchase Price Over Net Assets Acquired ("Goodwill")--The value of
goodwill acquired, including any arising from contingent payments based upon
earnings and performance of the acquired business and the purchase of limited
partners' ownership interest in majority owned partnerships, is generally
amortized using a straight-line method over forty years in accordance with
provisions of APB No. 17. The Company believes that the life of the ambulatory
surgery business and the delivery of such health care services is
indeterminate and likely to exceed 40 years.

The Company periodically evaluates whether events and circumstances
subsequent to acquisition have occurred that would indicate that the remaining
unamortized balance of goodwill may not be fully recoverable or that the
remaining useful-life may warrant revision. When such events or circumstances
indicate that the carrying value of goodwill may not be recoverable, the
Company performs an analysis over the remaining life of the related assets to
determine if the asset is impaired. Historically, impairment of goodwill has
been measured by comparing discounted future cash flows to the net carrying
value. If this analysis indicated that goodwill acquired was not fully
recoverable, then the Company adjusted the carrying value to the estimated
recoverable value.

In addition, the Company assesses long-lived assets for impairment under
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. Under those rules, goodwill
associated with assets acquired in a purchase business combination is included
in impairment evaluations when events or circumstances exist that indicate the
carrying amount of those assets may not be recoverable.

Common Share Data--Primary income (loss) per common and common equivalent
share and income (loss) per common and common equivalent share assuming full
dilution are computed using the weighted average number of shares outstanding
adjusted for the incremental shares attributable to outstanding options and
warrants to purchase common stock. Convertible debt is anti-dilutive for all
periods presented.

Income Taxes--The Company's method of accounting for income taxes is based
on an asset and liability method. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.

Property and Equipment--Property and equipment are stated at original cost,
except property and equipment acquired through business combinations accounted
for as purchases which are stated at fair

F-8
<PAGE>

NATIONAL SURGERY CENTERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
market value at the date of acquisition. Property and equipment under capital
leases are recorded at the lower of the present value of the minimum lease
payments or the fair market value of the leased property.

Depreciation and amortization are computed using the straight-line method
over the estimated useful lives or the terms of the leases of the related
assets. The general range of estimated useful lives is forty years for
buildings; seven to ten years for medical, surgical and capital leased
equipment; terms of the lease for leasehold improvements; and five to ten
years for furniture and fixtures.

Deferred Development Costs--Deferred development costs include development
fees, personnel, rent and other direct expenses incurred prior to a developed
surgery center obtaining the necessary licenses and state approvals which
permit the center to begin to perform surgeries. Once a center obtains the
necessary licenses and state approvals, these costs are amortized on a
straight-line basis over a two-year period.

Inventories--Inventories, comprised principally of medical supplies, drugs
and gases, are stated at the lower of cost (first-in, first-out method) or
market.

Cash Equivalents and Short-Term Investments--The Company considers highly
liquid investments with original maturities of three months or less to be cash
equivalents. Investments in cash equivalents are carried at cost which
approximates market with any associated purchase discount or premium amortized
over the period to maturity. Short-term investments consist primarily of
highly liquid debt securities. Management considers these investments to be
available-for-sale and these securities are carried at cost which approximates
market.

Accounting Estimates--Accounting estimates are an integral part of the
consolidated financial statements prepared by management and are based on
management's current judgements. These judgements are based on knowledge and
experience about past and current events and on assumptions about future
events. Management will accrue estimated liabilities when the financial impact
is probable and estimable.

Liability Insurance--The Company carries professional malpractice and
general liability insurance, subject to certain self insured retention limits,
on a claims-made basis for all of its centers. Additionally, the Company
maintains an umbrella liability insurance policy. The Company has procedures
in place to monitor incidents of significance. The Company does not have any
malpractice or other litigation in which the ultimate resolution could have a
material financial impact.

Off-Balance Sheet Risk and Concentrations of Credit Risk--Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash, cash equivalents, short-term investments and
trade receivables. The Company places its cash, cash equivalents and short-
term investments with high credit quality financial institutions and
instruments.

Concentrations of credit risk with respect to trade receivables is limited
due to the large number of customers comprising the Company's customer base
and their dispersion across many different insurance companies, health
maintenance and preferred provider organizations, individuals and geographic
locations.

For all periods presented, the Company had no significant concentrations of
credit risk or financial instruments with off-balance sheet risk.

F-9
<PAGE>

NATIONAL SURGERY CENTERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 2--ACQUISITIONS

Purchases--During August and October 1995, the Company acquired two surgery
centers. The total purchase price of $3,164,000 included $2,489,000 in cash,
$450,000 in a promissory note and the issuance of 22,500 shares of the
Company's common stock. Of the $3,164,000 purchase price, $2,567,000 was
recorded as goodwill.

During February and October 1993, the Company acquired two surgery centers
and purchased the development rights to a third surgery center in December
1993. The total purchase price of $4,140,000 included $4,043,000 in cash and
the issuance of $97,000 in convertible notes. Of the $4,140,000 purchase
price, $2,091,000 was recorded as goodwill.

The purchase agreements of certain acquired centers entitle the former
owners to receive further consideration which is contingent primarily upon
increases in future earnings of the acquired centers. In 1993, payments of
$1,339,000 in cash, $430,000 in convertible notes, and the issuance of 1,875
shares of common stock were made. In 1994, payments of $1,289,000 and the
issuance of 17,500 shares of common stock were made. During 1995, payments of
$171,000 in cash and $300,000 in convertible notes were made. Future
contingent payments are payable either in cash, convertible notes or common
stock; an additional $327,000 is anticipated to be paid through 1997.
Obligations related to these contingencies are reflected as increases to
goodwill in the period they became known if conditions and facts permit
capitalization.

The acquisitions have been accounted for under the purchase method of
accounting.

The following unaudited results of operations give effect to the operations
of the entities acquired in fiscal 1995 as if the respective transactions had
occurred as of the first day of fiscal 1994. The pro forma results of
operations do not purport to represent what the Company's results would have
been had such transactions in fact occurred at the beginning of the years
presented or to project the Company's results of operations in any future
period.

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------
1994 1995
------- -------
(IN THOUSANDS,
EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Net revenues............................................. $45,672 $55,621
Income before extraordinary item......................... 1,640 3,135
Net income............................................... 1,267 2,882
Income per common share:
Primary:
Before extraordinary item............................ $ 0.38 $ 0.57
Net income........................................... 0.30 0.53
Fully diluted:
Before extraordinary item............................ $ 0.38 $ 0.55
Net income........................................... 0.30 0.50
</TABLE>

*The pro forma operating results include adjustments to conform the
accounting policy of the acquired businesses for the amortization of certain
intangible assets and accounts receivable allowances.

F-10
<PAGE>

NATIONAL SURGERY CENTERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 3--SHAREHOLDERS' EQUITY

Public Offering--In November 1995, the Company completed a public offering
of 3,450,000 shares of common stock at $12.00 per share (the "Offering").
Prior to the Offering, there was no public market for the Company's common
stock. The common stock is traded in the NASDAQ national market system under
the symbol "NSCI". The net proceeds of the Offering, after deducting
applicable issuance costs and expenses, were $38.0 million. The proceeds were
used to repay $20.0 million of 10.5% Subordinated Debentures (the
"Debentures"), plus accrued interest, with excess funds to be used for general
corporate purposes.

Stock Exchange--Effective September 14, 1995, the Company's Board of
Directors authorized a 1-for-3 stock exchange in conjunction with the
Company's merger and reincorporation in Delaware. The merger included changing
the Company's common stock par value from no par value to $.01 per share and
authorized 10,000,000 shares of preferred stock, $.01 par value per share,
with no specific terms. Accordingly, all references in these financial
statements to average number of shares outstanding and related prices, per
share amounts, and stock option plan and warrant data have been restated to
reflect this stock exchange.

Common Stock--In August 1994, the Company's shareholders authorized a new
class of non-voting common stock. Subsequently, on August 19, 1994, the
Company issued 200,000 shares of voting common stock and 976,470 shares of
non-voting common stock through a private equity placement. The net proceeds
of the private placement of $9,918,000 after deducting applicable issuance
costs and expenses, were used to extinguish early $5,408,000 of revolving and
term loans with excess funds used for general corporate purposes.

In December 1994, as part of an agreement to restructure certain provisions
of a partnership agreement, the Company repurchased 128,438 shares of its
common stock for a total of $1,138,000 and the issuance of $917,000 in 9.0%
convertible notes.

The Company has reserved 1,992,540 shares of the Company's common stock for
issuance in conjunction with warrants, convertible notes, and the stock option
plan.

Stock Options--The Company has a stock option plan (the "Plan") whereby the
Company may issue to officers and other key employees, options to purchase up
to 750,000 shares of the Company's common stock. The Plan is administered by a
committee of the Board of Directors which has the authority to determine the
employees to whom awards will be made, the amount of the awards, and the other
terms and conditions of the awards. Each option allows the individual to
purchase one share of the Company's common stock for each option granted. All
options are granted at not less than fair market value at the date of the
grant and generally vest over a four-year period.

On October 19, 1994, the Company's Board of Directors authorized an
adjustment of the exercise price on all outstanding options to $8.50 for key
employees and $10.00 for officers.

The activity under the Plan is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1993 1994 1995
------------- ------------ ------------
<S> <C> <C> <C>
Outstanding at beginning of
period...................... 44,500 104,500 104,250
Granted...................... 70,000 500 549,277
Exercised.................... -- -- (5,494)
Canceled..................... (10,000) (750) (19,999)
------------- ------------ ------------
Outstanding at end of period. 104,500 104,250 628,034
============= ============ ============
Exercisable at end of period. 8,625 37,812 49,686
Exercise price range......... $16.00-$20.00 $8.50-$10.00 $8.50-$14.25
</TABLE>

F-11
<PAGE>

NATIONAL SURGERY CENTERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Employee Stock Purchase Plan--In November 1995, the Board of Directors of
the Company adopted, and the shareholders of the Company approved, the
Employee Stock Purchase Plan (the "Stock Purchase Plan") which will be
administered by the Compensation Committee. Under the Stock Purchase Plan, a
total of 750,000 shares of Common Stock are reserved for issuance upon the
exercise of one-year options which may be granted under the Stock Purchase
Plan. The Stock Purchase Plan permits eligible employees to purchase Common
Stock at 85% of the fair market value of the Common Stock at the time the
option is granted or at the time the option is exercised, whichever is lower.
As of December 31, 1995, no shares had been issued under the Stock Purchase
Plan.

Warrants--The Company has outstanding warrants at December 31, 1995,
providing for the purchase of 783,963 shares of the Company's common stock.
The warrants are exercisable at an average price of $10.29 and expire through
the year 2000.

NOTE 4--LONG-TERM DEBT AND LEASE COMMITMENTS

Long-Term Debt--In November 1995, the Company fully extinguished $20,000,000
of Debentures with proceeds from its Offering. The early retirement of this
debt resulted in the accelerated amortization of unamortized debt issuance
costs and discount of $383,000, with associated tax benefits of $130,000 and
is presented as an extraordinary item in the Consolidated Statements of
Operations. The Debenture agreement was with an affiliate of which two of the
Company's directors are general partners.

In November 1995, the Company amended its bank credit agreement dated
December 17, 1992. The amended credit agreement contained modifications of
interest rates and other financial covenants giving effect to the Company's
Offering. The amended agreement provides for borrowings of up to $20,000,000,
to be used for the acquisition and development of surgery centers and related
businesses. The credit agreement includes a $2,500,000 revolving note and a
$17,500,000 term note. The agreement provides for equal quarterly principal
repayments which occur over a five year period based on the timing of the take
down with any remaining outstanding balances due on June 30, 2000. The notes
bear interest at varying rates at either prime plus 1.00% or the Eurodollar
rate (LIBOR) plus 2.0%, subject to adjustment in certain circumstances, with
interest payments made from time to time. The annual commitment fees payable
on the unused portion of the facility is .375% per annum. The agreement
contains various financial covenants, including interest coverage, debt
coverage, fixed charge and net worth and prohibits payment of dividends or
distributions on the Company's common stock.

In August, 1994, the Company amended its bank credit agreement dated
December 17, 1992. The amended credit agreement contained modification of
terms, maturity and other financial covenants or conditions. In August, 1994,
concurrent with a private equity placement, the Company fully extinguished the
revolving and term notes due in 1999. The early retirement included the
accelerated amortization of unamortized debt issuance costs of $565,000, with
associated tax benefits of $192,000 and is presented as an extraordinary item
in the Consolidated Statements of Operations.

The convertible notes mature five to seven years from the date of issuance.
Certain notes are redeemable at the option of the Company on or after three
years from the date of issuance, or earlier under certain circumstances, at a
price equal to 100% of the principal amount thereof. The notes are convertible
into shares of the Company's common stock at any time prior to and including
the maturity date of the note at an average conversion price of $13.76 per
share. In conjunction with the repurchase of common stock in 1994, certain
convertible notes totaling $2,375,000 were amended, adjusting the conversion
price and extending the maturity date from the year 1996 to the year 2000.

F-12
<PAGE>

NATIONAL SURGERY CENTERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The 7.5% subordinated note is payable to a member of the Company's board of
directors as part of the payment for the acquisition of a center previously
owned by him.

Substantially all the Company's assets not otherwise pledged as collateral
on existing loans are pledged as collateral under the bank credit agreement.

Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
10.5% subordinated debentures due 2002, imputed 11%,
interest payable semi-annually (unamortized discount
of $375,000 at December 31, 1994)..................... $19,625 $ --
Revolving and term notes due 2000 (unamortized discount
of $170,000 at December 31, 1994 and $139,000 at
December 31, 1995).................................... (170) (139)
Convertible notes, interest ranging from 7% to 9.5%,
due 1996 through 2000, interest payable quarterly or
annually.............................................. 7,689 7,989
7.5% subordinated note due 1997, interest payable
quarterly............................................. 3,600 2,400
Installment notes payable, interest ranging from 7% to
10.5%, due through 2020............................... 5,952 7,692
Notes payable, interest rate at 8%, due through 1997... 3,777 3,890
Obligations under capital leases, interest ranging from
8.5% to 11.14% due through 2000....................... 2,238 2,242
------- -------
42,711 24,074
Less current installments.............................. (4,511) (7,069)
------- -------
$38,200 $17,005
======= =======
</TABLE>

Lease Commitments--The Company leases corporate office space, operating
facilities and various equipment under operating leases. The real estate upon
which the Company's surgery centers are located is leased usually on terms
whereby all costs associated with maintaining the property are paid by the
Company. The lease agreements usually have lease terms ranging from five to
twenty-five years, excluding renewal option periods, and have payment
increases based on scheduled or consumer price index adjustments.

Lease expenses for operating leases aggregated $2,681,000, $3,599,000, and
$4,748,000 for the years ended December 31, 1993, 1994 and 1995, respectively.

Scheduled Long-Term Debt and Lease Payments--Future minimum lease payments
under non-cancelable capital, operating leases and long-term debt payments as
of December 31, 1995 are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING LONG-TERM
LEASES LEASES DEBT
------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
1996.......................................... $ 808 $ 3,708 $ 7,069
1997.......................................... 798 3,577 5,350
1998.......................................... 740 3,349 1,749
1999.......................................... 255 3,521 1,179
2000.......................................... 7 3,550 4,395
Thereafter.................................... -- 18,700 4,332
------ ------- -------
Total lease payments.......................... 2,608 $36,405 $24,074
======= =======
Less amount representing interest............. (366)
------
Present value of minimum lease payments....... $2,242
======
</TABLE>

F-13
<PAGE>

NATIONAL SURGERY CENTERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Interest Payments--Total interest paid was $3,965,000, $4,096,000 and
$4,084,000 for the years ended December 31, 1993, 1994 and 1995, respectively.

NOTE 5--WRITEDOWN OF GOODWILL

During 1993, the Company recorded a charge of $50,871,000 related to the
writedown of goodwill to estimated recoverable value. The writedown was
related principally to the excess purchase price paid for the Company's
acquisitions and was the result of uncertainty in proposed health care reform
and market multiples decreasing in various markets subsequent to acquisition.

NOTE 6--INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets are as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
----------------------
1993 1994 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Book over tax amortization of intangibles...... $6,756 $5,789 $4,623
Tax over book depreciation (liability)......... (680) (1,132) (1,749)
Other.......................................... 306 1,120 1,551
------ ------ ------
6,382 5,777 4,425
Deferred tax liabilities......................... 21 53 181
------ ------ ------
Net deferred tax asset........................... $6,361 $5,724 $4,244
====== ====== ======
</TABLE>

A reconciliation of income tax expenses computed at the Federal statutory
tax rate to reported income tax expense is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1993 1994 1995
----- ---- ----
<S> <C> <C> <C>
Tax at statutory rate................................. (34.0)% 34.0% 34.0%
Non-deductible goodwill writedown..................... 22.3 -- --
Non-deductible goodwill amortization.................. 0.6 2.8 1.5
State income taxes, net of federal tax benefit........ (1.3) 3.8 3.8
Other................................................. (0.2) (0.1) (0.3)
----- ---- ----
(12.6)% 40.5% 39.0%
===== ==== ====
</TABLE>

F-14
<PAGE>

NATIONAL SURGERY CENTERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1993 1994 1995
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
State.......................................... $ 147 $ (27) $ 173
Federal........................................ 276 216 328
------- ------ ------
423 189 501
------- ------ ------
Deferred:
State.......................................... (1,085) 171 215
Federal........................................ (5,565) 658 1,265
------- ------ ------
(6,650) 829 1,480
------- ------ ------
Tax provision before extraordinary item.......... (6,227) 1,018 1,981
Tax benefit of extraordinary item................ -- (192) (130)
------- ------ ------
$(6,227) $ 826 $1,851
======= ====== ======
</TABLE>

Income Taxes Paid--Total income taxes paid, net of refunds received, was
$350,000, $189,000 and $211,000, for each of the years ended December 31,
1993, 1994 and 1995, respectively.

NOTE 7--PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land and land improvements............................... $ 1,143 $ 1,795
Buildings................................................ 2,545 4,557
Medical and surgical equipment........................... 14,462 17,997
Leasehold improvements................................... 6,057 6,237
Furniture and fixtures................................... 1,502 1,708
Construction in progress................................. 11 16
------- -------
$25,720 $32,310
======= =======
</TABLE>

Included in property and equipment is capitalized leased property and
equipment which aggregated $2,434,000 and $3,008,000 with accumulated
depreciation of $292,000 and $472,000 at December 31, 1994, and 1995,
respectively.

NOTE 8--ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------
1994 1995
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Accounts payable............................................ $ 895 $1,487
Accrued payroll............................................. 625 1,056
Accrued rent................................................ 674 787
Accrued other............................................... 1,218 2,057
------ ------
$3,412 $5,387
====== ======
</TABLE>

F-15
<PAGE>

NATIONAL SURGERY CENTERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--RELATED PARTY TRANSACTIONS

The Company leases one of its operating facilities under a long-term non-
cancelable lease arrangement from a partnership controlled by a director of
the Company. In addition to the minimum annual lease payments the lease
provides for a percentage rental based on gross receipts subject to certain
minimum exclusions. Lease payments made to this partnership were $831,000,
$934,000 and $995,000 for the years ended December 31, 1993, 1994 and 1995,
respectively. Total future minimum lease payments payable to this partnership
are $2,643,000.

One director of the Company is an officer and shareholder in a corporation
which provides day-to-day management services at one of the Company's limited
partnership centers. Management fees paid to this corporation were $133,000,
$146,000 and $163,000 for each of the years ended December 31, 1993, 1994 and
1995, respectively.

NOTE 10--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Quarterly financial information for the two years ended December 31, 1995 is
summarized below:

<TABLE>
<CAPTION>
QUARTER
---------------------------------
1ST 2ND 3RD 4TH(/1/)
------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
1995
Net revenue.................................. $11,979 $13,118 $13,391 $14,677
Income before income taxes and extraordinary
item........................................ 848 1,277 905 2,050
Income before extraordinary item............. 510 772 535 1,282
Net income................................... 510 772 535 1,029
Income (loss) per common share--primary(/2/)
Before extraordinary item.................. $ 0.10 $ 0.16 $ 0.11 $ 0.18
Extraordinary item......................... -- -- -- (0.05)
------- ------- ------- -------
Net income................................. $ 0.10 $ 0.16 $ 0.11 $ 0.13
======= ======= ======= =======
1994
Net revenue.................................. $ 9,674 $10,162 $10,427 $11,444
Income before income taxes and extraordinary
item........................................ 511 1,031 321 648
Income before extraordinary item 302 617 194 380
Net income (loss)............................ 302 617 (179) 380
Income (loss) per common share--primary(/2/)
Before extraordinary item.................. $ 0.08 $ 0.16 $ 0.04 $ 0.08
Extraordinary item......................... -- -- (0.08) --
------- ------- ------- -------
Net income (loss).......................... $ 0.08 $ 0.16 $ (0.04) $ 0.08
======= ======= ======= =======
</TABLE>
- --------
(1) The fourth quarter of 1995 includes non-recurring other income of $436,000
or $0.04 per primary share, arising primarily from gain on sale of limited
partnership interests in certain centers.
(2) Income (loss) per share is calculated independently for each quarter and
the sum of the quarters may not necessarily be equal to the full year
income (loss) per share amount.

F-16
<PAGE>

NOTE 11--SUBSEQUENT EVENT

Effective May 31, 1996, the Company effected a 3-for-2 stock split in the
form of a 50% stock dividend. Accordingly, all references in these financial
statements to average number of shares outstanding and related prices, per
share amounts, and option plan and warrant data have been restated to reflect
this stock split.

F-17
<PAGE>

NATIONAL SURGERY CENTERS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARES)

<TABLE>
<CAPTION>
JUNE 30,
1996
(UNAUDITED)
-----------
ASSETS
------
<S> <C>
Current assets:
Cash and cash equivalents........................................ $ 8,308
Short-term investments........................................... 250
Accounts receivable (less allowance for uncollectible accounts of
$1,700)......................................................... 13,221
Inventories...................................................... 2,529
Prepaid expenses................................................. 1,365
Other current assets............................................. 511
-------
26,184
-------
Property and equipment............................................. 43,018
Less accumulated depreciation and amortization................... (8,781)
-------
34,237
-------
Other assets:
Excess of purchase price over net assets acquired (less
accumulated amortization of $1,616)............................. 28,202
Deferred income taxes............................................ 3,871
Deferred development costs (less accumulated amortization of
$879)........................................................... 577
Other long-term assets........................................... 1,598
-------
34,248
-------
$94,669
=======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C>
Current liabilities:
Current installments of long-term debt........................... $ 8,698
Accounts payable and accrued expenses............................ 7,842
-------
16,540
-------
Long-term debt, less current installments:
Long-term debt................................................... 14,823
Convertible notes................................................ 4,837
-------
19,660
-------
Other long-term liabilities........................................ 493
Minority interests................................................. 6,376
Shareholders' equity:
Preferred stock, $.01 par value; authorized 10,000,000 shares; no
shares issued and outstanding................................... --
Non-voting common stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 1,307,016 shares................. 13
Common stock, $.01 par value; authorized 20,000,000 shares;
issued and outstanding 7,479,660 shares......................... 75
Additional paid-in-capital....................................... 87,897
Accumulated deficit.............................................. (36,385)
-------
51,600
-------
$94,669
=======
</TABLE>

The Notes to Consolidated Financial Statements (Unaudited) are an integral part
of these statements.

F-18
<PAGE>

NATIONAL SURGERY CENTERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
(UNAUDITED)
1995 1996
------- -----------
<S> <C> <C>
Net revenue.............................................. $25,097 $35,911
Operating expenses....................................... 17,266 23,765
General and administrative expenses...................... 1,136 1,623
Depreciation and amortization expense.................... 1,680 2,680
------- -------
Operating income....................................... 5,015 7,843
Interest expense......................................... (2,193) (1,297)
Interest income.......................................... 97 219
Minority interests....................................... (650) (1,517)
Other, net............................................... (144) 153
------- -------
Income before income taxes............................... 2,125 5,401
Provision for income taxes............................... 843 2,108
------- -------
Net income............................................... $ 1,282 $ 3,293
======= =======
Income per common share:
Primary................................................. $ 0.26 $ 0.36
======= =======
Fully diluted........................................... $ 0.26 $ 0.35
======= =======
Weighted average number of common and common equivalent
shares outstanding:
Primary................................................ 4,931 9,127
Fully diluted.......................................... 4,931 9,699
</TABLE>

The Notes to Consolidated Financial Statements (Unaudited) are an integral part
of these statements.

F-19
<PAGE>

NATIONAL SURGERY CENTERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK
-----------------------
AMOUNT
------------- ADDITIONAL
NUMBER NON- PAID-IN ACCUMULATED TOTAL
OF SHARES VOTING VOTING CAPITAL DEFICIT EQUITY
--------- ------ ------ ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 5,625 $50 $6 $87,814 $(39,678) $48,192
Net income
(unaudited).......... -- -- -- -- 3,293 3,293
Exercise of stock
options (unaudited).. 4 -- -- 50 -- 50
3-for-2 stock dividend
(unaudited).......... 2,815 25 4 (29) -- --
Exercise of warrants
(unaudited).......... 326 -- 3 (3) -- --
Exercise of stock
options (unaudited).. 2 -- -- 15 -- 15
Stock issued under
employee stock
ownership plan
(unaudited).......... 15 -- -- 160 -- 160
Stock issuance costs
(unaudited).......... -- -- -- (110) -- (110)
----- --- --- ------- -------- -------
Balance at June 30, 1996
(unaudited)............ 8,787 $75 $13 $87,897 $(36,385) $51,600
===== === === ======= ======== =======
</TABLE>

The Notes to Consolidated Financial Statements (Unaudited) are an integral part
of these statements.

F-20
<PAGE>

NATIONAL SURGERY CENTERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------------
(UNAUDITED)
1995 1996
------- -----------
<S> <C> <C>
Operating activities:
Net income.............................................. $ 1,282 $ 3,293
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization expense................. 1,680 2,680
Minority interests.................................... 650 1,517
Distributions to minority interests................... (601) (1,126)
Deferred income taxes................................. 575 530
Change in assets and liabilities, net of entities
acquired:
Accounts receivable................................... (354) (1,534)
Inventories........................................... 147 (65)
Prepaid expenses...................................... (182) (282)
Other current assets.................................. 19 367
Other assets.......................................... (190) (404)
Accounts payable and accrued expenses................. 571 (253)
Other................................................. 1 130
------- --------
Net cash provided by operating activities........... 3,598 4,853
------- --------
Investing activities:
Payments for entities acquired, net of cash acquired.... (216) (13,798)
Purchases of property and equipment..................... (1,434) (2,950)
Proceeds from sale of short-term investments............ -- 7,940
Proceeds from sale of property and equipment............ 20 --
Proceeds from sale of partnership interests............. -- 270
------- --------
Net cash used in investing activities............... (1,630) (8,538)
------- --------
Financing activities:
Payments on long-term debt.............................. (1,731) (2,775)
Proceeds from issuance of common stock, net of issuance
costs.................................................. 318 50
Proceeds from issuance of warrants and options.......... 8 65
------- --------
Net cash used in financing activities............... (1,405) (2,660)
------- --------
Net increase (decrease) in cash and cash equivalents...... 563 (6,345)
Cash and cash equivalents at beginning of period.......... 4,478 14,653
------- --------
Cash and cash equivalents at end of period................ $ 5,041 $ 8,308
======= ========
Non-cash transactions:
Long-term debt issued in acquisitions and contingent
payments............................................... $ 300 $ 240
Liabilities assumed in acquisitions..................... -- 11,155
Capital lease obligations............................... 568 155
Supplemental cash flow information:
Interest paid........................................... $ 1,846 $ 971
Income taxes paid....................................... 170 1,184
</TABLE>

The Notes to Consolidated Financial Statements (Unaudited) are an integral part
of these statements.

F-21
<PAGE>

NATIONAL SURGERY CENTERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(INFORMATION PERTAINING TO THE SIX MONTHS ENDING JUNE 30, 1996 IS UNAUDITED)

Basis of Presentation of Unaudited Financial Information

The accompanying interim financial statements of the Company have been
prepared in accordance with generally accepted accounting principles for
interim financial information. The financial information for 1995 has been
derived from audited financial statements of the Company, while the 1996
financial information is unaudited. In the opinion of management, all
adjustments for the 1996 unaudited financial statements (consisting only of
normal recurring adjustments) has been made which are necessary for a fair
presentation of the financial position, results of operations, and cash flows
for the interim periods presented. The interim statements presented herein do
not include all disclosures normally provided in annual financial statements.

Common Share Data--Primary income per common and common equivalent share and
income per common and common equivalent share assuming full dilution are
computed using the weighted average number of shares outstanding adjusted for
the incremental shares attributable to outstanding options and warrants to
purchase common stock. Certain convertible debt is dilutive and, therefore, is
included in the fully diluted weighted average number of shares outstanding
for the period ending June 30, 1996.

Stock Exchange--Effective September 14, 1995, the Company's Board of
Directors authorized a 1-for-3 stock exchange in conjunction with the
Company's merger and reincorporation in Delaware. The merger included changing
the Company's common stock par value from no par value to $.01 par value per
share and authorized 10,000,000 shares of preferred stock, $.01 par value per
share, with no specific terms. Effective May 31, 1996, the Company effected a
3-for-2 stock split in the form of a 50% stock dividend. Accordingly, all
references in the unaudited interim financial statements to average number of
shares outstanding and per share amounts have been restated to reflect these
stock exchanges.

Purchases--During January, February, April and May, 1996, the Company
acquired three multi-specialty surgery centers and two companies which
operated eleven specialty endoscopy centers. The aggregate purchase price was
$13.6 million in cash and of this purchase price, $11.9 million was recorded
as goodwill.

Stock-Based Compensation--The Company recognizes stock-based compensation
expense based on the excess of the estimated fair value of the stock on the
grant date over the exercise price.

F-22
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To National Surgery Centers, Inc.:

We have audited the accompanying consolidated balance sheets of ENDOSCOPY
CENTER AFFILIATES, INC. (a Delaware corporation) and subsidiaries (the
Company) as of December 31, 1994, 1995, and February 23, 1996, and the related
consolidated statements of operations, stockholders' deficit and cash flows
for the years ended December 31, 1993, 1994 and 1995 and the period ended
February 23, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material 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 audit provides a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Endoscopy
Center Affiliates, Inc. and subsidiaries as of December 31, 1994, 1995, and
February 23, 1996, the results of their operations and their cash flows for
the years ended December 31, 1993, 1994 and 1995, and the period ended
February 23, 1996, in conformity with generally accepted accounting
principles.

Arthur Andersen LLP

Los Angeles, California
May 3, 1996

F-23
<PAGE>

ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995, AND FEBRUARY 23, 1996

<TABLE>
<CAPTION>
ASSETS 1994 1995 1996
------ ------------ ------------ ------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......... $ 1,258,000 $ 1,501,000 $ 1,629,000
Accounts receivable, net of
allowance for doubtful accounts of
$66,000 in 1994, $156,000 in 1995
and $95,000 in 1996............... 583,000 1,249,000 1,260,000
Prepaid expenses and other assets.. 83,000 143,000 179,000
Notes receivable................... 980,000 499,000 248,000
------------ ------------ ------------
Total current assets............. 2,904,000 3,392,000 3,316,000
------------ ------------ ------------
Investment in partnerships........... 1,008,000 382,000 166,000
------------ ------------ ------------
Equipment, net....................... 4,135,000 5,384,000 5,914,000
------------ ------------ ------------
Other Assets:
Organizational costs, net.......... 256,000 337,000 195,000
Start-up costs, net................ 481,000 587,000 502,000
Other assets....................... 140,000 123,000 55,000
------------ ------------ ------------
Total other assets............... 877,000 1,047,000 752,000
------------ ------------ ------------
$ 8,924,000 $ 10,205,000 $ 10,148,000
============ ============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable................... $ 1,156,000 $ 217,000 $ 377,000
Accrued liabilities................ 297,000 402,000 752,000
Interest payable................... 703,000 2,434,000 2,800,000
Salaries payable................... 711,000 868,000 868,000
Current notes payable.............. 4,779,000 5,700,000 5,700,000
Current loans payable.............. 203,000 1,120,000 1,005,000
Current lease payable.............. -- 144,000 261,000
------------ ------------ ------------
Total current liabilities........ 7,849,000 10,885,000 11,763,000
------------ ------------ ------------
Long-term debt net of current
maturities:
Long-term notes payable............ 17,000 17,000 17,000
Long-term loans payable............ 1,515,000 2,657,000 2,657,000
Long-term lease payable............ -- 1,672,000 2,499,000
------------ ------------ ------------
Total long-term debt............. 1,532,000 4,346,000 5,173,000
------------ ------------ ------------
Minority interest.................... 661,000 591,000 670,000
------------ ------------ ------------
Subordinated convertible debenture... 10,000,000 10,000,000 10,000,000
------------ ------------ ------------
Commitments and contingencies
Stockholders' deficit:
Common stock $.01 par value,
10,000,000 shares authorized;
500,000 shares issued and
outstanding....................... 5,000 5,000 5,000
Accumulated deficit................ (11,123,000) (15,622,000) (17,463,000)
------------ ------------ ------------
Total stockholders' deficit...... (11,118,000) (15,617,000) (17,458,000)
------------ ------------ ------------
$ 8,924,000 $ 10,205,000 $ 10,148,000
============ ============ ============
</TABLE>

The Notes to Consolidated Financial Statements are an integral part of these
statements.

F-24
<PAGE>

ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE PERIOD ENDED FEBRUARY 23, 1996

<TABLE>
<CAPTION>
1993 1994 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenues:
Net patient service
revenues................ $ 604,000 $ 897,000 $ 4,841,000 $ 894,000
Other operating revenues. 333,000 470,000 651,000 25,000
----------- ----------- ----------- -----------
Total operating
revenues.............. 937,000 1,367,000 5,492,000 919,000
----------- ----------- ----------- -----------
Operating expenses:
Salaries, wages and
benefits................ 211,000 291,000 1,541,000 282,000
Supplies and other....... 325,000 376,000 1,637,000 335,000
Depreciation and
amortization............ 126,000 380,000 1,359,000 459,000
Provision for bad debts.. 82,000 36,000 52,000 13,000
Selling, general, and
administrative expenses. 3,664,000 3,980,000 3,250,000 1,149,000
Loss on closure of
centers................. -- 474,000 104,000 112,000
Writedown of assets...... 554,000 -- -- --
----------- ----------- ----------- -----------
Total operating
expenses.............. 4,962,000 5,537,000 7,943,000 2,350,000
----------- ----------- ----------- -----------
Operating loss............. (4,025,000) (4,170,000) (2,451,000) (1,431,000)
Interest expense........... 866,000 1,167,000 2,146,000 439,000
Minority interest in loss
of subsidiaries........... (3,000) (68,000) (99,000) (29,000)
----------- ----------- ----------- -----------
Net loss before provision
for income taxes.......... (4,888,000) (5,269,000) (4,498,000) (1,841,000)
Provision for income taxes. 1,000 1,000 1,000 --
----------- ----------- ----------- -----------
Net loss................... $(4,889,000) $(5,270,000) $(4,499,000) $(1,841,000)
=========== =========== =========== ===========
Loss per common share...... $ (9.78) $ (10.54) $ (9.00) $ (3.68)
=========== =========== =========== ===========
Common shares outstanding.. 500,000 500,000 500,000 500,000
=========== =========== =========== ===========
</TABLE>

The Notes to Consolidated Financial Statements are an integral part of these
statements.

F-25
<PAGE>

ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE PERIOD ENDED FEBRUARY 23, 1996

<TABLE>
<CAPTION>
COMMON STOCK
-------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------- ------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1992........... 500,000 $5,000 $ (964,000) $ (959,000)
Net loss......................... -- -- (4,889,000) (4,889,000)
------- ------ ------------ ------------
Balance, December 31, 1993........... 500,000 5,000 (5,853,000) (5,848,000)
Net loss......................... -- -- (5,270,000) (5,270,000)
------- ------ ------------ ------------
Balance, December 31, 1994........... 500,000 5,000 (11,123,000) (11,118,000)
Net loss......................... -- -- (4,499,000) (4,499,000)
------- ------ ------------ ------------
Balance, December 31, 1995........... 500,000 5,000 (15,622,000) (15,617,000)
Net loss......................... -- -- (1,841,000) (1,841,000)
------- ------ ------------ ------------
Balance, February 23, 1996........... 500,000 $5,000 $(17,463,000) $(17,458,000)
======= ====== ============ ============
</TABLE>

The Notes to Consolidated Financial Statements are an integral part of these
statements.

F-26
<PAGE>

ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE PERIOD ENDED FEBRUARY 23, 1996

<TABLE>
<CAPTION>
1993 1994 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................. $(4,889,000) $(5,270,000) $(4,499,000) $(1,841,000)
----------- ----------- ----------- -----------
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization............. 126,000 380,000 1,359,000 459,000
Writedown of assets....... 554,000 -- -- --
Gain on sale of centers... -- -- (294,000) --
Loss on sale of centers... -- 474,000 104,000 112,000
Minority interest in loss
of subsidiaries.......... (3,000) (68,000) (99,000) (29,000)
Change in assets and
liabilities:
Decrease (increase) in:
Accounts receivable,
net.................... 169,000 (286,000) (666,000) (11,000)
Prepaid expense and
other.................. (165,000) 84,000 (60,000) (36,000)
Deposits................ 11,000 (48,000) (15,000) 10,000
Increase (decrease) in:
Accounts payable........ 169,000 927,000 (939,000) 160,000
Accrued liabilities..... (45,000) 87,000 105,000 350,000
Interest payable........ (217,000) 703,000 1,731,000 366,000
Salaries payable........ 342,000 368,000 157,000 --
Minority interest....... 550,000 -- -- --
----------- ----------- ----------- -----------
Total adjustments...... 1,491,000 2,621,000 1,383,000 1,381,000
----------- ----------- ----------- -----------
Net cash used in
operating activities.. (3,398,000) (2,649,000) (3,116,000) (460,000)
----------- ----------- ----------- -----------
Cash flows from investing
activities:
Notes receivable.......... -- (980,000) -- --
Investment in
partnerships............. -- (1,008,000) -- --
Additions to equipment.... (787,000) (3,771,000) (958,000) (827,000)
Increase in organization
costs.................... (33,000) (223,000) (98,000) --
Increase in start up
costs.................... (44,000) (544,000) (608,000) --
Proceeds from sale of
partnership interests.... -- -- 263,000 586,000
Increase in goodwill...... (231,000) -- -- --
----------- ----------- ----------- -----------
Net cash used in
investing activities.. (1,095,000) (6,526,000) (1,401,000) (241,000)
----------- ----------- ----------- -----------
Cash flows from financing
activities:
Principal payments on
loans payable............ -- -- -- (115,000)
Principal payments on
capital lease
obligations.............. -- -- (36,000) --
Issuance of notes and
loans.................... 83,000 6,431,000 4,652,000 --
Increase in capital lease
obligations.............. -- 36,000 144,000 944,000
----------- ----------- ----------- -----------
Net cash provided by
financing activities.. 83,000 6,467,000 4,760,000 829,000
----------- ----------- ----------- -----------
Net increase (decrease) in
cash and cash equivalents. (4,410,000) (2,708,000) 243,000 128,000
Cash and cash equivalents,
beginning of year......... 8,376,000 3,966,000 1,258,000 1,501,000
----------- ----------- ----------- -----------
Cash and cash equivalents,
end of period............. $ 3,966,000 $ 1,258,000 $ 1,501,000 $ 1,629,000
=========== =========== =========== ===========
Supplemental disclosure of
cash flow information:
Interest paid............. $ 1,079,000 $ 459,000 $ 393,000 $ 95,000
=========== =========== =========== ===========
Taxes paid................ $ 1,000 $ 1,000 $ 1,000 $ --
=========== =========== =========== ===========
</TABLE>

The Notes to Consolidated Financial Statements are an integral part of these
statements.

F-27
<PAGE>

ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 23, 1996

1. OPERATIONS AND ORGANIZATION

These financial statements present the financial position and operations of
Endoscopy Center Affiliates, Inc. and subsidiaries (ECA or the Company). ECA,
a Delaware corporation, was formed on September 1, 1992 from the merger of
Medicenter Development, Inc., a California corporation, Surgicenter
Development Corporation, a California corporation and Endoscopy Center
Affiliates, Inc., a California corporation. The Company invests in, develops,
owns and manages out-patient, ambulatory endoscopy centers (ECs). The centers
are typically organized as general partnerships.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

b. Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
the Company and the partnerships in which the Company owns a majority
interest. All significant intercompany transactions and balances have been
eliminated.

c. Cash and Cash Equivalents

The Company considers only highly liquid investments with an original
maturity of three months or less to be cash equivalents.

d. Equipment

Equipment is stated at cost. Property and equipment under capital leases are
recorded at the lower of the present value of lease payments or fair market
value. When equipment is sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is included in income. The costs of normal maintenance and repairs and
minor replacements are charged to expense when incurred. The Company provides
for depreciation using the straight line method over the following estimated
useful lives:

<TABLE>
<S> <C>
Furniture and fixtures................... 3-5 Years
Machinery and equipment.................. 3-5 Years
Tenant improvements...................... lesser of lease life or 10 Years
</TABLE>

e. Organization Costs

The Company is deferring costs of bringing the partnership into legal
existence. The organization costs are being amortized over 5-10 years once the
centers are operational. Accumulated amortization related to organizational
costs as of December 31, 1994, 1995 and February 23, 1996, were $0, $17,000,
and $38,000, respectively.

F-28
<PAGE>

ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

f. Start-up Costs

The Company is deferring certain costs that are directly attributable to the
start up operation of its centers. Start-up costs include such costs as
development fees, personnel, rent, and other direct costs incurred prior to a
center obtaining licenses and state approvals which permit the center to begin
performing surgeries. These costs will be amortized over 2 years once the
surgery centers are available for use. As of December 31, 1994, 1995 and
February 23, 1996, there was $117,000, $619,000, and $718,000, respectively,
in accumulated amortization of start-up costs.

g. Net Patient Service Revenues

Net revenue consists of charges by the Company's centers at established
billing rates for services which generally include all fees for operating
room, recovery room, supplies, and medications. Net revenue is net of the
provision for contractual adjustments.

h. Insurance

Each center has professional liability insurance with a $1,000,000 limit per
occurrence and an aggregate limit of $3,000,000.

3. NOTES RECEIVABLE

During 1994, 1995 and 1996, ECA extended short-term notes to several of the
centers. The notes bear interest at the prime rate (8.25 percent at February
23, 1996) plus two percent.

4. EQUIPMENT

Equipment consisted of the following at December 31, 1994 and 1995 and
February 23, 1996:

<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Furniture and fixtures............... $ 364,000 $ 491,000 $ 486,000
Machinery and equipment.............. 1,678,000 2,765,000 3,609,000
Tenant improvements.................. 2,471,000 2,949,000 3,146,000
---------- ---------- ----------
4,513,000 6,205,000 7,241,000
Less--Accumulated depreciation and
amortization........................ (378,000) (821,000) (1,327,000)
---------- ---------- ----------
$4,135,000 $5,384,000 $5,914,000
========== ========== ==========
</TABLE>

Included in equipment is capitalized leased equipment which aggregated
$3,573,000, $5,059,000, and $4,795,000 with accumulated depreciation of
$108,000, $740,000, and $781,000 at December 31, 1994, 1995 and February 23,
1996.

F-29
<PAGE>

ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

5. NET PATIENT SERVICE REVENUES

The difference between charges generated from agreements with third-party
payors and the related payment amounts are reflected as contractual discounts
as shown below:

<TABLE>
<CAPTION>
1993 1994 1995 1996
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Gross patient service
revenues............... $ 817,000 $1,296,000 $ 8,122,000 $1,437,000
Contractual discounts... (213,000) (399,000) (3,281,000) (543,000)
--------- ---------- ----------- ----------
Net patient service
revenues............... $ 604,000 $ 897,000 $ 4,841,000 $ 894,000
========= ========== =========== ==========
</TABLE>

A summary of the payment arrangements with third party payors is as follows:

a. Medicare

The Company is reimbursed for outpatient services based on a fee schedule.
During 1994, 1995 and 1996, approximately 51, 52, and 58 percent,
respectively, of gross patient service revenues were derived from services
provided to Medicare patients.
b. Managed Care

The Company has also entered into other payment arrangements with certain
commercial insurance carriers, health maintenance organizations, and preferred
provider organizations. The basis for payment to the Company under these
agreements are at discounts from established charges.

6. LEASE OBLIGATIONS

The Company leases certain equipment and facilities under noncancellable
operating and capital leases. Certain rental amounts in the operating leases
are subject to escalation clauses throughout the next several years. Future
minimum lease payments under noncancellable operating and capital leases with
a remaining term of one year or more are as follows at February 23, 1996:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- ----------
<S> <C> <C>
1996............................................. $ 358,000 $ 524,000
1997............................................. 763,000 616,000
1998............................................. 778,000 500,000
1999............................................. 778,000 517,000
2000............................................. 778,000 475,000
Thereafter....................................... 675,000 1,289,000
----------- ----------
Total lease payments......................... 4,130,000 $3,921,000
==========
Less--amount representing interest............... (1,370,000)
-----------
Present value of minimum lease payments.......... $ 2,760,000
===========
</TABLE>

Rent expense for the years ended December 31, 1993, 1994 and 1995 was
approximately $115,000, $244,000 and $613,000, respectively and for the period
ended February 23, 1996 rent expense was $112,000.

F-30
<PAGE>

ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7. SUBORDINATED CONVERTIBLE DEBENTURE

ECA has a Floating Rate Convertible Subordinated Debenture (the Debenture)
due in 1997 in the amount of $10,000,000 issued to Caremark, Inc. (Caremark).
The interest rate at February 23, 1996 was 10.75 percent. Pursuant to the
terms of the Debenture, it may be converted into 4,500,000 of ECA's common
stock at the rate of $2.22 per share. Interest is due quarterly.

The Company did not comply with certain covenants including quarterly
interest payments and audited financial statement reporting requirements for
1994 and 1995. As of February 23, 1996, the Company received a waiver for
these conditions of noncompliance.

8. NOTES PAYABLE

During 1992, ECA obtained $10 million standby promissory notes (the Notes)
from Caremark. The interest rate on the Notes is based on a certain bank's
prime rate (8.25 at February 23, 1996) plus 2.50 percent. The Notes are
subject to ECA meeting certain targeted revenues identified in ECA's business
plan. On February 23, 1996 ECA had $5.7 million outstanding under the Notes.
On February 23, 1996, Caremark sold its interest in these notes to National
Surgery Centers. National Surgery Centers does not intend to call these notes
in 1996.

Also, included in Notes Payable is an unsecured note payable to a physician
corporation. The interest rate on this unsecured note is 8 percent. The note
is due in March 1997.

9. LOANS PAYABLE

During 1994 and 1995, several of the Company's centers obtained loans from
various sources for funding working capital and the acquisition of fixed
assets. The interest rate on these loans ranges from 12 percent to 13.25
percent. The term of the loans is 60 months, with principal and interest
payments due monthly. Caremark is the guarantor of $2,163,000 of these loans.
The loans are collateralized by the various assets of the individual centers,
including fixed assets.

The Company must comply with certain covenants in certain loan agreements.
As of February 23, 1996 and December 31, 1995, the Company had obtained a
waiver for conditions of financial statement noncompliance.

10. DEBT MATURITY SCHEDULE

Long-term debt maturities at February 23, 1996 were as follows:

<TABLE>
<S> <C>
1996.......................................................... $ 6,705,000
1997.......................................................... 10,655,000
1998.......................................................... 824,000
1999.......................................................... 922,000
2000.......................................................... 273,000
-----------
Total......................................................... $19,379,000
===========
</TABLE>

11. OFF-BALANCE SHEET RISK

ECA is a 50 percent guarantor for the loan payable of an unconsolidated
center. The loan balance was approximately $861,000 at February 23, 1996.

F-31
<PAGE>

ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

12. EMPLOYEE BENEFIT PLAN

Effective September 1, 1992, ECA adopted a Profit Sharing 401(k) Plan (the
Plan) covering all employees after minimum eligibility requirements have been
met. The Plan allows individuals to make pretax contributions and provides for
a profit-sharing contribution plus a partial matching by ECA for all eligible
employees. ECA's contribution to this plan was approximately $29,000, $34,000,
$58,000 and $13,000 during 1993, 1994, 1995 and the short period of 1996,
respectively.

13. COMMITMENTS AND CONTINGENCIES

a. Salaries Payable Contract

On September 1, 1992 ECA entered into four year employment agreements with
four ECA officers. Each of the agreements provides for annual compensation
(subject to upward adjustment). As of February 23, 1996 salaries payable to
these officers was a total of $100,000.

b. Litigation

The Company is from time to time subject to claims arising in the ordinary
course of business. In the opinion of management, the ultimate resolution of
such proceedings will not have a material adverse effect on the financial
position of the Company or result in a substantial impairment of its
operations.

c. Healthcare Reform

Legislation and regulations at all levels of government have affected and
are likely to continue to affect the operations of healthcare providers.
Numerous national healthcare reform bills have been introduced in the U.S.
Congress. These bills are complex and address such matters as health insurance
coverage, benefits, malpractice reform and cost controls or cost containment.
At this time, it is not possible to determine the impact of any national
healthcare reform legislation that might be enacted.

14. INCOME TAXES

The provision for income taxes is comprised of the following:

<TABLE>
<CAPTION>
1993 1994 1995 1996
------ ------ ------ ----
<S> <C> <C> <C> <C>
Current......................................... $1,000 $1,000 $1,000 $--
Deferred........................................ -- -- -- --
------ ------ ------ ----
$1,000 $1,000 $1,000 $--
====== ====== ====== ====
</TABLE>

The components of the deferred tax assets and liabilities as of December 31,
1994, and 1995 and February 23, 1996, were as follows:

<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for bad debts............... $ 41,000 $ 201,000 $ 145,000
Net operating loss carryforwards...... 2,795,000 3,485,000 4,058,000
Depreciation and amortization......... 46,000 160,000 248,000
Accounts payable, salaries payable and
accrued liabilities.................. 629,000 1,382,000 1,583,000
Valuation allowance................... (3,285,000) (4,954,000) (5,754,000)
----------- ----------- -----------
Total deferred tax assets........... 226,000 274,000 280,000
----------- ----------- -----------
Deferred tax liabilities:
Accounts receivable................... 222,000 272,000 279,000
Prepaid expenses...................... 4,000 2,000 1,000
----------- ----------- -----------
Total deferred tax liability........ 226,000 274,000 280,000
----------- ----------- -----------
Net deferred tax asset.............. $ -- $ -- $ --
=========== =========== ===========
</TABLE>

F-32
<PAGE>

ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. FINANCIAL ACCOUNTING STANDARDS NO. 121

The Financial Accounting Standards Board has promulgated a new standard
which is applicable to the Company: Statement No. 121 Accounting for the
Impairment of Long-Lived Assets to be Disposed of (SFAS 121). The Company's
management adopted this standard as required on January 1, 1996. The adoption
of SFAS 121 did not have a material impact on the Company's financial
statements.

16. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments:

Cash and cash equivalents: The carrying amount reported in the
consolidated balance sheets for cash and cash equivalents approximates its
fair value.

Notes receivable: The carrying amount reported in the consolidated
balance sheets for notes receivables approximates its fair value.

Accounts payable and accrued expenses: The carrying amount reported in
the consolidated balance sheets for accounts payable and accrued expenses
approximates its fair value.

Subordinated convertible debenture and current notes payable: The fair
value was based upon the sale price at February 23, 1996 (see note 7) of
these debt instruments.

Long-term notes payable and loans payable: The fair value was estimated
based upon current rates offered for debts of the same remaining maturities,
approximates the carrying amount reported in the consolidated balance sheets.

The carrying amounts and fair values of the Company's financial instruments
at December 31, 1995 and February 23, 1996 are as follows:

<TABLE>
<CAPTION>
1995 1996
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents.......... $1,501,000 $1,501,000 $1,629,000 $1,629,000
Notes receivable................... 499,000 499,000 248,000 248,000
Accounts payable and accrued
liabilities....................... 619,000 619,000 1,129,000 1,129,000
Subordinated convertible debenture
and current notes payable......... 15,700,000 1,750,000 15,700,000 1,750,000
Long-term notes payable, loans
payable and lease payable......... 5,610,000 5,610,000 6,439,000 6,439,000
</TABLE>

17. RELATED PARTY TRANSACTION

ECA had a loan to an employee with an interest rate of prime (8.25 at
February 23, 1996) plus 2 percent. The amounts of the loan at December 31,
1994, 1995 and February 23, 1996, was $26,000, $26,000, and $36,000,
respectively. These amounts were included in notes receivable.

F-33
<PAGE>

ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)

18. SUBSEQUENT EVENTS

Subsequent to February 23, 1996, ECA has sold its investment in two centers.
The Company received cash of $413,000 and loans payable and capital lease
obligations of $1,707,000 were assumed by the purchasers. The Company recorded
a loss of $112,000 in the period ended February 23, 1996 in connection with
the sale of these centers.

On February 23, 1996, Caremark sold its interest in the Company's
subordinated convertible debenture and certain demand notes, including accrued
interest and certain other liabilities to National Surgery Centers, Inc.
("NSC"). On March 31, 1996 NSC exercised its right under the terms of the
subordinated convertible debenture to exchange such indebtedness for 4.5
million newly issued shares of the Company's common stock. NSC has since
replaced the Company's senior management and intends to provide financial and
operational resources necessary to continue surgery center operations.

F-34
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Surgex-Atlanta, Inc.; Surgex-
Miami, Inc.; and Surgex-Sarasota, Inc.

We have audited the accompanying combined and consolidated balance sheet of
SURGEX-ATLANTA, INC. (a Delaware Corporation); SURGEX-MIAMI, INC. (a Florida
Corporation); AND SURGEX-SARASOTA, INC. (a Delaware Corporation) AND EACH OF
THEIR SUBSIDIARIES as of December 31, 1995, and the related combined and
consolidated statements of income, stockholders' equity, and cash flows for
the year then ended. These combined and consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these combined and consolidated financial statements
based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material 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 audit provides a reasonable basis
for our opinion.

In our opinion, the combined and consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
SURGEX-ATLANTA, INC.; SURGEX-MIAMI, INC.; AND SURGEX-SARASOTA, INC. AND EACH
OF THEIR SUBSIDIARIES as of December 31, 1995, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.

Habif, Arogeti & Wynne, P.C.

Atlanta, Georgia
June 28, 1996

F-35
<PAGE>

SURGEX-ATLANTA, INC.; SURGEX-MIAMI, INC.; AND
SURGEX-SARASOTA, INC. AND EACH OF THEIR SUBSIDIARIES

COMBINED AND CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995

<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current assets
Cash............................................................. $ 279,791
Accounts receivable, net of allowance for contractual adjustments
and doubtful accounts of $395,855............................... 852,568
Accounts receivable--other....................................... 53,125
Inventory........................................................ 60,214
Prepaid expenses................................................. 45,721
----------
Total current assets........................................... 1,291,419
----------
Property and equipment
Medical equipment................................................ 888,270
Leasehold improvements........................................... 1,193,775
Furniture and fixtures........................................... 42,361
----------
2,124,406
Accumulated depreciation......................................... (627,768)
----------
1,496,638
----------
Other assets
Goodwill, net of accumulated amortization of $98,026............. 1,522,024
Due from parent.................................................. 1,448,938
Deposits......................................................... 21,618
----------
2,992,580
----------
$5,780,637
==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C>
Current liabilities
Accounts payable................................................. $ 65,725
Accrued expenses--other.......................................... 581,585
Accrued distributions............................................ 807,299
Current portion of capital lease obligations..................... 66,732
Current portion of notes payable................................. 1,991,013
----------
Total current liabilities...................................... 3,512,354
----------
Long-term liabilities
Notes payable, net of current portion............................ 1,203,431
Capital lease obligation, net of current portion................. 210,991
Deferred taxes................................................... 23,369
----------
1,437,791
----------
Minority interests................................................. 430,583
----------
Stockholders' equity
Common stock..................................................... 15
Retained earnings................................................ 399,894
----------
399,909
----------
$5,780,637
==========
</TABLE>
See auditors' report and accompanying notes.

F-36
<PAGE>

SURGEX-ATLANTA, INC.; SURGEX-MIAMI, INC.; AND
SURGEX-SARASOTA, INC. AND EACH OF THEIR SUBSIDIARIES

COMBINED AND CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995

<TABLE>
<S> <C>
Net revenue......................................................... $4,765,718
Operating expenses................................................ 3,109,154
Depreciation and amortization expense............................. 307,363
----------
Operating income.................................................... 1,349,201
----------
Other income and (expense)
Minority interest in earnings..................................... (752,928)
Interest expense.................................................. (220,873)
Miscellaneous income.............................................. 143,513
----------
(830,288)
----------
Income before income tax expense.................................... 518,913
Income tax expense.................................................. (305,065)
----------
Net income...................................................... $ 213,848
==========
</TABLE>

See auditors' report and accompanying notes.

F-37
<PAGE>

SURGEX-ATLANTA, INC.; SURGEX-MIAMI, INC.; AND
SURGEX-SARASOTA, INC. AND EACH OF THEIR SUBSIDIARIES

COMBINED AND CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR DECEMBER 31, 1995

<TABLE>
<CAPTION>
COMMON STOCK
------------ RETAINED
SHARES PRICE EARNINGS TOTAL
------ ----- -------- --------
<S> <C> <C> <C> <C>
Balances, December 31, 1994..................... 2,000 $15 $186,046 $186,061
Net income...................................... -- -- 213,848 213,848
----- --- -------- --------
Balances, December 31, 1995..................... 2,000 $15 $399,894 $399,909
===== === ======== ========
</TABLE>

See auditors' report and accompanying notes.

F-38
<PAGE>

SURGEX-ATLANTA, INC.; SURGEX-MIAMI, INC.; AND
SURGEX-SARASOTA, INC. AND EACH OF THEIR SUBSIDIARIES

COMBINED AND CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995

<TABLE>
<S> <C>
Cash flows from operating activities
Net income...................................................... $ 213,848
-----------
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization................................. 307,363
Minority interest in earnings of subsidiary................... 752,928
Changes in assets and liabilities
Increase in accounts receivable............................. (219,615)
Increase in accounts receivable--other...................... (47,525)
Increase in inventory....................................... (6,284)
Decrease in prepaid expense................................. 9,874
Increase in accounts payable................................ 15,696
Increase in accrued expenses--other......................... 231,150
Increase in deferred taxes.................................. 42,733
Increase in accrued distributions........................... 807,299
-----------
Total adjustments......................................... 1,893,619
-----------
Net cash provided by operating activities............... 2,107,467
-----------
Cash flows from investing activities
Acquisition of property and equipment........................... (60,141)
-----------
Cash flows from financing activities
Proceeds from notes payable..................................... 125,000
Payments on notes payable....................................... (1,371,463)
Payments on capital lease obligations........................... (28,573)
Dividends paid.................................................. (859,407)
-----------
Net cash used by financing activities......................... (2,134,443)
-----------
Net decrease in cash...................................... (87,117)
-----------
Cash, beginning of year........................................... 366,908
-----------
Cash, end of year......................................... $ 279,791
===========
Supplementary Disclosures of Cash Flow Information
Cash paid during year for
Interest........................................................ $ 63,025
Income taxes.................................................... --
</TABLE>

See auditors' report and accompanying notes.

F-39
<PAGE>

SURGEX-ATLANTA, INC.; SURGEX-MIAMI, INC.; AND SURGEX-SARASOTA, INC. AND EACH
OF THEIR SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

General:

The Companies are investment companies that hold investment interests in
general partnerships that operate surgical centers. The respective ownerships
are as follows:

<TABLE>
<CAPTION>
PERCENTAGE OF OWNERSHIP
COMPANY PARTNERSHIP AND TYPE OF INTEREST
------- ------------------------ --------------------------------
<S> <C> <C>
Surgex-Atlanta, Inc..... North Atlanta Endoscopy, 66% General Partnership
Center, L.P. interest
Surgex-Miami, Inc....... Ambulatory Surgical 60% General Partnership interest
Centre of Miami, L.P.
Surgex-Saratoga, Inc.... Surgex-Sarasota 1% General Partnership
Endoscopy Center, L.P. interest and 59% Limited
Partnership interest
</TABLE>

The Companies listed above are wholly owned subsidiaries of Surgex, Inc.

Principles of Consolidation:

The consolidated and combined financial statements include the Companies'
accounts and their majority owned subsidiaries listed above. All significant
intercompany transactions and balances have been eliminated in consolidation.

Accounts Receivable and Net Revenue:

The Companies bill for the services rendered. If any of the accounts were
deemed uncollectible, the accounting loss suffered would be the value of the
account balance.

Net revenue consists of charges by the Companies' centers at established
billing rates for services. Net revenue is net of provision for contractual
adjustments and doubtful accounts.

Patient service revenue is reported at the estimated net realizable amounts
from patients, third party payors, and others for services rendered.

Accounts Receivable--Other:

Surgex-Atlanta, Inc. is due a reimbursement from its bank for funds
erroneously drafted from its account during the year.

Inventories:

Inventories consist of medical supplies and are stated at the lower-of-cost
or market, with cost determined by the FIFO (first-in, first-out) method.

Property and Equipment:

Property and equipment are carried at cost. Equipment under capital leases
is recorded at the lower of the present value of lease payments or fair market
value. Expenditures for maintenance and repairs will be expensed currently,
while renewals and betterments that materially extend the life of an asset
will be capitalized. The cost of assets sold, retired, or otherwise disposed
of, and the related allowance for depreciation, will be eliminated from the
accounts, and any resulting gain or loss will be recognized.

F-40
<PAGE>

SURGEX-ATLANTA, INC.; SURGEX-MIAMI, INC.; AND
SURGEX-SARASOTA, INC. AND EACH OF THEIR SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995

Depreciation will be provided using the straight-line method over the
estimated useful lives of the assets, which are as follows:

<TABLE>
<S> <C>
Medical equipment.............................................. 5-7 years
Leasehold improvements......................................... 9-20 years
Office furniture and fixtures.................................. 7 years
</TABLE>

Other Assets:

Goodwill is being amortized by the straight-line method over 40 years.

Use of Estimates:

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.

Financial Instruments:

The Companies estimate that the fair value of all financial instruments at
December 31, 1995 does not differ materially from the aggregate carrying value
of its financial instruments recorded in the accompanying balance sheet. The
estimated fair value amounts have been determined by the Companies using
available market information and appropriate valuation methodologies.
Considerable judgment is necessarily required in interpreting market data to
develop the estimates of fair values, and accordingly, the estimates are not
necessarily indicative of the amounts that the Companies could realize in a
current market exchange.

B. CASH--CONCENTRATION OF CREDIT RISK:

Surgex-Miami, Inc. maintained deposits in a financial institution which
exceeded the Federal Deposit Insurance Corporation limit in the amount of
$80,893.

C. COMMITMENTS:

The Companies have management agreements with Surgex, Inc., sole owner of
the Companies at December 31, 1995. Compensation for these management services
is 6% of net revenue for Surgex-Atlanta, Inc. and 5% of net revenues for
Surgex-Miami, Inc. and Surgex-Sarasota, Inc. On February 1, 1996, Surgex, Inc.
assigned these rights to National Surgery Centers, Inc. Termination of the
agreement will occur only upon mutual, written consent of all parties.

The amounts accrued at December 31, 1995 and paid during 1995 in accordance
with these agreements are as follows:

<TABLE>
<CAPTION>
SURGEX- SURGEX- SURGEX-
ATLANTA, MIAMI, SARASOTA,
INC. INC. INC. TOTAL
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Management fees accrued................... $ -0- $ 77,000 $54,994 $131,994
Management fees paid...................... 91,716 123,944 25,464 241,124
</TABLE>

The balance of the accrual is included in accrued expenses--other.

Surgex-Atlanta, Inc. entered into an agreement with Finova Capital
Corporation to pay monthly interest installments of $1,239 expiring November
1, 1996. The agreement is a continuation of a previously settled capital lease
obligation. Interest payments related to these agreements totaled $4,651.

F-41
<PAGE>

SURGEX-ATLANTA, INC.; SURGEX-MIAMI, INC.; AND
SURGEX-SARASOTA, INC. AND EACH OF THEIR SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995

The Companies lease their office space. Minimum rental commitments, under
non-cancelable leases with terms of one year or more, are as follows:

<TABLE>
<S> <C>
1996........................................................... $ 376,648
1997........................................................... 386,781
1998........................................................... 397,319
1999........................................................... 408,278
2000........................................................... 413,156
Thereafter..................................................... 1,617,520
----------
$3,599,702
==========
</TABLE>

Rental payments totaled $405,164 during the year.

D. COMMON STOCK:

Common stock consists of the following:

<TABLE>
<S> <C>
Surgex-Atlanta, Inc.
$.01 par value, 500 shares authorized, issued and outstanding...... $ 5
Surgex-Miami, Inc.
No par value, 1,000 shares authorized, issued and outstanding...... 5
Surgex-Sarasota, Inc.
$.01 par value, 500 shares authorized, issued and outstanding...... 5
---
$15
===
</TABLE>

E. CAPITAL LEASE:

Surgex-Sarasota, Inc. acquired machinery and equipment under the provisions
of two long-term capital leases. The assets under capital leases are included
in property and equipment and are depreciated over their estimated useful
lives.

As of December 31, 1995, minimum future lease payments under capital leases
are as follows:

<TABLE>
<S> <C>
1996............................................................. $100,276
1997............................................................. 100,276
1998............................................................. 100,276
1999............................................................. 50,701
--------
Total minimum lease payments..................................... 351,529
Less: Amounts representing interest.............................. 73,806
--------
Net minimum lease payments....................................... 277,723
========
</TABLE>

F. RELATED PARTY TRANSACTIONS:

Distributions of cash are paid out in the sole discretion of the general
partners and available cash is distributed as follows:

<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS PARTNERS
-------- --------
<S> <C> <C>
Surgex-Atlanta, Inc..................................... 66% 34%
Surgex-Miami, Inc....................................... 60% 40%
Surgex-Sarasota, Inc.................................... 1% 99%
</TABLE>

F-42
<PAGE>

SURGEX-ATLANTA, INC.; SURGEX-MIAMI, INC.; AND
SURGEX-SARASOTA, INC. AND EACH OF THEIR SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
A portion of the fourth quarter 1995 distribution were not paid out until
1996. An accrual at December 31, 1995 consisted of:

<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
-------- -------- --------
<S> <C> <C> <C>
Surgex-Atlanta, Inc............................ $ -0- $ 35,001 $ 35,001
Surgex-Miami, Inc.............................. 306,031 119,900 425,931
Surgex-Sarasota, Inc........................... 4,904 341,463 346,367
-------- -------- --------
$310,935 $496,364 $807,299
======== ======== ========
</TABLE>

Related parties have made advances or issued notes to the Companies. Coram
Healthcare Corporation ("Coram") and Surgex, Inc. ("Surgex"), an affiliate and
parent of the Companies, respectively, have loaned money to the Companies.
Coram and Surgex exercise management responsibilities over the Companies. The
balances for these debts and the related accounts at December 31, 1995 are as
follows:

<TABLE>
<CAPTION>
SURGEX-ATLANTA, SURGEX-MIAMI, SURGEX-SARASOTA,
INC. INC. INC. TOTAL
--------------- ------------- ---------------- ----------
<S> <C> <C> <C> <C>
Receivables from Surgex,
Inc.................... $ -0- $1,229,609 $219,329 $1,448,938
========== ========== ======== ==========
Notes payable--Surgex... $1,100,931 $1,163,013 $ -0- $2,263,944
Notes payable--Coram.... -0- 828,000 -0- 828,000
Notes from Limited
Partners (interest
free).................. -0- 93,500 -0- 93,500
Note from Limited
Partner (interest
bearing)............... -0- 9,000 -0- 9,000
---------- ---------- -------- ----------
Total............... $1,100,931 $2,093,513 $ -0- $3,194,444
========== ========== ======== ==========
Interest payable--Surgex
(7%)................... $ 11,149 $ 138,939 $ 32,555 $ 182,643
Interest payable--Coram
(7%)................... -0- 115,920 -0- 115,920
Interest payable--
Limited Partner (10%).. -0- 3,975 -0- 3,975
---------- ---------- -------- ----------
$ 11,149 $ 258,834 $ 32,555 $ 302,538
========== ========== ======== ==========
</TABLE>

All advances and notes are due on demand. The balance of the interest
payable is included in accrued expenses--other.

G. INCOME TAXES:

Earnings differ for financial statement and income tax reporting purposes
primarily as a result of timing differences in the recognition of depreciation
expense and the amortization of intangibles.

Provision has been made for income taxes on earnings reported on the tax
returns and includes a portion related to items recognized differently for
financial statement and income tax reporting.

F-43
<PAGE>

SURGEX-ATLANTA, INC.; SURGEX-MIAMI, INC.; AND
SURGEX-SARASOTA, INC. AND EACH OF THEIR SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995

The elements of income taxes are as follows:

<TABLE>
<S> <C>
Current:
State.......................................................... $ 38,746
Federal........................................................ 223,586
--------
262,332
========
Deferred:
State.......................................................... 5,995
Federal........................................................ 36,738
--------
42,733
--------
Total........................................................ $305,065
========
</TABLE>

H. SUBSEQUENT EVENT:

On February 21, 1996, National Surgery Centers, Inc. entered into an
agreement to purchase a 100% interest of Surgex-Atlanta, Inc.; Surgex-Miami,
Inc.; and Surgex-Sarasota, Inc.; all debt and accrued interest owed by the
Companies to each other or Surgex; and all management fees. The transaction
was consummated on May 13, 1996 by National Surgery Centers, Inc.

F-44
<PAGE>

SURGEX-ATLANTA, INC.; SURGEX-MIAMI, INC.; AND
SURGEX-SARASOTA, INC. AND EACH OF THEIR SUBSIDIARIES

COMBINED AND CONSOLIDATED BALANCE SHEET
APRIL 30, 1996 (UNAUDITED)

<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current assets
Cash............................................................. $ 641,338
Accounts receivable, net of allowances for contractual
adjustments and doubtful accounts of $438,574................... 726,909
Accounts receivable--other....................................... 4,507
Inventory........................................................ 75,254
Prepaid expenses................................................. 233,588
----------
Total current assets........................................... 1,681,596
----------
Property and equipment
Medical equipment................................................ 892,927
Leasehold improvements........................................... 1,193,775
Furniture and fixtures........................................... 45,318
----------
2,132,020
Accumulated depreciation and amortization........................ (697,983)
----------
1,434,037
----------
Other assets
Goodwill, net of accumulated amortization of $111,546............ 1,508,504
Due from parent.................................................. 1,063,735
Deposits......................................................... 16,797
----------
2,589,036
----------
$5,704,669
==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C>
Current liabilities
Accounts payable................................................. $ 69,567
Accrued expenses--other.......................................... 874,148
Current portion of capital lease obligations..................... 83,921
Current portion of notes payable................................. 1,954,150
----------
Total current liabilities...................................... 2,981,786
----------
Long-term liabilities
Capital lease obligations, net of current portion................ 183,407
Notes payable, net of current portion............................ 1,203,431
Deferred taxes................................................... 23,369
----------
1,410,207
----------
Minority interests................................................. 734,678
Stockholders' equity
Common stock..................................................... 15
Retained earnings................................................ 577,983
----------
577,998
----------
$5,704,669
==========
</TABLE>

The Notes to Combined and Consolidated Financial Statements (Unaudited) are an
integral part of these statements.

F-45
<PAGE>

SURGEX-ATLANTA, INC.; SURGEX-MIAMI, INC.; AND
SURGEX-SARASOTA, INC. AND EACH OF THEIR SUBSIDIARIES

COMBINED AND CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIOD ENDED APRIL 30, 1996 (UNAUDITED)

<TABLE>
<S> <C>
Net revenue......................................................... $1,907,134
Operating expenses................................................ 967,432
Non-operating expenses............................................ 277,836
----------
Operating income.................................................... 661,866
----------
Other income and (expense)
Minority interest in earnings..................................... (304,095)
Interest expense.................................................. (44,467)
----------
(348,562)
----------
Income before income tax expense.................................... 313,304
Income tax expense.................................................. 135,215
----------
Net income...................................................... $ 178,089
==========
</TABLE>

The Notes to Combined and Consolidated Financial Statements (Unaudited)are an
integral part of these statements.

F-46
<PAGE>

SURGEX-ATLANTA, INC.; SURGEX-MIAMI, INC.; AND
SURGEX-SARASOTA, INC. AND EACH OF THEIR SUBSIDIARIES

COMBINED AND CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD ENDED APRIL 30, 1996 (UNAUDITED)

<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS TOTAL
------ -------- --------
<S> <C> <C> <C>
Balances, December 31, 1995........................... $15 $399,894 $399,909
Net Income............................................ -- 178,089 178,089
--- -------- --------
Balances, April 30, 1996.............................. $15 $577,983 $577,998
=== ======== ========
</TABLE>

The Notes to Combined and Consolidated Financial Statements (Unaudited)are an
integral part of these statements.

F-47
<PAGE>

SURGEX-ATLANTA, INC.; SURGEX-MIAMI, INC.; AND
SURGEX-SARASOTA, INC. AND EACH OF THEIR SUBSIDIARIES

COMBINED AND CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD ENDED APRIL 30, 1996

<TABLE>
<S> <C>
Cash flows from operating activities
Net income........................................................ $ 178,089
---------
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization................................... 88,556
Minority interest in earnings of subsidiaries................... 304,095
Changes in assets and liabilities
Decrease in accounts receivable............................... 125,659
Decrease in accounts receivable--other........................ 48,618
Increase in inventory......................................... (15,040)
Increase in prepaid expenses.................................. (187,867)
Increase in accounts payable.................................. 3,842
Increase in accrued expenses.................................. 292,563
Decrease in accrued distributions............................. (344,028)
---------
Total adjustments........................................... 316,398
---------
Net cash provided by operating activities................... 494,487
---------
Cash flows from investing activities
Acquisition of property and equipment............................. (7,614)
Cash flows from financing activities
Payments on notes payable......................................... (36,863)
Payment on capital lease obligations.............................. (10,395)
Payments to parent................................................ (78,068)
---------
Net cash used in financing activities............................. (125,326)
---------
Net increase in cash........................................ 361,547
Cash, beginning of period........................................... 279,791
---------
Cash, end of period......................................... $ 641,338
=========
Non-cash transactions
Capital contribution of accrued distributions..................... $ 463,271
Supplementary disclosures of cash flow information
Interest paid..................................................... $ 9,119
Income taxes paid................................................. --
</TABLE>

The Notes to Combined and Consolidated Financial Statements (Unaudited) are an
integral part of these statements.

F-48
<PAGE>

SURGEX-ATLANTA, INC.; SURGEX-MIAMI, INC.; ANDSURGEX-SARASOTA, INC. AND EACH OF
THEIR SUBSIDIARIES

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(THE INFORMATION PERTAINING TO THE PERIOD ENDED APRIL 30, 1996 IS UNAUDITED)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation for Unaudited Financial Information

The accompanying unaudited interim financial statements of the Companies
have been prepared in accordance with generally accepted accounting principles
for interim financial information. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) have been made
which are necessary for a fair presentation of the financial position, results
of operations, and cash flows for the interim periods presented. All interim
statements presented herein do not include all disclosures normally provided
in annual financial statements.

F-49
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Partners
Westside Surgery Center, Ltd.

We have audited the accompanying balance sheet of Westside Surgery Center,
Ltd. (the Partnership), as of December 31, 1995, and the related statements of
income, changes in partners' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Westside Surgery Center,
Ltd., at December 31, 1995, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.

Ernst & Young LLP

Houston, Texas
June 26, 1996

F-50
<PAGE>

WESTSIDE SURGERY CENTER, LTD.

BALANCE SHEETS

<TABLE>
<CAPTION>
APRIL 30,
DECEMBER 31, 1996
ASSETS 1995 (UNAUDITED)
------ ------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 196,126 $ 239,928
Accounts receivable (less allowance for uncollectible
accounts of $165,680 and $185,680).................. 632,000 449,171
Accounts receivable--related party (Note 5).......... 60,431 7,518
Prepaid expenses..................................... 2,699 --
---------- ----------
Total current assets............................... 891,256 696,617
Property and equipment (Note 2)........................ 996,069 999,507
Less accumulated depreciation and amortization......... (423,668) (492,344)
---------- ----------
572,401 507,163
Other assets:
Security deposits.................................... 69,448 69,448
Organization costs (less accumulated amortization of
$28,500 and $28,500)................................ 28,500 24,700
---------- ----------
Total assets....................................... $1,561,605 $1,297,928
========== ==========
<CAPTION>
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
<S> <C> <C>
Current liabilities:
Current installments, capital leases................. $ 84,217 $ 86,635
Current installments, long-term debt................. 71,188 74,293
Accounts payable..................................... 199,897 213,419
Accrued expenses..................................... 41,587 54,617
---------- ----------
Total current liabilities.......................... 396,889 428,964
Capital leases (Note 4)................................ 236,079 206,624
Long-term debt (Note 3)................................ 232,977 207,149
Partners' equity....................................... 695,660 455,191
---------- ----------
Total liabilities and partners' equity............. $1,561,605 $1,297,928
========== ==========
</TABLE>

The Notes to Financial Statements are an integral part of these statements.

F-51
<PAGE>

WESTSIDE SURGERY CENTER, LTD.

STATEMENTS OF INCOME

<TABLE>
<CAPTION>
FOR THE FOUR
YEAR ENDED MONTH PERIOD ENDED
DECEMBER 31, APRIL 30, 1996
1995 (UNAUDITED)
------------ ------------------
<S> <C> <C>
Net revenue..................................... $3,314,460 $1,087,122
Expenses:
Operating expenses............................ 2,012,405 620,669
Depreciation and amortization expense......... 211,708 72,476
---------- ----------
Operating income................................ 1,090,347 393,977
Interest expense................................ (81,718) (24,992)
Interest income................................. 3,755 546
---------- ----------
Net income...................................... $1,012,384 $ 369,531
========== ==========
</TABLE>

The Notes to Financial Statements are an integral part of these statements.

F-52
<PAGE>

WESTSIDE SURGERY CENTER, LTD.

STATEMENTS OF CHANGES IN PARTNERS' EQUITY

<TABLE>
<CAPTION>
20% 80%
GENERAL LIMITED
TOTAL PARTNER PARTNERS
---------- --------- ---------
<S> <C> <C> <C>
Partners' equity at January 1, 1995.......... $ 653,044 $ 130,608 $ 522,436
Capital contributions...................... 71,250 14,250 57,000
Net income................................. 1,012,384 202,476 809,908
Distributions.............................. (1,041,018) (208,204) (832,814)
---------- --------- ---------
Partners' equity at December 31, 1995........ 695,660 139,130 556,530
Net income (unaudited)..................... 369,531 73,906 295,625
Distributions (unaudited).................. (610,000) (122,000) (488,000)
---------- --------- ---------
Partners' equity at April 30, 1996
(unaudited)................................. $ 455,191 $ 91,036 $ 364,155
========== ========= =========
</TABLE>

The Notes to Financial Statements are an integral part of these statements.

F-53
<PAGE>

WESTSIDE SURGERY CENTER, LTD.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE
YEAR ENDED FOUR MONTHS ENDED
DECEMBER 31, APRIL 30, 1996
1995 (UNAUDITED)
------------ -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................... $ 1,012,384 $ 369,531
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 211,708 72,476
Provision for uncollectible accounts........ 8,814 --
Changes in assets and liabilities:
Accounts receivable......................... (33,351) 182,829
Accounts receivable--related party.......... (40,487) 52,913
Prepaid expenses............................ (2,699) 2,699
Security deposits........................... (12,440) --
Accounts payable............................ (22,327) 13,522
Accrued expenses............................ 41,587 13,030
----------- ---------
Net cash provided by operating activities. 1,163,189 707,000
----------- ---------
INVESTING ACTIVITIES
Purchases of property and equipment........... (7,790) (3,438)
----------- ---------
Net cash used in investing activities..... (7,790) (3,438)
----------- ---------
FINANCING ACTIVITIES
Proceeds from long-term debt.................. 75,000 --
Payments on capital leases and long-term debt. (148,420) (49,760)
Contributed capital........................... 71,250 --
Partners' distributions....................... (1,041,018) (610,000)
----------- ---------
Net cash used in financing activities..... (1,043,188) (659,760)
----------- ---------
Net increase in cash and cash equivalents..... 112,211 43,802
Cash and cash equivalents at beginning of
year......................................... 83,915 196,126
----------- ---------
Cash and cash equivalents at end of year...... $ 196,126 $ 239,928
=========== =========
Interest paid during the year................. $ 79,670 $ 24,992
=========== =========
</TABLE>

The Notes to Financial Statements are an integral part of these statements.

F-54
<PAGE>

WESTSIDE SURGERY CENTER, LTD.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(THE INFORMATION PERTAINING TO THE FOUR-MONTH PERIOD ENDED APRIL 30, 1996 IS
UNAUDITED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Westside Surgery Center, Ltd., a Texas limited partnership (the
Partnership), was organized on June 3, 1993 for the purpose of providing an
ambulatory surgery center to the surrounding community.

The General Partner of the Partnership is HealthFirst Medical Westside
Corporation (HFMW). The Limited Partners are primarily members of the medical
staff and several executives of HFMW.

Significant accounting policies of the Partnership are presented below:

Cash and cash equivalents

The Partnership considers all investments in highly liquid investments with
maturities of three months or less to be cash equivalents.

Property and Equipment

Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.

Organization Costs

Organization costs are amortized using the straight-line method over five
years.

Net Patient Revenue

Net patient revenue consists of charges by the Partnership's center at
established billing rates for services which generally include all fees for
operating room, recovery room, supplies, and medications. Net patient revenue
is net of provisions for contractual adjustments.

Off-Balance-Sheet Risk and Concentrations of Credit Risk

Financial instruments which potentially subject the Partnership to
concentrations of credit risk consist principally of cash, cash equivalents,
and patient receivables. The Partnership places its cash and cash equivalents
with high credit quality financial institutions.

Concentrations of credit risk with respect to patient receivables is limited
due to the large number of customers comprising the Partnership's customer
base and their dispersion across many different insurance companies, health
maintenance and preferred provider organizations, and individuals.

The Partnership had no significant concentrations of credit risk or
financial instruments with off-balance-sheet risk.

Accounting Estimates

Accounting estimates are an integral part of the financial statements
prepared by management and are based on management's current judgments. These
judgments are based on knowledge and experience about past and current events
and on assumptions about future events. Management will accrue estimated
liabilities when the financial impact is probable and estimable.

F-55
<PAGE>

WESTSIDE SURGERY CENTER, LTD.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Liability Insurance

The Partnership carries professional malpractice and general liability
insurance, whereby the Partnership pays premiums based on the number of
patient cases, which covers all potential losses up to certain limits.

The Partnership has procedures in place to monitor incidents of
significance. The Partnership does not have any malpractice claims or other
litigation in which the ultimate resolution could have a material financial
impact.

Income Taxes

No provision for income taxes is made in the financial statements of the
Partnership because, as a partnership, the tax effect of its activities
accrues to the partners.

Allocation of Income (Loss) and Cash Distributions

In accordance with the Partnership agreement, operating income, gains,
losses, and cash distributions are allocated 80% to the Limited Partners and
20% to the General Partner. The allocation is made to each Limited Partner
based on the number of units owned by the Limited Partner divided by the total
number of units owned by the Limited Partners.

2. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
December 31,
1995
------------
<S> <C>
Medical and surgical equipment............................... $940,238
Leasehold improvements....................................... 16,302
Office equipment............................................. 27,592
Vehicle...................................................... 11,937
--------
$996,069
========
</TABLE>

Estimated useful lives for depreciation are:

<TABLE>
<S> <C>
Equipment and leasehold improvements............................ 3-5 years
Vehicle......................................................... 3 years
</TABLE>

3. LONG-TERM DEBT

The Partnership's debt represents an agreement with a financing company for
medical equipment acquired. The agreement requires monthly payments of $8,854
through March 1999 with a balloon payment due at maturity in April 1999. The
interest rate is 13.4%.

Annual maturities of long-term debt through 1999 are as follows:

The debt agreement is secured by medical equipment with a net book value of
$180,834 at December 31, 1995.

F-56
<PAGE>

WESTSIDE SURGERY CENTER, LTD.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

4. LEASES

The Partnership has entered into several lease agreements for medical
equipment and office equipment which are accounted for as capital leases.

At December 31, 1995, future minimum lease payments for capital leases are
as follows:

<TABLE>
<S> <C>
1996..................................... $115,421
1997..................................... 115,421
1998..................................... 103,216
1999..................................... 56,042
--------
Total minimum lease payments......... $390,100
</TABLE>

<TABLE>
<S> <C>
Less: Amount representing interest....... 69,804
--------
Present value of capital leases........ 320,296
Less: Current installments............... 84,217
--------
Capital lease obligations.............. $236,079
========
</TABLE>

The net book value of the equipment under capital leases is $285,455 at
December 31, 1995.

The Partnership leases its surgery center under an operating lease. Total
rental expense for the year ended December 31, 1995 was $146,714. Future
minimum lease payments under the operating lease are as follows:

5. TRANSACTIONS WITH PARTNERS AND AFFILIATES

In accordance with the Certificate and Agreement of Limited Partnership,
HFMW receives an annual fee of five percent of net revenues for managing the
Partnership. This fee was $164,306 for the year ended December 31, 1995.

The Partnership performs certain administrative services for an affiliate
company of HFMW and charges the affiliated company for the costs incurred. At
December 31, 1995, there was an outstanding receivable for these services with
a balance of $60,431. The total fees charged for 1995 for these services were
$113,518.

The Partnership pays certain physicians, who are limited partners, director
fees for their services provided for serving as directors of certain
departments of the Partnership. During 1995, the fees paid to these limited
partners were $41,500.

6. SUBSEQUENT EVENT

Effective May 1, 1996, National Surgery Centers, Inc. (National), purchased
100% of the General Partner's interest and 51% of the Limited Partners'
interests. As a result of this transaction, National owns 61% of the
Partnership interest and the Limited Partners own the remaining 39%.

7. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation for Unaudited Financial Information

The accompanying unaudited interim financial statements of the Company have
been prepared in accordance with generally accepted accounting principles for
interim financial information. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) have been made which are
necessary for a fair presentation of the financial position, results of
operations, and cash flows for the interim periods presented. All interim
statements presented herein do not include all disclosures normally provided
in annual financial statements.

F-57
<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OF-
FER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN-
DER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

-----------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
The Company............................................................... 3
Risk Factors.............................................................. 7
Recent Developments....................................................... 10
Use of Proceeds........................................................... 11
Price Range of Common Stock............................................... 11
Dividend Policy........................................................... 11
Capitalization............................................................ 12
Unaudited Pro Forma Consolidated Financial Statements..................... 13
Selected Consolidated Financial Data...................................... 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 17
Business.................................................................. 24
Management................................................................ 33
Certain Transactions...................................................... 39
Principal and Selling Stockholders........................................ 41
Description of Capital Stock.............................................. 42
Shares Eligible for Future Sale........................................... 44
Underwriting.............................................................. 46
Legal Matters............................................................. 47
Experts................................................................... 47
Available Information..................................................... 48
Index to Consolidated Financial Statements................................ F-1
</TABLE>

-----------

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

2,750,000 Shares

[LOGO] National Surgery Centers, Inc.

Common Stock

-----------

PROSPECTUS

-----------

Alex. Brown & Sons
INCORPORATED

Furman Selz

J.P. Morgan & Co.

, 1996

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the estimated expenses to be borne by the
Company in connection with the registration, issuance and distribution of the
securities being registered hereby, other than underwriting discounts and
commissions. All amounts are estimates except the SEC registration fee and the
NASD filing fee.

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 30,677
NASD filing fee................................................. 9,396
NASDAQ listing fee.............................................. 17,500
Transfer agent and registrar's fee and expenses................. 5,000
Blue Sky fees and expenses...................................... 10,000
Printing and engraving expenses................................. 75,000
Legal fees and expenses......................................... 100,000
Accounting fees and expenses.................................... 150,000
Miscellaneous................................................... 2,427
--------
Total....................................................... $400,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the General Corporation Law of Delaware authorizes the
Company to indemnify its directors and officers under specified circumstances.
The Certificate of Incorporation and bylaws of the Company provide that the
Company shall indemnify, to the extent permitted by Delaware law, its
directors and officers (and may indemnify its employees and agents) against
liabilities (including expenses, judgments and settlements) incurred by them
in connection with any actual or threatened action, suit, or proceeding to
which they are or may become parties and which arises out of their status as
directors, officers, or employees.

The Company's Certificate of Incorporation eliminates, to the fullest extent
permitted by Delaware law, liability of a director to the Company or its
stockholders for monetary damages for a breach of such director's fiduciary
duty of care except for liability where a director (a) breaches his or her
duty of loyalty to the Company or its stockholders, (b) fails to act in good
faith or engages in intentional misconduct or knowing violation of law, (c)
authorizes payment of an illegal dividend or stock repurchase, or (d) obtains
an improper personal benefit. While liability for monetary damages has been
eliminated, equitable remedies such as injunctive relief or rescission remain
available. In addition, a director is not relieved of his responsibilities
under any other law, including the federal securities laws.

The directors and officers of the Company are insured within the limits and
subject to the limitations of the policies, against certain expenses in
connection with the defense of actions, suits, or proceedings and certain
liabilities which might be imposed as a result of such actions, suits, or
proceedings, to which they are parties by reason of being or having been such
directors or officers.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

On October 1, 1993, pursuant to an Asset Purchase Agreement dated October 9,
1991 among the Company, Olympic Ambulatory Surgery Center, Inc., a Washington
corporation, and certain other signatories thereto, the Company issued to two
accredited investors $65,000 aggregate principal amount

II-1
<PAGE>

of 9% Convertible Subordinated Notes of the Company due October 1, 1998. The
above-mentioned securities were issued without registration under the
Securities Act, in reliance upon the exemption in Section 4(2) of the
Securities Act.

On October 20, 1993, pursuant to a Stock Purchase Agreement dated October
20, 1993 among the Company and all of the holders of the outstanding capital
stock of Walk In and Out, Inc., a Kentucky corporation ("Walk In"), in
exchange for the transfer of all of Walk In's outstanding capital stock, the
Company issued to eight accredited investors $97,125 aggregate principal
amount of 7% Convertible Subordinated Notes of the Company due October 20,
2000. The above-mentioned securities were issued without registration under
the Securities Act, in reliance upon the exemption in Section 4(2) of the
Securities Act.

On March 23, 1994, pursuant to an earnout provision in an Asset Purchase
Agreement dated November 11, 1992 between the Company and Surgical Center of
Elizabethtown, Inc., a Kentucky corporation, the Company issued to an
accredited investor 17,499 shares of Common Stock for an aggregate purchase
price of $280,000. The above-mentioned securities were issued without
registration under the Securities Act, in reliance upon the exemptions in
Sections 4(2) and 4(6) of the Securities Act and Rule 506 of Regulation D.

On June 21, 1994, the Company issued to one individual warrants to purchase
an aggregate of 22,500 shares of Common Stock for an aggregate purchase price
of $4,950. The above-mentioned securities were issued without registration
under the Securities Act, in reliance upon the exemption in Section 4(2) of
the Securities Act and Rule 504 of Regulation D.

On August 18, 1994, pursuant to a Common Stock Purchase Agreement by and
between the Company and J.P. Morgan Capital Corporation, a Delaware
corporation ("J.P. Morgan''), the Company issued and sold to J.P. Morgan
200,000 shares of Common Stock and 976,470 shares of the Company's Non-voting
Common Stock, for an aggregate purchase price of $10,000,000. The above-
mentioned securities were sold without registration under the Securities Act,
in reliance upon the exemptions in Sections 4(2) and 4(6) of the Securities
Act and Rule 506 of Regulation D.

On September 27, 1994, the Company sold to seven accredited investors 26,176
shares of Common Stock for an aggregate purchase price of $222,517. The above-
mentioned securities were sold without registration under the Securities Act,
in reliance upon the exemption in Section 4(2) of the Securities Act.

On December 6, 1994, the Company sold to three accredited investors 4,087
shares of Common Stock for an aggregate purchase price of $34,752. The above-
mentioned securities were sold without registration under the Securities Act,
in reliance upon the exemption in Section 4(2) of the Securities Act.

On December 16, 1994, pursuant to an Asset Purchase Agreement dated November
22, 1991 among the Company, Village Ambulatory Surgery Associates, Inc., a
North Carolina corporation, and certain other signatories thereto, the Company
issued to three accredited investors $917,504 aggregate principal amount of 9%
per annum Convertible Subordinated Notes of the Company due December 31, 2000.
The above-mentioned securities were sold without registration under the
Securities Act, in reliance upon the exemption in Section 4(2) of the
Securities Act.

On March 1, 1995, pursuant to an Asset Purchase Agreement dated June 30,
1992 among the Company, First Hill Surgery Center, Inc., a Washington
corporation, and certain other signatories thereto, the Company issued to an
accredited investor $300,000 aggregate principal amount of 9.5% Convertible
Subordinated Notes of the Company due October 1, 2000. The above-mentioned
security was issued to that accredited investor without registration under the
Securities Act, in reliance upon the exemption in Section 4(2) of the
Securities Act.

II-2
<PAGE>

On May 23, 1995, the Company sold to accredited investors 37,494 shares of
Common Stock for an aggregate purchase price of $318,699. The above-mentioned
securities were sold without registration under the Securities Act, in
reliance upon the exemptions in Sections 4(2) and 4(6) of the Securities Act
and Rule 506 of Regulation D.

On June 20, 1995, pursuant to an exercise of options under the Company's
1992 Stock Option Plan, the Company issued and sold to a former employee of
the Company, 999 shares of Common Stock for an aggregate purchase price of
$8,500. The above-mentioned securities were sold without registration under
the Securities Act in reliance upon the exemption in Rule 701 under the
Securities Act.

On July 5, 1995, the Company issued to one individual warrants to purchase
an aggregate of 15,000 shares of Common Stock for an aggregate purchase price
of $2,500. The above-mentioned securities were issued without registration
under the Securities Act, in reliance upon the exemption in Section 4(2) of
the Securities Act and Rule 504 of Regulation D.

On August 1, 1995, pursuant to an exercise of options under the Company's
1992 Stock Option Plan, the Company issued and sold to a former employee of
the Company, 2,374 shares of Common Stock for an aggregate purchase price of
$20,187. The above-mentioned securities were sold without registration under
the Securities Act in reliance upon the exemption in Rule 701 under the
Securities Act.

On October 1, 1995, the Company issued to one individual an aggregate of
22,500 shares of Common Stock pursuant to a Stock Purchase Agreement among the
Company, Greensboro Specialty Surgicenter Inc., and certain other signatories
thereto for an aggregate purchase price of $225,000. The above mentioned
securities were issued to that overcredited investor without registration
under the Securities Act, in reliance upon the exemption in Section 4(2) of
the Securities Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) EXHIBITS

II-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE+
------- ---------------------- -----
<C> <S> <C>
10.8* Supplemental Agreement No. 3 dated March 31, 1995 between
the Company and Bank of America Illinois (formerly known as
Continental Bank)
10.9* Form of Employment Agreement between the Company and E. Tim-
othy Geary ("ETG")
10.10* Form of Employment Agreement between the Company and John G.
Rex-Waller ("JRW")
10.11* Form of Employment Agreement between the Company and Dennis
D. Solheim
10.12* Form of Employment Agreement between the Company and Richard
D. Pence
10.13* Form of Employment Agreement between the Company and Dennis
J. Zamojski
10.14* Management Agreement dated November 22, 1991 among Physi-
cians Ambulatory Management Corp. ("PAM"), NSC Fayetteville,
Inc. and Fayetteville Ambulatory Surgery Center Limited
Partnership
10.15* Amended and Restated Registration Rights Agreement dated Au-
gust 18, 1994 among the Company, Welsh, Carson, Anderson &
Stowe V, L.P. ("WCAS V"), WCA Management Corp., Camp Hill
Associates II, WILBLAIRCO Associates, ETG, JRW and JPMCC
10.16* Convertible Subordinated Note dated December 16, 1994, for
$1,750,000, of the Company made payable to Village Ambula-
tory Surgery Associates, Inc. ("VASA")
10.17* Convertible Subordinated Note dated December 16, 1994, for
$350,000, of the Company made payable to VASA
10.18* Convertible Subordinated Note dated December 16, 1994, for
$780,000, of the Company made payable to VASA
10.19* Convertible Subordinated Note dated December 16, 1994, for
$275,000, of the Company made payable to PAM
10.20* Convertible Subordinated Note dated December 16, 1994, for
$68,752, of the Company made payable to John T. Henlery, Jr.
10.21* Warrant Purchase Agreement dated June 24, 1992 between the
Company and WCAS V
10.22* Stock Subscription Warrant dated June 24, 1992 issued by the
Company to WCAS V
10.23* Warrant Amendment dated August 18, 1994 between the Company
and WCAS V
10.24* Warrant Amendment dated August 18, 1994 between the Company
and WCAS II
10.25* Second Amendment to Warrant dated August 18, 1994 between
the Company and
WCAS II
10.26* Second Amendment to Warrant dated December 31, 1994 between
the Company and WCAS II
10.27** Purchase Agreement dated February 23, 1996 among National
Surgery Centers, Inc.; Endoscopy Center Affiliates, Inc.;
and Caremark Inc.
10.28*** Purchase Agreement dated February 21, 1996 by and among the
following parties: Coram Healthcare Corporation, a Nevada
corporation; T2 Medical, Inc., Delaware corporation; Surgex,
Inc., a Nevada corporation; Ronald E. Moore; and National
Surgery Centers, Inc., a Delaware corporation
10.29**** Agreement to Purchase Partnership Interests relating to
Westside Surgery Centers, Ltd. Among National Surgery
Centers, Inc., NSC Houston, Inc., Healthfirst Medical
Westside Corporation and The Limited Partners of Westside
Surgery Center, Ltd. Who Agree to Sell a Portion of Their
Limited Partnership Interests to NSC Houston, Inc.
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE+
------- ---------------------- -----
<C> <S> <C>
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP (included in Part II of this
registration statement)
23.2 Consent of Bell, Boyd & Lloyd (contained in Exhibit 5.1)
23.3 Consent of Arthur Andersen LLP (included in Part II of this
registration statement)
23.4 Consent of Habif, Arogeti & Wynne, P.C. (included in Part II
of this registration statement)
24.1 Powers of Attorney (included on the signature page of this
registration statement)
</TABLE>
- --------
*Incorporated by reference to the corresponding exhibit to the Company's
Registration Statement on Form S-1, Registration No. 33-96996.
**Incorporated by reference to the corresponding exhibit to the Company's
Current Report on Form 8-K dated February 23, 1996.
***Incorporated by reference to the corresponding exhibit to the Company's
Current Report on Form 8-K dated May 13, 1996.
****Incorporated by reference to the corresponding exhibit to the Company's
Current Report on Form 8-K dated July 19, 1996.
+This information appears only in the manually signed copy of this
Registration Statement.

(b) FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
+Report of Independent Auditors on Schedules............................... S-1
+Schedule I Condensed Financial Information of the Company................. S-2
+Schedule II Valuation and Qualifying Accounts of the Company.............. S-5
</TABLE>
- --------
+Incorporated by reference to the corresponding schedules to the Company's
Annual Report on Form 10-K dated March 29, 1996.

ITEM 17. UNDERTAKINGS

The undersigned registrant hereby undertakes to provide to the Underwriters,
at the closing specified in the Underwriting Agreements, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described under Item 14 above or otherwise,
the Company has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer, or controlling
person of the Company in the successful defense of any action, suit, or
proceeding) is asserted against the Company by such director, officer, or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule

II-5
<PAGE>

430A and contained in a form of prospectus filed by the registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it was declared
effective.

(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and this offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-6
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHICAGO, STATE OF
ILLINOIS, ON SEPTEMBER 25, 1996.

National Surgery Centers, Inc.

/s/ E. Timothy Geary
By: _________________________________
E. Timothy Geary
Chairman of the Board of Directors
and Chief Executive Officer

POWER OF ATTORNEY

EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY APPOINTS E. TIMOTHY GEARY
AND BRYAN S. FISHER, AND EACH OF THEM SEVERALLY, ACTING ALONE AND WITHOUT THE
OTHER, HIS OR HER TRUE AND LAWFUL ATTORNEY-IN-FACT WITH AUTHORITY TO EXECUTE
IN THE NAME OF EACH SUCH PERSON AND TO FILE WITH THE SECURITIES AND EXCHANGE
COMMISSION, TOGETHER WITH ANY EXHIBITS THERETO AND OTHER DOCUMENTS THEREWITH,
ANY AND ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS
REGISTRATION STATEMENT NECESSARY OR ADVISABLE TO ENABLE THE REGISTRANT TO
COMPLY WITH THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY RULES,
REGULATIONS, AND REQUIREMENTS OF THE SECURITIES AND EXCHANGE COMMISSION IN
RESPECT THEREOF, WHICH AMENDMENTS MAY MAKE SUCH OTHER CHANGES IN THE
REGISTRATION STATEMENT AS THE AFORESAID ATTORNEY-IN-FACT EXECUTING THE SAME
DEEMS APPROPRIATE.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON SEPTEMBER 25, 1996.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----

PRINCIPAL EXECUTIVE OFFICER:

<S> <C>
/s/ E. Timothy Geary Chairman of the Board of Directors and
___________________________________________ Chief Executive Officer
E. Timothy Geary

PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER:

/s/ Bryan S. Fisher Chief Financial Officer and Controller
___________________________________________
Bryan S. Fisher
</TABLE>

II-7
<PAGE>

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----

A MAJORITY OF THE DIRECTORS:

<S> <C>
/s/ John K. Carlyle Director
___________________________________________
John K. Carlyle

/s/ Russell L. Carson Director
___________________________________________
Russell L. Carson

/s/ John T. Henley, Jr., M.D. Director
___________________________________________
John T. Henley, Jr., M.D.

/s/ Donald E. Linder, M.D. Director
___________________________________________
Donald E. Linder, M.D.

/s/ Rocco A. Ortenzio Director
___________________________________________
Rocco A. Ortenzio

/s/ Andrew M. Paul Director
___________________________________________
Andrew M. Paul

/s/ John G. Rex-Waller Executive Vice President, Secretary,
___________________________________________ Treasurer and Director
John G. Rex-Waller
</TABLE>

II-8
<PAGE>

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and
"Selected Consolidated Financial Data" and to the use of our reports on the
Consolidated Financial Statements of National Surgery Centers, Inc. dated
February 2, 1996 (except for Note 11, as to which the date is May 31, 1996)
and the Financial Statements of Westside Surgery Center, Ltd. dated June 26,
1996, in the Registration Statement and related Prospectus of National Surgery
Centers, Inc.

Ernst & Young LLP

Chicago, Illinois
September 25, 1996

II-9
<PAGE>

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
report dated May 3, 1996 on the consolidated balance sheets of Endoscopy
Center Affiliates, Inc. and subsidiaries as of December 31, 1994 and 1995 and
February 23, 1996, and the related consolidated statements of operations,
stockholders' deficit and cash flows for the years ended December 31, 1993,
1994, and 1995 and the period ended February 23, 1996 and to all references to
our firm included in this registration statement of National Surgery Centers,
Inc.

Arthur Andersen LLP

Los Angeles, California
September 25, 1996

II-10
<PAGE>

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated June 28, 1996 on our audit of the consolidated
financial statements of Surgex-Atlanta, Inc., Surgex-Miami, Inc., Surgex-
Sarasota, Inc., and each of their subsidiaries in this registration statement
and related Prospectus of National Surgery Centers, Inc.

Habif, Arogeti, & Wynne, P.C.

Atlanta, Georgia
September 25, 1996

II-11
<PAGE>

EXHIBIT INDEX

(a) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE+
------- ---------------------- -----
<C> <S> <C>
1.1 Proposed form of Underwriting Agreement
3.1* Certificate of Incorporation of the Company
3.2* Bylaws of the Company
4.1* Specimen certificate representing shares of Common Stock
4.2* Debenture and Warrant Purchase Agreement dated June 22, 1992
between the Company and WCAS Capital Partners II, L.P.
("WCAS II")
4.3* 10 1/2% Subordinated Redeemable Debenture Due June 22, 2002
dated June 22, 1992 issued by the Company to WCAS II
4.4* 10 1/2% Subordinated Redeemable Debenture Due October 27,
2002 dated October 27, 1992 issued by the Company to WCAS II
5.1 Opinion of Bell, Boyd & Lloyd as to the legality of the Com-
mon Stock
10.1 Amended and Restated 1992 Stock Option Plan of the Company,
as further amended.
10.2 Amended and Restated Employee Stock Purchase Plan of the
Company
10.3* Lease dated December 22, 1988 between Surgical Center In-
vestors, Ltd. ("SCI") and Surgical Center of Greensboro,
Inc. ("SCE")
10.4* Agreement dated June 23, 1992 among SCI, Surgical Care and
SCE
10.5* Second Amendment to Lease dated September 24, 1992 between
SCI and NSC Greensboro, Inc.
10.6* Common Stock Purchase Agreement dated August 18, 1994 be-
tween the Company and J.P. Morgan Capital Corporation
("JPMCC")
10.7* Amended and Restated Credit Agreement dated August 18, 1994
between the Company and Continental Bank
10.8* Supplemental Agreement No. 3 dated March 31, 1995 between
the Company and Bank of America Illinois (formerly known as
Continental Bank)
10.9* Form of Employment Agreement between the Company and E. Tim-
othy Geary ("ETG")
10.10* Form of Employment Agreement between the Company and John G.
Rex-Waller ("JRW")
10.11* Form of Employment Agreement between the Company and Dennis
D. Solheim
10.12* Form of Employment Agreement between the Company and Richard
D. Pence
10.13* Form of Employment Agreement between the Company and Dennis
J. Zamojski
10.14* Management Agreement dated November 22, 1991 among Physi-
cians Ambulatory Management Corp. ("PAM"), NSC Fayetteville,
Inc. and Fayetteville Ambulatory Surgery Center Limited
Partnership
10.15* Amended and Restated Registration Rights Agreement dated Au-
gust 18, 1994 among the Company, Welsh, Carson, Anderson &
Stowe V, L.P. ("WCAS V"), WCA Management Corp., Camp Hill
Associates II, WILBLAIRCO Associates, ETG, JRW and JPMCC
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE+
------- ---------------------- -----
<C> <S> <C>
10.16* Convertible Subordinated Note dated December 16, 1994, for
$1,750,000, of the Company made payable to Village Ambula-
tory Surgery Associates, Inc. ("VASA")
10.17* Convertible Subordinated Note dated December 16, 1994, for
$350,000, of the Company made payable to VASA
10.18* Convertible Subordinated Note dated December 16, 1994, for
$780,000, of the Company made payable to VASA
10.19* Convertible Subordinated Note dated December 16, 1994, for
$275,000, of the Company made payable to PAM
10.20* Convertible Subordinated Note dated December 16, 1994, for
$68,752, of the Company made payable to John T. Henlery, Jr.
10.21* Warrant Purchase Agreement dated June 24, 1992 between the
Company and WCAS V
10.22* Stock Subscription Warrant dated June 24, 1992 issued by the
Company to WCAS V
10.23* Warrant Amendment dated August 18, 1994 between the Company
and WCAS V
10.24* Warrant Amendment dated August 18, 1994 between the Company
and WCAS II
10.25* Second Amendment to Warrant dated August 18, 1994 between
the Company and
WCAS II
10.26* Second Amendment to Warrant dated December 31, 1994 between
the Company and WCAS II
10.27** Purchase Agreement dated February 23, 1996 among National
Surgery Centers, Inc.; Endoscopy Center Affiliates, Inc.;
and Caremark Inc.
10.28*** Purchase Agreement dated February 21, 1996 by and among the
following parties: Coram Healthcare Corporation, a Nevada
corporation; T2 Medical, Inc., Delaware corporation; Surgex,
Inc., a Nevada corporation; Ronald E. Moore; and National
Surgery Centers, Inc., a Delaware corporation
10.29**** Agreement to Purchase Partnership Interests relating to
Westside Surgery Centers, Ltd. Among National Surgery
Centers, Inc., NSC Houston, Inc., Healthfirst Medical
Westside Corporation and The Limited Partners of Westside
Surgery Center, Ltd. Who Agree to Sell a Portion of Their
Limited Partnership Interests to NSC Houston, Inc.
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP (included in Part II of this
registration statement)
23.2 Consent of Bell, Boyd & Lloyd (contained in Exhibit 5.1)
23.3 Consent of Arthur Andersen LLP (included in Part II of this
registration statement)
23.4 Consent of Habif, Arogetie Wynne, P.C. (included in Part II
of this registration statement)
24.1 Powers of Attorney (included on the signature page of this
registration statement)
</TABLE>
- --------
*Incorporated by reference to the corresponding exhibit to the Company's
Registration Statement on Form S-1, Registration No. 33-96996.
**Incorporated by reference to the corresponding exhibit to the Company's
Current Report on Form 8-K dated February 23, 1996.
***Incorporated by reference to the corresponding exhibit to the Company's
Current Report on Form 8-K dated May 13, 1996.
****Incorporated by reference to the corresponding exhibit to the Company's
Current Report on Form 8-K dated July 19, 1996.
+This information appears only in the manually signed copy of this
Registration Statement.
<PAGE>

(b)FINANCIAL STATEMENT SCHEDULES

<PAGE>

_________________ Shares

NATIONAL SURGERY CENTERS, INC.

Common Stock

($.01 Par Value)

UNDERWRITING AGREEMENT
----------------------

October __, 1996

Alex. Brown & Sons Incorporated
Furman Selz Incorporated
J.P. Morgan Securities, Inc.
As Representatives of the
Several Underwriters
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202

Gentlemen:

National Surgery Centers, Inc., a Delaware corporation (the "Company"), and
certain stockholders of the Company (the "Selling Stockholders") propose to sell
to the several underwriters (the "Underwriters") named in Schedule I hereto for
whom you are acting as representatives (the "Representatives") an aggregate of
2,750,000 shares of the Company's Common Stock, $.01 par value (the "Firm
Shares"), of which 2,003,011 shares will be sold by the Company and 746,989
shares will be sold by the Selling Stockholders. The respective amounts of the
Firm Shares to be so purchased by the several Underwriters are set forth
opposite their names in Schedule I hereto, and the respective amounts to be sold
by the Selling Stockholders are set forth opposite their names in Schedule II
hereto. The Company and the Selling Stockholders are sometimes referred to
herein collectively as the "Sellers." The Company also proposes to sell at the
Underwriters' option an aggregate of up to 412,500 additional shares of the
Company's Common Stock (the "Option Shares") as set forth below.

As the Representatives, you have advised the Company and the Selling
Stockholders (a) that you are authorized to enter into this Agreement on behalf
of the several Underwriters, and (b) that the several Underwriters are willing,
acting severally and not jointly, to purchase the numbers
<PAGE>

of Firm Shares set forth opposite their respective names in Schedule I, plus
their pro rata portion of the Option Shares if you elect to exercise the over-
allotment option in whole or in part for the accounts of the several
Underwriters. The Firm Shares and the Option Shares (to the extent the
aforementioned option is exercised) are herein collectively called the "Shares."

In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:

1. Representations and Warranties of the Company and the Selling
Stockholders.

(a) The Company represents and warrants to each of the Underwriters as
follows:

(i) A registration statement on Form S-1 (File No. 333-______) with
respect to the Shares has been prepared by the Company in conformity with
the requirements of the Securities Act of 1933, as amended (the "Act"), and
the Rules and Regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") thereunder and has been filed
with the Commission. Copies of such registration statement, including any
amendments thereto, the preliminary prospectuses (meeting the requirements
of the Rules and Regulations) contained therein and the exhibits, financial
statements and schedules, as finally amended and revised, have heretofore
been delivered by the Company to you. Such registration statement, together
with any registration statement filed by the Company pursuant to Rule
462(b) of the Act, herein referred to as the "Registration Statement,"
which shall be deemed to include all information omitted therefrom in
reliance upon Rule 430A and contained in the Prospectus referred to below,
has become effective under the Act and no post-effective amendment to the
Registration Statement (other than a post-effective amendment pursuant to
Rule 462(b) of the Act, if any) has been filed as of the date of this
Agreement. "Prospectus" means (a) the form of prospectus first filed with
the Commission pursuant to Rule 424(b) or (b) the last preliminary
prospectus included in the Registration Statement filed prior to the time
it becomes effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers of
the Shares, together with the term sheet or abbreviated term sheet filed
with the Commission pursuant to Rule 424(b)(7) under the Act. Each
preliminary prospectus included in the Registration Statement prior to the
time it becomes effective is herein referred to as a "Preliminary
Prospectus."

(ii) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct
its business as described in the Registration Statement. The Company is
duly qualified to transact business in all jurisdictions in which the
conduct of its business requires such qualification, except for
jurisdictions in which the failure to so qualify, together with all other
such failures, would not have a material adverse effect upon the business,
properties, assets, rights, operations, condition (financial or otherwise)
or prospects of the Company and the Subsidiaries taken

<PAGE>

as a whole.

(iii) Each of the corporate subsidiaries of the Company, as listed
in Exhibit 21 to Item 16(a) of the Registration Statement (collectively,
the "Corpoate Subsidiaries") are the only subsidiaries, direct or indirect,
of the Company. Each of the Corporate Subsidiaries is duly qualified to
transact business in all jurisdictions in which the conduct of its business
requires such qualification, except for jurisdictions in which the failure
to so qualify, together with all other such failures, would not have a
material adverse effect upon the business, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company
and the Subsidiaries taken as a whole. The outstanding shares of capital
stock of each of the Corporate Subsidiaries have been duly authorized and
validly issued, are fully paid and non-assessable; and except as disclosed
in the Registration Statement or Prospectus, are owned by the Company or
another Subsidiary free and clear of all liens, encumbrances and equities
and claims; and were issued and sold in compliance with all applicable
Federal and state securities laws, except where the failure to so comply,
together with all other such failures, would not have a material adverse
effect upon the business, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and the Subsidiaries
taken as a whole.

(iv) Each of the limited partnerships of which a Corporate Subsidiary
is general partner, as listed in Exhibit 21 to Item 16(a) of the
Registration Statement (collectively, the "Limited Partnerships," and
together with the Corporate Subsidiaries, the "Subsidiaries") has been duly
organized and is an existing limited partnership in good standing under the
laws of the jurisdiction of its organization, with the power and authority
to own or lease its properties and conduct its business as described in the
Registration Statement. Each of the Limited Partnerships is duly qualified
to transact business in all jurisdictions in which the conduct of its
business requires such qualification; except for jurisdictions in which the
failure to so qualify, together with all such other failures, would not
have a material adverse effect upon the business, properties, assets,
rights, operations, condition (financial or otherwise) or prospects of the
Company and the Subsidiaries taken as a whole. The capital contributions
with respect to the outstanding units of each of the Limited Partnerships
have been made to the Limited Partnerships. All outstanding limited
partnership interests in the Limited Partnerships were issued and sold in
compliance with all applicable Federal and state securities laws, except
where the failure to so comply, together with all other such failures,
would not have a material adverse effect upon the business, properties,
assets, rights, operations, condition (financial or otherwise) or prospects
of the Company and the Subsidiaries taken as a whole. The general and
limited partnership interests therein held directly or indirectly by the
Company are owned free and clear of all liens, encumbrances and equities
and claims, except (i) for encumbrances disclosed in the Prospectus, and
(ii) for encumbrances relating to any

<PAGE>

indebtedness disclosed in the Prospectus. To the knowledge of the Company,
each limited partnership agreement pursuant to which the Company or a
Subsidiary holds an interest in a Limited Partnerhip is in full force and
effect and constitutes the legal, valid and binding agreement of the
parties thereto, enforceable against such parties in accordance with the
terms thereof, except as enforcement thereof may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors'
rights generally. There has been no material breach of or default under,
and no event which with notice or lapse of time would constitute a material
breach of or default under, such agreements by the Company or any
Subsidiary or, to the Company's knowledge, any other party to such
agreements. Except to the extent disclosed in the Prospectus, each of the
surgery centers described in the Prospectus as owned by the Company is
owned and operated either by a Corporate Subsidiary or by a Limited
Partnership in which a Corporate Subsidiary owns at least 50% of the
outstanding partnership interests.

(v) The outstanding shares of Common Stock of the Company, including
all shares to be sold by the Selling Stockholders, have been duly
authorized validly issued and are fully paid and non-assessable; all
outstanding shares of capital stock of the Company were issued and sold in
compliance with all applicable federal and state securities laws, except
where the failure to so comply, together with all other such failures,
would not have a material adverse effect upon the business, properties,
assets, rights, operations, condition (financial or otherwise) or prospects
of the Company and the Subsidiaries taken as a whole; the portion of the
Shares to be issued and sold by the Company have been duly authorized and
when issued and paid for as contemplated herein will be validly issued,
fully paid and non-assessable; and no preemptive rights of stockholders
exist with respect to any of the Shares or the issuance and sale thereof
which rights have not been waived, complied with or terminated. Neither the
filing of the Registration Statement nor the offering or sale of the Shares
as contemplated by this Agreement gives rise to any rights, other than
those which have been waived or satisfied, for or relating to the
registration of any shares of Common Stock.

(vi) The information set forth under the caption "Capitalization"
in the Prospectus is true and correct. All of the Shares conform in all
material respects to the description thereof contained in the Registration
Statement. The form of certificates for the Shares conforms to the
corporate law of the jurisdiction of the Company's incorporation.

(vii) Except (i) as disclosed in the Prospectus, (ii) in connection
with currently ongoing offerings of limited partnership interests in
limited partnerships in which the Company, through one or more affiliates,
owns a general partnership interest and (iii) with respect to any Limited
Partnership, as contained in the applicable limited partnership agreement,
there are no outstanding warrants, option, convertible securities or other
commitments of sale related to or entitling any person to purchase or
otherwise acquire any securities or interest in any Subsidiary. Except as
disclosed in the Prospectus and, with respect to any Limited Partnership,
as contained in the applicable limited partnership agreement, there are no
consensual encumbrances or restrictions on the ability of any

<PAGE>

Subsidiary (i) to pay any dividends or make any distributions
on such Corporate Subsidiary's capital stock or such Limited Partnership's
partnership interests or to pay any indebtedness owed to the Company or any
other Subsidiary, (ii) to make any loans or advances to, or investments in,
the Company or any other Subsidiary, or (iii) to transfer any of its
properties or assets to the Company or any other Subsidiary.

(viii) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering of
the Shares nor instituted proceedings for that purpose. The Registration
Statement contains, and the Prospectus and any amendments or supplements
thereto will contain, all statements which are required to be stated
therein by, and will conform in all material respects, to the requirements
of the Act and the Rules and Regulations. The Registration Statement and
any amendment thereto do not contain, and will not contain, any untrue
statement of a material fact and do not omit, and will not omit, to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus and any amendments and
supplements thereto do not contain, and will not contain, any untrue
statement of material fact; and do not omit, and will not omit, to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the Company makes no
representations or warranties as to information contained in or omitted
from the Registration Statement or the Prospectus, or any such amendment or
supplement, in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of any Underwriter through the
Representatives, specifically for use in the preparation thereof.

(ix) The consolidated financial statements of the Company and the
Subsidiaries, together with related notes and schedules as set forth in the
Registration Statement, present fairly the financial position and the
results of operations and cash flows of the Company and the consolidated
Subsidiaries, at the indicated dates and for the indicated periods. Such
financial statements and related schedules have been prepared in accordance
with generally accepted principles of accounting, consistently applied
throughout the periods involved, except as disclosed herein, and all
adjustments necessary for a fair presentation of results for such periods
have been made. The summary financial and statistical data included in the
Registration Statement presents fairly the information shown therein and
such data has been compiled on a basis consistent with the financial
statements presented therein and the books and records of the company. The
pro forma financial statements and other pro forma financial information
included in the Registration Statement and the Prospectus present fairly
the information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements, have been properly compiled on the pro forma bases described
therein, and, in the opinion of the Company, the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions or circumstances referred to
therein.

5
<PAGE>

(x) Ernst & Young, LLP, who have certified certain of the financial
statements filed with the Commission as part of the Registration Statement,
are independent public accountants as required by the Act and the Rules and
Regulations.

(xi) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against the Company or any of the
Subsidiaries before any court or administrative agency or otherwise which
if determined adversely to the Company or any of its Subsidiaries in the
reasonable belief of the Company might result in any material adverse
change in the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company
and of the Subsidiaries taken as a whole or to prevent the consummation of
the transactions contemplated hereby, except as set forth in the
Registration Statement.

(xii) The Company and the Subsidiaries have good and marketable title
to all of the properties and assets reflected in the financial statements
(or as described in the Registration Statement) hereinabove described,
subject to no lien, mortgage, pledge, charge or encumbrance of any kind
except those reflected in such financial statements (or as described in the
Registration Statement or Prospectus) or which are not material in nature
or amount. The Company and the Subsidiaries occupy their leased properties
under valid and binding leases conforming in all material respects to the
description thereof set forth in the Registration Statement, except as
enforcement or validity thereof may be limited by bankruptcy, insolvency or
other similar laws affecting the enforcement of creditors' rights
generally.

(xiii) The Company and the Subsidiaries have filed all Federal,
State, local and foreign income tax returns which have been required to be
filed and have paid all taxes indicated by said returns and all assessments
received by them or any of them to the extent that such taxes have become
due and are not being contested in good faith. All such tax liabilities
have been adequately provided for in the financial statements of the
Company.

(xiv) Since the respective dates as of which information is given
in the Registration Statement, as it may be amended or supplemented, there
has not been any material adverse change or any development involving a
prospective material adverse change in or affecting the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise), or prospects of the Company and its Subsidiaries taken as a
whole, whether or not occurring in the ordinary course of business, and
there has not been any material transaction entered into or any material
transaction that is probable of being entered into by the Company or the
Subsidiaries, other than transactions in the ordinary course of business
and changes and transactions described in or contemplated by the
Registration Statement, as it may be amended or supplemented. Neither the
Company nor any Subsidiary has incurred any material liability or
obligation, direct or contingent, and there has not been any material
change in the capital stock, or material increase in the short-term debt or
long-term debt of the Company or any of the Subsidiaries.

6
<PAGE>

(xv) Neither the Company nor any of the Subsidiaries is or, with the
giving of notice or lapse of time or both, will be, in violation of or in
default under its Charter or By-Laws, limited partnership agreement or
under any other agreement, lease,contract, indenture or other instrument or
obligation to which it is a party or by which it, or any of its properties,
is bound or in violation of any law, ordinance, administrative or
governmental rule or regulation applicable to the Company or any of the
Subsidiaries, which default or violation is of material significance in
respect of the condition, financial or otherwise, of the Company and its
Subsidiaries taken as a whole. The execution and delivery of this Agreement
and the consummation of the transactions herein contemplated and the
fulfillment of the terms hereof will not conflict with or result in a
breach of any of the terms or provisions of, or constitute a default under,
any material indenture, mortgage, deed of trust or other agreement or
instrument to which the Company or any Subsidiary is a party, or of the
Charter or by-laws of the Company or any order, rule or regulation
applicable to the Company or any Subsidiary of any court or of any
regulatory body or administrative agency or other governmental body having
jurisdiction, except where such conflict, breach or default, together with
all other such conflicts, breaches or defaults, would not have a material
adverse effect upon the business, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company and the
Subsidiaries taken as a whole.

(xvi) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions
herein contemplated (except such additional steps as may be required by the
Commission, the National Association of Securities Dealers, Inc. (the
"NASD") or such additional steps as may be necessary to qualify the Shares
for public offering by the Underwriters under state securities or Blue Sky
laws) has been obtained or made and is in full force and effect.

(xvii) The Company and each of the Subsidiaries holds all material
licenses, certificates, permits and other approvals from governmental
authorities (collectively, "Permits") which are necessary to own their
properties and to conduct their businesses, including, without limitation,
such Permits as are required (i) under such federal and state healthcare
laws as are applicable to the Company and the Subsidiaries and (ii) with
respect to those facilities operated by the Company or any Subsidiary that
participate in Medicare and/or Medicaid, to receive reimbursement
thereunder, except where such failure to have or hold such Permits,
together with all other such failures, would not have a material adverse
effect upon the business, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and the Subsidiaries
taken as a whole; the Company and each of the Subsidiaries have fulfilled
and performed all of their material obligations with respect to such
Permits, and no event or change in condition has occurred which allows, or
after notice or lapse of time would allow, revocation or termination
thereof or results in any other material impairment of the rights of the
holder of any such

7
<PAGE>

Permit, such in each case to such qualifications as may be set forth in the
Prospectus. During the period for which financial statements are included
in the Prospectus, denials by third party payers of claims for
reimbursement for services rendered by the Company have not had a material
adverse effect on the condition (financial or other), business, prospects,
properties, net worth or results of operations of the Company and the
Subsidiaries taken as a whole, and any such denials are either under appeal
or the Company has ceased seeking reimbursement for the services of
supplies to which they relate.

(xviii) Neither the Company nor any of the Subsidiaries has
infringed any patents, patent rights, trade names, trademarks or
copyrights, which infringement is material to the business of the Company
and the Subsidiaries taken as a whole. The Company knows of no material
infringement by others of patents, patent rights, trade names, trademarks
or copyrights owned by or licensed to the Company.

(xiv) Neither the Company, nor to the Company's knowledge, any of its
affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of the shares of Common Stock to facilitate the sale or resale of
the Shares. The Company acknowledges that the Underwriters may engage in
passive market making transactions in the Shares on The Nasdaq Stock Market
in accordance with Rule 10b-6A under the Exchange Act.

(xv) Neither the Company nor any Subsidiary is, nor will the Company
nor any Subsidiary become upon the sale of the Shares and the application
of the proceeds therefrom as described in the Prospectus under the caption
"Use of Proceeds," an "investment company" within the meaning of such term
under the Investment Company Act of 1940 and the rules and regulations of
the Commission thereunder.

(xvi) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.

(xvii) The Company and each of its Subsidiaries carry, or are
covered by, insurance in such amounts and covering such risks as is
adequate for the conduct of their respective businesses and the value of
their respective properties and as is customary for companies engaged in
similar industries.

(xviii) To the Company's knowledge, neither the Company nor any of
its Subsidiaries nor any employee or agent of the Company or any Subsidiary
has made any
8
<PAGE>

payment of funds of the Company or any Subsidiary or received or retained
any funds in violation of any law, rule or regulation, which payment,
receipt or retention of funds is material and of a character required to be
disclosed in the Prospectus.

(xix) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification.

(xx) The property, assets and operations of the Company and the
Subsidiaries comply in all material respects with all applicable federal,
state or local law, common law, doctrine, rule, order, decree, judgment,
injunction, license, permit or regulation relating to environmental matters
(the "Environmental Laws"), except to the extent that failure to comply
with such Environmental Laws would not have a material adverse effect on
the condition (financial or other), business, prospects, properties, net
worth or results of operations of the Company and the Subsidiaries taken as
a whole. To the knowledge of the Company, none of the property, assets or
operations of the Company and the Subsidiaries is the subject of any
federal, state or local investigation evaluating whether any remedial
action is needed to respond to a release into the environment of any
substance regulated by, or form the basis of liability under, any
Environmental Laws (a "Hazardous Material"), or is in contravention of any
Environmental Law that would have a material adverse effect on the
condition (financial or other), business, prospects, properties, net worth
or results of operations of the Company and Subsidiaries taken as a whole.
Neither the Company nor any Subsidiary has received any notice or claim,
nor are there pending, reasonably anticipated or, or to the Company's
knowledge, threatened lawsuits against them with respect to violations of
an Environmental Law or in connection with the release of any Hazardous
Material into the environment, in each case which, individually or in the
aggregate, would have a material adverse effect on the condition (financial
or other), business, properties, prospects, net worth or results of
operations of the Company and the Subsidiaries taken as a whole. Neither
the Company nor any Subsidiary has any material contingent liability in
connection with any release of Hazardous Material into the environment.

(xxi) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-
198, An Act Relating to
9
<PAGE>

Disclosure of doing Business with Cuba, and the Company further agrees that
if it commences engaging in business with the government of Cuba or with
any person or affiliate located in Cuba after the date the Registration
Statement becomes or has become effective with the Commission or with the
Florida Department of Banking and Finance (the "Department"), whichever
date is later, or if the information reported or incorporated by reference
in the Prospectus, if any, concerning the Company's business with Cuba or
with any person or affiliate located in Cuba changes in any material way,
the Company will provide the Department notice of such business or change,
as appropriate, in a form acceptable to the Department.

(b) Each of the Selling Stockholders severally represents and warrants as
follows:

(i) Such Selling Stockholder now has and at the Closing Date and at
the Option Closing Date, as the case may be (as such dates are hereinafter
defined) will have good and marketable title to the Firm Shares to be sold
by such Selling Stockholder, free and clear of any liens, encumbrances,
equities and claims whatsoever, and full right, power and authority to
effect the sale and delivery of such Firm Shares; and upon the delivery of,
against payment for, such Firm Shares pursuant to this Agreement, the
Underwriters will acquire good and marketable title thereto, free and clear
of any liens, encumbrances, equities and claims.

(ii) Such Selling Stockholder has duly executed and delivered a
power of attorney (the "Power of Attorney"), in the form heretofore
delivered to the Representatives, appointing E. Timothy Geary and John G.
Rex-Waller, as such Selling Stockholders' attorneys-in-fact ("Attorney-in-
Fact"), with authority to execute, deliver and perform on behalf of such
Selling Stockholder this Agreement and a custody agreement ("Custody
Agreement") in the form heretofore delivered to the Representatives, with
the Company, as custodian (the "Custodian"). Such Selling Stockholder has
full right, power and authority to execute and deliver the Power of
Attorney and to authorize the execution of this Agreement and the
Custody Agreement and to perform its obligations under such agreements. The
execution and delivery of this Agreement and the consummation by such
Selling Stockholder of the transactions herein contemplated and the
fulfillment by such Selling Stockholder of the terms hereof will not
require any consent, approval, authorization or other order of any court,
regulatory body, administrative agency or other governmental body (except
as may be required under the Act, or state securities or Blue Sky laws) and
will not result in a breach of any of the terms and provisions of, or
constitute a default under, organizational documents of such Selling
Stockholder, if not an individual, or an indenture, mortgage, deed of trust
or other agreement or instrument to which such Selling Stockholder is a
party, or of any order, rule or regulation applicable to such Selling
Stockholder of any court or of any regulatory body or administrative agency
or other governmental body having jurisdiction.

(iii) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to, or which has constituted,
or which might reasonably be

10
<PAGE>

expected to cause or result in the stabilization or manipulation of the
price of the Common Stock of the Company and, other than as permitted by
the Act, the Selling Stockholder will not distribute any prospectus or
other offering material in connection with the offering of the Shares.

(iv) The information pertaining to such Selling Stockholder in the
Prospectus is complete and accurate in all material respects.

2. Purchase, Sale and Delivery of the Firm Shares.

(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the
Sellers agree to sell to the Underwriters and each Underwriter agrees,
severally and not jointly, to purchase, at a price of $________ per share,
the number of Firm Shares set forth opposite the name of each Underwriter
in Schedule I hereof, subject to adjustments in accordance with Section 9
hereof. The obligations of the Company and each of the Selling Stockholders
shall be several and not joint.

(b) Certificates in negotiable form for the total number of the
Shares to be sold hereunder by the Selling Stockholders have been placed in
custody with the Custodian pursuant to the Custody Agreement executed by
the Attorney-in-Fact on behalf of each Selling Stockholder for delivery of
all Firm Shares to be sold hereunder by the Selling Stockholders. Each of
the Selling Stockholders specifically agrees that the Firm Shares
represented by the certificates held in custody for the Selling
Stockholders under the Custody Agreement are subject to the interests of
the Underwriters hereunder, that the arrangements made by the Selling
Stockholders for such custody are to that extent irrevocable, and that the
obligations of the Selling Stockholders hereunder shall not be terminable
by any act or deed of the Selling Stockholders (or by any other person,
firm or corporation including the Company, the Custodian or the
Underwriters) or by operation of law (including the death of an individual
Selling Stockholder or the dissolution of a corporate Selling Stockholder)
or by the occurrence of any other event or events, except as set forth in
the Custody Agreement.

11
<PAGE>

If any such event should occur prior to the delivery to the Underwriters of
the Firm Shares hereunder, certificates for the Firm Shares shall be
delivered by the Custodian in accordance with the terms and conditions of
this Agreement as if such event has not occurred. The Custodian is
authorized to receive and acknowledge receipt of the proceeds of sale of
the Shares held by it against delivery of such Shares.

(b) On the Closing Date (as defined below), Alex. Brown & Sons
Incorporated shall wire transfer payment for the Firm Shares to be sold
hereunder to separate accounts, one established in the name of the Company
for the shares to be sold by it and one in the name of the Company, "as
Custodian" for the shares to be sold by the Selling Stockholders, in each
case against delivery of certificates therefor to the Representatives for
the several accounts of the Underwriters. Such payment and delivery are to
be made at the offices of Alex. Brown & Sons Incorporated, 135 East
Baltimore Street, Baltimore, Maryland, at 10:00 a.m., Baltimore time, on
the third business day after the date of this Agreement or at such other
time and date not later than five business days thereafter as you and the
Company shall agree upon, such time and date being herein referred to as
the "Closing Date." (As used herein, "business day" means a day on which
the New York Stock Exchange is open for trading and on which banks in New
York are open for business and are not permitted by law or executive order
to be closed.) The certificates for the Firm Shares will be delivered in
such denominations and in such registrations as the Representatives request
in writing not later than the second full business day prior to the Closing
Date, and will be made available for inspection by the Representatives at
least one business day prior to the Closing Date.

(c) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth,
the Company hereby grants an option to the several Underwriters to purchase
the Option Shares at the price per share as set forth in the first
paragraph of this Section 2. The option granted hereby may be exercised in
whole or in part by giving written notice (i) at any time before the
Closing Date and (ii) only once thereafter within 30 days after the date of
this Agreement, by you, as Representatives of the several Underwriters, to
the Company setting forth the number of Option Shares as to which the
several Underwriters are exercising the option, the names and denominations
in which the Option Shares are to be registered and the time and date at
which such certificates are to be delivered. The time and date at which
certificates for Option Shares are to be delivered shall be determined by
the Representatives but shall not be earlier than three nor later than 10
full business days after

12
<PAGE>

the exercise of such option, nor in any event prior to the Closing Date
(such time and date being herein referred to as the "Option Closing Date").
If the date of exercise of the option is three or more days before the
Closing Date, the notice of exercise shall set the Closing Date as the
Option Closing Date. The number of Option Shares to be purchased by each
Underwriter shall be in the same proportion to the total number of Option
Shares being purchased as the number of Firm Shares being purchased by such
Underwriter bears to 2,750,000, adjusted by you in such manner as to avoid
fractional shares. The option with respect to the Option Shares granted
hereunder may be exercised only to cover over-allotments in the sale of the
Firm Shares by the Underwriters. You, as Representatives of the several
Underwriters, may cancel such option at any time prior to its expiration by
giving written notice of such cancellation to the Company and the Attorney-
in-Fact. To the extent, if any, that the option is exercised, Alex. Brown &
Sons Incorporated shall wire transfer payment for the Option Shares to be
sold hereunder to the account of the Company against delivery of
certificates therefor at the offices of Alex. Brown & Sons Incorporated,
135 East Baltimore Street, Baltimore, Maryland.

3. Offering by the Underwriters.

It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it
advisable to do so. The Firm Shares are to be initially offered to the
public at the public offering price set forth in the Prospectus. The
Representatives may from time to time thereafter change the public offering
price and other selling terms. To the extent, if at all, that any Option
Shares are purchased pursuant to Section 2 hereof, the Underwriters will
offer them to the public on the foregoing terms.

It is further understood that you will act as the Representatives for
the Underwriters in the offering and sale of the Shares in accordance with
a Master Agreement Among Underwriters entered into by you and the several
other Underwriters.

4. Covenants of the Company and the Selling Stockholders.

(a) The Company covenants and agrees with the several Underwriters
that:

(i) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule
430A of the Rules and Regulations is followed, to prepare and timely file
with the Commission under Rule 424(b) of the Rules and Regulations a
Prospectus in a form approved by the Representatives containing information
previously omitted at the time of effectiveness of the Registration
Statement in reliance on Rule 430A of the Rules and Regulations, (B) not
file any amendment to the Registration Statement or supplement to the
Prospectus of which the Representatives shall not previously have been
advised and furnished with a copy or to which the

13
<PAGE>

Representatives shall have reasonably objected in writing or which is not
in compliance with the Rules and Regulations in all material respects, and
(C) file on a timely basis all reports and any definitive proxy or
information statements required to be filed by the Company with the
Commission subsequent to the date of the Prospectus and prior to the
termination of the offering of the Shares by the Underwriters.

(ii) The Company will advise the Representatives promptly (A) when
the Registration Statement or any post-effective amendment thereto shall
have become effective, (B) of receipt of any comments from the Commission,
(C) of any request of the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional
information, and (D) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of
the Prospectus or of the institution of any proceedings for that purpose.
The Company will use its commercially reasonable best efforts to prevent
the issuance of any such stop order preventing or suspending the use of the
Prospectus and to obtain as soon as possible the lifting thereof, if
issued.

(iii) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of
such jurisdictions as the Representatives may reasonably have designated in
writing and will make such applications, file such documents, and furnish
such information as may be reasonably required for that purpose, provided
the Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction where it
is not now so qualified or required to file such a consent. The Company
will, from time to time, prepare and file such statements, reports, and
other documents, as are or may be required to continue such qualifications
in effect for so long a period as the Representatives may reasonably
request for distribution of the Shares.

(iv) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the Representatives during the period
when delivery of a Prospectus is required under the Act, as many copies of
the Prospectus in final form, or as thereafter amended or supplemented, as
the Representatives may reasonably request, provided that in the event that
an Underwriter is required to deliver a Prospectus in connection with sales
of any of the Shares at any time nine months or more after the date of the
Prospectus, upon the request of such Underwriter but at its expense, the
Company will prepare and deliver to such Underwriter as many copies as it
may request of a Prospectus (as amended or supplemented) complying with the
Act. The Company will deliver to the Representatives at or before the
Closing Date, four signed copies of the Registration Statement and all
amendments thereto including all exhibits filed therewith, and will deliver
to the Representatives such number of copies of the Registration Statement
(including up to ten copies of the exhibits filed therewith), and of all
amendments thereto, as the Representatives may reasonably request.

14
<PAGE>

(v) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934 (the "Exchange Act"),
and the rules and regulations of the Commission thereunder, so as to permit
the completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, any event
shall occur as a result of which, in the judgment of the Company or in the
reasonable opinion of the Underwriters, it becomes necessary to amend or
supplement the Prospectus in order to make the statements therein, in the
light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading, or, if it is necessary at any time to amend
or supplement the Prospectus to comply with any law, the Company promptly
will prepare and file with the Commission an appropriate amendment to the
Registration Statement or supplement to the Prospectus so that the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when it is so delivered, be misleading, or so that the
Prospectus will comply with the law.

(vi) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later
than 15 months after the effective date of the Registration Statement, an
earnings statement (which need not be audited) in reasonable detail,
covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement, which earning statement shall
satisfy the requirements of Section 11(a) of the Act and Rule 158 of the
Rules and Regulations and will advise you in writing when such statement
has been so made available.

(vii) The Company will, for a period of five years from the Closing
Date, deliver to the Representatives copies of annual reports and copies of
all other documents, reports and information furnished by the Company to
its stockholders or filed with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant to the Act or
the Securities Exchange Act of 1934, as amended. The Company will deliver
to the Representatives similar reports with respect to significant
subsidiaries, as that term is defined in the Rules and Regulations, which
are not consolidated in the Company's financial statements.

(viii) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company or other securities convertible into
or exchangeable or exercisable for shares of Common Stock or derivative of
Common Stock (or agreement for such) will be made for a period of 90 days
after the date of this Agreement, directly or indirectly, by the Company
otherwise than hereunder or with the prior written consent of Alex. Brown &
Sons Incorporated, except for Common Stock issued pursuant to this
Agreement, pursuant to the Company's Stock Option Plan , Employee Stock
Purchase Plan or any directors' stock option plan that may be adopted, or
in connection with acquisitions accounted for as a pooling of interests or
are otherwise subject to restrictions on transfer for a period of 90 days
from the date of this Agreement.

15
<PAGE>

(ix) The Company will use its commercially reasonable best efforts to
list, subject to notice of issuance, the Shares on the Nasdaq National
Market System.

(x) The Company has caused each officer and director, Bank of America
Illinois, N.A., CMS Capital Corporation and J.P. Morgan Capital Corporation
to furnish to you, on or prior to the date of this agreement, a letter or
letters, in form and substance satisfactory to the Underwriters, pursuant
to which each such person shall agree not to offer, sell, sell short or
otherwise dispose of any shares of Common Stock of the Company or other
capital stock of the Company, or any other securities convertible,
exchangeable or exercisable for Common Shares or derivative of Common
Shares owned by such person or request the registration for the offer or
sale of any of the foregoing (or as to which such person has the right to
direct the disposition of) for a period of 90 days after the date of this
Agreement, directly or indirectly, except with the prior written consent of
Alex. Brown & Sons Incorporated ("Lockup Agreements").

(xi) The Company shall apply the net proceeds of its sale of the
Shares as set forth in the Prospectus.

(xii) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Shares in such a manner as
would require the Company or any of the Subsidiaries to register as an
investment company under the Investment Company Act of 1940, as amended
(the "1940 Act").

(xiii) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar for the
Common Stock.

(xiv) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably
be expected to constitute, the stabilization or manipulation of the price
of any securities of the Company.

(b) Each of the Selling Stockholders covenants and agrees with the several
Underwriters that:

(i) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company or other capital stock of the
Company or other securities convertible, exchangeable or exercisable
for Common Stock or derivative of Common Stock owned by the Selling
Stockholder or request for the registration for the offer or sale of
any of the foregoing (or as to which the Selling Stockholder has the
right to direct the disposition of) will be made for a period of 90
days after the date of this Agreement, directly or indirectly, by such
Selling Stockholder otherwise than hereunder or with the prior written
consent of Alex. Brown & Sons Incorporated.

(ii) In order to document the Underwriters' compliance with the
reporting

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<PAGE>

and withholding provisions of the Tax Equity and Fiscal Responsibility
Act of 1982 and the Interest and Dividend Tax Compliance Act of 1983
with respect to the transactions herein contemplated, each of the
Selling Stockholders agrees to deliver to you prior to or at the
Closing Date a properly completed and executed United States Treasury
Department Form W-9 (or other applicable form or statement specified
by Treasury Department regulations in lieu thereof).

(iii) Such Selling Stockholder will not take, directly or
indirectly, any action designed to cause or result in, or that has
constituted or might reasonably be expected to constitute, the
stabilization or manipulation of the price of any securities of the
Company.

5. Costs and Expenses.

Except as otherwise provided in Section 4(d) hereof, the Company will
pay all costs, expenses and fees incident to the performance of the
obligations of the Sellers under this Agreement, including, without
limiting the generality of the foregoing, the following: accounting fees of
the Company; the fees and disbursements of counsel for the Company and the
Selling Stockholders; the cost of printing and delivering to, or as
requested by, the Underwriters copies of the Registration Statement,
Preliminary Prospectuses, the Prospectus, this Agreement, the Underwriters'
Selling Memorandum, the Underwriters' Invitation Letter, the Listing
Application, the Blue Sky Survey and any supplements or amendments thereto;
the filing fees of the Commission; the filing fees and expenses (including
legal fees and disbursements) incident to securing any required review by
the National Association of Securities Dealers, Inc. (the "NASD") of the
terms of the sale of the Shares; the Listing Fee of the Nasdaq Stock
Market; and the expenses, including the fees and disbursements of counsel
for the Underwriters, incurred in connection with the qualification of the
Shares under State securities or Blue Sky laws. To the extent, if at all,
that any of the Selling Stockholders engage special legal counsel to
represent them in connection with this offering, the fees and expenses of
such counsel shall be borne by such Selling Stockholder. Any transfer taxes
imposed on the sale of the Shares to the several Underwriters will be paid
by the Sellers pro rata. The Company agrees to pay all costs and expenses
of the Underwriters, including the fees and disbursements of counsel for
the Underwriters, incident to the offer and sale of directed shares of the
Common Stock by the Underwriters to employees and persons having business
relationships with the Company and its Subsidiaries. The Sellers shall not,
however, be required to pay for any of the Underwriters expenses (other
than those related to qualification under NASD regulation and State
securities or Blue Sky laws) except that, if this Agreement shall not be
consummated because the conditions in Section 6 hereof are not satisfied,
or because this Agreement is terminated by the Representatives pursuant to
Section 11(a) or Sections 11(b)(i),(iv) or (vi) hereof, or by reason of any
failure, refusal or inability on the part of the Company or the Selling
Stockholders to perform any undertaking or satisfy any condition of this
Agreement or to comply with any of the terms hereof on its part to be
performed, unless such failure to satisfy said condition or to comply with
said terms be

17
<PAGE>

due to the default or omission of any Underwriter, then the Company shall
reimburse the several Underwriters for reasonable out-of-pocket expenses,
including fees and disbursements of counsel, reasonably incurred in
connection with investigating, marketing and proposing to market the Shares
or in contemplation of performing their obligations hereunder; but the
Company and the Selling Stockholders shall not in any event be liable to
any of the several Underwriters for damages on account of loss of
anticipated profits from the sale by them of the Shares.

6. Conditions of Obligations of the Underwriters.

The several obligations of the Underwriters to purchase the Firm
Shares on the Closing Date and the Option Shares, if any, on the Option
Closing Date are subject to the accuracy, as of the Closing Date or the
Option Closing Date, as the case may be, of the representations and
warranties of the Company and the Selling Stockholders contained herein,
and to the performance by the Company and the Selling Stockholders of their
covenants and obligations hereunder and to the following additional
conditions:

(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by
Rule 424 and Rule 430A of the Rules and Regulations shall have been made,
and any request of the Commission for additional information (to be
included in the Registration Statement or otherwise) shall have been
disclosed to the Representatives and complied with to their reasonable
satisfaction. No stop order suspending the effectiveness of the
Registration Statement, as amended from time to time, shall have been
issued and no proceedings for that purpose shall have been taken or, to the
knowledge of the Company or the Selling Stockholders, shall be contemplated
by the Commission and no injunction, restraining order, or order of any
nature by a Federal or state court of competent jurisdiction shall have
been issued as of the Closing Date which would prevent the issuance of the
Shares.

(b) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, the opinion of Bell, Boyd &
Lloyd, counsel for the Company and the Selling Stockholders, dated the
Closing Date or the Option Closing Date, as the case may be, addressed to
the Underwriters (and stating that it may be relied upon by counsel to the
Underwriters) to the effect that:

(i) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own, lease and operate
its properties and conduct its business as described in the
Registration Statement and the Prospectus; and the Company is duly
qualified to transact business in all jurisdictions in which the
conduct of its business requires such qualification, or in which the
failure to qualify would have a materially adverse effect upon the
business of the Company and the Subsidiaries taken as a whole

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<PAGE>

(ii) Each of the Corporate Subsidiaries has been duly organized
and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, with corporate power
and authority to own, lease and operate its properties and conduct its
business as described in the Registration Statement; each of the
Corporate Subsidiaries are duly qualified to transact business in all
jurisdictions in which the conduct of their business requires such
qualification, or in which the failure to qualify would have a
materially adverse effect upon the business of the Company and the
Subsidiaries taken as a whole; and the outstanding shares of capital
stock of each of the Corporate Subsidiaries have been duly authorized
and validly issued and are fully paid and non-assessable and are owned
by the Company or another Corporate Subsidiary; and, to the best of
such counsel's knowledge and except as otherwise disclosed in the
Registration Statement or Prospectus, the outstanding shares of
capital stock of each of the Corporate Subsidiaries is owned free and
clear of all liens, encumbrances and equities and claims, and no
options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into
any shares of capital stock or of ownership interests in the Corporate
Subsidiaries are outstanding, except as described in the Registration
Statement or Prospectus.

(iii) Each of the Limited Partnerships has been duly organized
and is an existing limited partnership in good standing under the laws
of the jurisdiction of its organization, with the power and authority
to own, lease and operate its properties and to conduct its business
as described in the Registration Statement and Prospectus, and is duly
qualified to conduct its business; each of the Limited Partnerships is
in good standing as a foreign limited partnership in each jurisdiction
in which the nature of its properties or the conduct of its business
requires such qualification, except where the failure so to qualify
does not have a materially adverse effect upon the business of the
Company and the Subsidiaries taken as a whole; the limited partnership
interests in the Limited Partnerships held directly or indirectly by
the Company are free and clear of all liens, encumbrances and equities
and claims, except (a) for those encumbrances disclosed in the
Prospectus, (b) for encumbrances relating to indebtedness disclosed in
the Registration Statement or Prospectus and (c) to the extent
provided in the applicable limited partnership agreement; to such
counsel's knowledge, each limited partnership agreement pursuant to
which the Company or a Subsidiary holds a general partnership interest
in a Limited Partnership is in full force and effect and constitutes
the legal, valid and binding agreement of the parties thereto,
enforceable against such parties in accordance with the terms thereof,
except as enforcement thereof may be limited by equitable principles
or by bankruptcy, insolvency or other similar laws affecting
creditors' rights generally. To such counsel's knowledge, there has
been no material breach of or default under, and no event which with
notice or lapse of time would constitute a material breach of or
default under, such agreements by the Company or any Subsidiary or any
other party to such agreements.

19
<PAGE>

(iv) The Company has authorized and outstanding capital stock as
set forth under the caption "Capitalization" in the Prospectus; the
authorized shares of the Company's Common Stock have been duly
authorized; the outstanding shares of the Company's Common Stock,
including the Shares to be sold by the Selling Stockholders, have been
duly authorized and validly issued and are fully paid and non-
assessable; all of the Shares conform to the description thereof
contained in the Prospectus; the certificates for the Shares, assuming
they are in the form filed with the Commission, are in due and proper
form; the shares of Common Stock, including the Option Shares, if any,
to be sold by the Company pursuant to this Agreement have been duly
authorized and will be validly issued, fully paid and non-assessable
when issued and paid for as contemplated by this Agreement; and no
preemptive rights of stockholders exist with respect to any of the
Shares or the issue or sale thereof.

(v) Except as described in or contemplated by the Prospectus, to
the knowledge of such counsel, there are no outstanding securities of
the Company convertible or exchangeable into or evidencing the right
to purchase or subscribe for any shares of capital stock of the
Company and there are no outstanding or authorized options, warrants
or rights of any character obligating the Company to issue any shares
of its capital stock or any securities convertible or exchangeable
into or evidencing the right to purchase or subscribe for any shares
of such stock; and except as described in the Prospectus, to the
knowledge of such counsel, no holder of any securities of the Company
or any other person has the right, contractual or otherwise, which has
not been satisfied or effectively waived, to cause the Company to sell
or otherwise issue to them, or to permit them to underwrite the sale
of, any of the Shares or the right to have any Common Shares or other
securities of the Company included in the Registration Statement or
the right, as a result of the filing of the Registration Statement, to
require registration under the Act of any shares of Common Stock or
other securities of the Company.

(vi) Except (a) as described in or contemplated by the
Prospectus, (b) in connection with currently ongoing offerings of
limited partnership interests in limited partnerships in which the
Company, through one or more affiliates, owns a general partnership
interest and (c) with respect to any Limited Partnership, as contained
in the applicable limited partnership agreement, to such counsel's
knowledge, there are no outstanding subscriptions, rights, warrants,
options, calls, convertible securities or commitments of sale related
to or entitling any person to purchase or otherwise acquire any shares
of capital stock, or partnership or other ownership interest in, any
Subsidiary.

(vii) The Registration Statement and all post-effective
amendments, if any, have become effective under the Act and, to the
best of the knowledge of such counsel, no stop order proceedings with
respect thereto have been instituted or are

20
<PAGE>

pending or threatened under the Act.

(viii) The Registration Statement, the Prospectus and each
amendment or supplement thereto comply as to form in all material
respects with the requirements of the Act and the applicable rules and
regulations thereunder (except that such counsel need express no
opinion as to the financial statements and related schedules therein).

(ix) The statements in the Registration Statement and
Prospectus, insofar as such statements constitute a summary of
documents referred to therein or matters of law, fairly summarize in
all material respects the information called for with respect to such
documents and matters.

(x) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or
described in the Registration Statement or the Prospectus which are
not so filed or described as required, and such contracts and
documents as are summarized in the Registration Statement or the
Prospectus are fairly summarized in all material respects.

(xi) Such counsel is not aware that the Company nor any of the
Subsidiaries is in violation of its certificate or articles of
incorporation or bylaws, or other organizational documents or is in
default in the performance of any material obligation, agreement or
condition contained in any evidence of indebtedness, except as may be
disclosed in the Prospectus.

(xii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company or any of the
Subsidiaries except as set forth in the Prospectus.

(xiii) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will
not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, the Charter or by-laws
of the Company, or any agreement or instrument known to such counsel
to which the Company or any of the Subsidiaries is a party or by which
the Company or any of the Subsidiaries may be bound.

(xiv) The Company has corporate power and authority to enter
into this Agreement and to issue, sell and deliver the Shares to the
Underwriters as provided herein; this Agreement has been duly
authorized, executed and delivered by the Company and is a valid and
binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as the enforcement hereof may be
limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally and except as rights to
indemnity and contribution hereunder may be limited by federal or
state securities laws or

21
<PAGE>

principals of public policy.

(xv) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or
other governmental body is necessary in connection with the execution
and delivery of this Agreement and the consummation of the
transactions herein contemplated (other than as may be required by the
NASD or as required by State securities and Blue Sky laws as to which
such counsel need express no opinion) except such as have been
obtained or made, specifying the same.

(xvi) The Company is not, and will not become, as a result of
the consummation of the transactions contemplated by this Agreement,
and application of the net proceeds therefrom as described in the
Prospectus, required to register as an investment company under the
1940 Act.

(xvii) Such counsel is not aware, except as may be disclosed
in the Prospectus, that the Company or any of the Subsidiaries is in
violation of any material law, ordinance, administrative or
governmental rule or regulation applicable to the Company or any of
the Subsidiaries or of any decree of any court or governmental agency
or body having jurisdiction over the Company or any of the
Subsidiaries.

(xviii) To such counsel's knowledge, the Company and each of the
Subsidiaries have all necessary Permits (except where the failure to
have such Permits, individually or in the aggregate, would not have a
material adverse effect on the business, operations or financial
condition of the Company and the Subsidiaries taken as a whole), to
own their respective properties and to conduct their respective
businesses as now being conducted, and as described in the
Registration Statement and Prospectus, including, without limitation,
such Permits as are required (a) under such federal and state
healthcare laws as are applicable to the Company and the Subsidiaries
and (y) with respect to those facilities owned or operated by the
Company or any Subsidiary that participate in Medicare and/or
Medicaid, to receive reimbursement thereunder; provided, however, that
with respect to state healthcare laws such counsel has undertaken no
independent review.

(xix) Except as disclosed in the Prospectus, such counsel is not
aware of any holder of any security of the Company or any other person
who has the right, contractual or otherwise, to have any securities of
of the Company included in the Registration Statement, except for any
such rights hall have been complied with or waived.

(xx) This Agreement has been duly authorized, executed and
delivered on behalf of the Selling Stockholders.

22
<PAGE>

(xxi) Each Selling Stockholder has full legal right, power and
authority, and any approval required by law (other than as required by
State securities and Blue Sky laws as to which such counsel need
express no opinion), to sell, assign, transfer and deliver the portion
of the Shares to be sold by such Selling Stockholder.

(xxii) The Custody Agreement and the Power of Attorney executed
and delivered by or on behalf of each Selling Stockholder is valid
and binding.

(xxiii) The Underwriters (assuming that they are bona fide
purchasers within the meaning of the Uniform Commercial Code) have
acquired good and marketable title to the Shares being sold by each
Selling Stockholder on the Closing Date, and the Option Closing Date,
as the case may be, free and clear of all liens, encumbrances,
equities and claims.

In rendering such opinion Bell, Boyd & Lloyd may rely as to matters
governed by the laws of states other than Illinois and Delaware or Federal
laws on local counsel in such jurisdictions and as to the matters set forth
in subparagraphs (xx), (xxi) and (xxii) on opinions of other counsel
representing the respective Selling Stockholders, provided that in each
case Bell, Boyd & Lloyd shall state that they believe that they and the
Underwriters are justified in relying on such other counsel. In addition to
the matters set forth above, such opinion shall also include a statement to
the effect that nothing has come to the attention of such counsel which
leads them to believe that (i) the Registration Statement, at the time it
became effective under the Act (but after giving effect to any
modifications incorporated therein pursuant to Rule 430A under the Act) and
as of the Closing Date or the Option Closing Date, as the case may be,
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading (except that such counsel need express no
view as to financial statements, schedules and statistical information
therein), and (ii) the Prospectus, or any supplement thereto, on the date
it was filed pursuant to the Rules and Regulations and as of the Closing
Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact necessary
in order to make the statements, in the light of the circumstances under
which they are made, not misleading (except that such counsel need express
no view as to financial statements, schedules and statistical information
therein). With respect to such statement, Bell, Boyd & Lloyd may state that
their belief is based upon the procedures set forth therein, but is without
independent check and verification and that they are relying as to factual
maters or information set forth in certificates of one or more officers of
he Company, satisfactory in form and substance to the Underwriters.

(c) The Representatives shall have received from Alston & Bird, coun
sel for the Underwriters, an opinion dated the Closing Date or the Option
Closing Date, as the case may be, substantially to the effect specified in
subparagraphs (iv), (v), (vii), (xiii) and (xv)

23
<PAGE>

of Paragraph (b) of this Section 6, and that the Company is a duly
incorporated and validly existing corporation under the laws of the State
of Delaware. In rendering such opinion Alston & Bird may rely as to all
matters governed other than by the laws of the States of Georgia and
Delaware or Federal laws on the opinion of counsel referred to in Paragraph
(b) of this Section 6. In addition to the matters set forth above, such
opinion shall also include a statement to the effect that nothing has come
to the attention of such counsel which leads them to believe that (i) the
Registration Statement, or any amendment thereto, as of the time it became
effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) and as of the
Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, and (ii) the Prospectus, or any supplement thereto, on the
date it was filed pursuant to the Rules and Regulations and as of the
Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact,
necessary in order to make the statements, in the light of the
circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial statements, schedules and
statistical information therein). With respect to such statement, Alston &
Bird may state that their belief is based upon the procedures set forth
therein, but is without independent check and verification.

(d) The Representatives shall have received at or prior to the
Closin g Date from Alston & Bird, a memorandum or summary, in form and
substance satisfactory to the Representatives, with respect to the
qualification for offering and sale by the Underwriters of the Shares under
the State securities or Blue Sky laws of such jurisdictions as the
Representatives may reasonably have designated to the Company.

(e) You shall have received, on each of the date hereof, the Closing
Date and the Option Closing Date, as the case may be, a letter dated the
date hereof, the Closing Date or the Option Closing Date, as the case may
be, in form and substance satisfactory to you, of Ernst & Young, LLP,
confirming that they are independent public accountants within the meaning
of the Act and the applicable published Rules and Regulations thereunder
and stating that in their opinion the financial statements and schedules
examined by them and included in the Registration Statement comply in form
in all material respects with the applicable accounting requirements of the
Act and the related published Rules and Regulations; and containing such
other statements and information as is ordinarily included in accountants'
"comfort letters" under SFAS 71 and SFAS 72 to Underwriters with respect to
the financial statements and certain financial and statistical information
contained in the Registration Statement and Prospectus. The letters to be
delivered by Ernst & Young, LLP, on the Closing Date and the Option Closing
Date, as the case may be, shall be satisfactory to the Underwriters if they
confirm as of the date delivered the information contained in the letter
delivered to the Underwriters on the date hereof.

(f) The Representatives shall have received on the Closing Date or
the Option
24
<PAGE>

Closing Date, as the case may be, a certificate or certificates of the
Chief Executive Officer and the Chief Financial Officer of the Company to
the effect that, as of the Closing Date or the Option Closing Date, as the
case may be, each of them severally represents as follows:

(i) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the
Registrations Statement has been issued, and no proceedings for such
purpose have been taken or are, to his knowledge, contemplated by the
Commission;

(ii) The representations and warranties of the Company
contained in Section 1 hereof are true and correct as of the Closing
Date or the Option Closing Date, as the case may be;

(iii) All filings required to have been made pursuant to Rules
424 or 430A under the Act have been made;

(iv) He or she has carefully examined the Registration Statement
and the Prospectus and, to the best of such officer's knowledge, as
of the effective date of te Registration Statement, the statements
contained in the Registration Statement were true and correct, and
such Registration Statement and Prospectus did not omit to state a
material fact required to be stated therein or necessary in order to
make the statements therein not misleading, and since the effective
date of the Registration Statement, no event has occurred which should
have been set forth in a supplement to or an amendment of the
Prospectus which has not been so set forth in such supplement or
amendment; and

(v) Since the respective dates as of which information is given
in the Registration Statement and Prospectus, there has not been any
material adverse change or any development involving a prospective
material adverse change in or affecting the condition, financial or
otherwise, of the Company and its Subsidiaries taken as a whole or the
earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the
Company and the Subsidiaries taken as a whole, whether or not arising
in the ordinary course of business.

(g) The Company and the Selling Stockholders shall have furnished to
the Representatives such further certificates and documents confirming the
representations and warranties, covenants and conditions contained herein
and related matters as the Representatives may reasonably have requested.

(h) The Firm Shares and Option Shares, if any, have been approved for
designation upon notice of issuance on the Nasdaq National Market System.

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<PAGE>

(i) The Lockup Agreements described in Section 4(b)(i) are in full force
and effect.

The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects satisfactory to the Representatives and to Alston & Bird, counsel for
the Underwriters.

If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company and the Selling Stockholders of such
termination in writing or by telegram at or prior to the Closing Date or the
Option Closing Date, as the case may be.

In such event, the Company, the Selling Stockholders and the Underwriters
shall not be under any obligation to each other (except to the extent provided
in Sections 5 and 8 hereof).

7. Conditions of the Obligations of the Sellers.

The obligations of the Sellers to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.

8. Indemnification.

(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of the Act,
against any losses, claims, damages or liabilities to which such Underwriter or
any such controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; and will reimburse each Underwriter and
each such controlling person upon demand for any legal or other expenses
reasonably incurred by such Underwriter or such controlling person in connection
with investigating or defending any such loss, claim, damage or liability,
action or proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Shares, whether or not such Underwriter or
controlling person is a party to any action or proceeding; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim,

26
<PAGE>

damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement, or omission or alleged omission made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by or through the
Representatives specifically for use in the preparation thereof and;
provided further, that, insofar as this indemnity agreement relates to any
untrue statement or omission, or any alleged untrue statement or omission,
made in a Preliminary Prospectus, but eliminated or remedied in the
Prospectus, it shall not inure to the benefit of an Underwriter (or to the
benefit of any person who controls such Underwriter) if a copy of the
Prospectus was not delivered by such Underwriter to the person asserting
the claim arising from such untrue statement or omission, or such alleged
untrue statement or omission at or prior to the time required by the Act,
delivery thereof would have constituted a defense to the claim asserted by
such person. This indemnity agreement will be in addition to any liability
which the Company may otherwise have.

(b) The Selling Stockholders, severally and not jointly, agree to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of the Act, against any losses,
claims, damages or liabilities to which such Underwriter or any such
controlling person may become subject under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions or proceedings
in respect thereof) arise out of or are based upon (i) any untrue statement
or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading; and will reimburse each
Underwriter and each such controlling person upon demand for any legal or
other expenses reasonably incurred by such Underwriter or such controlling
person in connection with investigating or defending any such loss, claim,
damage or liability, action or proceeding or in responding to a subpoena or
governmental inquiry related to the offering of the Shares, whether or not
such Underwriter or controlling person is a party to any action or
proceeding; provided, however, that the Selling Stockholders will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged
untrue statement, or omission or alleged omission made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof and; provided further,
that, insofar as this indemnity agreement relates to any untrue statement
or omission, or any alleged untrue statement or omission, made in a
Preliminary Prospectus, but eliminated or remedied in the Prospectus, it
shall not inure to the benefit of an Underwriter (or to the benefit of any
person who controls such Underwriter) if a copy of the Prospectus was not
delivered by such Underwriter to the person asserting the claim arising
from such untrue statement or omission, or such alleged untrue statement or
omission at or prior to the time required by the Act, delivery thereof
would have constituted a defense to the claim asserted by such person;
provided, further, however, that such Selling Stockholder will be liable
hereunder in any such case only if and to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made
in reliance upon and in conformity with information pertaining to such
Selling Stockholder, as such, furnished in writing to the Company by such
Selling Stockholder specifically for use in such registration statement or
prospectus. In no event, however, shall the liability of any Selling
Stockholder for indemnification under this Section 8(b) exceed the proceeds
received by such Selling Stockholder from the Underwriters in the offering.
This indemnity agreement will be in addition to any liability which the
Selling Stockholders may otherwise have.

(c) Each Underwriter severally and not jointly will indemnify and
hold harmless the Company, each of its directors, each of its officers who
have signed the Registration Statement, the Selling Stockholders, and each
person, if any, who controls the Company or the Selling Stockholders within
the meaning of the Act, against any losses, claims, damages or liabilities
to which the Company or any such director, officer, Selling Stockholder or
controlling person may become subject under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions or proceedings
in respect thereof) arise out of or are based upon (i) any untrue statement
or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made; and will reimburse any legal or
other expenses reasonably incurred by the Company or any such director,
officer, Selling Stockholder or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, action
or proceeding; provided, however, that each Underwriter will be liable in
each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission has been made
in the Registration Statement, any Preliminary Prospectus, the Prospectus
or such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by or through the
Representatives specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which such
Underwriter may otherwise have.

(d) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to this Section 8, such person (the "indemnified party")
shall promptly notify the person

27
<PAGE>

against whom such indemnity may be sought (the "indemnifying party") in
writing. No indemnification provided for in Section 8(a) or (b) shall be
available to any party who shall fail to give notice as provided in this
Section 8(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was materially
prejudiced by the failure to give such notice, but the failure to give such
notice shall not relieve the indemnifying party or parties from any
liability which it or they may have to the indemnified party for
contribution or otherwise than on account of the provisions of Section 8(a)
or (b). In case any such proceeding shall be brought against any
indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party and shall pay promptly
after presentation for payment the reasonable fees and disbursements of
such counsel related to such proceeding. In any such proceeding, any
indemnified party shall have the right to retain its own counsel at its own
expense. Notwithstanding the foregoing, the indemnifying party shall pay as
incurred (or within 30 days of presentation) the reasonable fees and
expenses of the counsel retained by the indemnified party in the event (i)
the indemnifying party and the indemnified party shall have mutually agreed
to the retention of such counsel, (ii) the named parties to any such
proceeding (including any impleaded parties) include both the indemnifying
party and the indemnified party and representation of both parties by the
same counsel would be inappropriate due to actual or potential differing
interests between them or (iii) the indemnifying party shall have failed to
assume the defense and employ counsel acceptable to the indemnified party
within a reasonable period of time after notice of commencement of the
action. It is understood that the indemnifying party shall not, in
connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant to
Section 8(a) and by the Company and the Selling Stockholders in the case of
parties indemnified pursuant to Section 8(b). The indemnifying party shall
not be liable for any settlement of any proceeding effected without its
written consent but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party from and against any loss or liability by reason of such
settlement or judgment. In addition, the indemnifying party will not,
without the prior written consent of the indemnified party, settle or
compromise or consent to the entry of any judgment in any pending or
threatened claim, action or proceeding of which indemnification may be
sought hereunder (whether or not any indemnified party is an actual or
potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.

(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect

28
<PAGE>

thereof) referred to therein, then each indemnifying party shall contribute
to the amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Selling Stockholders on
the one hand and the Underwriters on the other from the offering of the
Shares but also the relative fault of the Company and the Selling
Stockholders on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, (or actions or proceedings in respect
thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Stockholders on
the one hand and the Underwriters on the other shall be deemed to be in the
same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Stockholders
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company and the Selling Stockholders
on the one hand or the Underwriters on the other and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.

The Company, the Selling Stockholders and the Underwriters agree that
it would not be just and equitable if contributions pursuant to this
Section 8(d) were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above in this Section 8(d). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages
or liabilities (or actions or proceedings in respect thereof) referred to
above in this Section 8(d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter, (ii) no
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation, and (iii) no
Selling Stockholder shall be required to contribute any amount in excess of
the proceeds received by such Selling Stockholder from the Underwriters in
the offering. The Underwriters' obligations in this Section 8(d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.

(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this
Section 8 hereby consents to the jurisdiction of any court having
jurisdiction over any other contributing party, agrees that process

29
<PAGE>

issuing from such court may be served upon him or it by any other
contributing party and consents to the service of such process and agrees
that any other contributing party may join him or it as an additional
defendant in any such proceeding in which such other contributing party is
a party.

(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement
shall remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A
successor to any Underwriter, or to the Company, its directors or officers,
or any person controlling the Company, shall be entitled to the benefits of
the indemnity, contribution and reimbursement agreements contained in this
Section 8.

9. Default by Underwriters.

If on the Closing Date, any Underwriter shall fail to purchase and pay
for the portion of the Shares which such Underwriter has agreed to purchase
and pay for on such date (otherwise than by reason of any default on the
part of the Company or a Selling Stockholder), you, as Representatives of
the Underwriters, shall use your reasonable efforts to procure within 36
hours thereafter one or more of the other Underwriters, or any others, to
purchase from the Company and the Selling Stockholders such amounts as may
be agreed upon and upon the terms set forth herein the Firm Shares which
the defaulting Underwriter or Underwriters failed to purchase. If during
such 36 hours you, as such Representatives, shall not have procured such
other Underwriters, or any others, to purchase the Firm Shares agreed to be
purchased by the defaulting Underwriter or Underwriters, then (a) if the
aggregate number of shares with respect to which such default shall occur
does not exceed 10% of the Firm Shares covered hereby, the other
Underwriters shall be obligated, severally, in proportion to the respective
numbers of Firm Shares which they are obligated to purchase hereunder, to
purchase the Firm Shares which such defaulting Underwriter or Underwriters
failed to purchase, or (b) if the aggregate number of shares of Firm Shares
with respect to which such default shall occur exceeds 10% of the Firm
Shares covered hereby, the Company and the Selling Stockholder or you as
the Representatives of the Underwriters will have the right, by written
notice given within the next 36-hour period to the parties to this
Agreement, to terminate this Agreement without liability on the part of the
non-defaulting Underwriters or of the Company or of the Selling
Stockholders except to the extent provided in Section 8 hereof. In the
event of a default by any Underwriter or Underwriters, as set forth in this
Section 9, the Closing Date may be postponed for such period, not exceeding
seven days, as you, as

30
<PAGE>

Representatives, may determine in order that the required changes in the
Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this
Section 9 shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.

10. Notices.

All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or
telegraphed and confirmed as follows: if to the Underwriters, to Alex.
Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland
21202, Attention: Mr. Steven Schuh; with a copy to Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202.
Attention: General Counsel; if to the Company or the Selling Stockholders,
to

National Surgery Centers, Inc.
35 East Wacker Drive, Suite 2800
Chicago, Illinois 60601
Attn: E. Timothy Geary

Bell, Boyd & Lloyd
Three First National Plaza
70 West Madison Street
Suite 300
Chicago, Illinois 60602
Attn: Steven E. Ducommun

11. Termination.

This Agreement may be terminated by you by notice to the Sellers as
follows:

(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m.
on the first business day following the date of this Agreement;

(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change or any development involving a prospective material adverse change
in or affecting the condition, financial or otherwise, of the Company and
its Subsidiaries taken as a whole or the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise)
or prospects of the Company and its Subsidiaries taken as a whole, whether
or not arising in the ordinary course of business, (ii) any outbreak or
escalation of hostilities or declaration of war or

31
<PAGE>

national emergency or other national or international calamity or crisis or
change in economic or political conditions if the effect of such outbreak,
escalation, declaration, emergency, calamity, crisis or change on the
financial markets of the United States would, in your reasonable judgment,
make it impracticable to market the Shares or to enforce contracts for the
sale of the Shares, or (iii) suspension of trading in securities generally
on the New York Stock Exchange or the American Stock Exchange or limitation
on prices (other than limitations on hours or numbers of days of trading)
for securities on either such Exchange, (iv) the enactment, publication,
decree or other promulgation of any statute, regulation, rule or order of
any court or other governmental authority which in your opinion materially
and adversely affects or may materially and adversely affect the business
or operations of the Company, (v) declaration of a banking moratorium by
United States or New York State authorities, (vi) the suspension of trading
of the Company's common stock by the Commission on the NASDAQ Stock Market
or (vii) the taking of any action by any governmental body or agency in
respect of its monetary or fiscal affairs which in your reasonable opinion
has a material adverse effect on the securities markets in the United
State; or

12. Successors.

This Agreement has been and is made solely for the benefit of the
Underwriters, the Company and the Selling Stockholders and their respective
successors, executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other person
will have any right or obligation hereunder. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign merely
because of such purchase.

13. Information Provided by Underwriters.

The Company, the Selling Stockholders and the Underwriters acknowledge
and agree that the only information furnished or to be furnished by any
Underwriter to the Company for inclusion in any Prospectus or the
Registration Statement consists of the information set forth in the last
paragraph on the front cover page (insofar as such information relates to
the Underwriters), legends required by Item 502(d) of Regulation S-K under
the Act and the information under the caption "Underwriting" in the
Prospectus.

14. Miscellaneous.

The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation
made by or on behalf of any Underwriter or controlling person thereof, or
by or on behalf of the Company or its directors or officers and (c)
delivery of and

32
<PAGE>

payment for the Shares under this Agreement.

This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.

This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Maryland.

[Signatures on Next Page]

33
<PAGE>

If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company, the Selling
Stockholders and the several Underwriters in accordance with its terms.

Very truly yours,

NATIONAL SURGERY CENTERS, INC.

By:
-----------------------------
President

SELLING STOCKHOLDER LISTED ON SCHEDULE II

By:
-----------------------------
Attorney-in-Fact

The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.

ALEX. BROWN & SONS INCORPORATED
FURMAN SELZ INCORPORATED
J.P. MORGAN SECURITIES, INC.
As Representatives of the several
Underwriters listed on Schedule I

By: Alex. Brown & Sons Incorporated

By:
---------------------------
Authorized Officer

34
<PAGE>

SCHEDULE I

Schedule of Underwriters

<TABLE>
<CAPTION>
Number of Firm Shares
Underwriter to be Purchased
- ----------- ---------------------
<S> <C>

Alex. Brown & Sons Incorporated
Furman Selz Incorporated
J.P. Morgan Securities, Inc.

TOTAL UNDERWRITERS (___)
</TABLE>

35
<PAGE>

SCHEDULE II

Schedule of Selling Stockholders
<TABLE>
<CAPTION>
Number of Firm Shares
Selling Stockholder to be Sold
- ------------------- ---------------------
<S> <C>

TOTAL
</TABLE>

36
<PAGE>

SCHEDULE III

Schedule of Option Shares

Percentage of Total
Maximum Number of Number of Option
Name of Seller Option Shares to be Sold Shares
- -------------- ------------------------ -------------------
<S> <C> <C>

TOTAL 100%
</TABLE>

<PAGE>

[LETTERHEAD OF BELL, BOYD & LLOYD]

September 26, 1996

National Surgery Centers, Inc.
35 E. Wacker Drive, Suite 2800
Chicago, Illinois 60601

Re: Registration Statement on Form S-1
----------------------------------
Gentlemen:

We have acted as counsel for National Surgery Centers, Inc., a Delaware
corporation (the "Company"), in connection with the preparation and filing with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended, of a registration statement on Form S-1 (the "Registration Statement")
relating to the registration of 2,415,511 shares of common stock, par value
$0.01 per share, of the Company (the "Primary Shares"), and 746,989 shares of
common stock, par value $0.01 per share, of the Company being sold by certain
stockholders (the "Selling Stockholders") of the Company (the "Secondary
Shares"). The Primary Shares and the Secondary Shares are sometimes referred to
collectively herein as the "Shares." The Primary Shares are proposed to be
issued and sold by the Company to a group of underwriters (the "Underwriters")
for resale pursuant to an underwriting agreement (the "Underwriting Agreement"),
including a total of up to 412,500 of the Shares which may be issued and sold by
the Company pursuant to an over-allotment option granted to the Underwriters.
The Secondary Shares are proposed to be sold by the Selling Stockholders to the
Underwriters for resale pursuant to the Underwriting Agreement.

We are familiar with the proceedings to date with respect to the proposed
issuance and sale of the Primary Shares and the proposed sale of the Secondary
Shares and have examined such corporate and other records, documents,
instruments, certificates and questions of law, and satisfied ourselves as to
such matters of fact, as we have considered relevant and necessary as a basis
for this opinion.

Based on the foregoing, we are of the opinion that:

1. The Company is a corporation duly incorporated in and validly existing
under the laws of the State of Delaware.
<PAGE>

National Surgery Centers, Inc.
September 26, 1996
Page 2

2. The Primary Shares are legally authorized and, upon issuance and
delivery thereof to the Underwriters in accordance with the terms of the
Underwriting Agreement and the receipt by the Company of the purchase price
therefor, will be legally issued, fully paid and nonassessable.

3. The Secondary Shares are legally authorized, legally issued, fully paid
and nonassessable.

Our opinion expressed herein is limited to the laws of the State of
Delaware and of the United States.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to all references to our firm included in or made a
part of the Registration Statement. In giving this consent, we do not admit
that we are within the category of persons whose consent is required by Section
7 of the Securities Act of 1933.

Very truly yours,

/s/ Bell, Boyd & Lloyd

<PAGE>

Exhibit 10.1

NATIONAL SURGERY CENTERS, INC.

AMENDED AND RESTATED
1992 STOCK OPTION PLAN

This Stock Option Plan, originally adopted and authorized by the Board of
Directors of National Surgery Centers, Inc. (the "Company") on February 13,
1992, is amended and restated as of January 1, 1995 in its entirety as set forth
below:

1. STATEMENT OF PURPOSE. The purpose of this Amended and Restated Stock
Option Plan (the "Plan") is to benefit National Surgery Centers, Inc. (the
"Company") and its subsidiaries through the maintenance and development of the
management by offering certain present and future executives and key personnel a
favorable opportunity to become holders of stock in the Company over a period of
years, thereby giving them a permanent stake in the growth and prosperity of the
Company and encouraging the continuance of their services with the Company or
its subsidiaries.

2. ADMINISTRATION. The Plan shall be administered by a committee (the
"Committee") of the Board of Directors composed of no fewer than two
disinterested directors designated by the Board of Directors, provided that the
Committee shall not include any person who has been granted an option under the
Plan or under any other plan of the Company entitling the participants therein
to acquire common stock or options to purchase common stock of the Company at
any time within the 12-month period immediately preceding the date on which such
person becomes a member of the Committee. A majority of the Committee shall
constitute a quorum, and the acts of a majority of the members present at any
meeting at which a quorum is present, or acts approved in writing by all of the
members, shall be the acts of the Committee.

Subject to the provisions of the Plan, the Committee shall have full and
final authority, in its absolute discretion, (a) to determine the persons to be
granted options under the Plan, (b) to determine the number of shares subject to
each option, (c) to determine the time or times at which options will be
granted, (d) to determine the option price of the shares subject to each option,
which price shall not be less than the minimum specified in Section 4 of the
Plan, (e) to determine the time or times when each option becomes exercisable
and the duration of the exercise period, (f) to determine whether or not an
option is intended to be treated as an incentive stock option as defined in
Section 422 of the Internal Revenue Code of 1986 as amended (the "Code") (f) to
prescribe the form or forms of the agreements evidencing any options granted
under the Plan (which forms shall be consistent with the Plan), (g) to adopt,
amend and rescind such rules and regulations as, in the Committee's opinion, may
be advisable in the administration of the Plan, and (h) to construe and
interpret the Plan, the rules and regulations and the agreements evidencing
options granted under the Plan and to make all other determinations deemed
necessary or advisable for the administration of the Plan. Any decision made or
action taken in good faith by the Committee in connection with the
administration, interpretation, and implementation of the Plan and of its rules
and regulations shall, to the extent permitted by law, be conclusive and binding
upon all optionees under the Plan and upon any person claiming

<PAGE>

under or through such an optionee, and no director of the Company shall be
liable for any such decision made or action taken by the Committee.

3. ELIGIBILITY. Options shall be granted only to key employees of the
Company and its subsidiaries (other than members of the Committee) selected
initially and from time to time thereafter by the Committee on the basis of the
special importance of their services in the management, development and
operations of the Company or its subsidiaries.

4. GRANTING OF OPTIONS. The Committee may grant options under which a
total of not in excess of 1,500,000 shares of the common stock of the Company
may be purchased from the Company, subject to adjustment as provided in
Paragraph 11. The Committee has the authority to designate whether or not an
option is intended to be treated as an incentive stock option as defined in the
Code.

Unless otherwise expressly provided by the Committee in any specific
instance, the action of the Committee in selecting an individual to receive a
grant, determining the number of shares subject to the option and setting the
option price constitutes the granting of the option. The date of the
Committee's action will be considered the date the option is granted.

No options shall be granted under the Plan subsequent to December 31, 2004.
In the event that an option expires or is terminated or canceled unexercised as
to any shares, such released shares may again be optioned (including a grant in
substitution for a canceled option). Shares subject to options may be made
available from unissued or reacquired shares of common stock.

The aggregate fair market value (determined at the time of grant of the
option) of the shares of common stock with respect to which incentive stock
options are exercisable for the first time during any calendar year by an
employee granted incentive stock options under this Plan or any other plan of
the Company or its parent or any subsidiary shall not exceed $100,000; provided
however, that this limit shall not apply to those options which are not intended
to be treated as incentive stock options as defined in the Code.

Nothing contained in the Plan or in any option granted pursuant thereto
shall confer upon any optionee any right to be continued in the employment of
the Company or any subsidiary of the Company, or interfere in any way with the
right of the Company or its subsidiaries to terminate his employment at any
time.

5. OPTION PRICE. The option price shall be determined by the Committee
and, subject to the provisions of Paragraph 11 hereof, shall be not less than
the fair market value, at the time the option is granted, of the stock subject
to the option, provided however, that in the case of an option granted to an
employee who, at the time the option is granted, owns more than 10% of the total
combined voting power of all classes of stock of the Company or of the parent or
any subsidiary of the Company (a "10% Holder"), the option price shall not be
less than 110% of the fair market value, at the time the option is granted, of
the stock subject to the option. For purposes of this Plan, the term "fair
market value" shall mean the average of the closing prices per share of the
common stock of the Company as quoted on the New York Stock Exchange (as

2
<PAGE>

reported in the Wall Street Journal, Midwest Edition) on each of the five
trading days preceding the day the option is granted or, in the event that the
common stock is not listed or quoted on the New York Stock Exchange or any other
national stock exchange and is not so quoted, an amount which, in the
Committee's reasonable determination, represents the fair market value of the
Common Stock on that date.

6. DURATION OF OPTIONS, INCREMENTS, AND EXTENSIONS. Subject to the
provisions of Paragraph 9 hereof, each option shall be for such term of not more
than ten years, as shall be determined by the Committee at the date of the
grant, provided, however, that no option granted to an employee who, at the time
the option is granted, is a 10% Holder, shall have a term of more than five
years. Each option shall become exercisable with respect to one-quarter of the
total number of shares subject to the option twelve months after the date of its
grant and with respect to an additional one-quarter at the end of each twelve-
month period thereafter during the succeeding three years (each twelve month
period sometimes referred to herein as a "Vesting Year" and each share increment
sometimes referred to herein as an "Annual Vesting Amount"). Provided however,
that unapproved leaves of absence which continue for more than twelve months
shall be deemed to delay the exercisability of the options for a period equal in
duration to the length of the unapproved absence. In the event that the number
of shares subject to the option is not a whole number, any fractional shares
will vest in the last Vesting Year, provided that the exercise date shall be
deemed to be the date such notice is actually received by the Secretary.
Notwithstanding the foregoing, the Committee may in its discretion (i)
specifically provide at the date of the grant for another time or times of
exercise; (ii) accelerate the exercisability of any option subject to such terms
and conditions as the Committee deems necessary and appropriate to effectuate
the purpose of the Plan including, without limitation, a requirement that the
optionee grant to the Company an option to repurchase all or a portion of the
number of shares acquired upon exercise of the accelerated option for their fair
market value on the date of grant; or (iii) at any time prior to the expiration
or termination of any option previously granted, extend the term of any option
(including such options held by officers or directors) for such additional
period as the Committee, in its discretion shall determine. In no event,
however, shall the aggregate option period with respect to any option, including
the original term of the option and any extensions thereof, exceed ten years
(or five years, in the case of an option granted to any employee who, at the
time the option is granted, is a 10% Holder) Subject to the foregoing, all or
any part of the shares to which the right to purchase has accrued may be
purchased at the time of such accrual or at any time or times thereafter during
the option period; provided, however, that the minimum number of shares
purchased shall be no less than the greater of either (i) 100 shares or (ii) 25%
of the Annual Vesting Amount, unless the total number of shares purchasable
shall be less than 100.

7. CHANGE IN CONTROL. Any option previously granted under the Plan to an
optionee who is an employee of the Company or any of its subsidiaries on the
date of a "Change in Control" shall be immediately exercisable in full on such
date, without regard to any times of exercise established under Paragraph 6
hereof. The term "Change in Control" shall mean the occurrence, at any time
during the specified term of an option granted under the Plan, of any of the
following events:

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<PAGE>

(a) The Company is merged or consolidated or reorganized into or with
or shares of stock of the Company are exchanged for stock or
securities of, another corporation or other legal person and as a
result of such, merger, consolidation, reorganization or exchange
less than 51% of the outstanding voting securities or other
capital interests of the surviving, resulting or acquiring
corporation or other legal person are owned in the aggregate by
the stockholders of the Company immediately prior to such merger,
consolidation, reorganization or exchange;

(b) The Company sells all or substantially all of its business and/or
assets to any other corporation or other legal person, less than
51% of the outstanding voting securities or other capital
interests of which are owned in the aggregate by the stockholders
of the Company, directly or indirectly, immediately prior to or
after such sale;

(c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any
successor schedule, form or report), as promulgated pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), disclosing that any person or group (as the terms "person"
and "group" are used in Section 13(d)(3) or Section 14(d)(2) of
the Exchange Act and the rules and regulations promulgated
thereunder) has become the beneficial owner (as the term
"beneficial owner" is defined under Rule 13d-3 or any successor
rule or regulation promulgated under the Exchange Act) of 20% or
more of the issued and outstanding shares of voting securities of
the Company; or

(d) During any period of two consecutive years, individuals who at
the beginning of any such period constitute the directors of the
Company cease for any reason to constitute at least a majority
thereof unless the election, or nomination for election by the
Company's stockholders of each new director of the Company was
approved by a vote of at least two-thirds of such directors of
the Company then still in office who were directors of the
Company at the beginning of any such period.

Notwithstanding any other provisions in the Plan, during the period of 30
days after any Change in Control, each optionee (or other person entitled to
exercise an option granted under the Plan) (in either case, the "Optionholder")
shall have the right to require the Company to purchase from him any option
granted under the Plan at a purchase price equal to (1) the excess of the fair
market value per share (as defined in Section 5) over the option price (2)
multiplied by the number of option shares specified by the Optionholder for
purchase in a written notice to the Company, attention of the Secretary. The
amount payable to each Optionholder by the Company shall be in cash or by
certified check and shall be reduced by any taxes required to be withheld.

8. EXERCISE OF OPTION. An option may be exercised by giving written
notice to the Company, attention of the Secretary specifying the number of
shares to be purchased, accom-

4
<PAGE>

panied by the full purchase price for the shares to be purchased in cash or by
check, provided, however, that in lieu of cash an Optionee may, with the
approval of the Committee, exercise his or her option by (i) tendering to the
Company shares of Common Stock owned by him or her and with the certificates
therefor registered in his or her name, having a fair market value equal to the
cash exercise price of the shares being purchased; or (ii) instructing the
Company to withhold from the shares of Common Stock otherwise issuable upon the
exercise of the option that number of shares having a fair market value equal to
the cash exercise price of the shares being purchased; provided, however, that
an election pursuant to clause (ii) must be made by the Optionee during the
period beginning on the third business day following the date of release for
publication of the Company's quarterly or annual financial summary of its
results of operations and ending on the twelfth business day following such
date. For these purposes, the per share value of the Company's common stock
shall be the fair market value at the close of business on the date preceding
the date of exercise (or, if that date is not a trading day, on the trading day
next preceding the date of exercise of the option).

At the time of any exercise of any option, the Committee may, if it shall
determine it necessary or desirable for any reason, require the optionee (or his
heirs, legatees, or legal representative, as the case may be) as a condition
upon the exercise thereof, to deliver to the Company a written representation of
present intention to purchase the shares for investment and not for distribution
or resale. In the event such representation is required to be delivered, an
appropriate legend may be placed upon each certificate delivered to the optionee
upon his exercise of part of all of the option and a stop transfer order may be
placed with the transfer agent. Each option shall also be subject to the
requirements that, if at any time the Company determines, in its discretion,
that the listing, registration or qualification of the shares subject to the
option upon any securities exchange or under any state or Federal law, or the
consent or approval of any governmental regulatory body is necessary or
desirable as a condition of, or in connection with, the issue or purchase of
shares thereunder, the option may not be exercised in whole or in part unless
such listing, registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Company.

If the Committee shall determine it necessary or desirable for any reason,
an option shall provide that it is contemplated that the shares acquired through
the exercise of the option will not be registered under applicable federal and
state securities laws and that such shares cannot be resold unless they are
registered under such laws or unless an exemption from registration is
available, and the certificate for any such shares issued upon the exercise of
the option shall bear a legend making appropriate reference to such provisions
and a stop transfer order may be placed with the transfer agent.

At the time of the exercise of any option the Company may require, as a
condition of the exercise of such option, the optionee to pay the Company an
amount equal to the amount of the tax the Company may be required to withhold as
a result of the exercise of such option by the optionee.

At any time when an optionee is required to pay to the optionee's employer
an amount required to be withheld under applicable income tax laws in connection
with the exercise of an

5
<PAGE>

option, the optionee may satisfy this obligation in whole or in part by making
an election (the "Election") to have the Company withhold shares of common stock
of the Company having a value equal to the amount required to be withheld. The
value of the shares to be withheld shall be based on the fair market value of
the common stock of the company on the date that the amount of tax to be
withheld shall be determined (the "Tax Date"). Each Election must be made on or
prior to the Tax Date and shall be irrevocable. The Committee may disapprove of
any Election or may suspend or terminate the right to make Elections. If an
optionee is a person described in Section 16(a) of the Exchange Act, then an
Election is subject to the following additional restrictions: (a) no election
shall be effective for a Tax Date which occurs within six months of the grant of
the option; and (b) the Election must be made either (i) at least six months
prior to the Tax Date or (ii) during a period beginning on the third business
day following the date of release for publication of the Company's quarterly or
annual summary consolidated statements of income and ending on the twelfth
business day following such date.

9. TERMINATION OF EMPLOYMENT--EXERCISE THEREAFTER. In the event the
employment of an optionee with the Company or any of its subsidiaries is
terminated for any reason other than death or permanent disability, such
optionee's option shall expire and all rights to purchase shares pursuant
thereto shall terminate three months after such termination. Temporary absence
from employment because of illness, vacation, approved leaves of absence, and
transfers of employment among the Company and its subsidiaries, shall not be
considered to terminate employment or to interrupt continuous employment.

In the event of termination of employment because of death (as that term is
defined in Section 22(e)(3) of the Code, as now in effect or as shall be
subsequently amended), the option may be exercised in full, without regard to
any times of exercise established under Paragraph 6 hereof, by his heirs,
legatees, or legal representative, as the case may be, during its specified term
prior to one year after the date of death.

10. NON-TRANSFERABILITY OF OPTIONS. No option shall be transferable by
the optionee otherwise than by will or the laws of descent and distribution and
each option shall be exercisable during an optionee's lifetime only by him.

11. ADJUSTMENT. The number of shares subject to the Plan and to options
granted under the Plan shall be adjusted as follows: (a) in the event that the
Company's outstanding common stock is changed by any stock dividend, stock split
or combination of shares, the number of shares subject to the Plan and to
options granted thereunder shall be proportionately adjusted; (b) in the event
of any merger, consolidation or reorganization of the Company with any other
corporation or corporations, there shall be substituted, on an equitable basis
as determined by the Committee, for each share of common stock then subject to
the Plan, whether or not at the time subject to outstanding options, the number
and kind of shares of stock or other securities to which the holders of common
stock of the Company will be entitled pursuant to the transaction; (c) in the
event of any other relevant change in the capitalization of the Company, the
Committee shall provide for an equitable adjustment in the number of shares of
common stock then subject to the Plan, whether or not then subject to
outstanding options; and (d) in the event of any such adjustment the purchase
price per share shall be proportionately adjusted.

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<PAGE>

12. AMENDMENT OF PLAN. The Board of Directors of the Company may amend or
discontinue the Plan at any time. However, no such amendment or discontinuance
shall (a) change or impair any option previously granted without the consent of
the optionee, (b) increase the maximum number of shares which may be purchased
by all employees, (c) change the minimum purchase price, (d) change the
limitations on the option period or increase the time limitations on the grant
of options, or (e) permit the granting of options to members of the Committee.

13. EFFECTIVE DATE. On February 13, 1992, the Plan was initially adopted
and authorized by the Board of Directors of the Company. On August 15, 1995,
this Amended and Restated Stock Option Plan was adopted and authorized by the
Board of Directors for submission to the stockholders of the Company for
approval by them. If the Plan is approved by the affirmative vote of the
holders of a majority of the shares of the voting stock of the Company it shall
be deemed to have become effective on January 1, 1995. Options may be granted
under the Plan prior, but subject, to approval of the Plan by stockholders of
the Company and, in each such case, the date of grant shall be determined
without reference to the date of approval of the Plan by the stockholders of the
Company. No options may be exercised until the Plan is approved by the
stockholders, and if the Plan is not so approved within twelve months after its
approval by the Board of Directors, the Plan, and all options granted
thereunder, shall be null and void.

<PAGE>

Exhibit 10.2

NATIONAL SURGERY CENTERS, INC.

AMENDED AND RESTATED
EMPLOYEE STOCK PURCHASE PLAN

The purpose of this Employee Stock Purchase Plan (the "Plan") is to benefit
National Surgery Centers, Inc. (the "Company") and its subsidiaries by offering
eligible employees a favorable opportunity to become stockholders of the Company
over a period of years, thereby giving them a proprietary interest in the growth
and prosperity of the Company and encouraging the continuance of their dedicated
services with the Company or its subsidiaries. Pursuant to this Plan, 500,000
shares of authorized but unissued common stock of the Company may be offered for
sale to eligible employees through periodic offerings to be made during the
five-year period commencing November 10, 1995.

The Plan is intended to qualify as an Employee Stock Purchase Plan under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"), and
the regulations promulgated thereunder.

1. ADMINISTRATION. The Plan will be administered by a Committee
appointed by the Board of Directors. The Committee shall consist of not fewer
than three members of the Board of Directors, each of whom is (i) a
"disinterested person" (as such term is defined under Rule 16b-3 of the
Securities Exchange Act of 1934 (the "Exchange Act")), and (ii) an "outside
director" (as such term is defined under Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code"). Its interpretations and decisions with
regard thereto shall be final and conclusive.

2. ELIGIBILITY. All employees of the Company and its subsidiaries on the
date of any offering (as hereinafter described) shall be eligible to participate
in the Plan, except that the following classes of employees shall not be
eligible:

a. employees who have been employed for fewer than six months; provided,
however, that all persons employed on the first offering date under the Plan
shall be eligible to participate in such offering regardless of their period of
employment;

b. employees whose customary employment is 20 hours or fewer per week;

c. employees whose customary employment is for not more than 5 months in
any calendar year; and

d. employees who either own, or immediately after the grant of an option
under the Plan would own, Company stock possessing 5% or more of the total
combined voting power or value of all classes of stock of the Company or its
parent or subsidiaries.

For purposes of subparagraph (a), a participating employee who terminates
his or her employment and is subsequently reemployed by the Company or one of
its subsidiaries within
<PAGE>

one year of the termination date shall be immediately eligible to participate in
any current or subsequent offering under this Plan following the date of such
reemployment. Additionally, in determining an employee's months of employment
for purposes of this Plan, such employee's months of employment with any
business entity, the assets, business, stock or product line of which is
acquired by the Company through purchase, merger or otherwise will be deemed to
be months of employment with the Company. For purposes of subparagraph (d), the
rules of Section 424(d) of the Code shall apply in determining the stock
ownership of an employee, and stock which the employee may purchase under
outstanding options shall be treated as stock owned by the employee. For
purposes of this Plan, a subsidiary of the Company shall mean a "subsidiary
corporation" as defined in Section 424(f) of the Internal Revenue Code.

3. OFFERINGS. The Company will make one or more annual offerings to
employees to purchase stock under this Plan. Each offering period shall be one
year in duration, during which (or during such portion thereof as an employee
may elect to participate) the amounts received as direct compensation by an
employee, plus the amount of any dividends received on any shares purchased by
the employee under the Plan while such shares are registered in the name of a
custodian appointed pursuant to Section 9 hereof, shall constitute the measure
by which the employee's participation in the offering is based. For all purposes
of this Plan, "direct compensation" shall mean all cash payments on account of
the employee's employment with the Company or its subsidiaries and shall
include: wage or salary payments, incentives or bonuses, commissions advanced
and paid, and extra cash payments of: overtime premium, shift pay for Saturday,
Sunday or holiday work, emergency call-in and other special awards made by cash
payments.

No employee may be granted an option which permits his rights to purchase
stock under this Plan, and any other stock purchase plan of the Company and its
parent or subsidiaries, to accrue at a rate which exceeds $25,000 of the fair
market value of such stock (determined at the effective date of the offering)
for each calendar year in which the offering is outstanding at any time. For
purposes of the preceding sentence, the rules set forth in Section 423(b)(8) of
the Code shall apply.

4. PARTICIPATION. Subject to the second sentence of Section 7, an
employee eligible on the effective date of any offering may participate in such
offering on such effective date or on the first day of any calendar quarter
commencing within the offering period (an "enrollment date") by completing and
forwarding a payroll deduction authorization form to the Personnel Department.
The form will authorize a regular payroll deduction from the employee's direct
compensation, and will take effect on the next payroll date after the enrollment
date (or such later payroll date as the Committee may determine by uniform
rules). The form will also authorize the purchase of additional shares with any
dividends received on any shares purchased by the employee under this Plan while
such shares are registered in the name of a custodian appointed pursuant to
Section 9 hereof.

5. PAYROLL DEDUCTIONS. The Company will maintain payroll deduction
accounts for all participating employees. With respect to any offering made
under this Plan, an employee may authorize a payroll deduction in terms of whole
number percentages from a minimum of 1%

2
<PAGE>

up to a maximum of 10% of the direct compensation an employee receives during
the offering period (or during such portion thereof as an employee may elect to
participate). Notwithstanding the foregoing, in no event may more than $10,000
be deducted from an employee's direct compensation for each offering period.

6. DEDUCTION CHANGES. An employee may at any time (but not more than
twice during any offering period on dates designated by the Committee) increase
or decrease the employee's payroll deduction by filing a new payroll deduction
authorization form. The change will not become effective sooner than the next
pay period after receipt of the form by the Personnel Department.

7. WITHDRAWAL OF FUNDS. A employee may at any time and for any reason
permanently draw out the balance accumulated in the employee's account
(including any dividends added to such account) and thereby withdraw from
participation in a stock offering. An employee may thereafter resume
participation again only once during the remainder of the offering period;
provided, however, that an employee who is an officer or director of the Company
may not thereafter resume participation in that offering or participate in a
subsequent offering prior to the expiration of six months from the date of such
withdrawal. Partial withdrawals will not be permitted.

8. PURCHASE OF SHARES. Each employee participating in any offering under
this Plan will be granted an option, upon the effective date of such offering,
for as many full or fractional shares of National Surgery Centers, Inc. common
stock as the participating employee may elect to purchase with the following
amounts:

(a) up to 10% of direct compensation received during the specified
offering period (or during such portion thereof as an employee may elect to
participate) but not to exceed $10,000, to be paid by payroll deductions during
such period; and

(b) the amount of any dividends received on any shares purchased by the
employee under this Plan while such shares are registered in the name of a
custodian appointed pursuant to Section 9 hereof.

9. PURCHASE PRICE OF SHARES. The purchase price for each share purchased
will be the lesser of 85% of the fair market value (as defined in Section 11) on
the date of the offering (the "Subscription Price") or 85% of the fair market
value at the time the option is exercised, when there are sufficient funds in
the employee's account to purchase one or more full shares. As of the last day
of each calendar quarter during any offering, and upon termination of the Plan,
the account of each participating employee (including any dividends added to
such account) shall be totaled. If such account contains sufficient funds to
purchase one or more full shares as of that date, the employee shall be deemed
to have exercised an option to purchase such share or shares as of that date.
However, under no circumstances shall options be exercised or shares purchased
under the plan prior to the registration of such shares with the Securities and
Exchange Commission. If a registration statement delays the exercising of an
option, such option shall be exercised in full as of the date the registration
statement for such shares becomes effective. The employee's account shall be
charged for the amount of the purchase price and ownership of such

3
<PAGE>

share or shares shall be appropriately entered in the books of the Company. The
Committee may appoint a custodian to accept custody of such shares on behalf of
each participating employee. In such instance, a stock certificate shall be
issued in the custodian's name at the end of each quarter during an offering
period. An employee may request issuance of a certificate for any or all of the
shares held by the custodian on his or her behalf by completing a form approved
by the Committee.

A participating employee who is an officer or director of the Company may
not sell, transfer or dispose of any shares within six months after such shares
have been acquired upon exercise of an option.

A participating employee may not purchase a share under any offering beyond
12 months from the effective date thereof. Any balance remaining in an
employee's payroll deduction account at the end of an offering period will be
carried forward into the employee's payroll deduction account for the following
offering period or, if there is none, shall be paid to the employee as soon as
practicable.

10. REGISTRATION OF CERTIFICATES. Any certificates issued to an employee
may be registered only in the name of the employee, or, if the employee so
indicates on the employee's payroll deduction authorization form, in the
employee's name jointly with a member of the employee's family, with right of
survivorship.

11. FAIR MARKET VALUE. The "fair market value" for any day shall be the
average of the high bid and low asked prices in the over-the-counter market, as
reported by the National Association of Securities Dealers, Inc. Automated
Quotation System ("NASDAQ") or such other system then in use; provided that if
the stock of the Company shall become listed on a national securities exchange,
the fair market value shall be the last sale price, regular way, or, in case no
such sale takes place on such day, the average of the closing bid and asked
prices, regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to the principal exchange on which the
stock is so listed. If such prices are not available on a given day, then the
Committee may use the prices of such stock on the next preceding trading day for
which such prices are available. The Committee may revise the method of
determining the fair market value of stock, provided that such revisions are
uniformly applied and consistent with the requirements of Section 423 of the
Code.

12. RIGHTS AS A STOCKHOLDER. None of the rights or privileges of a
stockholder of the Company shall exist with respect to shares purchased under
this Plan unless and until a stock certificate with respect to such full or
fractional shares shall have been issued to the employee or the custodian on his
behalf.

13. RIGHTS ON RETIREMENT, DEATH OR TERMINATION OF EMPLOYMENT. In the
event of a participating employee's retirement, death or termination (other than
an authorized leave of absence) of employment, no payroll deduction shall be
taken from any pay due and owing to an employee at such time and the balance in
the employee's account shall be paid to the employee or, in the event of the
employee's death, to the employee's estate, as soon as practicable thereafter.

4
<PAGE>

14. RIGHTS NOT TRANSFERABLE. Rights under this Plan are not transferable
by a participating employee other than by will or the laws of the descent and
distribution, and are exercisable during the employee's lifetime only by the
employee.

15. APPLICATION OF FUNDS. All funds received or held by the Company under
this Plan may be used for any corporate purpose.

16. ADJUSTMENT IN CASE OF CHANGES AFFECTING NATIONAL SURGERY CENTERS, INC.
STOCK. The number of shares subject to the Plan and to offerings granted under
the Plan shall be adjusted as follows: (a) in the event that the Company's
outstanding common stock is changed by any stock dividend, stock split or
combination of shares, the number of shares subject to the Plan and to offerings
theretofore granted thereunder shall be proportionately adjusted; (b) in the
event of any merger or consolidation of the Company with any other corporation
or corporations, there shall be substituted for each share of National Surgery
Centers, Inc. then subject to the Plan, whether or not at the time subject to
outstanding offerings, the number and kind of shares of common stock or other
securities to which the holders of common stock of the Company will be entitled
pursuant to the transaction; and (c) in the event of any other relevant change
in the capitalization of the Company, the Board of Directors shall provide for
an equitable adjustment in the number of shares of National Surgery Centers,
Inc. common stock subject to the Plan, whether or not then subject to
outstanding offerings. In the event of any such adjustment, the Subscription
Price per share shall be appropriately adjusted.

17. AMENDMENT OF THE PLAN. The Committee or the Board of Directors may at
any time, or from time to time, amend this Plan in any respect, except that,
without the approval of a majority of the shares of stock of the Company then
issued and outstanding and entitled to vote, no amendment shall be made (i)
increasing or decreasing the number of shares approved for this Plan (other than
as provided in Section 16) or (ii) decreasing the purchase price per share
(other than as provided in Section 16).

18. TERMINATION OF THE PLAN. This Plan and all rights of employees under
any offering pursuant to the Plan hereunder shall terminate:

a. on the day that participating employees become entitled to purchase a
number of shares equal to or greater than the number of shares remaining
available for purchase. If the number of shares so purchasable is greater than
the shares remaining available, the available shares shall be allocated by the
Committee on a pro rata basis of each participant's direct compensation on that
date; or

b. at any time, at the discretion of the Board of Directors.

No offering hereunder shall be made which shall extend beyond November 10,
2000. Upon termination of this Plan, all amounts in the accounts of
participating employees representing fractional shares shall be carried forward
into the employees' payroll deduction account under a successor Plan, if any, or
refunded as soon as practicable thereafter.

5
<PAGE>

19. GOVERNMENTAL REGULATIONS. The Company's obligation to sell and
deliver National Surgery Centers, Inc. common stock under this Plan is subject
to the approval of any governmental authority required in connection with the
authorization, issuance or sale of such common stock.

Each option shall also be subject to the requirement that, if at any time
the Company determines, in its discretion, that the listing, registration or
qualification of the shares subject to the option upon any securities exchange
or under any state or federal law, or the consent or approval of any government
regulatory body is necessary or desirable as a condition of, or in connection
with, the issue or purchase of shares thereunder, the option may not be
exercised in whole or in part unless such listing, registration, qualification,
consent or approval shall have been effected or obtained free of any conditions
not acceptable by the Company.

20. PURCHASE OF SHARES. Purchase of outstanding shares may be made
pursuant to and on behalf of this Plan, upon such terms as the Company may
approve, for delivery under this Plan.

21. APPROVAL OF STOCKHOLDERS. This Plan was approved by stockholders of
the Company on August 15, 1995 at a meeting held subsequent to the adoption of
the Plan by the Board of Directors. All options granted prior to such approval
are valid and exercisable.

22. NO EMPLOYMENT GUARANTEE. Neither the establishment of the Plan nor
any modification thereof shall be construed as giving to any participant or
other person any legal or equitable right against the Company or any other
participating employer except as herein provided. Under no circumstances shall
the terms of employment of any participant be modified or in any way affected
hereby. The maintenance of this Plan shall not constitute a contract of
employment with any participant, and participation in the Plan will not give any
participant a right to be retained as an employee of any employer.

<PAGE>

EXHIBIT 21.1

Subsidiaries of the Company

Corporations (Jurisdiction)

KPSC, Inc. (Washington)
National Surgery Centers - Bakersfield, Inc. (California)
National Surgery Centers - Santa Monica, Inc. (California)
Northern Rockies Surgicenter, Inc. (Montana)
NSC Brownsville, Inc. (Texas)
NSC Channel Islands, Inc. (California)
NSC Dallas, Inc. (Texas)
NSC Elizabethtown, Inc. (Kentucky)
NSC Fayetteville, Inc. (North Carolina)
NSC Greensboro, Inc. doing business as Surgical Center of Greensboro (North
Carolina)
NSC Greensboro West, Inc. (North Carolina)
NSC Las Vegas, Inc. (Nevada)
NSC Las Vegas East, Inc. (Nevada)
NSC Norman, Inc. (Oklahoma)
NSC Phoenix, Inc. (Arizona)
NSC Provo, Inc. doing business as Provo Surgical Center (Utah)
NSC Seattle, Inc. (Washington)
Walk In and Out, Inc. (Kentucky)

Endoscopy Center Affiliates, Inc. (Del.)
Northern Rockies Surgicenter, Inc. (Mont.)
NSC Kent, Inc. (Ohio)
NSC Houston, Inc. (Texas)
NSC Atlanta, Inc.
NSC Sarasota, Inc.
NSC Miami, Inc.
NSC Port St. Lucie, Inc. (Fla.)

Partnerships (Jurisdiction)

2121 Surgery Center, Limited Partnership doing business as Surgery Center of
Santa Monica (California)
Bakersfield Surgery Center Limited Partnership (California)
Brownsville Surgery Center, Ltd. doing business as Brownsville Surgicare (Texas)
Channel Islands Surgicenter, L.P. (California)
Desert Surgery Center Limited Partnership (Nevada)
Fayetteville Ambulatory Surgery Center Limited Partnership (North Carolina)
Greensboro Specialty Surgery Center, Limited Partnership (North Carolina)
Kitsap Peninsula Surgery Center Limited Partnership doing business as Olympic
Ambulatory Surgery Center (Washington)
Las Palmas Surgery Center Limited Partnership (Arizona)
NSCSM, Ltd. (California)
Physicians Surgical Center Limited Partnership (Oklahoma)
Physicians' Daysurgery Center Operating Limited (Texas)
Seattle Surgery Center, Limited Partnership (Washington)
Somerset Surgery Center, Limited Partnership (Kentucky)
Surgery Center of Elizabethtown, Limited Partnership (Kentucky)
Valley View Surgery Center, Limited Partnership (Nevada)
Ambulatory Surgical Center of Miami, L.P. (Fla).
Biloxi Endoscopy Center
Brunswick Endoscopy Center
Columbia Endoscopy Center
East Cincinnati Endoscopy Center
Endoscopy West
Fort Worth Endoscopy Center
Greater Long Beach Endoscopy Center
Indianapolis Endoscopy Center
Mid Peninsula Endoscopy Center
Newport Beach Endoscopy Center
North Atlanta Endoscopy Center, L.P. (Ga.)
Pittsburgh GI Surgical Center
San Diego Endoscopy Center
South Bay Endoscopy Center
Suburban Endoscopy Center
Superior Endoscopy Center
Surgex - Sarasota Endoscopy Center, L.P. (Fla).
Thousand Oaks Endoscopy Center
Western Reserve Surgery Center, Limited Partnership (Ohio)
Westside Surgery Center, Ltd. (Texas)
Loan Vision Northwest, Limited Partnership (Washington)