<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No: 333-50813
PROSPECTUS
3,700,000 SHARES
(AMSURG LOGO)
CLASS A COMMON STOCK
All of the shares of Class A Common Stock, no par value per share (the
"Class A Common Stock") of AmSurg Corp. (the "Company") offered hereby (the
"Offering") are being sold by the Company.
The Company has two classes of common stock, the Class A Common Stock,
which is offered hereby, and the Class B Common Stock, no par value per share
(the "Class B Common Stock" and, together with the Class A Common Stock, the
"Common Stock"). The Class A Common Stock and the Class B Common Stock are
identical in all respects except that in the election and removal of directors
the Class A Common Stock has one vote per share and the Class B Common Stock has
10 votes per share. See "Description of Capital Stock." The Class A Common Stock
and the Class B Common Stock are traded on the Nasdaq Stock Market's National
Market (the "Nasdaq National Market") under the symbols "AMSGA" and "AMSGB,"
respectively. On June 11, 1998, the last reported sale prices of the Class A
Common Stock and the Class B Common Stock were $8.50 and $9.38 per share,
respectively. See "Price Range of Common Stock and Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
CLASS A COMMON STOCK OFFERED HEREBY.
---------------------
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>
<CAPTION>
===================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................ $8.00 $0.42 $7.58
- -------------------------------------------------------------------------------------------------------------------
Total(3)............................. $29,600,000 $1,554,000 $28,046,000
===================================================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $400,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 450,000 additional shares of Class A Common Stock, solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $33,200,000, the Underwriting Discount will
total $1,743,000 and the Proceeds to Company will total $31,457,000. See
"Underwriting."
---------------------
The shares of Class A Common Stock are offered by the several Underwriters
named herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that delivery of
the certificates representing such shares will be made against payment therefor
at the office of J.C. Bradford & Co. on or about June 17, 1998.
---------------------
J.C. Bradford & Co.
Piper Jaffray Inc.
Morgan Keegan & Company, Inc.
JUNE 12, 1998
<PAGE> 2
[Map of United States depicting Surgery Centers, Surgery Centers Under
Development and Networks at May 1, 1998. Map depicts 45 Surgery Centers in 20
states and Washington, D.C.; 6 Surgery Centers Under Development in 5 states; 5
Networks in 5 states.]
<PAGE> 3
(MAP)
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE AND
PURCHASES OF COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMPANY'S COMMON STOCK MAINTAINED BY THE UNDERWRITERS. FOR A DESCRIPTION OF
THESE ACTIVITIES SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M.
SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and consolidated financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
All figures have been adjusted to give effect to a recapitalization on December
3, 1997 pursuant to which every three shares of the Company's then outstanding
common stock were converted into one share of Class A Common Stock. Unless
otherwise indicated, the information contained in this Prospectus assumes (i)
the conversion of the Company's Series B Convertible Preferred Stock (the
"Series B Preferred Stock") into approximately 606,000 shares of Class A Common
Stock upon the completion of the Offering and (ii) no exercise of the
Underwriters' over-allotment option. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business," as
well as those described elsewhere in this Prospectus.
THE COMPANY
The Company develops, acquires and operates practice-based ambulatory
surgery centers, in partnership with physician practice groups, throughout the
United States. As of May 1, 1998, the Company owned a majority interest in 44
surgery centers and a minority interest in one center in 20 states and the
District of Columbia. The Company also had six centers under development, had
executed letters of intent to develop or acquire six additional centers and had
two centers awaiting certificate of need ("CON") approval. The Company believes
that it is a leader in the ownership and operation of practice-based ambulatory
surgery centers.
The Company's centers are licensed for outpatient surgery, are generally
equipped and staffed for a single medical specialty and are usually located in
or adjacent to the offices of a physician group practice. The Company has
targeted ownership in centers that perform gastrointestinal endoscopy,
ophthalmology, urology, orthopaedics or otolaryngology procedures. Surgical
procedures associated with these specialties include many types of high volume,
lower-risk procedures that are appropriate for the practice-based setting. The
Company believes its single specialty centers have significantly lower capital
and operating costs than hospital and freestanding ambulatory surgery center
alternatives that are designed to accommodate a broader array of surgical
specialties and procedures. In addition, the practice-based surgery center
provides a more convenient setting for the patient and for the physician
performing the procedure.
In recent years, government programs, private insurance companies, managed
care organizations and self-insured employers have implemented various
cost-containment measures to limit the growth of healthcare expenditures. These
cost-containment measures, together with technological advances, have resulted
in a significant shift in the delivery of healthcare services away from
traditional inpatient hospitals to more cost-effective alternate sites,
including ambulatory surgery centers. According to SMG Marketing Group Inc.'s
Freestanding Outpatient Surgery Center Directory (June 1997), an industry
publication, outpatient surgical procedures represented approximately 69% of all
surgical procedures performed in the United States in 1996. The number of
outpatient surgery cases increased 54% from 3.1 million in 1993 to 4.8 million
in 1996. As of December 31, 1996, there were 2,425 freestanding ambulatory
surgery centers in the United States, of which 171 were owned by hospitals and
607 were owned by corporate entities. The remaining 1,647 centers were
independently owned, primarily by physicians.
The Company's strategy focuses on providing high volume, lower-risk
ambulatory surgery services in single specialty settings, which results in lower
costs, improved operating efficiencies and greater convenience and appeal to
patients, physicians, private and governmental payers and managed care
organizations. The Company intends to continue to grow through the acquisition
of existing centers and the development of new centers. In addition, the
Company's center operations are designed to enhance physician productivity and
maximize the efficient use of the centers. Furthermore, the Company believes
that it can make its centers more attractive to managed care organizations
through the development of single specialty physician networks
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<PAGE> 5
in combination with practice-based ambulatory surgery centers strategically
located in markets serving the managed care organizations' members.
While the Company currently owns majority interests in two physician
practices, in May 1998 the Board of Directors approved a plan for the Company to
dispose of its physician practice interests as part of the Company's overall
strategy to exit the practice management business and focus solely on the
development, acquisition and operation of ambulatory surgery centers and
specialty networks.
The Company typically owns its surgery centers through limited or general
partnerships or limited liability companies in which a subsidiary of the Company
is a general partner or member and holds a majority interest. The other partners
of the partnerships or members of the limited liability companies are physician
practice groups that generally have offices adjacent to or in close proximity to
the surgery center. In development projects, the capital contributed by the
physicians and the Company, together with bank financing, provides the
partnership or limited liability company with the funds necessary to construct
and equip the surgery center and to provide initial working capital.
The start-up specialty physician networks are also owned through limited
partnerships or limited liability companies in which a subsidiary of the Company
is a general partner or member and holds a majority interest. The other partners
or members are individual physicians who provide the medical services to the
patient population covered by contracts which the network will seek to enter
into with managed care payers. These entities are funded by the Company and the
physicians on a pro rata basis based on their ownership interests.
The Company was a majority-owned subsidiary of American Healthcorp, Inc.
("AHC") from 1992 until December 3, 1997 when AHC distributed to its
stockholders all of its holdings of AmSurg common stock (the "Distribution"). As
a result of the Distribution, the Company became an independent public company.
The Company was incorporated in Tennessee in April 1992. Its principal
executive offices are located at One Burton Hills Boulevard, Nashville,
Tennessee 37215. Its telephone number is (615) 665-1283.
THE OFFERING
Class A Common Stock offered by the
Company............................... 3,700,000 shares
Common Stock to be outstanding after
the Offering:
Class A Common Stock................ 9,494,173 shares(1)
Class B Common Stock................ 4,787,131 shares
Use of proceeds....................... Repayment of indebtedness.
Nasdaq National Market symbols:
Class A Common Stock................ AMSGA
Class B Common Stock................ AMSGB
- ---------------
(1) Excludes 1,350,809 shares of Class A Common Stock reserved for issuance upon
the exercise of stock options granted as of the date of this Prospectus
pursuant to the Company's stock option plans. See "Management -- Stock
Incentive Plans."
2
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND CENTER DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------ ----------------------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1997(1) 1997 1998 1998(1)
------- ------- ------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................. $22,389 $34,898 $57,414 $68,881 $12,591 $17,829 $20,038
Operating expenses:
Salaries and benefits.............. 6,243 11,613 17,363 19,866 3,972 5,367 5,827
Other operating expenses........... 7,558 11,547 20,352 24,429 4,451 6,384 7,116
Depreciation and amortization...... 2,397 3,000 4,944 5,609 1,087 1,568 1,670
Net loss on sale of assets......... -- 31 1,425(2) 1,425(2) 2,321(3) 43 43
------- ------- ------- ------- ------- ------- -------
Total operating expenses..... 16,198 26,191 44,084 51,329 11,831 13,362 14,656
------- ------- ------- ------- ------- ------- -------
Operating income............. 6,191 8,707 13,330 17,552 760 4,467 5,382
Minority interest.................... 3,938 5,433 9,084 11,320 1,948 2,807 3,257
Other (income) and expenses:
Interest expense, net.............. 627 808 1,554 2,463 308 493 646
Distribution cost.................. -- -- 842(4) 842(4) -- -- --
------- ------- ------- ------- ------- ------- -------
Earnings (loss) before income
taxes...................... 1,626 2,466 1,850 2,927 (1,496) 1,167 1,479
Income tax expense................... 578 985 1,774 2,205 329 467 592
------- ------- ------- ------- ------- ------- -------
Net earnings (loss).......... 1,048 1,481 76 722 (1,825) 700 887
Accretion of preferred stock
discount........................... -- 22 286 286 67 -- --
------- ------- ------- ------- ------- ------- -------
Net earnings (loss) available
to common shareholders..... $ 1,048 $ 1,459 $ (210) $ 436 $(1,892) $ 700 $ 887
======= ======= ======= ======= ======= ======= =======
Earnings (loss) per common share:
Basic.............................. $ 0.13 $ 0.17 $ (0.02)(5) $ 0.05(6) $ (0.20)(7) $ 0.07 $ 0.09
Diluted............................ $ 0.12 $ 0.16 $ (0.02)(5) $ 0.04(6) $ (0.20)(7) $ 0.07 $ 0.09
Weighted average number of shares and
share equivalents outstanding:
Basic.............................. 8,174 8,689 9,453 9,588 9,360 9,673 9,674
Diluted............................ 8,581 9,083 9,453 9,924 9,360 10,347 10,348
CENTER DATA:
Procedures........................... 55,344 71,323 101,819 23,207 32,417
Centers at end of year............... 18 27 39 29 42
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------------------------
PRO FORMA
PRO AS
ACTUAL FORMA(8) ADJUSTED(9)
----------- ------------ --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $11,162 $10,351 $10,351
Total assets................................................ 82,758 87,091 87,091
Long-term debt, less current portion........................ 30,060 34,060 6,414
Minority interest........................................... 10,216 10,549 10,549
Preferred stock............................................. 3,208 3,208 --
Shareholders' equity........................................ 32,813 32,813 63,667
</TABLE>
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(1) Reflects the effect of six acquisitions in 1997 and three acquisitions in
1998 occurring after the beginning of the period as if such transactions had
occurred at the beginning of the period. See Unaudited Pro Forma Combined
Statement of Operations.
(2) Includes a loss attributable to the sale of a partnership interest, net of a
gain on the sale of a surgery center building and equipment, which had an
impact after taxes of reducing basic and diluted earnings per share by $0.16
for the year ended December 31, 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 4 to the
Consolidated Financial Statements.
(3) Reflects an impairment loss attributable to the sale of a partnership
interest, which had an impact after taxes of reducing basic and diluted
earnings per share by $0.24 for the three months ended March 31, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 4 to the Consolidated Financial Statements.
(4) Reflects cost incurred related to the Distribution, which reduced basic and
diluted earnings per share by $0.09 for the year ended December 31, 1997.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(5) Without giving effect to the items reflected in footnotes (2) and (4) above,
basic and diluted earnings per common share would have been $0.24 and $0.23,
respectively, for the year ended December 31, 1997.
(6) Without giving effect to the items reflected in footnotes (2) and (4) above,
pro forma basic and diluted earnings per common share would have been $0.28
and $0.27, respectively, for the year ended December 31, 1997.
(7) Without giving effect to the item reflected in footnote (3) above, basic and
diluted earnings per common share would have been $0.05 and $0.04,
respectively, for the three months ended March 31, 1997.
(8) Reflects the effect of an acquisition of a surgery center occurring
subsequent to March 31, 1998 as if such transaction had occurred as of March
31, 1998.
(9) Reflects the effect of the application of net proceeds of this Offering. See
"Use of Proceeds."
3
<PAGE> 7
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following factors in
evaluating an investment in the Class A Common Stock offered hereby.
Dependence on Acquisition and Development Growth Strategy. The Company
intends to increase its revenues and earnings, in part, by continuing to develop
and acquire practice-based ambulatory surgery centers and by developing
specialty physician networks. The Company's ability to develop and acquire
additional centers may be affected by its ability to identify suitable
candidates, negotiate and close acquisition and development transactions and
minimize start-up losses for its developed centers. A developed center typically
incurs start-up losses during its initial months of operations and will
experience lower revenues and operating margins than an established center until
the case load grows to a more optimal operating level, which generally is
expected to occur within 12 months after a center opens. There can be no
assurance that the Company will be able to acquire or develop additional surgery
centers, complete the development of centers or achieve satisfactory operating
results at newly developed centers within the expected period of time or develop
and place in operation specialty physician networks. There can also be no
assurance that the assets acquired by the Company in the future will ultimately
produce returns that justify their related investment by the Company. See
"Business -- Strategy; and -- Acquisition and Development of Surgery Centers."
Growth Strategy Requires Substantial Capital Investment. Capital will be
needed not only for the acquisition of the assets of surgery centers, but also
for their development, effective integration, operation and expansion. The
Company may finance future center development and acquisition by raising
additional capital through debt or equity financings or using shares of its
capital stock for all or a portion of the consideration to be paid in
acquisitions. To the extent that the Company undertakes such financings or uses
capital stock as consideration, the Company's shareholders will experience
future ownership dilution. In the event that the Class A Common Stock does not
maintain a sufficient valuation, or potential acquisition candidates are
unwilling to accept Class A Common Stock as part of the consideration for the
sale of the assets of their businesses, the Company may be required to utilize
more of its cash resources, if available, or rely solely on additional financing
arrangements in order to pursue its acquisition strategy. In such an instance,
if the Company does not have sufficient capital resources, its growth could be
limited and its operations impaired. There can be no assurance that the Company
will be able to obtain financing or that, if available, such financing will be
on terms acceptable to the Company. See "Business -- Strategy."
Ability to Manage Growth. The Company has recently experienced rapid
growth that has resulted in new and increased responsibilities for management
personnel and has placed increased demands on the Company's management,
operational and financial systems and resources. To accommodate this recent
growth and to compete effectively and manage future growth, the Company will be
required to continue to implement and improve its operational, financial and
management information systems and to expand, train, motivate and manage its
workforce. There can be no assurance that the Company's personnel, systems,
procedures and controls will be adequate to support the Company's operations.
Any failure to implement and improve the Company's operational, financial and
management systems or to expand, train, motivate or manage employees could have
a material adverse effect on the Company's financial condition and results of
operation.
Dependence on Relationships with Physician Partners; Risks of Conflicts of
Interest and Disputes. The Company's business depends upon, among other things,
the efforts and success of the physicians who provide medical services at the
surgery centers or who are employed by the Company's physician practices and the
strength of the Company's relationship with such physicians. The Company's
business could be adversely affected by any failure of these physicians to
maintain the quality of medical care or otherwise adhere to required
professional guidelines at the Company's surgery centers and physician
practices, any damage to the reputation of a key physician or group of
physicians or the impairment of the Company's relationship with a key physician
or group of physicians. The Company's ownership interests in practice-based
ambulatory surgery centers and specialty physician networks generally are
structured through limited or general partnerships or limited liability
companies. The Company generally maintains a majority interest in each
partnership or limited liability company with physicians or physician practice
groups holding minority limited
4
<PAGE> 8
partnership interests or serving as minority members. The Company, as owner of
majority interests in such partnerships and limited liability companies, owes a
fiduciary duty to the minority interest holders in such entities and may
encounter conflicts between the respective interests of the Company and the
minority holders. In such cases, the Company's directors are obligated to
exercise reasonable, good-faith judgment to resolve the conflicts and may not be
free to act solely in the best interests of the Company. The Company, in its
role as general partner or as the chief manager of the limited liability
company, generally exercises its discretion in managing the business. Disputes
may arise between the Company and its physician partners with respect to a
particular business decision or regarding the interpretation of the provisions
of the partnership agreement or limited liability company operating agreement,
in which event the agreements provide for arbitration as a dispute resolution
process. No assurances can be given that any such dispute will be resolved or
that any dispute resolution will be on terms satisfactory to the Company.
Contingent Obligations. In the limited partnerships in which the Company
is the general partner, the Company is liable for 100% of the debts and other
obligations of the partnership; however, the partnership agreement requires the
physician partners to guarantee their pro rata share of any indebtedness or
lease agreements to which the partnership is a party, based on the limited
partner's ownership interest in the partnership. The Company also has primary
liability with respect to the bank debt incurred for the benefit of the limited
liability companies, and guarantees are also required of the physician members.
There can be no assurance that a third party lender or lessor would seek
performance of the guarantees rather than seek repayment from the Company of any
obligation of the partnership should it default thereunder or that the physician
partners would have sufficient assets to satisfy their guarantee obligations.
See Note 7 to the Consolidated Financial Statements.
Contingent Purchase Obligations. Upon the occurrence of certain
fundamental regulatory changes, the Company will be obligated to purchase some
or all of the minority interests of the physicians affiliated with the Company
in the partnerships or limited liability companies which own and operate the
Company's surgery centers. The regulatory changes that could create such an
obligation include changes that: (i) make the referral of Medicare and other
patients to the Company's surgery centers by physicians affiliated with the
Company illegal; (ii) create the substantial likelihood that cash distributions
from the partnership or limited liability company to the physicians associated
therewith will be illegal; or (iii) cause the ownership by the physicians of
interests in the partnerships or limited liability companies to be illegal.
There can be no assurance that the Company's existing capital resources would be
sufficient for it to meet the obligation, if it arises, to purchase minority
interests held by physicians in the partnerships or limited liability companies
which own and operate the Company's surgery centers. The determination of
whether such an obligation has been created is made by the concurrence of
counsel for the Company and the physician partners or, in the absence of such
concurrence, by independent counsel having an expertise in healthcare law and
who is chosen by both parties. Accordingly, such determination is not within the
control of the Company. While the Company has structured the purchase
obligations to be as favorable as possible to the Company, the creation of these
obligations could have a material adverse effect on the financial condition and
results of operations of the Company. See "Business -- Acquisition and
Development of Surgery Centers; and -- Government Regulation."
Risks Associated with Capitated Payment Arrangements. In 1997,
approximately 11% of the Company's total revenues were derived from capitated
payment arrangements. A significant part of the Company's growth strategy
involves assisting its surgery centers, owned physician practices and specialty
physician networks in obtaining capitated managed care contracts and managing
the medical risk associated with such contracts. These capitated managed care
contracts typically are with health maintenance organizations ("HMOs"). Under
such contracts the provider accepts a pre-determined amount per patient per
month, referred to as a "capitation" payment, and in return is responsible for
providing all necessary specified covered services to the patients covered by
the contract, thus shifting much of the risk of providing care from the payer to
the provider. Such an arrangement results in a greater predictability of
revenue, but exposes the provider to the risk of controlling the costs of
providing the services. To the extent that patients covered by such contracts
require more frequent or extensive care than is anticipated, operating margins
may be reduced and the revenue derived from such contracts may be insufficient
to cover the costs of the services provided. There can be no
5
<PAGE> 9
assurance that the Company will be able to negotiate satisfactory risk-sharing
or capitated arrangements on behalf of its surgery centers, owned physician
practices and specialty physician networks. See "Business."
Dependence on Third-Party Reimbursement; Risk of Fee Reductions or
Exclusion from Managed Care Arrangements. The Company is dependent upon private
and governmental third-party sources of reimbursement for services provided to
patients in its centers and physician practices. In addition to market and cost
factors affecting the fee structure implemented by centers and practices
operated by the Company, numerous Medicare and Medicaid regulations, cost
containment and utilization decisions of third-party payers and other payment
factors over which the Company has no control may adversely affect the amount of
payment a center or practice may receive for its services. On or before January
1, 1999, outpatient surgery services will be reimbursed by Medicare under a
revised prospective payment system, utilizing approximately 100 ambulatory
patient classifications, rather than the eight codes currently utilized. There
can be no assurance that the Company's revenues will not be adversely affected
under this revised payment system. The Company derived approximately 37%, 36%,
37% and 40% of its revenues in 1995, 1996, 1997 and the three months ended March
31, 1998, respectively, from governmental healthcare programs, including
Medicare and Medicaid. The market share growth of managed care has resulted in
substantial competition among providers of services for inclusion in managed
care contracting in some locations. Exclusion from participation in a managed
care contract in a specific location can result in material reductions in
patient volume and reimbursement to a physician practice or to a practice-based
ambulatory surgery center. The Company's financial condition and results of
operations may be adversely affected by fixed fee schedules, capitation payment
arrangements, reduced payments to physicians generally, exclusion from
participation in managed care programs or other changes in payments for
healthcare services. In May 1998 the Company received notification from a payer
with which one of its physician practices and surgery centers has a capitated
contract for professional and surgical gastroenterology services covering
approximately 120,000 lives that the contract would not be renewed beyond the
June 30, 1998 anniversary date of the contract. The payer has advised the
Company that it plans to negotiate a new contract. At this time, the Company
cannot determine the outcome of these negotiations; however, an unfavorable
outcome in these negotiations may have an adverse impact on the Company's
results of operations. This contract contributed $676,000, or 5%, and $617,000,
or 3%, to the Company's consolidated revenues in the three months ended March
31, 1997 and 1998, respectively. See "Business -- Government
Regulation -- Reimbursement" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Sources of Revenues."
Risks Associated with Medicare-Medicaid Illegal Remuneration
("anti-kickback") Laws. Federal anti-kickback laws prohibit the offer, payment,
solicitation or receipt of any form of remuneration in return for the referral
of Medicare or state health program patients or patient care opportunities, or
in return for the purchase, lease or order of items or services that are covered
by Medicare or state health programs. The anti-kickback statute is very broad in
scope and its provisions are not well defined by existing case law or
regulations. Violations of the anti-kickback laws may result in substantial
civil or criminal penalties for individuals or entities. A violation of the
anti-kickback law is a felony punishable by a fine of up to $25,000 or
imprisonment for up to five years, or both. A violation may also result in civil
penalties of up to $10,000 for each violation, plus three times the amount
claimed and exclusion from participation in the Medicare and Medicaid programs.
Such exclusion, if applied to the Company's surgery centers or networks, could
result in significant loss of reimbursement and could have a material adverse
effect on the Company. In July 1991, the Department of Health and Human Services
("DHHS") Inspector General issued final regulations identifying various "safe
harbors," including two related to investment interests, which offer exemption
from the anti-kickback laws. The structure of the partnerships and limited
liability companies operating the Company's surgery centers and physician
networks, as well as certain relationships with physician group practices, do
not satisfy all of the requirements of either of the "investment interest" safe
harbors or the "personal services and management contracts" safe harbor and,
therefore, are not immune from government review or prosecution. Notwithstanding
the Company's belief that the relationships of physician partners with the
Company's surgery centers should not constitute illegal remuneration under the
anti-kickback laws, no assurances can be given that a federal or state agency
charged with enforcement of the anti-kickback laws and similar laws or a private
party might not assert a contrary position or that new federal or state laws
might not be enacted that would cause the physician partners' relationships with
the Company's surgery centers to become illegal or result in
6
<PAGE> 10
the imposition of penalties on the Company or certain of its facilities. Even
the assertion of a violation could have a material adverse effect upon the
financial condition and results of operations of the Company. See
"Business -- Government Regulation -- Medicare-Medicaid Illegal Remuneration
Provisions."
Risks Associated with Physician Self-Referral Laws. At both the state and
federal level, there are legislative restrictions on the ability of a physician
to refer patients to healthcare entities when the physician (or immediate family
member) has a financial relationship, directly or indirectly, with the entity
receiving the referral. The financial relationship giving rise to prohibition on
referrals may be either an ownership or investment interest or a compensatory
arrangement. At the federal level, this legislation (42 USC sec.sec. 1395nn) is
known as the "Stark bill" because of its sponsor, Representative Pete Stark.
Originally, the Stark bill applied only to entities providing clinical
laboratory services. However, as of January 1, 1995, the ban on physician
financial relationships with healthcare entities extended to entities providing
certain defined "designated health services" ("Stark II"). The Company believes
physician ownership of practice-based ambulatory surgery centers to which they
refer patients and physician networks is not prohibited under Stark II or other
similar statutes recently enacted at the state level. However, these statutes
are subject to different interpretations with respect to many important
provisions. Violations of these "self-referral" laws may result in substantial
civil or criminal penalties for individuals or entities, including large civil
monetary penalties and exclusion from participation in the Medicare and Medicaid
programs. Such exclusion, if applied to the Company's surgery centers, could
result in significant loss of reimbursement and could have a material adverse
effect on the Company. There can be no assurances that further judicial or
agency interpretation of existing law or further legislative restrictions on
physician ownership of healthcare entities will not be issued which could have a
material adverse effect upon the financial condition and results of operations
of the Company. See "Business -- Government Regulation -- Prohibition on
Physician Ownership of Healthcare Facilities."
Risks Related to Laws Governing Corporate Practice of Medicine. The laws
of certain states in which the Company operates or may operate in the future do
not permit business corporations to practice medicine, exercise control over
physicians who practice medicine or engage in certain business practices such as
fee-splitting with physicians. The Company is not required to obtain a license
to practice medicine in any jurisdiction in which it owns and operates an
ambulatory surgery center because the surgery centers are not engaged in the
practice of medicine. The physician partners who utilize the center are
individually licensed to practice medicine. The group practices, with the
exception of the two physician practices majority owned by the Company, are not
affiliated with the Company other than through the physicians' ownership in the
partnerships and limited liability companies that own the surgery centers. The
Company owns a majority interest in two group practices in Florida, a state
which permits physicians to practice medicine through an entity that is not
wholly-owned by physicians. A recent ruling by the Florida Board of Medicine
that an agreement between a physician practice and a practice management company
constituted impermissible fee-splitting, if upheld on judicial appeal, would
cause the Company to restructure its relationship with one of the two group
practices. The Company does not believe that any such restructuring would have a
material adverse effect on the Company. There can be no assurance, however, that
future changes in the law in Florida will not require the Company to restructure
its ownership of these group practices and that such restructuring will not have
a material adverse effect on the Company. See "Business -- Government
Regulation -- Corporate Practice of Medicine."
Risks of Potential Applicability of Insurance Regulations and Antitrust
Laws. Laws in all states regulate the business of insurance and the operations
of HMOs. Many states also regulate the establishment and operation of networks
of healthcare providers. The Company believes that its operations are in
compliance with these laws in the states in which it currently does business.
The National Association of Insurance Commissioners (the "NAIC") has endorsed a
policy proposing the state regulation of risk assumption by healthcare
providers. The policy proposes prohibiting providers from entering into
capitated payment or other risk sharing contracts except through HMOs or
insurance companies. Several states have adopted regulations implementing the
NAIC policy in some form. In states where such regulations have been adopted,
healthcare providers will be precluded from entering into capitated contracts
directly with employers and benefit plans other than HMOs or insurance
companies.
7
<PAGE> 11
The Company and its affiliated physician groups may in the future enter
into additional contracts with managed care organizations, such as HMOs, whereby
the Company and its affiliated physician groups would assume risk in connection
with providing healthcare services under capitation arrangements. If the Company
or its affiliated physician groups are considered to be in the business of
insurance as a result of entering into such risk sharing arrangements, they
could become subject to a variety of regulatory and licensing requirements
applicable to insurance companies or HMOs, which could have a material adverse
effect on the Company's ability to enter into such contracts. See
"Business -- Government Regulation -- Insurance and Antitrust Laws."
With respect to managed care contracts that do not involve capitated
payments or some other form of financial risk sharing, federal and state
antitrust laws restrict the ability of healthcare provider networks such as the
Company's specialty physician networks to negotiate payments on a collective
basis.
Risks of Compliance with Other Government Regulation. All facets of the
healthcare industry are highly regulated at the federal and state levels. The
Company's ability to be profitable may be adversely affected by licensing and
certification requirements, reimbursement restrictions or reductions and other
governmental regulatory factors. In addition, the Company's ability to expand
its services in the future may be adversely affected by health planning laws,
including CON requirements, at the state and/or federal level. A number of other
initiatives have developed during the past several years to reform various
aspects of the healthcare system in the United States. There can be no assurance
that current or future legislative initiatives or government regulation will not
have a material adverse effect on the financial condition or results of
operations of the Company or reduce the demand for its services. See
"Business -- Government Regulation -- CONs and State Licensing."
Prior Reliance on AHC. The Company historically relied upon AHC for
certain corporate management, administrative and accounting services. The
Company is now responsible for maintaining its own management, administrative
and accounting functions, except for certain financial and accounting services
provided by AHC on a transitional basis until December 1998 pursuant to the
Administrative Services Agreement (as defined herein) and for certain advisory
services provided by members of AHC senior management pursuant to advisory
agreements expiring in December 1999. In particular, Thomas G. Cigarran, who was
the Chairman and Chief Executive Officer of the Company, no longer serves as an
officer of the Company, although he continues to serve as Chairman of the Board
of Directors and is now an advisor to the Company. Henry D. Herr, who was Vice
President and Secretary of the Company, now serves as a director and an advisor
to the Company, but no longer serves as an officer of the Company. See "Certain
Relationships and Related Transactions."
Risks Related to Intangible Assets. As a result of purchase accounting for
the Company's various acquisition transactions, the Company's balance sheet at
March 31, 1998 contains an intangible asset designated as excess of cost over
net assets of purchased operations totaling $44.1 million. Using an amortization
period of 25 years, amortization expense relating to this intangible asset will
be approximately $1.9 million per year. Purchases of interests in practice-based
surgery centers that result in the recognition of additional intangible assets
would cause amortization expense to increase further.
On an ongoing basis, the Company evaluates, based upon projected
undiscounted cash flows, whether facts and circumstances indicate any impairment
of value of intangible assets and if the amortization period continues to be
appropriate. As the underlying facts and circumstances subsequent to the date of
acquisition can change, there can be no assurance that the value of such
intangible assets will be realized by the Company. Any determination that a
significant impairment has occurred would require the write-off of the impaired
portion of unamortized intangible assets, which could have a material adverse
effect on the Company's results of operations. In that regard, in 1997 the
Company recorded an impairment loss which ultimately resulted in a net loss of
$2.0 million in connection with one partnership and in the second quarter of
1998 the Company expects to record a charge of $3.6 million net of income tax
benefit in conjunction with its plan to exit the physician practice management
business. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Notes 4 and 16 to the Consolidated Financial
Statements.
8
<PAGE> 12
Proposed Treasury Regulation Regarding Tax Deduction for Amortization of
Goodwill. Effective on August 10, 1993, Section 197 of the Internal Revenue
Code of 1986, as amended (the "Code"), was enacted to allow goodwill and other
intangible assets purchased after that date to be amortized over a fifteen-year
period for tax purposes. Previously, no tax deduction was allowed for purchases
of goodwill. On January 16, 1997, the Internal Revenue Service (the "IRS")
published proposed regulations regarding Section 197 amortization of intangible
assets including goodwill. The proposed regulations cover certain
"anti-churning" provisions which deny a deduction for goodwill amortization in
several situations, including situations in which the taxpayer acquired the
goodwill in a transaction immediately before or after which the seller of the
goodwill is related to the acquiring taxpayer. The anti-churning rules are
designed to prevent taxpayers from converting existing goodwill for which an
amortization deduction would not have been allowable prior to the enactment of
Section 197 into an asset with respect to which Section 197 would currently
allow an amortization deduction. These proposed regulations do not specifically
contain an exception for the form of transaction that the Company has utilized
in its acquisition of interests in practice-based ambulatory surgery centers and
interests in physician practices. However, because the goodwill for which the
Company has been claiming amortization deductions was purchased by the Company
from unrelated parties after the effective date of Section 197 and, as per
agreement with the sellers, the tax deduction for goodwill amortization is
specifically allocated exclusively to the Company (and therefore, the seller
receives no tax benefit from the amortization of the goodwill), the Company
believes that the proposed regulations should not affect the Company's
amortization deductions. Together with other taxpayers similarly affected, the
Company will vigorously attempt to persuade the IRS to revise the proposed
regulations to recognize that the methodology utilized by the Company is
consistent with the intent of Section 197 and the anti-churning rules and to
preserve the amortization deduction with respect to the Company's acquired
goodwill. However, there can be no assurance that the proposed regulations will
be amended or modified by the IRS. If the proposed regulations are adopted as
currently written, it will not be clear whether the Company would be entitled to
the deduction for the amortization of goodwill associated with the purchase of
interests in practice-based surgery centers and physician practices and these
deductions could be subject to challenge by the IRS. Loss of these tax
deductions would have a material adverse effect on the Company's results of
operations. Due to the lengthy public hearing and adoption process, the Company
is not able to estimate a date by which the IRS will take action on the proposed
regulations.
Competition. The healthcare business is highly competitive. There are
other companies in the same or similar business of developing, acquiring and
operating practice-based ambulatory surgery centers, specialty physician
networks and physician practices, or who may decide to enter the practice-based
ambulatory surgery center business, the development of specialty physician
networks or the acquisition of physician practices, who have greater financial,
research, marketing and staff resources than the Company. In addition, the
Company competes with other healthcare providers for contracting with managed
care payers in each of its markets. There can be no assurance the Company can
compete effectively with such entities. See "Business -- Competition."
Risks Relating to Year 2000 Compliance. Many existing computer software
programs and operating systems were designed such that the year 1999 is the
maximum date that many computer systems will be able to process. The Company is
addressing the potential problems posed by this limitation in its systems
software to assure that the Company is prepared for the Year 2000. The Company
also intends to seek verification from third parties with which it conducts
material business, such as payers, that such parties will be Year 2000
compliant. If modifications and conversions to deal with Year 2000 issues are
not completed on a timely basis by the Company or by third parties with which
the Company conducts material business, such issues may have a material adverse
effect on the results of operations of the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Year 2000."
Shares Eligible for Future Sale. Upon completion of the Offering, the
Company will have outstanding an aggregate of 9,494,173 shares of Class A Common
Stock (9,944,173 shares if the Underwriters' over-allotment option is exercised
in full) and 4,787,131 shares of Class B Common Stock. The 3,700,000 shares of
Class A Common Stock sold in the Offering will be freely tradeable without
restriction under the Securities Act of 1933, as amended (the "Securities Act")
unless acquired by "affiliates" of the Company as that term is
9
<PAGE> 13
defined in Rule 144 under the Securities Act, which shares would be subject to
the resale limitations of Rule 144. In addition, the 743,000 shares of Class A
Common Stock that were issued to holders of AHC common stock in the Distribution
are freely tradeable without restriction or further registration under the
Securities Act, unless held by affiliates of the Company (which shares also
would be subject to certain resale limitations and other restrictions under Rule
144 described below).
Of the remaining 5,051,173 outstanding shares of Class A Common Stock,
4,784,962 have not been issued in transactions registered under the Securities
Act, which means that under current law, absent registration or an exemption
from registration other than Rule 144, such shares are "restricted securities"
as that term is defined in Rule 144 under the Securities Act and are eligible
for sale or transfer only in accordance with Rule 144. Substantially all of
these shares of Class A Common Stock have met the one-year holding period
requirement of Rule 144, and therefore are eligible for sale thereunder.
Anti-takeover Provisions. Certain provisions of the Company's Amended and
Restated Charter (the "Charter") and Amended and Restated Bylaws (the "Bylaws")
establish staggered terms for members of the Company's Board of Directors and
include advance notice procedures for shareholders to nominate candidates for
election as directors of the Company and for shareholders to submit proposals
for consideration at shareholders' meetings. In addition, the Company is subject
to the Tennessee Business Combination Act (the "Combination Act") of the
Tennessee Business Corporation Act ("TBCA") which limits transactions between a
publicly held company and "interested shareholders" (generally, those
shareholders who, together with their affiliates and associates, own 10% or more
of the voting power of any class or series of a company's stock). The
restrictions of the Combination Act would not apply to those who were
"interested shareholders" prior to the consummation of the Offering. These
provisions of the TBCA may have the effect of deterring certain potential
acquirors of the Company. The Company's Charter provides for 5,000,000
authorized shares of preferred stock, the rights, preferences, qualifications,
limitations and restrictions of which may be fixed by the Board of Directors
without any further action by the shareholders. See "Description of Capital
Stock -- Certain Provisions of the Charter, Bylaws and Tennessee Law."
Risks Associated With Forward-Looking Statements. This Prospectus contains
certain forward-looking statements within the meaning of Section 27A of the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which are intended to be covered by the safe
harbors created thereby. When used in this Prospectus, the words "anticipate,"
"believe," "estimate," "expect" and similar expressions are intended to identify
forward-looking statements. Investors are cautioned that all forward-looking
statements involve risks and uncertainty. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included in this Prospectus
will prove to be accurate. In light of the significant uncertainties inherent in
the forward-looking statements included herein, including those discussed in
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," the inclusion of such information should
not be regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved. The Company does not
intend to update any of these forward-looking statements.
10
<PAGE> 14
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock began trading on the Nasdaq National Market on December 4,
1997. Since such time, the Class A Common Stock has traded under the symbol
"AMSGA" and the Class B Common Stock has traded under the symbol "AMSGB." The
following table sets forth the range of high and low closing sales prices per
share for the Common Stock for the periods indicated, as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
--------------- ---------------
HIGH LOW HIGH LOW
------ ----- ------ -----
<S> <C> <C> <C> <C>
1997
Fourth Quarter (from December 4, 1997).................... $ 9.50 $7.50 $ 9.25 $7.38
1998
First Quarter............................................. 9.75 6.88 9.88 7.19
Second Quarter (through June 11, 1998).................... 11.25 8.50 10.88 8.63
</TABLE>
On June 11, 1998, the last reported sale prices for the Class A Common
Stock and the Class B Common Stock were $8.50 and $9.38 per share, respectively.
The Company estimates that as of March 15, 1998, there were approximately 160
holders of record and 2,084 beneficial owners of the Class A Common Stock and 95
holders of record and 2,124 beneficial owners of the Class B Common Stock.
The Company has never declared or paid a cash dividend on its Common Stock.
It is the current policy of the Board of Directors to retain all earnings to
support operations and to finance expansion of the Company's business;
therefore, the Company does not anticipate declaring or paying dividends on the
Common Stock in the foreseeable future. The declaration and payment of cash
dividends in the future will be at the Board of Directors' discretion and will
depend on the Company's earnings, financial condition, capital needs and other
factors deemed pertinent by the Board of Directors, including limitations, if
any, on the payment of dividends under state law and any then-existing credit
agreement. Pursuant to the terms of the Company's bank credit facility, the
Company is prohibited from declaring or paying cash dividends.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Class A Common Stock
offered hereby will be approximately $27.6 million ($31.1 million if the
Underwriters' over-allotment option is exercised in full), after deduction of
the underwriting discount and estimated offering expenses payable by the
Company. The net proceeds will be used to repay borrowings under the revolving
credit facility of the Company's Third Amended and Restated Loan Agreement (the
"Loan Agreement"). Borrowings under the Loan Agreement mature in January 2001,
and bear interest at a rate equal to, at the Company's option, the prime rate or
LIBOR plus a spread of 1.0% to 2.25%, depending upon borrowing levels. The Loan
Agreement also provides for a fee ranging between .15% and .40% of unused
commitments based on borrowing levels. The Company will have approximately $44.5
million available for borrowing under the Loan Agreement upon completion of the
Offering and application of the net proceeds. The indebtedness under the Loan
Agreement was incurred primarily to finance the development and acquisition of
surgery centers, and the Company intends to continue to utilize borrowings under
the Loan Agreement for the same purpose. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
11
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1998 on an actual basis and as adjusted to reflect the issuance and sale by
the Company of 3,700,000 shares of Class A Common Stock offered hereby and the
application of the estimated net proceeds received by the Company therefrom as
described under "Use of Proceeds." This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements, including the notes
thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
---------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt........................... $ 1,447 $ 1,447
Long-term debt, less current portion........................ 30,060 2,487
Preferred Stock, no par value, 5,000,000 shares authorized:
Series B Preferred Stock, 416,666 and no shares issued and
outstanding, respectively.............................. 3,208 --
Shareholders' equity:
Class A Common Stock, 20,000,000 shares authorized,
5,145,966 and 9,451,964 shares issued and outstanding,
respectively(1)........................................ 16,724 47,578
Class B Common Stock, 4,800,000 shares authorized,
4,787,131 shares issued and outstanding................ 13,529 13,529
Retained earnings......................................... 2,799 2,799
Deferred compensation on restricted stock................. (239) (239)
------- -------
Total shareholders' equity........................ 32,813 63,667
------- -------
Total capitalization......................... $67,528 $67,601
======= =======
</TABLE>
- ---------------
(1) Excludes 1,330,524 shares of Class A Common Stock issuable upon the exercise
of outstanding stock options at March 31, 1998 with a weighted average
exercise price per share of $4.23.
12
<PAGE> 16
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE)
The following table sets forth selected consolidated financial data which
have been derived from the Company's consolidated financial statements. The
financial statements at and for the periods ended December 31, 1993 through 1997
have been audited. The pro forma combined statement of operations data for the
year ended December 31, 1997 and the three months ended March 31, 1998 set forth
below reflect the effect of six acquisitions in 1997 and three acquisitions in
1998 occurring subsequent to the beginning of the period as if such transactions
were completed at January 1, 1997. The pro forma balance sheet data at March 31,
1998 set forth below reflect the effect of an acquisition of a surgery center
occurring subsequent to March 31, 1998 as if such transaction had been completed
as of March 31, 1998. Comparability of data on a year-to-year basis is affected
by the number of centers acquired or opened in each year. All the information
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and related notes included elsewhere herein. See "Index to
Financial Statements."
The Company operated as a majority owned subsidiary of AHC until the
Distribution. The historical financial information may not be indicative of the
Company's future performance and does not necessarily reflect the financial
position and results of operations of the Company had it operated as a separate,
stand-alone entity prior to December 3, 1997.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------ ------------------------------
PRO FORMA PRO FORMA
1993 1994 1995 1996 1997 1997 1997 1998 1998
------- ------- ------- ------- ------- --------- ------- ------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ 6,558 $13,784 $22,389 $34,898 $57,414 $68,881 $12,591 $17,829 $20,038
Operating expenses:
Salaries and benefits.......... 2,307 4,092 6,243 11,613 17,363 19,866 3,972 5,367 5,827
Other operating expenses....... 3,002 5,091 7,558 11,547 20,352 24,429 4,451 6,384 7,116
Depreciation and
amortization................. 665 1,309 2,397 3,000 4,944 5,609 1,087 1,568 1,670
Net loss on sale of assets..... -- -- -- 31 1,425(1) 1,425(1) 2,321(2) 43 43
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 5,974 10,492 16,198 26,191 44,084 51,329 11,831 13,362 14,656
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income......... 584 3,292 6,191 8,707 13,330 17,552 760 4,467 5,382
Minority interest................ 1,121 2,464 3,938 5,433 9,084 11,320 1,948 2,807 3,257
Other (income) and expenses:
Interest expense, net.......... 2 151 627 808 1,554 2,463 308 493 646
Distribution cost.............. -- -- -- -- 842(3) 842(3) -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Earnings (loss) before
income taxes........... (539) 677 1,626 2,466 1,850 2,927 (1,496) 1,167 1,479
Income tax expense............... -- 26 578 985 1,774 2,205 329 467 592
------- ------- ------- ------- ------- ------- ------- ------- -------
Net earnings (loss)...... (539) 651 1,048 1,481 76 722 (1,825) 700 887
Accretion of preferred stock
discount....................... -- -- -- 22 286 286 67 -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Net earnings (loss)
available to common
shareholders........... $ (539) $ 651 $ 1,048 $ 1,459 $ (210) $ 436 $(1,892) $ 700 $ 887
======= ======= ======= ======= ======= ======= ======= ======= =======
Earnings (loss) per common share:
Basic.......................... $ (0.11) $ 0.09 $ 0.13 $ 0.17 $ (0.02)(4) $ 0.05(5) $ (0.20)(6) $ 0.07 $ 0.09
Diluted........................ $ (0.11) $ 0.09 $ 0.12 $ 0.16 $ (0.02)(4) $ 0.04(5) $ (0.20)(6) $ 0.07 $ 0.09
Weighted average number of shares
and share equivalents
outstanding:
Basic.......................... 4,737 6,999 8,174 8,689 9,453 9,588 9,360 9,673 9,674
Diluted........................ 4,737 7,313 8,581 9,083 9,453 9,924 9,360 10,347 10,348
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------------------- -------------------
PRO FORMA
1993 1994 1995 1996 1997 1998 1998
------- ------- ------- ------- ------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 993 $ 2,557 $ 2,931 $ 4,732 $ 9,312 $11,162 $10,351
Total assets.............................................. 14,637 27,065 35,106 54,653 75,238 82,758 87,091
Long-term debt, less current portion...................... 640 3,520 4,786 9,218 24,970 30,060 34,060
Minority interest......................................... 601 2,019 3,010 5,674 9,192 10,216 10,549
Preferred stock........................................... -- -- -- 4,982 5,268 3,208 3,208
Shareholders' equity...................................... 12,055 19,558 22,479 28,374 29,991 32,813 32,813
</TABLE>
- ---------------
(1) Includes a loss attributable to the sale of a partnership interest, net of a
gain on the sale of a surgery center building and equipment, which had an
impact after taxes of reducing basic and diluted earnings per share by $0.16
for the year ended December 31, 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 4 to the
Consolidated Financial Statements.
(2) Includes an impairment loss attributable to the sale of a partnership
interest, which had an impact after taxes of reducing basic and diluted
earnings per share by $0.24 for the three months ended March 31, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 4 to the Consolidated Financial Statements.
(3) Reflects cost incurred related to the Distribution, which reduced basic and
diluted earnings per share by $0.09 for the year ended December 31, 1997.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(4) Without giving effect to the items reflected in footnotes (1) and (3) above,
basic and diluted earnings per common share would have been $0.24 and $0.23,
respectively, for the year ended December 31, 1997.
(5) Without giving effect to the items reflected in footnotes (1) and (3) above,
pro forma basic and diluted earnings per common share would have been $0.28
and $0.27, respectively, for the year ended December 31, 1997.
(6) Without giving effect to the item reflected in footnote (2) above, basic and
diluted earnings per common share would have been $0.05 and $0.04,
respectively, for the three months ended March 31, 1997.
13
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contains forward-looking statements. These statements, which have
been included in reliance on the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, involve risks and uncertainties. The
Company's actual operations and results may differ materially from the results
discussed in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, the Company's ability to enter into
partnership or operating agreements for new practice-based ambulatory surgery
centers and new specialty physician networks; its ability to identify suitable
acquisition candidates and negotiate and close acquisition transactions; its
ability to obtain the necessary financing or capital on terms satisfactory to
the Company in order to execute its expansion strategy; its ability to manage
growth; its ability to contract with managed care payers on terms satisfactory
to the Company for its existing centers and its centers that are currently under
development; its ability to obtain and retain appropriate licensing approvals
for its existing centers and centers currently under development; its ability to
minimize start-up losses of its development centers; its ability to maintain
favorable relations with its physician partners; and its ability to sell the two
physician practices.
OVERVIEW
The Company develops, acquires and operates practice-based ambulatory
surgery centers in partnership with physician practice groups. As of March 31,
1998, the Company owned a majority interest (51% or greater) in 41 surgery
centers, owned a minority interest in one surgery center, owned a majority
interest (60% or greater) in two physician practices and had established and was
the majority owner (51%) of five start-up specialty physician networks.
The Company operated as a majority-owned subsidiary of AHC from 1992 until
the Distribution on December 3, 1997. Prior to the Distribution, the Company
effected a recapitalization pursuant to which every three shares of the
Company's then outstanding common stock were converted into one share of Class A
Common Stock. Immediately following the Recapitalization, AHC exchanged a
portion of its shares of Class A Common Stock for shares of Class B Common
Stock. The principal purpose of the Distribution was to enable the Company to
have access to debt and equity capital markets as an independent, publicly
traded company. Upon the Distribution, the Company became a publicly traded
company.
The following table presents the changes in the number of surgery centers
in operation and centers under development for the periods indicated. A center
is deemed to be under development when a partnership or limited liability
company has been formed with the physician group partner to develop the center.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------- ------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Centers in operation, beginning of period................. 14 18 27 27 39
New center acquisitions................................... 2 6 5 2 2
New development centers placed in operation............... 2 3 10 -- 2
Centers sold.............................................. -- -- (3) -- (1)
-- -- -- -- --
Centers in operation, end of period....................... 18 27 39 29 42
== == == == ==
Centers under development, end of period.................. 13 20 10 17 8
== == == == ==
</TABLE>
Thirty-two of the surgery centers in operation as of March 31, 1998 perform
gastrointestinal endoscopy procedures; eight centers perform ophthalmology
procedures; one center performs orthopaedic procedures; and one center performs
ophthalmology, urology, general surgery and otolaryngology procedures. The other
partner or member in each partnership or limited liability company is in each
case an entity owned by physicians who perform procedures at the center.
14
<PAGE> 18
In addition, the Company has a majority interest in two physician practices
which were acquired in January 1996 and January 1997, the other partners of
which are entities owned by the principal physicians who provide professional
medical services to patients of the practices. In May 1998, the Company's Board
of Directors approved a plan to dispose of the Company's interests in these two
specialty physician practices as part of an overall strategy to exit the
practice management business and focus solely on the development, acquisition
and operation of ambulatory surgery centers and specialty networks. Accordingly,
the Company will record a charge of $3.6 million, net of income tax benefit of
$1.8 million, in the second quarter of 1998 for the estimated loss on the
disposal of these assets. Although the Company is currently in negotiations
regarding the possible sale of one of the two practices, there are no definitive
agreements or arrangements with regard thereto. Therefore, there can be no
assurance that the Company will sell these operations; however, the Company
believes that the estimated disposal loss will be adequate in the sale of the
practices. See Note 16 of the Consolidated Financial Statements.
The start-up specialty physician networks are owned through limited
partnerships and limited liability companies in which the Company owns a
majority interest. The other partners or members are individual physicians who
will provide the medical services to the patient population covered by the
contracts the network will seek to enter into with managed care payers. The
Company does not expect that the specialty physician networks alone will be a
significant source of income for the Company. These networks were and will be
formed in selected markets primarily as a contracting vehicle for certain
managed care arrangements to generate revenues for the Company's practice-based
surgery centers. As of March 31, 1998, one network had secured a managed care
contract and was operational.
The Company intends to expand primarily through the development and
acquisition of additional practice-based ambulatory surgery centers in targeted
surgical specialties. In addition, the Company believes that its surgery
centers, combined with the Company's relationships with specialty physician
practices in the surgery centers' markets, will provide the Company with other
opportunities for growth from specialty network development. By using its
surgery centers as a base to develop specialty physician networks that are
designed to serve large numbers of covered lives, the Company believes that it
will strengthen its market position in contracting with managed care
organizations.
While the Company generally owns 51% to 70% of the entities that own the
surgery center or physician group practice, the Company's consolidated
statements of operations include 100% of the results of operations of the
entities, reduced by the minority partners' share of the net earnings or loss of
the surgery center/practice entities.
SOURCES OF REVENUES
The Company's principal source of revenues is a facility fee charged for
surgical procedures performed in its surgery centers. This fee varies depending
on the procedure, but usually includes all charges for operating room usage,
special equipment usage, supplies, recovery room usage, nursing staff and
medications. Facility fees do not include the charges of the patient's surgeon,
anesthesiologist or other attending physicians, which are billed directly to
third-party payers by such physicians. The Company's other significant source of
revenues is the fee for physician services performed by the two physician group
practices in which the Company owns a majority interest.
Practice-based ambulatory surgery centers and physician practices such as
those in which the Company owns a majority interest depend upon third-party
reimbursement programs, including governmental and private insurance programs,
to pay for services rendered to patients. The Company derived approximately 37%,
36%, 37% and 40% of its net revenues from governmental healthcare programs,
including Medicare and Medicaid, in 1995, 1996, 1997 and the three months ended
March 31, 1998, respectively. The Medicare program currently pays ambulatory
surgery centers and physicians in accordance with fee schedules which are
prospectively determined.
Approximately 10%, 11% and 9% of the Company's revenues for 1996, 1997 and
the three months ended March 31, 1998, respectively, were generated by capitated
payment contracts with HMOs. These revenues generally were attributable to
contracts held by physician practices and a surgery center in which the
15
<PAGE> 19
Company holds a majority interest. These contracts require the practices to
provide specialty physician and certain outpatient surgery services for the HMO
members on an exclusive basis. These contracts do not require the practices to
provide or to be at risk for hospital or other ancillary services such as
laboratory or imaging services. The services required by these contracts are
provided almost solely by surgery centers and the physician practices in which
the Company owns a majority interest. Because the Company is only at risk for
the cost of providing relatively limited healthcare services to these HMO
members, the Company's risk of overutilization by HMO members is limited to the
cost of the physician's time and the supply, drug and nursing staff expense
required for outpatient surgery. In May 1998 the Company received notification
from a payer with which one of its physician practices and surgery centers has a
capitated contract for professional and surgical gastroenterology services
covering approximately 120,000 lives that the contract would not be renewed
beyond the June 30, 1998 anniversary date of the contract. The payer has advised
the Company that it plans to negotiate a new contract. At this time, the Company
cannot determine the outcome of these negotiations; however, an unfavorable
outcome in these negotiations may have an adverse impact on the Company's
results of operations. This contract contributed $676,000, or 5%, and $617,000,
or 3%, to the Company's consolidated revenues in the three months ended March
31, 1997 and 1998, respectively. See Note 16 of the Consolidated Financial
Statements.
The Company's sources of revenues as a percentage of total revenues for the
periods indicated are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------- ------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Surgery centers................................. 97% 83% 83% 80% 87%
Physician practices............................. -- 15 15 17 12
Other........................................... 3 2 2 3 1
--- --- --- --- ---
Total.................................... 100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
RESULTS OF OPERATIONS
The following table shows certain statement of operations items expressed
as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Salaries and benefits.................. 27.9 33.3 30.2 31.6 30.1
Other operating expenses............... 33.7 33.1 35.5 35.4 35.8
Depreciation and amortization.......... 10.7 8.6 8.6 8.6 8.8
Net loss on sale of assets............. -- -- 2.5 18.4 0.2
----- ----- ----- ----- -----
Total operating expenses....... 72.3 75.0 76.8 94.0 74.9
----- ----- ----- ----- -----
Operating income............... 27.7 25.0 23.2 6.0 25.1
Minority interest........................ 17.6 15.6 15.8 15.5 15.8
Other (income) and expenses:
Interest expense, net of interest
income.............................. 2.8 2.3 2.7 2.4 2.8
Distribution cost...................... -- -- 1.5 -- --
----- ----- ----- ----- -----
Earnings (loss) before income
taxes........................ 7.3 7.1 3.2 (11.9) 6.5
Income tax expense....................... 2.6 2.9 3.1 2.6 2.6
----- ----- ----- ----- -----
Net earnings (loss)............ 4.7 4.2 0.1 (14.5) 3.9
Accretion of preferred stock discount.... -- -- 0.5 0.5 --
----- ----- ----- ----- -----
Net earnings (loss) available
to common shareholders....... 4.7% 4.2% (0.4)% (15.0)% 3.9%
===== ===== ===== ===== =====
</TABLE>
16
<PAGE> 20
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Revenues were $17.8 million in the three months ended March 31, 1998, an
increase of $5.2 million, or 42%, over revenues in the comparable 1997 period.
The increase is primarily attributable to additional centers in operation in the
three months ended March 31, 1998. Same-center revenues in the three months
ended March 31, 1998, increased by 14%. Same-center revenue growth resulted
primarily from increased procedure volume. The Company anticipates further
revenue growth during 1998 as a result of additional start-up and acquired
centers expected to be placed in operation and from same-center revenue growth,
net of a revenue reduction due to the expected disposition of the physician
practices and any possible adverse impact of the renegotiated capitated
contract, as discussed above.
Salaries and benefits expense was $5.4 million in the three months ended
March 31, 1998, an increase of $1.4 million, or 35%, over salaries and benefits
expense in the comparable 1997 period. Other operating expenses were $6.4
million in the three months ended March 31, 1998, an increase of $1.9 million,
or 43%, over other operating expenses in the comparable 1997 period. These
increases resulted primarily from additional centers in operation, from an
increase in corporate staff primarily to support growth in the number of centers
in operation and anticipated future growth and from additional corporate costs
associated with being a publicly traded company.
The Company anticipates further increases in operating expenses in 1998,
primarily due to additional start-up centers and acquired centers expected to be
placed in operation, offset by the expected elimination of physician practice
operating expenses upon the planned disposal of these practices. Typically, a
start-up center will incur start-up losses during its initial months of
operation and will experience lower revenues and operating margins than an
established center until its case load increases to a more optimal operating
level, which generally is expected to occur within 12 months after a center
opens.
Depreciation and amortization expense increased $481,000, or 44%, in the
three months ended March 31, 1998, over the comparable 1997 period, primarily
due to 13 additional surgery centers in operation in the three months ended
March 31, 1998 compared to the comparable 1997 period.
During the three months ended March 31, 1998, the Company incurred a net
loss of $43,000 related to the sale of a surgery center to an unaffiliated third
party. The Company does not believe that this sale will have a significant
impact on the Company's future ongoing results of operations. During the
comparable 1997 period, the Company recorded an impairment loss of $2.3 million,
which ultimately resulted in a net loss of $2.0 million, in connection with a
partnership that operated two surgery centers.
The minority interest in earnings in the three months ended March 31, 1998,
increased by $860,000, or 44%, over the comparable 1997 period primarily as a
result of minority partners' interests in earnings of surgery centers recently
added to operations and from increased same-center profitability.
Interest expense increased $185,000, or 60%, during the three months ended
March 31, 1998, over the comparable 1997 period due to debt assumed or incurred
in connection with additional acquisitions of interests in surgery centers,
together with the interest expense associated with newly opened start-up surgery
centers financed partially with bank debt.
The Company recognized income tax expense of $467,000 in the three months
ended March 31, 1998, compared to $329,000 in the comparable 1997 period. In the
three months ended March 31, 1997, the Company recognized no tax benefit
associated with the net loss on sale of assets. The Company's effective tax rate
in both periods was 40% of earnings prior to the impact of the net loss on sale
of assets and differed from the federal statutory income tax rate of 34%
primarily due to the impact of state income taxes.
Accretion of preferred stock discount in the three months ended March 31,
1997 resulted from the issuance during November 1996 of redeemable preferred
stock with a redemption amount of $3.0 million. The preferred stock was recorded
at its fair market value, net of issuance costs. From the time of issuance, the
Series A Redeemable Preferred Stock (the "Series A Preferred Stock") has been
accreted toward its redemption value, including potential dividends, over the
redemption term. During the three months ended March 31, 1998, the holders of
this series of preferred stock elected to convert their preferred shares into
17
<PAGE> 21
380,952 shares of Class A Common Stock pursuant to the provisions of the
Company's Charter using a conversion ratio based on the market price of the
Company's Class A Common Stock. Accordingly, the Company will no longer record
accretion of preferred stock discount.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues were $57.4 million in 1997, an increase of $22.5 million, or 65%,
over revenues in 1996. The increase is primarily attributable to additional
centers in operation in 1997 and the acquisition of a urology physician practice
on January 1, 1997. Excluding the three centers which were disposed as described
below, same-center revenues in 1997 increased by 6%. Same-center growth resulted
from increased case volume and increases in fees.
Salaries and benefits expense was $17.4 million in 1997, an increase of
$5.7 million, or 50%, over salaries and benefits expense in 1996. Other
operating expenses were $20.4 million in 1997, an increase of $8.8 million, or
76%, over other operating expenses in 1996. This increase resulted primarily
from additional centers in operation, the acquisition of the interest in the
urology physician practice and from an increase in corporate staff primarily to
support growth in the number of centers in operation and anticipated future
growth. Salaries and benefits expense and other operating expenses in the
aggregate as a percentage of revenues remained comparable at 66% in 1997 and
1996. However, salaries and benefits expense as a percentage of revenues
decreased in 1997 while other operating expenses as a percentage of revenues
increased proportionately in 1997 compared to 1996, primarily due to the
addition of contracted physician service expense for the physician practice
acquired in January 1997 within other operating expenses.
Depreciation and amortization expense increased $1.9 million, or 65%, in
1997 over 1996, primarily due to 12 additional surgery centers and one physician
practice in operation in 1997 compared to 1996.
Included in net loss on sale of assets in 1997 is a loss of approximately
$2.0 million from the disposition of the Company's investment in a partnership
that owned two surgery centers acquired in 1994. Various disagreements with the
sole physician partner over the operation of these centers had adversely
affected the operations of these centers. After a series of discussions and
attempts to resolve these differences, the Company determined that the partners
could not resolve their disagreements, and that, as a result, the carrying value
of the assets associated with this partnership would not likely be fully
recovered. The Company projected the undiscounted cash flows from these centers
and determined these cash flows to be less than the carrying value of the
long-lived assets attributable to this partnership. Accordingly, an impairment
loss equal to the excess of the carrying value of the long-lived assets over the
present value of the estimated future cash flows was recorded in the first
quarter of 1997 in accordance with Statement of Financial Accounting Standards
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of." In September 1997, the Company sold its interest in
the partnership assets to its physician partner and recognized a partial loss
recovery. The Company believes that it has good relationships with its other
physician partners and that the loss attributable to the partnership discussed
above resulted from a unique set of circumstances.
In addition, net loss on sale of assets includes a pretax gain of
approximately $460,000 from the sale in July 1997 of a surgery center building
and equipment which the Company had leased to a gastrointestinal physician
practice. Concurrently with the sale, the Company terminated its management
agreement with the physician practice for the surgery center in which the
Company had no ownership interest but had managed since 1994.
The minority interest in earnings in 1997 increased by $3.7 million, or
67%, over 1996 primarily as a result of minority partners' interest in earnings
at surgery centers recently added to operations and from increased same-center
profitability.
Interest expense increased $745,000, or 92%, in 1997 over 1996 due to debt
assumed or incurred in connection with additional acquisitions of interests in
surgery centers and a physician practice, together with the interest expense
associated with newly opened start-up surgery centers financed partially with
bank debt.
Distribution cost in 1997 represents costs incurred by the Company related
to effecting the Distribution.
18
<PAGE> 22
The Company recognized income tax expense of $1.8 million in 1997, compared
to $1.0 million in 1996. The Company has recognized no tax benefit associated
with distribution cost and net loss on sale of assets, while certain tax aspects
of the gain transaction recorded in July 1997 resulted in income tax expense of
approximately $100,000. The Company's effective tax rate in both periods was 40%
of earnings prior to the impact of distribution cost and net loss on sale of
assets and differed from the federal statutory income tax rate of 34%, primarily
due to the impact of state income taxes.
Accretion of preferred stock discount resulted from the issuance during
November 1996 of redeemable preferred stock with a redemption amount of $3.0
million. The preferred stock was recorded at its fair market value, net of
issuance costs. From the time of issuance, the Series A Preferred Stock has been
accreted toward its redemption value, including potential dividends, over the
redemption term. Subsequent to December 31, 1997, using a conversion ratio based
on the market price of the Company's Class A Common Stock, the holders of this
preferred stock elected to convert their preferred shares into 380,952 shares of
Class A Common Stock pursuant to the provisions of the Company's Charter.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues were $34.9 million in 1996, an increase of $12.5 million, or 56%,
over revenues in 1995. The increase resulted primarily from the growth in the
number of surgery centers in operation, the acquisition of a majority interest
in a physician practice as of January 31, 1996 and an increase of 14% in
same-center revenues for the 15 centers in operation since January 1, 1995.
Salaries and benefits expense increased by $5.4 million, or 86%, while
other operating expenses increased by $4.0 million, or 53%, in 1996 over 1995.
These increases resulted primarily from the acquisition of the interest in a
physician practice, additional centers in operation and an increase in corporate
staff primarily to support growth in the number of centers in operation and
anticipated future growth. Salaries and benefits expense and other operating
expenses represented in the aggregate approximately 66% of revenues for 1996 as
compared to approximately 62% of revenues for 1995. Physician group practices
generally have lower operating margins than ambulatory surgery centers. Because
the physician practice has both greater revenues and greater operating expenses
as a percentage of revenues than any single center, its acquisition had a
disproportionately large impact on operating margins.
Depreciation and amortization expense increased $603,000, or 25%, in 1996
over 1995, primarily due to the acquisition of majority interests in additional
surgery centers, the acquisition of the interest in a physician practice and new
start-up surgery centers placed in operation. The increase of $182,000, or 29%,
in interest expense in 1996 over 1995 is primarily attributable to debt assumed
or incurred in connection with additional acquisitions of interests in surgery
centers and a physician practice, together with the interest expense associated
with newly opened start-up surgery centers financed partially with bank debt.
Minority partners' interest in center earnings in 1996 rose to $5.4 million
from $3.9 million in 1995, an increase of 38%, primarily as a result of minority
partners' interest in earnings at surgery centers added to operations and from
increased same-center profitability.
Income tax expense increased 70% in 1996 to $985,000 as a result of
increased income before income taxes and an increase in the Company's effective
income tax rate to 40% from 36%. The increase in the effective income tax rate
resulted from the utilization of prior period net operating loss carryforwards
during 1995. The difference between the federal statutory income tax rate of 34%
and the Company's effective income tax rates resulted primarily from the
utilization of prior period net operating loss carryforwards in 1995 and the
impact of state income taxes.
19
<PAGE> 23
QUARTERLY STATEMENT OF OPERATIONS DATA
The following table presents certain quarterly statement of operations data
for the years ended December 31, 1996 and 1997 and the first quarter of 1998.
The quarterly statement of operations data set forth below was derived from
unaudited financial statements of the Company and includes all adjustments,
consisting of only normal recurring adjustments, which the Company considers
necessary for a fair presentation thereof. Results of operations for any
particular quarter are not necessarily indicative of results of operations for a
full year or predictive of future periods.
<TABLE>
<CAPTION>
1996 1997 1998
---------------------------------- -------------------------------------- -------
Q1 Q2 Q3 Q4 Q1(1) Q2 Q3(2)(3) Q4(3) Q1
------ ------ ------ ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $7,133 $8,094 $8,774 $10,897 $12,591 $13,890 $14,566 $16,367 $17,829
Earning (loss) before
income taxes............. 589 605 470 802 (1,496) 1,014 1,478 854 1,166
Net earnings (loss)
available to common
shareholders............. 353 364 282 460 (1,892) 537 862 283 700
Basic and diluted earnings
(loss) per common
share.................... 0.04 0.04 0.03 0.05 (0.20) 0.06 0.09 0.03 0.07
</TABLE>
- ---------------
(1) Includes an impairment loss of $2.3 million, or $0.24 per share on a diluted
basis, on a partnership interest.
(2) Includes a gain on sale of assets of $727,000, net of income taxes, or $0.08
per share on a diluted basis, attributable to a loss recovery on the sale of
a partnership interest and gain on sale of a surgery center building and
equipment.
(3) Includes distribution cost of $458,000 and $384,000, or $0.05 and $0.04 per
share on a diluted basis, respectively, incurred in the third and fourth
quarters of 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998 and December 31, 1997, the Company had working capital of
$11.2 million and $9.3 million compared to $4.8 million and $4.7 million in the
comparable prior periods. Operating activities for 1997 generated $4.0 million
in cash flow from operations compared to $3.8 million in 1996. Operating
activities for the three months ended March 31, 1998 generated $1.1 million in
cash flow from operations compared to $1.6 million in the comparable 1997
period. Cash and cash equivalents at March 31, 1998 and December 31, 1997 were
$3.8 million and $3.4 million compared to $2.4 million and $3.2 million in the
comparable prior periods.
During 1997 the Company used $12.6 million to acquire interests in five
additional practice-based ambulatory surgery centers and a urology physician
practice. In addition, the Company made capital expenditures primarily for new
start-up surgery centers and for new or replacement property at existing centers
which totaled $10.6 million in 1997, of which $3.0 million was funded from the
capital contributions of the Company's minority partners. The Company used its
cash flow from operations and net borrowings on long-term debt of $14.1 million
to fund its acquisition and development obligations. During the three months
ended March 31, 1998, the Company used $4.6 million to acquire interests in two
additional practice-based ambulatory surgery centers. In addition, the Company
made capital expenditures primarily for new start-up surgery centers and for new
or replacement property at existing centers which totaled $2.4 million in the
three months ended March 31, 1998, of which $804,000 was funded from the capital
contributions of the Company's minority partners. The Company used its cash flow
from operations and net borrowings on long-term debt of $4.8 million to fund
these acquisitions and development obligations.
During 1997 the Company received cash proceeds of $2.0 million from the
sale of a surgery center building and equipment and the sale of a partnership
interest in two surgery centers. In addition, the Company received proceeds of
$524,000 from the sale of common stock to its minority partners in 1997. During
the three months ended March 31, 1998, the Company received cash proceeds of
$641,000 from the sale of a surgery center. In addition, the Company received
proceeds of $18,000 from the issuance of common stock.
20
<PAGE> 24
At March 31, 1998, the Company's partnerships and limited liability
companies had unfunded construction and equipment purchase commitments for
centers under development of approximately $2.0 million, of which the Company
expects that approximately $943,000 will be borrowed under the Loan Agreement
(and guaranteed on a pro rata basis by the physicians), and that the remaining
amount will be provided by the Company and the physician partners in proportion
to their respective ownership interests in the partnerships and limited
liability companies. The Company intends to fund its portion out of future cash
flows from operations.
Under the terms of the Loan Agreement, all borrowings outstanding under the
Company's term loan were converted to its revolving credit facility. At March
31, 1998, borrowings under the Loan Agreement were $27.6 million, are due in
January 2001 and are guaranteed by the wholly owned subsidiaries of the Company,
and in some instances, are secured by the underlying assets of certain developed
centers or the stock of the wholly owned subsidiaries of the Company. The Loan
Agreement permits the Company to borrow up to $50.0 million to finance the
Company's acquisition and development projects at a rate equal to, at the
Company's option, the prime rate or LIBOR plus a spread of 1.0% to 2.25%,
depending upon borrowing levels. The Loan Agreement also provides for a fee
ranging between .15% and .40% of unused commitments based on borrowing levels.
The Loan Agreement also prohibits the payment of dividends and contains
covenants relating to the ratio of debt to net worth, operating performance and
minimum net worth. The Company was in compliance with all covenants at March 31,
1998.
On November 20, 1996, the Company issued shares of its Series A Preferred
Stock and Series B Preferred Stock to certain unaffiliated institutional
investors for net cash proceeds of approximately $5.0 million. The purpose of
the offering was to fund the acquisition and development of surgery centers and
to provide other working capital as needed prior to being in position to access
capital markets as an independent public company. The Series A Preferred Stock,
which had a liquidation value of $3.0 million and was subject to redemption at
any time at the option of the Company, upon the occurrence of certain events and
in 2002 at the option of the holders, was converted during the three months
ended March 31, 1998 by its holders into 380,952 shares of Class A Common Stock
using a conversion ratio based on market price of the Class A Common Stock
pursuant to the provisions of the Company's Charter. Upon the occurrence of
certain events, including an Initial Public Offering (as that term is defined in
the Company's Charter), the Series B Preferred Stock will automatically convert
into a number of shares of Class A Common Stock that approximates 6% of the
equity of the Company determined as of November 20, 1996, with that percentage
being ratably increased to 8% of the equity of the Company if a triggering event
has not occurred by November 20, 2000. This Offering, if consummated, will
constitute such a triggering event, and the Series B Preferred Stock will
convert into approximately 606,000 shares of Class A Common Stock. If a
triggering event does not occur by November 20, 2002, the holders of the Series
B Preferred Stock will have the right to sell such preferred stock to the
Company on an as-if-converted basis at the current market price of the
underlying Class A Common Stock.
Historically, the Company depended on AHC for the majority of its equity
financing. A principal purpose of the Distribution was to permit the Company to
have access to public debt and equity capital markets as an independent public
company. While the Company anticipates that its operating activities will
continue to provide increased revenues and cash flow, the Company will require
additional financing in order to fund its development and acquisition plans and
to achieve its long-term strategic growth plans. This additional financing could
take the form of a private or public offering of debt or equity securities or
additional bank financing. No assurances can be given that the necessary
financing will be obtainable on terms satisfactory to the Company. The failure
to raise the funds necessary to finance its future cash requirements could
adversely affect the Company's ability to pursue its strategy and could
adversely affect its results of operations for future periods.
YEAR 2000
The Company is evaluating the Year 2000 issues and the impact upon
information systems and computer technologies. While certain applications in
system software critical to processing financial and operational information are
Year 2000 compliant, the Company expects to incur some costs in testing and
implementing
21
<PAGE> 25
updates to such software. The Company is also evaluating the impact of the Year
2000 on other computer technologies and software. All costs to evaluate and make
modifications will be expensed as incurred and are not expected to have a
significant impact on the Company's ongoing results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard ("SFAS") No. 130 "Reporting
Comprehensive Income" became effective for the Company during the first quarter
of 1998 and its adoption did not have a material impact on the Company's
financial reporting practices. SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" becomes effective for the Company for the
year ended December 31, 1998. The Company is still evaluating the effects of
adopting this statement, but does not expect its adoption to have a material
effect on the Company's consolidated financial statements.
Statement of Position ("SOP") No. 98-5 "Reporting on the Costs of Start-Up
Activities" becomes effective for the Company for the year ended December 31,
1999. SOP No. 98-5 requires that start-up costs be expensed as incurred and that
upon adoption, all deferred start-up costs be expensed as a cumulative effect of
a change in accounting principle. The Company does not anticipate that the
adoption of SOP No. 98-5 will have a material effect on the Company's financial
position or ongoing results of operations.
22
<PAGE> 26
BUSINESS
The Company develops, acquires and operates practice-based ambulatory
surgery centers, in partnership with physician practice groups, throughout the
United States. As of May 1, 1998, the Company owned a majority interest in 44
surgery centers and a minority interest in one center in 20 states and the
District of Columbia. The Company also had six centers under development, had
executed letters of intent to develop or acquire six additional centers and had
two centers awaiting CON approval. The Company believes that it is a leader in
the ownership and operation of practice-based ambulatory surgery centers.
The Company's centers are licensed for outpatient surgery, are generally
equipped and staffed for a single medical specialty and are usually located in
or adjacent to the offices of a physician group practice. The Company has
targeted ownership in centers that perform gastrointestinal endoscopy,
ophthalmology, urology, orthopaedics or otolaryngology procedures. Surgical
procedures associated with these specialties include many types of high volume,
lower-risk procedures that are appropriate for the practice-based setting. The
Company believes its single specialty centers have significantly lower capital
and operating costs than hospital and freestanding ambulatory surgery center
alternatives that are designed to accommodate a broader array of surgical
specialties and procedures. In addition, the practice-based surgery center
provides a more convenient setting for the patient and for the physician
performing the procedure.
The Company is utilizing its surgery centers in selected markets as a base
to develop start-up specialty physician networks that are designed to serve
large numbers of covered lives and thus strengthen the Company's position in
contracting with managed care organizations. As of May 1, 1998, the Company had
established five start-up specialty physician networks, located in Alabama,
Florida, Ohio, Tennessee and Texas.
INDUSTRY OVERVIEW
In recent years, government programs, private insurance companies, managed
care organizations and self-insured employers have implemented various
cost-containment measures to limit the growth of healthcare expenditures. These
cost-containment measures, together with technological advances, have resulted
in a significant shift in the delivery of healthcare services away from
traditional inpatient hospitals to more cost-effective alternate sites,
including ambulatory surgery centers.
According to SMG Marketing Group Inc.'s Freestanding Outpatient Surgery
Center Directory (June 1997), an industry publication, outpatient surgical
procedures represented approximately 69% of all surgical procedures performed in
the United States in 1996 and the number of outpatient surgery cases increased
54% from 3.1 million in 1993 to 4.8 million in 1996. As of December 31, 1996,
there were 2,425 freestanding ambulatory surgery centers in the United States,
of which 171 were owned by hospitals and 607 were owned by corporate entities.
The remaining 1,647 centers were independently owned, primarily by physicians.
The Company believes that the following factors have contributed to the
growth of ambulatory surgery:
Cost-Effective Alternative. Ambulatory surgery is generally less
expensive than hospital inpatient surgery. In addition, the Company
believes that surgery performed at a practice-based ambulatory surgery
center is generally less expensive than hospital-based ambulatory surgery
for a number of reasons, including lower facility development costs, more
efficient staffing and space utilization and a specialized operating
environment focused on cost containment. Interest in ambulatory surgery
centers has grown as managed care organizations have continued to seek a
cost-effective alternative to inpatient services.
Physician and Patient Preference. The Company believes that many
physicians prefer practice-based ambulatory surgery centers. The Company
believes that such centers enhance physicians' productivity by providing
them with greater scheduling flexibility, more consistent nurse staffing
and faster turnaround time between cases, allowing them to perform more
surgeries in a defined period of time. In contrast, hospitals and
freestanding multi-specialty ambulatory surgery centers generally serve a
broader group of physicians, including those involved with emergency
procedures, resulting in postponed or delayed surgeries. Additionally, many
physicians choose to perform surgery in a practice-based
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ambulatory surgery center because their patients prefer the simplified
admissions and discharge procedures and the less institutional atmosphere.
New Technology. New technology and advances in anesthesia, which have
been increasingly accepted by physicians, have significantly expanded the
types of surgical procedures that are being performed in ambulatory surgery
centers. Lasers, enhanced endoscopic techniques and fiber optics have
reduced the trauma and recovery time associated with many surgical
procedures. Improved anesthesia has shortened recovery time by minimizing
post-operative side effects such as nausea and drowsiness, thereby
avoiding, in some cases, overnight hospitalization.
STRATEGY
The Company believes it is a leader in the development, acquisition and
operation of practice-based ambulatory surgery centers. The key components of
the Company's strategy are:
Develop and Acquire Practice-Based Ambulatory Surgery Centers. The
Company expects to grow through a combination of acquisitions and
development of single specialty centers throughout the United States.
Although the Company historically has grown primarily by acquisition of
existing centers, it anticipates that its future growth will come
increasingly from development of new practice-based ambulatory surgery
centers.
Achieve Growth in Surgery Center Revenues and Profitability. The
Company enhances physician productivity and promotes increased same-center
revenues and profitability by creating operating efficiencies, including
improved scheduling, group purchasing programs and the clinical
efficiencies associated with operating a single specialty surgery center.
In addition, the Company's operations are designed to attract additional
managed care contracts by emphasizing convenience, a single specialty
focus, lower cost procedures and the ability to contract for large numbers
of covered lives.
Develop Specialty Networks. Utilizing single specialty ambulatory
surgery centers to provide a cost advantage, the Company's strategy has
evolved to include the development and ownership of specialty physician
networks which offer specialty physician services, as well as outpatient
surgery procedures with wide geographic coverage to managed care payers.
These specialty networks will be developed in selected markets to provide
broad geographic patient access points in the market through the network
participation of high quality and strategically located practices.
As part of this strategy, the Company has established and is the
majority owner of five start-up specialty physician networks. By
establishing these networks, the Company believes it will be able to obtain
additional contracts with managed care payers and increase the
profitability of its surgery centers and associated physician practices.
ACQUISITION AND DEVELOPMENT OF SURGERY CENTERS
The Company's practice-based ambulatory surgery centers are licensed
outpatient surgery centers generally equipped and staffed for a single medical
specialty and generally are located in or adjacent to a physician group
practice. The Company has targeted ownership in centers that perform
gastrointestinal endoscopy, ophthalmology, urology, orthopaedics or
otolaryngology procedures. These specialties perform many high volume,
lower-risk procedures that are appropriate for the practice-based setting. The
focus at each center on only the procedures in a single specialty results in
these centers generally having significantly lower capital and operating costs
than the costs of hospital and freestanding ambulatory surgery center
alternatives that are designed to provide more intensive services in a broader
array of surgical specialties. In addition, the practice-based surgery center,
which is located in or adjacent to the group practice, provides a more
convenient setting for the patient and for the physician performing the
procedure. Improvements in technology are also enabling additional types of
procedures to be performed in the practice-based setting.
The Company's development staff identifies existing centers that are
potential acquisition candidates and identifies physician practices that are
potential partners for new center development in the medical specialties
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which the Company has targeted for development. These candidates are evaluated
against the Company's project criteria which include several factors such as the
number of procedures currently being performed by the practice, competition from
and the fees being charged by other surgical providers, relative competitive
market position of the physician practice under consideration, and state CON
requirements for development of a new center.
In presenting the advantages to physicians of developing a new
practice-based ambulatory surgery center in partnership with the Company, the
Company's development staff emphasizes the proximity of a practice-based surgery
center to a physician's office, the simplified administrative procedures, the
ability to schedule consecutive cases without preemption by inpatient or
emergency procedures, the rapid turnaround time between cases, the high
technical competency of the center's clinical staff that performs only a limited
number of specialized procedures and the availability of state-of-the-art
surgical equipment. The Company also focuses on its expertise in developing and
operating centers. In addition, as part of the Company's role as the general
partner or manager of the surgery center partnerships and limited liability
companies, the Company markets the centers to third party payers.
In a development project, the Company, among other things, provides the
following services:
- Financial feasibility pro forma analysis;
- Assistance in state CON approval process;
- Site selection;
- Assistance in space analysis and schematic floor plan design;
- Analysis of local, state and federal building codes;
- Negotiation of equipment financing with lenders;
- Equipment budgeting, specification, bidding and purchasing;
- Construction financing;
- Architectural oversight;
- Contractor bidding;
- Construction management; and
- Assistance with licensing, Medicare certification and third party payer
contracts.
The Company's ownership interests in practice-based ambulatory surgery
centers generally are structured through limited or general partnerships or
limited liability companies. The Company generally owns 51% to 70% of the
partnerships or limited liability companies and acts as the general partner in
each limited partnership. In development transactions, capital contributed by
the physicians and the Company plus bank financing provides the partnership or
limited liability company with the funds necessary to construct and equip a new
surgery center and to provide initial working capital.
As part of each development and acquisition transaction, the Company enters
into a partnership agreement or, in the case of a limited liability company, an
operating agreement with its physician group partner. Under these agreements,
the Company receives a percentage of the net income and cash distributions of
the entity equal to its percentage interest in the entity and has the right to
the same percentage of the proceeds of a sale or liquidation of the entity. As
sole general partner, the Company is generally liable for the debts of the
partnership.
These agreements generally provide that the Company will oversee the
business and administrative operations of the surgery center, and that the
physician group partner will provide the center with a medical director, and
with certain specified services such as billing and collections, transcription,
and accounts payable processing. In connection with the Company's management of
the business operations at each center, the Company historically received a
management fee paid by the partnership or limited liability company. The
partnership or limited liability company also paid a physician group partner a
medical director fee and a fee for providing certain administrative services to
the center. Because the management fee usually approximates the value of
services provided to the center by the physician practice, on an ongoing basis,
the Company has structured its agreements so that the Company generally no
longer provides for any of such fees. Now, the respective parties are required
to provide the services pursuant to the terms of the partnership or operating
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agreement. For start-up centers that are being developed, the partnership or
limited liability company generally pays a fee to the Company for management of
the planning, construction and opening of the center.
In addition, these agreements typically provide that the partnership or
limited liability company will lease certain non-physician personnel from the
physician practice, who will provide services at the center. The cost of the
salary and benefits of these personnel are reimbursed to the practice by the
partnership or limited liability company. Certain significant aspects of the
partnership's or limited liability company's governance are overseen by an
operating board, which is comprised of equal representation by the Company and
the physician partners.
The partnership and operating agreements provide that if certain regulatory
changes take place the Company will be obligated to purchase some or all of the
minority interests of the physicians affiliated with the Company in the
partnerships or limited liability companies which own and operate the Company's
surgery centers. The regulatory changes that could trigger such an obligation
include changes that: (i) make the referral of Medicare and other patients to
the Company's surgery centers by physicians affiliated with the Company illegal;
(ii) create the substantial likelihood that cash distributions from the
partnership or limited liability company to the physicians associated therewith
will be illegal; or (iii) cause the ownership by the physicians of interests in
the partnerships or limited liability companies to be illegal. There can be no
assurance that the Company's existing capital resources would be sufficient for
it to meet the obligation, if it arises, to purchase minority interests held by
physicians in the partnerships or limited liability companies which own and
operate the Company's surgery centers. The determination of whether a triggering
event has occurred is made by the concurrence of counsel for the Company and the
physician partners or, in the absence of such concurrence, by independent
counsel having an expertise in healthcare law and who is chosen by both parties.
Such determination is therefore not within the control of the Company. While the
Company has structured the purchase obligations to be as favorable as possible
to the Company, the triggering of these obligations could have a material
adverse effect on the financial condition and results of operations of the
Company. See "-- Government Regulation."
SURGERY CENTER LOCATIONS
The following table sets forth certain information relating to centers in
operation as of May 1, 1998. The Company generally owns 51% to 70% of the
partnerships or limited liability companies that own and operate each of the
centers.
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<TABLE>
<CAPTION>
YEAR OR
DATE OPERATING OR
ORIGINALLY ACQUISITION PROCEDURE
LOCATION SPECIALTY OPENED DATE ROOMS
- -------- --------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
ACQUIRED CENTERS:
Knoxville, Tennessee................. Gastroenterology 1987 Nov. 1992 7
Topeka, Kansas....................... Gastroenterology 1990 Nov. 1992 4
Nashville, Tennessee................. Gastroenterology 1989 Nov. 1992 3
Nashville, Tennessee................. Gastroenterology 1988 Dec. 1992 3
Washington, D.C...................... Gastroenterology 1990 Nov. 1993 3
Melbourne, Florida................... Ophthalmology 1986 Nov. 1993 3
Torrance, California................. Gastroenterology 1990 Feb. 1994 2
Sebastopol, California............... Ophthalmology 1988 Apr. 1994 2
Maryville, Tennessee................. Gastroenterology 1992 Jan. 1995 3
Miami, Florida....................... Gastroenterology 1995 Apr. 1995 7
Panama City, Florida................. Gastroenterology 1993 July 1996 3
Ocala, Florida....................... Gastroenterology 1993 Aug. 1996 3
Columbia, South Carolina............. Gastroenterology 1988 Oct. 1996 3
Wichita, Kansas...................... Orthopaedics 1991 Nov. 1996 3
Minneapolis, Minnesota............... Gastroenterology 1993 Nov. 1996 2
Crystal River, Florida............... Gastroenterology 1994 Jan. 1997 3
Abilene, Texas....................... Ophthalmology 1987 Mar. 1997 2
Fayetteville, Arkansas............... Gastroenterology 1992 May 1997 2
Independence, Missouri............... Gastroenterology 1994 Sept. 1997 2
Kansas City, Missouri................ Gastroenterology 1995 Sept. 1997 2
Phoenix, Arizona..................... Ophthalmology 1995 Jan. 1998 4
Denver, Colorado..................... Gastroenterology 1994 Mar. 1998 4
Sun City, Arizona.................... Ophthalmology 1984 Apr. 1998 6
DEVELOPED CENTERS:
Santa Fe, New Mexico................. Gastroenterology May 1994 -- 3
Tarzana, California.................. Gastroenterology July 1994 -- 3
Beaumont, Texas...................... Gastroenterology Oct. 1994 -- 3
Abilene, Texas....................... Gastroenterology Dec. 1994 -- 3
Knoxville, Tennessee................. Ophthalmology June 1996 -- 2
West Monroe, Louisiana............... Gastroenterology June 1996 -- 2
Miami, Florida....................... Gastroenterology Sept. 1996 -- 3
Sidney, Ohio......................... Ophthalmology Dec. 1996 -- 3
Urology
General Surgery
Otolaryngology
Montgomery, Alabama.................. Ophthalmology May 1997 -- 2
Willoughby, Ohio..................... Gastroenterology July 1997 -- 2
Milwaukee, Wisconsin................. Gastroenterology July 1997 -- 2
Chevy Chase, Maryland................ Gastroenterology July 1997 -- 2
Melbourne, Florida................... Gastroenterology Aug. 1997 -- 2
Lorain, Ohio......................... Gastroenterology Aug. 1997 -- 2
Hillmont, Pennsylvania............... Gastroenterology Oct. 1997 -- 2
Minneapolis, Minnesota............... Gastroenterology Nov. 1997 -- 2
Hialeah, Florida..................... Gastroenterology Dec. 1997 -- 3
Cleveland, Ohio...................... Ophthalmology Dec. 1997 -- 2
Evansville, Indiana.................. Ophthalmology Jan. 1998 -- 2
Cincinnati, Ohio..................... Gastroenterology Jan. 1998 -- 2
Salt Lake City, Utah................. Gastroenterology Apr. 1998 -- 2
Kansas City, Kansas.................. Gastroenterology Apr. 1998 -- 4
</TABLE>
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The Company's partnerships and limited liability companies lease certain of
the real property in which its centers operate and the equipment used in certain
of its centers, either from the physician partners or from unaffiliated parties.
SURGERY CENTER OPERATIONS
The Company generally designs, builds, staffs and equips each of its
facilities to meet the specific needs of a single specialty physician practice
group. The Company's typical ambulatory surgery center averages 3,000 square
feet and is located adjacent to or in the immediate vicinity of the specialty
physicians' offices. Each center developed by the Company typically has two to
three operating or procedure rooms with areas for reception, preparation,
recovery and administration. As of May 1, 1998, 34 of the Company's centers in
operation performed gastrointestinal endoscopy procedures, nine centers
performed ophthalmology procedures, one center performed orthopaedic procedures
and one center performed ophthalmology, urology, general surgery and
otolaryngology procedures. The procedures performed at the Company's centers
generally do not require an extended recovery period following the procedures.
The Company's centers are typically staffed with three to five clinical
professionals and administrative personnel, some of whom may be shared with the
physician practice group. The clinical staff includes nurses and surgical
technicians.
The types of procedures performed at each center depend on the specialty of
the practicing physicians. The typical procedures performed or to be performed
most commonly at the Company's centers in operation or under development within
each specialty are:
- Gastroenterology -- colonoscopy and endoscopy procedures
- Ophthalmology -- cataracts and retinal laser surgery
- Orthopaedics -- knee arthroscopy and carpal tunnel repair
- Urology -- cystoscopy and biopsy
- Otolaryngology -- myringotomy and tonsillectomy
The Company markets its surgery centers and networks directly to
third-party payers, including HMOs, preferred provider organizations ("PPOs"),
other managed care organizations and employers. Payer-group marketing activities
conducted by the Company's management and center administrators emphasize the
high quality of care, cost advantages and convenience of the Company's surgery
centers and are focused on making each center an approved provider under local
managed care plans. In addition, the Company is pursuing relationships with
selected physician groups in its markets in order to market a comprehensive
specialty physician network that includes its surgery centers to managed care
payers.
JCAHO ACCREDITATION
Twenty of the Company's surgery centers are currently accredited by the
Joint Commission for the Accreditation of Healthcare Organizations ("JCAHO") and
17 additional surgery centers are scheduled for accreditation surveys during
1998. Of the accredited centers, all have received three-year certification with
15 of the 20 receiving commendation. The Company believes that JCAHO
accreditation is the quality benchmark for managed care organizations. Many
managed care organizations will not contract with a facility until it is JCAHO
accredited. The Company believes that its historical performance in the
accreditation process reflects the Company's commitment to providing high
quality care in its surgery centers.
SPECIALTY PHYSICIAN NETWORKS
Managed care organizations with significant numbers of covered lives are
seeking to direct large numbers of patients to high-quality, low-cost providers
and provider groups. The Company believes that specialty physician networks that
include its practice-based surgery centers are attractive to managed care
organizations because of the geographic coverage of the network, the lower costs
associated with treatment, the availability of the complete delivery system for
a specific specialty and high levels of patient satisfaction. As a result, the
Company believes the development of such networks will position it to capture an
increased volume of managed care contracts, including capitated contracts, and
will increase the market share and profitability of the Company's surgery
centers and physician practices.
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The Company does not expect that the specialty physician networks
themselves will be a significant source of income for the Company. These
networks were and will be formed primarily as a contracting vehicle to generate
revenues for the Company's practice-based surgery centers and physician
practices.
As of March 31, 1998, the Company had established and was the majority
owner and operator of five start-up specialty physician networks consisting of a
gastroenterology network in Miami and four ophthalmology/eye care networks
located in Knoxville, Tennessee; Montgomery, Alabama; Cleveland, Ohio; and
Abilene, Texas. These networks had not generated any revenues as of March 31,
1998. Each specialty physician network is formed either as a limited partnership
or limited liability company in which the Company owns a majority interest.
Individual physicians practicing in the medical specialty on which the network
focuses own the minority interests in the network. These minority physician
owners, who may or may not be affiliated with a Company surgery center or
physician practice, provide the medical services to the patient population
covered by the contracts the network enters into with managed care payers.
Following the establishment of a network, the Company provides management
services and marketing services to the network in an effort to secure patient
service contracts with managed care payers. Fees paid by these networks to the
Company are nominal and generally are intended to cover only the Company's cost
in providing such services.
In addition, as part of its network development strategy, in January 1996
and January 1997 the Company acquired a majority interest in the assets of two
physician practices in Miami, Florida. As a result of the Company's experience
in developing specialty physician networks, the Company does not believe that
ownership of physician practices is required in order to establish a specialty
physician network. In May 1998, the Board of Directors approved a plan for the
Company to dispose of its physician practice interests as part of an overall
strategy to exit the practice management business and focus solely on the
development, acquisition and operation of ambulatory surgery centers and
specialty networks.
REVENUES
The Company's principal source of revenues is a facility fee charged for
surgical procedures performed in its surgery centers. This fee varies depending
on the procedure, but usually includes all charges for operating room usage,
special equipment usage, supplies, recovery room usage, nursing staff and
medications. Facility fees do not include the charges of the patient's surgeon,
anesthesiologist or other attending physicians, which are billed directly to
third-party payers by such physicians. The Company's other significant source of
revenues is the fee for physician services performed by the two physician group
practices in which the Company owns a majority interest.
Practice-based ambulatory surgery centers and physician practices such as
those in which the Company owns a majority interest depend upon third-party
reimbursement programs, including governmental and private insurance programs,
to pay for services rendered to patients. The Company derived approximately 37%
of its net revenues from governmental healthcare programs, including Medicare
and Medicaid, in 1997. The Medicare program currently pays ambulatory surgery
centers and physicians in accordance with fee schedules which are prospectively
determined. On or before January 1, 1999, outpatient surgery services will be
reimbursed by Medicare under a revised prospective payment system, utilizing
approximately 100 ambulatory patient classifications, rather than the eight
codes currently utilized. There can be no assurance that the Company's revenues
will not be adversely affected under this revised payment system. There may be
continuing legislative and regulatory initiatives to limit the rate of increase
in expenditures under the Medicare and Medicaid programs in an effort to curtail
or reduce the federal budget deficit. These limitations, if enacted, may
negatively impact the Company's revenues and operations.
In addition to payment from governmental programs, ambulatory surgery
centers derive a significant portion of their net revenues from private
healthcare reimbursement plans. These plans include both standard indemnity
insurance programs, as well as managed care structures such as PPOs, HMOs and
other similar structures. The strengthening of managed care systems nationally
has resulted in substantial competition among providers of services, including
providers of surgery center services with greater financial resources and market
penetration than the Company, to contract with these systems. The Company
believes that all payers, both governmental and private, will continue their
efforts over the next several years to reduce healthcare costs
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and that their efforts generally will result in a less stable market for
healthcare services. While no assurances can be given concerning the ultimate
success of the Company's efforts to contract with healthcare payers, the Company
believes that its position as a low-cost alternative for certain surgical
procedures should enable the Company's centers to compete effectively in the
evolving healthcare marketplace.
Approximately 11% of the Company's revenues for 1997 were generated by
capitated payment contracts with HMOs. These revenues generally were
attributable to contracts held by physician practices and a surgery center in
which the Company holds a majority interest. These contracts require the
practices to provide specialty physician and certain outpatient surgery services
for the HMO members on an exclusive basis. These contracts do not require the
practices to provide or to be at risk for hospital or other ancillary services
such as laboratory or imaging services. The services required by these contracts
are provided almost solely by surgery centers and the physician practices in
which the Company owns a majority interest. Because the Company is only at risk
for the cost of providing relatively limited healthcare services to these HMO
members, the Company's risk of overutilization by HMO members is limited to the
cost of the physician's time and the supply, drug and nursing staff expense
required for outpatient surgery.
COMPETITION
The Company encounters competition in two separate areas: competition with
other companies for its physician partnership relationships and competition with
other providers for patients and for contracting with managed care payers in
each of its markets.
Competition for Partnership Relationships. The Company believes that it
does not have a direct competitor in the development of practice-based
ambulatory surgery centers across the specialties of gastroenterology,
ophthalmology, otolaryngology, urology, and orthopaedic surgery. There are,
however, several large, publicly-held companies, or divisions or subsidiaries of
large publicly-held companies, that develop freestanding multi-specialty surgery
centers, and these companies may compete with the Company in the development of
centers.
Many physician groups develop surgery centers without a corporate partner.
It is generally difficult, however, in the rapidly evolving healthcare industry,
for a single practice to create effectively the efficient operations and
marketing programs necessary to compete with other provider networks and
companies. Because of this, as well as the financial investment necessary to
develop surgery centers, physician groups are attracted to corporate partners,
such as the Company. Other factors that may influence the physicians' decisions
concerning the choice of a corporate partner are the potential corporate
partner's experience, reputation and access to capital.
There are several companies, many in niche markets, that acquire existing
practice-based ambulatory surgery centers and specialty physician practices.
Many of these competitors have greater resources than the Company. Most of the
Company's competitors acquire centers through the acquisition of the related
physician practice. The principal competitive factors that affect the ability of
the Company and its competitors to acquire surgery centers are price, experience
and reputation, access to capital and willingness to acquire a surgery center
without acquiring the physician practice.
While there are a few national networking companies that specialize in the
establishment and operation of single specialty networks similar to the
Company's networks, most networks are either multi-specialty or primary care
based. The competitive factors the Company primarily experiences in the
development of specialty networks include the ability to attract physician
practice groups to the network and to achieve market penetration and geographic
coverage.
Competition for Patients and Managed Care Contracts. The Company believes
that its surgery centers can provide lower-cost, high quality surgery in a more
comfortable environment for the patient in comparison to hospitals and to
freestanding surgery centers with which the Company competes for managed care
contracts. In addition, the existence of the Company's specialty physician
networks are designed to provide the geographic access within local markets that
managed care companies desire. Competition for managed care contracts with other
providers is focused on pricing of services, quality of services, and
affiliation with key physician groups in a particular market.
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GOVERNMENT REGULATION
The healthcare industry is subject to extensive regulation by a number of
governmental entities at the federal, state and local level. Regulatory
activities affect the business activities of the Company by controlling the
Company's growth, requiring licensure and certification for its facilities,
regulating the use of the Company's properties, and controlling reimbursement to
the Company for the services it provides.
CONs and State Licensing. CON regulations control the development of
ambulatory surgery centers in certain states. CONs generally provide that prior
to the expansion of existing centers, the construction of new centers, the
acquisition of major items of equipment or the introduction of certain new
services, approval must be obtained from the designated state health planning
agency. State CON statutes generally provide that, prior to the construction of
new facilities or the introduction of new services, a designated state health
planning agency must determine that a need exists for those facilities or
services. The Company's development of ambulatory surgery centers generally
focuses on states that do not require CONs. However, acquisitions of existing
surgery centers, even in states that require CONs for new centers, generally do
not require CON regulatory approval.
State licensing of ambulatory surgery centers is generally a prerequisite
to the operation of each center and to participation in federally funded
programs, such as Medicare and Medicaid. Once a center becomes licensed and
operational, it must continue to comply with federal, state and local licensing
and certification requirements in addition to local building and life safety
codes. In addition, every state imposes licensing requirements on individual
physicians, and facilities and services operated and owned by physicians.
Physician practices are also subject to federal, state and local laws dealing
with issues such as occupational safety, employment, medical leave, insurance
regulations, civil rights and discrimination, and medical waste and other
environmental issues.
Corporate Practice of Medicine. The Company is not required to obtain a
license to practice medicine in any jurisdiction in which it owns and operates
an ambulatory surgery center, because the surgery centers are not engaged in the
practice of medicine. The physicians who perform procedures at the surgery
centers are individually licensed to practice medicine. The group practices,
with the exception of the two physician practices majority owned by the Company,
are not affiliated with the Company other than through the physicians' ownership
in the partnerships and limited liability companies that own the surgery
centers. The Company owns a majority interest in two group practices in Florida,
a state which permits physicians to practice medicine through an entity that is
not wholly owned by physicians. All third party payer contracts for physician
services are in the name of the group practice entities in which the Company
owns a majority interest. The physicians associated with these group practices
provide medical services to the patients of the practice entities and are
compensated for these services pursuant to either an employment contract or an
independent contractor arrangement with the practice entity. The Company's
operations do not require the Company to otherwise obtain any license to
practice medicine in any other jurisdiction. A recent ruling by the Florida
Board of Medicine that an agreement between a physician practice and a practice
management company constituted impermissible fee-splitting, if upheld on
judicial appeal, would cause the Company to restructure its relationship with
one of the two group practices. The Company does not believe that any such
restructuring would have a material adverse effect on the Company.
Insurance and Antitrust Laws. Laws in all states regulate the business of
insurance and the operation of HMOs. Many states also regulate the establishment
and operation of networks of healthcare providers. The Company believes that its
operations are in compliance with these laws in the states in which it currently
does business. The NAIC recently endorsed a policy proposing the state
regulation of risk assumption by healthcare providers. The policy proposes
prohibiting providers from entering into capitated payment or other risk sharing
contracts except through HMOs or insurance companies. Several states have
adopted regulations implementing the NAIC policy in some form. In states where
such regulations have been adopted, healthcare providers will be precluded from
entering into capitated contracts directly with employers and benefit plans
other than HMOs and insurance companies.
The Company and its affiliated groups may in the future enter into
additional contracts with managed care organizations, such as HMOs, whereby the
Company and its affiliated groups would assume risk in
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connection with providing healthcare services under capitation arrangements. If
the Company or its affiliated groups are considered to be in the business of
insurance as a result of entering into such risk sharing arrangements, they
could become subject to a variety of regulatory and licensing requirements
applicable to insurance companies or HMOs, which could have a material adverse
effect upon the Company's ability to enter into such contracts.
With respect to managed care contracts that do not involve capitated
payments or some other form of financial risk sharing, federal and state
antitrust laws restrict the ability of healthcare provider networks such as the
Company's specialty physician networks to negotiate payments on a collective
basis.
Reimbursement. The Company depends upon third-party programs, including
governmental and private health insurance programs, to reimburse it for services
rendered to patients in its ambulatory surgery centers. In order to receive
Medicare reimbursement, each ambulatory surgery center must meet the applicable
conditions of participation set forth by the Department of Health and Human
Services ("DHHS") relating to the type of facility, its equipment, personnel and
standard of medical care, as well as compliance with state and local laws and
regulations, all of which are subject to change from time to time. Ambulatory
surgery centers undergo periodic on-site Medicare certification surveys. Each of
the Company's existing centers is certified as a Medicare provider. Although the
Company intends for its centers to participate in Medicare and other government
reimbursement programs, there can be no assurance that these centers will
continue to qualify for participation.
Medicare-Medicaid Illegal Remuneration Provisions. The anti-kickback
statute makes unlawful knowingly and willfully soliciting, receiving, offering
or paying any remuneration (including any kickback, bribe, or rebate) directly
or indirectly to induce or in return for referring an individual to a person for
the furnishing or arranging for the furnishing of any item or service for which
payment may be made in whole or in part under Medicare or Medicaid. Violation is
a felony punishable by a fine of up to $25,000 or imprisonment for up to five
years, or both. The Medicare and Medicaid Patient Program Protection Act of 1987
(the "1987 Act") provides administrative penalties for healthcare practices
which encourage overutilization or illegal remuneration when the costs of
services are reimbursed under the Medicare program. Loss of Medicare
certification and severe financial penalties are included among the 1987 Act's
sanctions. The 1987 Act, which adds to the criminal penalties under preexisting
law, also directs the Inspector General of the DHHS to investigate practices
which may constitute overutilization, including investments by healthcare
providers in medical diagnostic facilities, and to promulgate regulations
establishing exemptions or "safe harbors" for investments by medical service
providers in legitimate business ventures that will be deemed not to violate the
law even though those providers may also refer patients to such a venture.
Regulations identifying safe harbors were published in final form in July 1991
(the "Regulations").
The Regulations set forth two specific exemptions or "safe harbors" related
to "investment interests": the first concerning investment interests in large
publicly traded companies ($50,000,000 in net tangible assets) and the second
for investments in smaller entities. The partnerships and limited liability
companies that own the Company's centers do not meet all of the criteria of
either existing "investment interests" safe harbor as announced in the
Regulations.
While several federal court decisions have aggressively applied the
restrictions of the anti-kickback statute, they provide little guidance as to
the application of the anti-kickback statute to the Company's partnerships and
limited liability companies. The Company believes that the physician partner's
ownership interest in the Company's centers is in compliance with the current
requirements of applicable federal and state law because among other factors:
i. the partnerships and limited liability companies exist to effect
legitimate business purposes, including the ownership, operation and
continued improvement of quality, cost effective and efficient services to
their patients;
ii. the partnerships and limited liability companies function as an
extension of the group practices of physicians who are affiliated with the
surgery centers and the surgical procedures are performed personally by
these physicians without referring the patients outside of their practice;
32
<PAGE> 36
iii. the physician partners have a substantial investment at risk in
the partnership or limited liability company;
iv. terms of the investment do not take into account volume of the
physician partner's past or anticipated future services provided to
patients of the centers;
v. the physician partners are not required or encouraged as a
condition of the investment to treat Medicare or Medicaid patients at the
centers or to influence others to refer such patients to the centers for
treatment;
vi. neither the partnership, limited liability company, the Company
subsidiary, nor any of their affiliates will loan any funds or guarantee
any debt on behalf of the physician partners; and
vii. distributions by the partnerships and limited liability companies
are allocated uniformly in proportion to ownership interests.
The Regulations also set forth a safe harbor for personal services and
management contracts. Certain of the Company's partnerships and limited
liability companies have entered into ancillary services agreements with their
physician partners' group practice pursuant to which the practice provides the
center with billing and collections, transcription, payables processing and
payroll services. The consideration payable by the partnership or limited
liability company for these services is based on the volume of services provided
by the practice which is measured by the partnership or limited liability
company's revenues. Although these relationships do not meet all of the criteria
of the personal services and management contracts safe harbor, the Company
believes that the ancillary services agreements are in compliance with the
current requirements of applicable federal and state law because, among other
factors, the fees payable to the physician practice approximate the practice's
cost of providing the services thereunder.
Notwithstanding the Company's belief that the relationship of physician
partners to the Company's surgery centers should not constitute illegal
remuneration under the anti-kickback statute, no assurances can be given that a
federal or state agency charged with enforcement of the anti-kickback statute
and similar laws might not assert a contrary position or that new federal or
state laws might not be enacted that would cause the physician partners'
relationships with the Company's centers to become illegal, or result in the
imposition of penalties on the Company or certain of its facilities. Even the
assertion of a violation could have a material adverse effect upon the Company.
Prohibition on Physician Ownership of Healthcare Facilities. The so-called
"Stark II" provisions of the Omnibus Budget Reconciliation Act of 1993 ("OBRA
93") amend the federal Medicare statute to prohibit the making by a physician of
referrals for "designated health services" to an entity in which the physician
has an investment interest or other financial relationship, subject to certain
exceptions. A referral under Stark II that does not fall within an exception is
strictly prohibited. This prohibition took effect on January 1, 1995. Sanctions
for violating Stark II can include civil monetary penalties and exclusion from
Medicare and Medicaid.
Ambulatory surgery is not identified as a "designated health service", and
the Company, therefore, does not believe that ambulatory surgery is otherwise
subject to the restrictions set forth in Stark II. Proposed regulations pursuant
to Stark II that were published on January 9, 1998 specifically provide that
services provided in an ambulatory surgery center and reimbursed under the
composite payment rate are not designated health services. However, unfavorable
final Stark II regulations or subsequent adverse court interpretations
concerning similar provisions found in recently enacted state statutes could
prohibit reimbursement for treatment provided by the physicians affiliated with
the Company's centers to their patients. The Company cannot predict whether
other regulatory or statutory provisions will be enacted by federal or state
authorities which would prohibit or otherwise regulate relationships which the
Company has established or may establish with other healthcare providers or the
possibility of material adverse effects on its business or revenues arising from
such future actions. The Company believes, however, that it will be able to
adjust its operations so as to be in compliance with any regulatory or statutory
provision, as may be applicable.
33
<PAGE> 37
The Company is subject to state and federal laws that govern the submission
of claims for reimbursement. These laws generally prohibit an individual or
entity from knowingly and willfully presenting a claim (or causing a claim to be
presented) for payment from Medicare, Medicaid or other third party payers that
is false or fraudulent. The standard for "knowing and willful" often includes
conduct that amounts to a reckless disregard for whether accurate information is
presented by claims processors. Penalties under these statutes include
substantial civil and criminal fines, exclusion from the Medicare program, and
imprisonment. One of the most prominent of these laws is the federal False
Claims Act, which may be enforced by the federal government directly, or by a
qui tam plaintiff on the government's behalf. Under the False Claims Act, both
the government and the private plaintiff, if successful, are permitted to
recover substantial monetary penalties, as well as an amount equal to three
times actual damages. In recent cases, some qui tam plaintiffs have taken the
position that violations of the anti-kickback statute and Stark II should also
be prosecuted as violations of the federal False Claims Act. The Company
believes that it has procedures in place to ensure the accurate completion of
claims forms and requests for payment. However, the laws and regulations
defining the proper parameters of proper Medicare or Medicaid billing are
frequently unclear and have not been subjected to extensive judicial or agency
interpretation. Billing errors can occur despite the Company's best efforts to
prevent or correct them, and no assurances can be given that the government will
regard such errors as inadvertent and not in violation of the False Claims Act
or related statutes.
Under its agreements with its physician partners, the Company is obligated
to purchase the interests of the physicians at the greater of the physicians'
capital account or a multiple of earnings in the event that their continued
ownership of interests in the partnerships and limited liability companies
becomes prohibited by the statutes or regulations described above. The
determination of such a prohibition is required to be made by counsel of the
Company in concurrence with counsel of the physician partners, or if they cannot
concur, by a nationally recognized law firm with an expertise in healthcare law
jointly selected by the Company and the physician partners. The interest
required to be purchased by the Company will not exceed the minimum interest
required as a result of the change in the statute or regulation causing such
prohibition.
PROPERTIES
The Company's principal executive offices are located in Nashville,
Tennessee and contain an aggregate of approximately 15,000 square feet of office
space, which the Company subleases from AHC pursuant to an agreement that
expires in December 1999. The Company's partnerships and limited liability
companies generally lease space for their surgery centers. Forty-three of the
centers and the physician practices in operation at May 1, 1998 lease space
ranging from 1,200 to 13,500 square feet with remaining lease terms ranging from
two to 18 years. Two centers in operation at May 1, 1998 are located in
buildings owned indirectly by the Company.
EMPLOYEES
As of March 31, 1998, the Company and its affiliated entities employed
approximately 260 persons, 210 of whom were full-time employees and 50 of whom
were part-time employees. Of the above, 63 were employed at the Company's
headquarters in Nashville, Tennessee. In addition, approximately 190 employees
are leased on a full-time basis and 120 are leased on a part-time basis from the
associated physician practices. None of these employees are represented by a
union. The Company believes its employee relations to be good.
LEGAL PROCEEDINGS AND INSURANCE
From time to time, the Company may be named a party to legal claims and
proceedings in the ordinary course of business. The Company is not aware of any
claims or proceedings against it or its partnerships or limited liability
companies that might have a material financial impact on the Company.
Each of the Company's surgery centers and physician practices maintains
separate medical malpractice insurance in amounts the Company deems adequate for
its business.
34
<PAGE> 38
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Certain information with respect to the directors and executive officers of
the Company is set forth below. The Board of Directors is composed of seven
persons who are divided into three classes, designated Class I, Class II and
Class III. Each class consists, as nearly as possible, of one-third of the total
number of directors constituting the entire Board of Directors. Each class of
directors is elected for a three-year term, except that the initial term is for
one year in the case of the Class I directors and two years in the case of the
Class II directors. All executive officers are elected by the Board of Directors
and serve until their successors are duly elected by the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
Ken P. McDonald................... 58 President, Chief Executive Officer and Director (Class II
director with term expiring in 1999)
Claire M. Gulmi................... 44 Senior Vice President, Chief Financial Officer and
Secretary
Royce D. Harrell.................. 52 Senior Vice President, Operations, and Assistant Secretary
Rodney H. Lunn.................... 47 Senior Vice President, Center Development
David L. Manning.................. 48 Senior Vice President, Development
Thomas G. Cigarran................ 55 Chairman of the Board (Class III director with term
expiring in 2000)
James A. Deal..................... 47 Director (Class I director with term expiring in 2001)
Steven I. Geringer................ 52 Director (Class I director with term expiring in 2001)
Debora A. Guthrie................. 42 Director (Class III director with term expiring in 2000)
Henry D. Herr..................... 51 Director (Class II director with term expiring in 1999)
Bergein F. Overholt, M.D.......... 60 Director (Class III director with term expiring in 2000)
</TABLE>
Ken P. McDonald joined the Company in 1993 as a Vice President. Mr.
McDonald became Executive Vice President and Chief Operating Officer in December
1994, President and a director in July 1996, and Chief Executive Officer in
December 1997. Mr. McDonald was President of NASCO Data Systems, Inc., a
distributor of IBM micro-computer products to the value-added reseller
community, from 1988 until he joined the Company.
Claire M. Gulmi joined the Company in September 1994 as Vice President and
Chief Financial Officer. Ms. Gulmi became Senior Vice President in March 1997
and Secretary in December 1997. From 1991 to 1994, Ms. Gulmi served as Chief
Financial Officer of Music Holdings, Inc., a music publishing and video
distribution company.
Royce D. Harrell joined the Company in October 1992 as Senior Vice
President, Operations. Mr. Harrell served, in successive order from 1982 to
1992, as a Vice President of Development, Senior Vice President of Development
and Senior Vice President, Operations of Forum Group, Inc., an owner and
operator of retirement and healthcare communities.
Rodney H. Lunn has been Senior Vice President of Center Development since
1992 and was a director from 1992 until February 1997. Mr. Lunn is a founding
shareholder of the Company and was a principal of Practice Development
Associates, Inc. ("PDA"), a company specializing in developing practice-based
surgery centers, from March 1987 until it was acquired by the Company in 1992.
David L. Manning has served as Senior Vice President of Development and
Assistant Secretary of the Company since April 1992. Mr. Manning is a founding
shareholder of the Company and co-founded and was a principal of PDA from March
1987 until its acquisition by the Company in 1992.
Thomas G. Cigarran has served as Chairman of the Board since 1992. Mr.
Cigarran served as Chief Executive Officer from January 1993 until December
1997, and President from January 1993 to July 1996.
35
<PAGE> 39
Since December 1997, Mr. Cigarran has served as an advisor to the Company. Mr.
Cigarran is a co-founder of AHC and has served as Chairman of the Board,
President and Chief Executive Officer thereof since 1988. Mr. Cigarran also
serves as a member of the Board of Directors of ClinTrials Research, Inc. and
CorporateFamily Solutions, Inc.
James A. Deal, a director of the Company since 1992, has served as
Executive Vice President of AHC since May 1991 and as President of Diabetes
Treatment Centers of America, Inc., an AHC subsidiary, since 1985.
Steven I. Geringer, a director of the Company since March 1997, was
President and Chief Executive Officer of PCS Health Systems, Inc., a unit of Eli
Lilly & Company ("PCS"), and one of the nation's largest providers of managed
pharmaceutical services to managed care organizations and health insurers, from
June 1995 until June 1996, and President and Chief Operating Officer of PCS from
May 1993 through May 1995. Prior to joining PCS, Mr. Geringer was a founder,
Chairman and Chief Executive Officer of Clinical Pharmaceuticals, Inc. which was
acquired by PCS.
Debora A. Guthrie, a director of the Company since November 1996, has been
President and Chief Executive Officer of the general partner of Capitol Health
Partners, L.P., a Washington, D.C.-based venture fund specializing in healthcare
industries since October 1995. Prior to forming Capitol Health Partners in 1995,
Ms. Guthrie was President and Chief Executive Officer of Guthrie Capital
Corporation, a venture management company providing financial advisory and
investment banking services to healthcare companies in the Mid-Atlantic and
Southeastern United States.
Henry D. Herr, a director of the Company since 1992, has served as
Executive Vice President of Finance and Administration and Chief Financial
Officer of AHC since 1986 and a director of AHC since 1988. Since December 1997,
Mr. Herr has served as an advisor to the Company. Mr. Herr served as Chief
Financial Officer of the Company from April 1992 until September 1994, and as
Secretary from April 1992 until December 1997.
Bergein F. Overholt, M.D., a director of the Company since November 1992,
is President of Gastrointestinal Associates, P.C. a gastrointestinal specialty
group, and a partner in The Endoscopy Center, Knoxville, Tennessee, which owns a
limited partnership interest in an ambulatory surgery center that is
majority-owned and managed by the Company. Dr. Overholt also serves as Chairman,
Laser/Hyperthermia Department, Thompson Cancer Survival Center in Knoxville,
Tennessee and is an Associate Professor of Clinic Medicine, University of
Tennessee in Knoxville, Tennessee.
There are no family relationships, by blood, marriage or adoption, between
or among any of the individuals listed above as directors or executive officers.
Ms. Guthrie, an affiliate of Capitol Health Partners, L.P., was appointed to the
Board of Directors in connection with the preferred stock equity financing in
November 1996, in which Capitol Health Partners, L.P. purchased 18.2% of the
Series A Preferred Stock and Series B Preferred Stock. See "Description of
Capital Stock -- Preferred Stock."
COMMITTEES OF THE BOARD OF DIRECTORS
In order to facilitate its various functions, the Board of Directors
created several standing committees, including a Nominating Committee, a
Compensation Committee and an Audit Committee.
Nominating Committee. The principal function of the Nominating Committee
is to recommend to the Board of Directors nominees for election to the Board.
Members of the Nominating Committee are Ken P. McDonald, Thomas G. Cigarran and
Bergein F. Overholt, M.D.
Compensation Committee. No member of this committee is a former or current
officer or employee of the Company. The functions of the Compensation Committee
include recommending to the full Board of Directors the compensation
arrangements for senior management and directors and the adoption of
compensation and benefit plans in which officers and directors are eligible to
participate, and granting options or other benefits under (and otherwise
administering) such plans, including the Company's 1992 Stock Option
36
<PAGE> 40
Plan (the "1992 Plan") and the Company's 1997 Stock Incentive Plan (the "1997
Plan"). Members of the Compensation Committee are Debora A. Guthrie and Steven
I. Geringer.
Audit Committee. The principal functions of the Audit Committee are to
recommend to the full Board of Directors the engagement or discharge of the
Company's independent auditors; to review the nature and scope of the audit,
including but not limited to a determination of the effectiveness of the audit
effort through meetings held at least annually with the independent auditors of
the Company and a determination through discussion with the auditors that no
unreasonable restrictions were placed on the scope or implementation of their
examinations; to review the qualifications and performance of the auditors,
including but not limited to review of the plans and results of the auditing
engagement and each professional service provided by the independent auditors;
to review the financial organization and accounting practices of the Company,
including but not limited to review of the Company's financial statements with
the auditors and inquiry into the effectiveness of the Company's financial and
accounting functions and internal controls through discussions with the auditors
and the officers of the Company; and to recommend to the full Board of Directors
policies concerning avoidance of employee conflicts of interest and to review
the administration of such policies. Members of the Audit Committee are Debora
A. Guthrie, James A. Deal and Henry D. Herr.
COMPENSATION OF DIRECTORS
Members of the Board of Directors, other than those who are employees of
the Company, receive an annual fee of $10,000, adjusted annually to reflect
changes in the Consumer Price Index, U.S. All City Average Report, of the U.S.
Bureau of Labor Statistics (the "CPI") for their services as directors and as
members of any committees of the Board of Directors on which they serve. In
addition, each non-employee director is reimbursed for out-of-pocket expenses
incurred in attending Board of Directors' meetings and committee meetings. Also,
Outside Directors (as defined below) are eligible to receive annual restricted
stock awards ("Outside Director Restricted Stock") pursuant to the 1997 Plan. An
"Outside Director" is a member of the Board of Directors who is not an officer
or employee of the Company, its subsidiaries or affiliates. A director serving
as medical director of the Company but not as an employee of the Company will be
treated as an Outside Director for purposes of the 1997 Plan. On the date of
each annual meeting of shareholders of the Company, each Outside Director who is
elected or reelected to the Board of Directors or who otherwise continues as a
director shall automatically receive on the date of the annual meeting of
shareholders a grant of that number of shares of restricted Class A Common Stock
having an aggregate fair market value on such date equal to $10,000, adjusted
annually for changes in the CPI. Members of the Board of Directors who are
employees of the Company will not receive any additional compensation for their
services as directors or as members of committees.
Each grant of Outside Director Restricted Stock shall vest in increments of
one-third of the shares of Class A Common Stock subject to such grant, with the
first one-third increment vesting on the date of grant, the second one-third
increment vesting on the first anniversary of the date of grant and the final
one-third increment vesting on the second anniversary of the date of grant, if
the grantee is still a member of the Board of Directors on each of such dates.
Until the earlier of (i) five years from the date of grant and (ii) the date on
which the Outside Director ceases to serve as a director of the Company, no
Outside Director Restricted Stock may be sold, transferred, pledged, assigned,
or otherwise alienated or hypothecated, except by will or by the laws of descent
and distribution. Upon termination of an Outside Director's service as a member
of the Board of Directors for any reason other than death, disability or
retirement, all shares of Outside Director Restricted Stock not vested at such
time will be forfeited. Upon termination of an Outside Director's service as a
member of the Board of Directors due to death, disability or retirement, all
shares of Outside Director Restricted Stock will immediately vest. Pursuant to
Section 9 of the 1997 Plan, during December 1997 and May 1998, each Outside
Director received a grant of Outside Director Restricted Stock having an
aggregate fair market value on such date equal in value to $10,000 on each of
such dates.
37
<PAGE> 41
EXECUTIVE COMPENSATION
The following table provides information as to annual, long-term or other
compensation during fiscal years 1997, 1996 and 1995 for the persons who, at the
end of fiscal year 1997, were the Chief Executive Officer and the other four
most highly compensated executive officers of the Company (collectively, the
"Named Executive Officers"). Prior to the Distribution, Thomas G. Cigarran
served as Chief Executive Officer of the Company but received no compensation
from or with respect to the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS/
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
- --------------------------- ---- --------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Ken P. McDonald.......................... 1997 $156,253 $ 13,461 88,333 $4,000(1)
President and Chief 1996 139,050 41,905 68,333 4,000
Executive Officer 1995 125,050 25,386 -- 4,000
Claire M. Gulmi.......................... 1997 124,796 9,984 16,666 --
Senior Vice President, 1996 100,000 28,292 6,667 --
Chief Financial Officer 1995 86,292 22,652 -- --
and Secretary
Royce D. Harrell......................... 1997 138,190 11,055 8,333 --
Senior Vice President, 1996 130,788 38,471 8,333 --
Operations 1995 124,538 36,708 -- --
Rodney H. Lunn........................... 1997 139,597 26,872 38,333 4,320(2)
Senior Vice President, 1996 132,108 29,169 5,000 4,320
Center Development 1995 125,818 18,205 -- 4,320
David L. Manning......................... 1997 139,597 7,782 43,333 4,320(2)
Senior Vice President, 1996 132,108 106,460 8,333 4,320
Development 1995 125,818 26,384 -- 4,320
</TABLE>
- ---------------
(1) Forgiveness of debt.
(2) Automobile allowance.
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<PAGE> 42
OPTION/STOCK APPRECIATION RIGHTS GRANTS IN LAST FISCAL YEAR
The following table provides information as to options granted to the Named
Executive Officers during fiscal year 1997. No Stock Appreciation Rights
("SARs") were awarded in fiscal year 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
--------------------------------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF PERCENT OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS/SARS EXERCISE APPRECIATION
UNDERLYING GRANTED TO OR BASE FOR OPTION TERM
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION ---------------------------
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---- ------------ ------------------ -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ken P. McDonald.......... 13,333(1) 4.6% $5.91 02/07/07 $ 49,556 $ 125,584
75,000(1) 25.7 8.70 12/02/07 410,354 1,039,917
Claire M. Gulmi.......... 16,666(1) 5.7 5.91 02/07/07 61,944 156,977
Royce D. Harrell......... 8,333(1) 2.9 5.91 02/07/07 30,972 78,489
Rodney H. Lunn........... 5,000(2) 1.7 5.91 02/07/07 18,584 47,095
33,333(2) 11.4 6.15 04/11/07 128,922 326,714
David L. Manning......... 10,000(2) 3.4 5.91 02/07/07 37,168 94,190
33,333(2) 11.4 6.15 04/11/07 128,922 326,714
</TABLE>
- ---------------
(1) Represents options to purchase shares of Class A Common Stock which vest at
the rate of 25% per year over a four year period beginning on the date of
grant. If there is a Change in Control or a Potential Change in Control as
defined in the 1997 Plan, any stock options which are not then exercisable,
in the discretion of the Board of Directors, may become fully exercisable
and vested.
(2) Represents options to purchase shares of Class A Common Stock which vested
April 11, 1997.
None of the Named Executive Officers exercised options or separate SARs
during fiscal year 1997. The following table provides information with respect
to the number of shares covered by both exercisable and unexercisable stock
options as of December 31, 1997. Also reported are the values for "in-the-money"
options, which represent the positive spread between the exercise price of any
existing stock options and the year-end price.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUE TABLE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END($)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ken P. McDonald................................. 53,334 146,664 $ 201,463 $163,381
Claire M. Gulmi................................. 14,167 25,831 58,026 58,368
Royce D. Harrell................................ 86,583 16,248 425,242 37,819
Rodney H. Lunn.................................. 225,332 -- 1,272,345 --
David L. Manning................................ 235,332 -- 1,296,646 --
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has employment agreements with each of Mr. McDonald, Ms. Gulmi,
Mr. Harrell, Mr. Lunn and Mr. Manning (the "Employment Agreements"). The
Employment Agreements have an initial one-year term, but contain a provision
that automatically extends the term for an additional one year on the first and
each successive anniversary date of the Employment Agreements until such
employee reaches age 65, after which term the Employment Agreement shall not be
automatically extended. The automatic renewal provision can be canceled by the
Company prior to each anniversary date of the Employment Agreements. The
Employment Agreements provide that if the Company elects not to extend the
executive's employment, the executive will be considered to have been terminated
without cause and will receive his or her base salary,
39
<PAGE> 43
reduced by any salary earned by the executive from another employer, plus
certain benefits for a period of one year. The executive will also receive the
same compensation as provided above if the executive terminates his or her
employment with the Company under certain circumstances at any time within
twelve months following a Change In Control (as defined in the Employment
Agreements). The Employment Agreements also contain a restrictive covenant
pursuant to which each executive has agreed not to compete with the Company
during the time the Company is obligated to compensate him or her pursuant to
the Employment Agreement.
STOCK INCENTIVE PLANS
1992 Stock Option Plan. The Company has adopted, and its shareholders have
approved, the 1992 Plan pursuant to which a committee of the Board of Directors
(the "Plan Committee"), currently composed of the Members of the Compensation
Committee has the authority (i) to determine which of the eligible persons shall
be granted options to purchase shares of Class A Common Stock, (ii) to determine
whether such options shall be incentive or non-statutory stock options, (iii) to
determine the number of shares for which each option shall be granted, (iv) to
construe, interpret and administer the 1992 Plan, (v) to prescribe the terms and
provisions of each option granted, (vi) to amend the 1992 Plan, and (vii)
generally, to exercise such powers and to perform such acts as are deemed
necessary or expedient to promote the best interests of the Company.
There are 914,666 shares of Class A Common Stock reserved for issuance upon
exercise of options granted under the 1992 Plan. The price per share under each
option granted shall be determined by the Board or the Plan Committee, but in
the case of incentive stock options, shall be no less than 100% of the fair
market value of the Class A Common Stock on the date of grant, and, in the case
of non-statutory options, shall in no event be less than 85% of the fair market
value of the Class A Common Stock on the date of grant.
The option exercise period shall be determined by the Board or the Plan
Committee, however, incentive stock options shall not be exercisable more than
10 years from the date of grant (and five years for any individual who, at the
time of grant, owns more than 10% of the total combined voting power of all
classes of stock of the Company). No option shall be transferable otherwise than
by will or the laws of descent and distribution and an option is exercisable
during the lifetime of the optionee only by such optionee.
As of the date of this Prospectus, non-qualified stock options for the
purchase of 869,596 shares of Class A Common Stock have been granted to certain
management employees. The options granted will generally vest in four equal
annual installments. The options are subject to the terms of the 1992 Plan, will
expire 10 years from the date of grant, and are exercisable at an average
exercise price of approximately $2.49 per share. In the event of certain
fundamental changes to the Company (including liquidation, dissolution, merger,
reorganization or sale of all or substantially all of the assets of the
Company), the stock options shall immediately vest and be fully exercisable by
the optionees. If shares subject to an option or stock appreciation right under
the 1992 Plan cease to be subject to such option or stock appreciation right
without the exercise of such option or stock appreciation right, or if shares of
restricted stock or shares underlying other stock-based awards under the 1992
Plan are forfeited or otherwise terminate without a payment being made in the
form of Class A Common Stock and without the payment of any dividends thereon,
such shares will again be available for future distribution under the 1992 Plan.
1997 Stock Incentive Plan. The Company has adopted, and its shareholders
have approved, the 1997 Plan pursuant to which the Plan Committee has the
authority to grant to key employees and consultants of the Company the following
types of awards: (1) stock options; (2) stock appreciation rights; (3)
restricted stock; and/or (4) other stock-based awards. Pursuant to the 1997
Plan, 650,000 shares of Common Stock have been reserved and will be available
for distribution, which may include authorized and unissued shares or treasury
shares. Any shares as to which an option or other award expires, lapses
unexpired, or is forfeited, terminated or canceled may become subject to a new
option or other award. The Plan will terminate on, and no award may be granted
later than December 2007, but the exercise date of awards granted prior to such
tenth anniversary may extend beyond that date. As of the date of this
Prospectus, options for the purchase of 477,875 shares of Class A Common Stock
were outstanding at a weighted average exercise price per share of $7.68.
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<PAGE> 44
Incentive stock options ("ISOs") and non-qualified stock options may be
granted for such number of shares as the Plan Committee may determine and may be
granted alone, in conjunction with, or in tandem with other awards under the
1997 Plan or cash awards outside the 1997 Plan. A stock option will be
exercisable at such times and subject to such terms and conditions as the Plan
Committee will determine. However, in the case of an ISO, the term will be no
more than ten years after the date of grant (five years in the case of ISOs for
certain 10% shareholders). The option price for an ISO will not be less than
100% (110% in the case of certain 10% shareholders) of the fair market value of
the Class A Common Stock as of the date of grant and for any non-qualified stock
option will not be less than 50% of the fair market value as of the date of
grant. Stock options and stock appreciation rights granted under the 1997 Plan
may not be assigned or transferred without the prior written consent of the Plan
Committee other than (i) transfers by the optionee to a member of his or her
immediate family or a trust for the benefit of the optionee or a member of his
or her immediate family or (ii) transfers by will or by the laws of descent and
distribution.
Stock appreciation rights may be granted under the 1997 Plan in conjunction
with all or part of a stock option and will be exercisable only when the
underlying stock option is exercisable. Once a stock appreciation right has been
exercised, the related portion of the stock option underlying the stock
appreciation right will terminate. Upon the exercise of a stock appreciation
right, the Plan Committee will pay to the employee or consultant in cash, Class
A Common Stock or a combination thereof (the method of payment to be at the
discretion of the Plan Committee), an amount equal to the excess of the fair
market value of the Class A Common Stock on the exercise date over the option
price, multiplied by the number of stock appreciation rights being exercised.
Restricted stock awards may be granted alone, in addition to, or in tandem
with, other awards under the 1997 Plan or cash awards made outside the 1997
Plan. The provisions attendant to a grant of restricted stock may vary from
participant to participant. In making an award of restricted stock, the Plan
Committee will determine the periods during which the restricted stock is
subject to forfeiture and may provide such other awards designed to guarantee a
minimum of value for such stock. During the restricted period, the employee or
consultant may not sell, transfer, pledge, or assign the restricted stock but
will be entitled to vote the restricted stock and to receive, at the election of
the Plan Committee, cash or deferred dividends.
The Plan Committee also may grant other types of awards such as performance
shares, convertible preferred stock, convertible debentures or other
exchangeable securities that are valued, as a whole or in part, by reference to
or otherwise based on the Class A Common Stock. These awards may be granted
alone, in addition to, in tandem with, stock options, stock appreciation rights,
restricted stock, or cash awards outside of the 1997 Plan. Awards will be made
upon such terms and conditions as the Plan Committee may determine.
If there is a change in control or a potential change in control of the
Company (as defined in the 1997 Plan), stock appreciation rights and limited
stock appreciation rights outstanding for at least six months and any stock
options which are not then exercisable, in the discretion of the Board, may
become fully exercisable and vested. Notwithstanding the foregoing, stock
appreciation rights held by persons subject to Section 16(b) of the Exchange Act
will be automatically exercised if the change in control or potential change in
control is not within the control of such person for purposes of Rule
16b-3(e)(3) of the Exchange Act. Also, in the discretion of the Board, the
restrictions and deferral limitations applicable to restricted stock and other
stock-based awards may lapse, and such shares and awards will be deemed fully
vested. Stock options, stock appreciation rights, limited stock appreciation
rights, restricted stock and other stock-based awards, will unless otherwise
determined by the Plan Committee in its sole discretion, be cashed out on the
basis of the change in control price (as defined in the 1997 Plan and as
described below). The change in control price will be the highest price per
share paid in any transaction reported on the Nasdaq National Market or paid or
offered to be paid in any bona fide transaction relating to a change in control
or potential change in control at any time during the immediately preceding
60-day period. The Plan Committee has the discretion to determine the change in
control price, based on the parameters described in the preceding sentence.
Other Stock Options. The Company also has granted non-qualified stock
options for the purchase of 20,668 shares of Class A Common Stock to certain
non-employee directors of the Company and to the Company's Medical Director and
Associate Medical Director, of which options for 4,000 shares have been
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<PAGE> 45
exercised and/or terminated. The outstanding options granted will vest in four
equal annual installments, will expire 10 years from the date of grant, and are
exercisable at an average exercise price of approximately $4.92 per share. In
the event of certain fundamental changes to the Company (including liquidation,
dissolution, merger, reorganization or sale of all or substantially all of the
assets of the Company), the stock options shall immediately vest and be fully
exercisable by the optionees.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIMITATION OF LIABILITY
The Tennessee Business Corporation Act (the "TBCA") provides that a
corporation may indemnify any of its directors and officers against liability
incurred in connection with a proceeding if: (a) such person acted in good
faith; (b) in the case of conduct in an official capacity with the corporation,
he reasonably believed such conduct was in the corporation's best interests; (c)
in all other cases, he reasonably believed that his conduct was at least not
opposed to the best interests of the corporation; and (d) in connection with any
criminal proceeding, such person had no reasonable cause to believe his conduct
was unlawful. In actions brought by or in the right of the corporation, however,
the TBCA provides that no indemnification may be made if the director or officer
was adjudged to be liable to the corporation. The TBCA also provides that in
connection with any proceeding charging improper personal benefit to an officer
or director, no indemnification may be made if such officer or director is
adjudged liable on the basis that such personal benefit was improperly received.
Notwithstanding the foregoing, the TBCA provides that a court of competent
jurisdiction, unless the corporation's charter provides otherwise, upon
application, may order that an officer or director be indemnified for reasonable
expenses if, in consideration of all relevant circumstances, the court
determines that such individual is fairly and reasonably entitled to
indemnification, notwithstanding the fact that: (a) such officer or director was
adjudged liable to the corporation in a proceeding by or in the right of the
corporation; (b) such officer or director was adjudged liable on the basis that
personal benefit was improperly received by him; or (c) such officer or director
breached his duty of care to the corporation.
The Charter and Bylaws require the Company to indemnify its directors and
officers to the fullest extent permitted by law with respect to all liability
and loss suffered and expense reasonably incurred by such person in any action,
suit or proceeding in which such person was or is made, or threatened to be
made, a party, or is otherwise involved by reason of the fact that such person
is or was a director or officer of the Company.
In addition, the Charter provides that its directors shall not be
personally liable to the Company or its shareholders for monetary damages for
breach of any fiduciary duty as a director of the Company except to the extent
such exemption from liability or limitation thereof is not permitted under the
TBCA. Under the TBCA, this provision does not relieve the Company's directors
from personal liability to the Company or its shareholders for monetary damages
for breach of fiduciary duty as a director, to the extent such liability arises
from a judgment or other final adjudication establishing: (a) any breach of the
director's duty of loyalty; (b) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; or (c) any
unlawful distributions. Nor does this provision eliminate the duty of care and,
in appropriate circumstances, equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Tennessee law. Finally,
this provision does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.
The Company has entered into indemnification agreements with all of its
directors and executive officers providing that it will indemnify those persons
to the fullest extent permitted by law against claims arising out of their
actions as officers or directors of the Company and will advance expenses of
defending claims against them. The Company believes that indemnification under
these agreements covers at least negligence and gross negligence by the
directors and officers and requires the Company to advance litigation expenses
in the case of actions, including shareholder derivative actions, against an
undertaking by the officer or director to repay any advances if it is ultimately
determined that the officer or director is not entitled to indemnification.
The Company believes that its Charter and Bylaw provisions and
indemnification agreements are necessary to attract and retain qualified persons
as directors and officers.
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<PAGE> 46
At present, there is no litigation or proceeding involving a director or
officer of the Company as to which indemnification is being sought, nor is the
Company aware of any threatened litigation that may result in claims for
indemnification by any officer or director.
Pursuant to the Administrative Services Agreement (as hereinafter defined),
the Company will indemnify and hold AHC, its directors, officers, employees and
agents and any person who controls AHC within the meaning of the Securities Act
in the absence of gross negligence, harmless from and against any and all
liabilities, claims or damages (including the cost of investigating any claim
and reasonable attorneys' fees and disbursements) in connection with any
services performed by AHC pursuant to the Management Agreement or any
transactions or conduct in connection therewith. See "Certain Relationships and
Related Transactions -- Management and Administrative Services Agreements."
The Company maintains an executive liability insurance policy which
provides coverage for its directors and officers. Under this policy, the insurer
has agreed to pay, subject to certain exclusions (including violations of
securities laws), for any claim made against a director or officer of the
Company for a wrongful act by such director or officer, but only if and to the
extent such director or officer becomes legally obligated to pay such claim or
the Company is required to indemnify the director or officer for such claim.
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<PAGE> 47
PRINCIPAL SHAREHOLDERS
The following tables set forth the "beneficial ownership," as that term is
defined in the rules of the Securities and Exchange Commission (the
"Commission") of the Company's capital stock of (i) each director, (ii) each
Named Executive Officer, (iii) all directors and executive officers as a group
and (iv) each other person known to be a "beneficial owner" of more than five
percent (5%) of any class of capital stock of the Company based on information
available to the Company on June 10, 1998. Except as otherwise indicated, the
Company believes the persons listed in the table have sole voting and investment
power with respect to the stock owned by them.
<TABLE>
<CAPTION>
COMMON STOCK BENEFICIALLY
OWNED PRIOR TO THE OFFERING CLASS A COMMON STOCK
--------------------------------------------- BENEFICIALLY OWNED
CLASS A CLASS B PERCENT AFTER THE OFFERING
COMMON PERCENT OF COMMON OF ---------------------
NAME STOCK(1) CLASS STOCK CLASS NUMBER PERCENT
- ---- --------- ---------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Electra Investment Trust P.L.C.(2)...... 717,738(3) 12.4% -- -- 717,738(3) 7.6%
Waddell & Reed, Inc.(4)................. 94,142 1.6 606,851 12.7% 94,142 1.0
The Capital Group Companies, Inc.(5).... -- -- 309,970 6.5 -- --
Ken P. McDonald......................... 74,167(6) 1.3 -- -- 74,167(6) *
Claire M. Gulmi......................... 20,000(7) * -- -- 20,000(7) *
Royce D. Harrell........................ 90,750(8) 1.5 -- -- 90,750(8) *
Rodney H. Lunn(9)....................... 281,945(10) 4.7 59 * 281,945(10) 2.9
David L. Manning(11).................... 287,332(12) 4.8 -- -- 287,332(12) 3.0
Thomas G. Cigarran(13).................. 84,069 1.5 363,554 7.6 84,069 *
James A. Deal........................... 29,992(14) * 179,728(15) 3.8 29,992(14) *
Steven I. Geringer...................... 10,560(16) * -- -- 10,560(16) *
Debora A. Guthrie....................... 181,684(17) 3.1 890 * 181,684(17) 1.9
Henry D. Herr........................... 55,645 1.0 221,558 4.6 55,645 *
Bergein F. Overholt, M.D................ 137,321(18) 2.4 340 * 137,321(18) 1.4
All directors and executive officers as
a group (11 persons).................. 1,253,465 19.5 766,129 16.0 1,253,465 12.4
</TABLE>
- ---------------
* Less than 1%.
(1) Pursuant to the rules of the Commission, shares of Class A Common Stock
which a person set forth in this table has a right to acquire within 60
days after June 10, 1998 pursuant to the exercise of stock options are
deemed to be outstanding for the purpose of computing the ownership of that
owner, but are not deemed outstanding for the purpose of computing the
ownership of any other individual owner shown in the table. Likewise, the
shares subject to options held by the other directors and executive
officers of the Company which are exercisable within 60 days after June 10,
1998 are all deemed outstanding for the purpose of computing the percentage
ownership of all executive officers and directors as a group.
(2) The address of Electra Investment Trust P.L.C. is 65 Kingsway, London,
England WC 2B6QT.
(3) Includes 440,682 shares of Class A Common Stock issuable upon conversion of
the Series B Preferred Stock.
(4) The address of Waddell & Reed, Inc. is 6300 Lamar Avenue, P.O. Box 29217,
Shawnee Mission, KS 66201-9217. Information with respect to the Class B
Common Stock ownership of Waddell & Reed, Inc. is based upon the Form 13G
dated January 30, 1998.
(5) The address of The Capital Group Companies, Inc. is 333 South Hope Street,
Los Angeles, California 90071. Information with respect to the Class B
Common Stock ownership of The Capital Group Companies, Inc. is based upon
the Form 13G dated February 10, 1998.
(6) Represents currently exercisable options for the purchase of 74,167 shares
of Class A Common Stock.
(7) Represents currently exercisable options for the purchase of 20,000 shares
of Class A Common Stock.
(8) Represents currently exercisable options for the purchase of 90,750 shares
of Class A Common Stock.
(9) The address of Mr. Lunn is One Burton Hills Boulevard, Suite 350,
Nashville, TN 37215.
(10) Includes 999 shares held for the benefit of Mr. Lunn's children, 1,800
shares held in a family trust and currently exercisable options for the
purchase of 225,332 shares of Class A Common Stock
(11) The address of Mr. Manning is One Burton Hills Boulevard, Suite 350,
Nashville, TN 37215.
(12) Includes currently exercisable options for the purchase of 235,332 shares
of Class A Common Stock.
(13) The address of Mr. Cigarran is One Burton Hills Blvd., Nashville, TN 37215.
(14) Includes 1,086 shares of Class A Common Stock held by Mr. Deal's children.
(15) Includes 7,013 shares of Class B Common Stock held by Mr. Deal's children.
(16) Includes 8,460 shares of Class A Common Stock held in trust for the benefit
of Mr. Geringer's son.
(17) 179,434 shares held by Capitol Health Partners, L.P. are attributable to
Ms. Guthrie, who is President and Chief Executive Officer of the general
partner of Capitol Health Partners, L.P. These shares are also included in
the shares beneficially held by directors and executive officers as a
group. Ms. Guthrie disclaims beneficial ownership of these shares.
(18) Includes 21,000 shares of Class A Common Stock owned by The Endoscopy
Center, Knoxville, Tennessee, and 10,000 shares of Class A Common Stock
owned by Gastrointestinal Associates, P.C. Dr. Overholt is a partner of The
Endoscopy Center and President of Gastrointestinal Associates, P.C. Also,
includes currently exercisable options for the purchase of 4,166 shares of
Class A Common Stock and 23,583 shares of Class A Common Stock held in
trust for Dr. Overholt's grandchildren.
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<PAGE> 48
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENTS
Until December 31, 1996, the Company and AHC were parties to a management
agreement dated November 30, 1992 (the "1992 Management Agreement"), pursuant to
which Henry D. Herr and Thomas G. Cigarran provided general supervision and
business management services to the Company, and AHC provided accounting,
financial and administrative services for the operations of the Company and each
of the Company's surgery centers. Under the 1992 Management Agreement, the
Company paid AHC $186,215 and $213,820 for the years ended December 31, 1995 and
1996, respectively. By letter agreement dated January 1, 1997 (the "1997 Letter
Agreement"), AHC and the Company agreed to continue, on a modified basis, the
arrangements provided under the 1992 Management Agreement. Under the 1997 Letter
Agreement, the Company paid AHC an aggregate of $382,467 for these services
during the fiscal year ended December 31, 1997. The 1997 Letter Agreement was
terminated in December 1997.
In December 1997, the Company and AHC entered into an administrative
services agreement (the "Administrative Services Agreement") pursuant to which
AHC provides certain financial and accounting services to the Company and its
subsidiaries on a transitional basis, with the intent that the Company acquire
the personnel, systems and expertise necessary to become self-sufficient in the
provision of these services during the period beginning on the date of the
Administrative Services Agreement and ending one year later (or earlier if so
elected by the Company). Pursuant to the Administrative Services Agreement, AHC
provides the Company with services, including processing payroll and associated
payroll tax returns and accounts payable for the Company's corporate office,
maintaining general accounting records for the Company's corporate operations
and operations of the Company's subsidiaries (including the partnerships and
limited liability companies), preparing the Company's consolidated financial
statements, preparing the Company's corporate tax returns and tax returns for
its subsidiaries, preparing estimated tax reports, and preparing financial
statements in connection with periodic reports required to be filed by the
Company with the Commission.
Under the Administrative Services Agreement, as amended, the Company pays
AHC $11,210 per month for all services provided thereunder, subject to
adjustment as the Company assumes the responsibility for such services. In
addition, in the absence of gross negligence on the part of AHC, the Company
will indemnify and hold AHC, its directors, officers, employees and agents and
any person who controls AHC within the meaning of the Securities Act harmless
from and against any and all liabilities, claims or damages (including the cost
of investigating any claim and reasonable attorneys' fees and disbursements) in
connection with any services performed by AHC or any transactions or conduct in
connection therewith.
ADVISORY AGREEMENTS
Effective as of December 1997, the Company entered into advisory agreements
with Thomas G. Cigarran and Henry D. Herr (the "Advisory Agreements"), pursuant
to which Messrs. Cigarran and Herr will provide certain continuing services to
the Company through December 1999. Immediately prior to December 1997, Mr.
Cigarran served as Chairman of the Board of the Company, and Mr. Herr served as
Vice President and Secretary of the Company. Pursuant to the Advisory
Agreements, Messrs. Cigarran and Herr provide advisory services to the senior
management of the Company in the areas of strategy, operations, management and
organizational development. As compensation for these services, the Company paid
compensation of $200,000 to Mr. Cigarran and $150,000 to Mr. Herr in shares of
Class A Common Stock, which shares were issued as restricted stock pursuant to
the terms of the 1997 Plan. One-third of the shares paid as compensation vested
immediately, one-third will vest on December 3, 1998 and the remaining one-third
of the shares will vest on December 3, 1999. The Advisory Agreements provide
that Messrs. Cigarran and Herr will not sell the shares of the Class A Common
Stock received pursuant to the agreement until December 1999, subject to certain
limited exceptions. The Advisory Agreements also contain certain non-compete and
confidentiality provisions. In addition, Messrs. Cigarran and Herr are eligible
to receive compensation as Outside Directors. Messrs. Cigarran and Herr also are
entitled to indemnification as provided in the indemnification agreement that
each entered into with the Company on the Distribution Date.
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<PAGE> 49
LEASE ARRANGEMENT
Pursuant to a sublease dated June 9, 1996 between AHC and the Company (the
"Sublease"), the Company leases approximately 15,400 square feet of space from
AHC in Nashville, Tennessee where the Company's corporate headquarters are
located. The Company is required to make an aggregate of $960,820 in rental
payments to AHC over the term of the Sublease, which expires December 31, 1999.
OTHER ARRANGEMENTS
Bergein F. Overholt, M.D. is a director of the Company, the Company's
Medical Director and President and a 14% owner of The Endoscopy Center. The
Endoscopy Center is a limited partner and a subsidiary of the Company is the
general partner and majority owner of The Endoscopy Center of Knoxville, L.P.,
which owns and operates an ambulatory surgery center. The aggregate amount of
distributions made by The Endoscopy Center of Knoxville, L.P. to The Endoscopy
Center in 1997, 1996 and 1995 was $1,230,390, $1,028,000 and $667,870,
respectively, of which Dr. Overholt received his pro rata ownership percentage.
During each of 1997, 1996 and 1995 Dr. Overholt was paid $50,000 for his
services as the Company's Medical Director. In 1997 he participated in the 1997
Plan as an Outside Director of the Company. See "Compensation of Directors."
On March 7, 1997, the Board of Directors approved the sale to Steven I.
Geringer of 8,460 shares of Class A Common Stock for an aggregate purchase price
of $50,000 in connection with his joining the Board of Directors.
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The Company is authorized to issue 20,000,000 shares of Class A Common
Stock, 4,800,000 shares of Class B Common Stock and 5,000,000 shares of
preferred stock, no par value. As of June 10, 1998, 5,188,175 shares of the
Class A Common Stock and 4,787,131 shares of the Class B Common Stock are issued
and outstanding. As of March 15, 1998, there are approximately 160 holders of
record and 2,084 beneficial owners of Class A Common Stock and approximately 95
holders of record and 2,124 beneficial owners of Class B Common Stock. The
Company may issue preferred stock from time to time in one or more series, each
such series to be so designated as to distinguish the shares thereof from the
shares of all other series and classes. The Board of Directors is vested with
the authority to divide any or all classes of authorized but unissued preferred
stock into series and to fix and determine the relative rights and preferences
of the shares of any series so established. As of the date of this Prospectus,
stock options for the purchase of 1,350,809 shares of Class A Common Stock are
outstanding, of which options to purchase 833,786 shares of Class A Common Stock
having an average exercise price of $2.61 per share are currently exercisable.
The options granted generally will vest in four equal annual installments, and
will expire 10 years from the date of grant. In the event of certain fundamental
changes to the Company (including liquidation, dissolution, merger,
reorganization or sale of all or substantially all of the assets of the
Company), the stock options shall immediately vest and be fully exercisable by
the optionees.
As of June 10, 1998, the Company's executive officers and directors or
their affiliates beneficially own approximately 19.5% of the outstanding Class A
Common Stock and 16.0% of the Class B Common Stock. The holders of Class A
Common Stock and the Class B Common Stock are entitled to receive such
dividends, if any, as may be declared from time to time by the Board of
Directors in its discretion from funds legally available therefor. No dividends
have been paid to date and the management of the Company does not anticipate
dividends being paid in the foreseeable future.
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<PAGE> 50
The following summary of certain terms of the Company's capital stock
describes briefly the material provisions of the Charter and Bylaws, and
applicable provisions of Tennessee corporate law (including but not limited to
the TBCA).
Class A Common Stock. The holders of Class A Common Stock are entitled to
one vote per share on all matters to be submitted to a vote of the shareholders
and are not entitled to cumulative voting in the election of directors. Subject
to prior dividend rights and sinking fund or redemption or purchase rights which
may be applicable to any outstanding preferred stock, the holders of Class A
Common Stock are entitled to share ratably with the shares of Class B Common
Stock in such dividends, if any, as may be declared from time to time by the
Board of Directors in its discretion out of funds legally available therefor.
The holders of Class A Common Stock are entitled to share ratably with the
shares of Class B Common Stock in any assets remaining after satisfaction of all
prior claims upon liquidation of the Company, including prior claims of any
outstanding preferred stock. The Charter does not give holders of Class A Common
Stock any preemptive or other subscription rights, and Class A Common Stock is
not redeemable at the option of the holders, does not have any conversion
rights, and is not subject to call. The rights, preferences and privileges of
holders of Class A Common Stock are subject to, and may be adversely affected
by, the rights of holders of any other series of preferred stock that the
Company may designate and issue in the future.
Class B Common Stock. The holders of Class B Common Stock are entitled to
ten votes per share in the election and removal of the Board of Directors and
are not entitled to cumulative voting in the election and removal of such
directors. The holders of Class B Common Stock are entitled to one vote per
share on all other matters to be submitted to a vote of the shareholders. The
holders of Class B Common Stock are entitled to vote separately as a group with
respect to (i) amendments to the Charter that alter or change the powers,
preferences or special rights of the holders of Class B Common Stock so as to
affect them adversely and (ii) such other matters as may require separate group
voting under the TBCA. Subject to prior dividend rights and sinking fund or
redemption or purchase rights which may be applicable to any outstanding
preferred stock, the holders of Class B Common Stock are entitled to share
ratably with the shares of Class A Common Stock in such dividends, if any, as
may be declared from time to time by the Board of Directors in its discretion
out of funds legally available therefor. The holders of Class B Common Stock are
entitled to share ratably with the shares of Class A Common Stock in any assets
remaining after satisfaction of all prior claims upon liquidation of the
Company, including prior claims of any outstanding preferred stock. The Charter
does not give holders of Class B Common Stock preemptive or other subscription
rights, and Class B Common Stock is not redeemable at the option of the holders,
and is not subject to call. The rights, preferences and privileges of holders of
the Class B Common Stock are subject to, and may be adversely affected by, the
rights of holders of shares of any series of preferred stock that the Company
may designate and issue in the future.
Dividend Policy. The Company has never declared a cash dividend on the
shares of Common Stock and does not currently intend to declare or pay a cash
dividend on the shares of Common Stock. In addition, the payment of cash
dividends in the future will depend on the Company's earnings, financial
condition, capital needs and other factors deemed relevant by the Board of
Directors, including corporate law restrictions on the availability of capital
for the payment of dividends, the rights of holders of any series of preferred
stock that may hereafter be issued and the limitations, if any, on the payment
of dividends under any documents relating to equity investments, then-existing
credit facilities or other indebtedness. Pursuant to the Loan Agreement, the
Company is prohibited from declaring or paying any dividend to any person other
than itself or a subsidiary. It is the current intention of the Board of
Directors to retain earnings, if any, in order to finance the operations and
expansion of the Company's business.
Preferred Stock. The Company is authorized to issue 5,000,000 shares of
undesignated preferred stock, no par value. The Company established and
designated two series of shares out of the 5,000,000 authorized shares. On
November 20, 1996, the Company issued 500,000 shares of Series A Preferred Stock
for a purchase price of $6.00 per share and 416,666 shares of Series B Preferred
Stock for a purchase price of $6.00 per share. On March 3, 1998, the holders of
the Series A Preferred Stock converted their shares at fair market value into
380,952 shares of Class A Common Stock. Accordingly, the Series A Preferred
Stock has been canceled and no longer exists under the Charter. Upon completion
of this Offering, all of the shares of Series B Preferred Stock will convert
into shares of Class A Common Stock. Pursuant to the conversion terms, the
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<PAGE> 51
outstanding Series B Preferred Stock will be converted into approximately
606,000 shares of Class A Common Stock. Thereafter, the Series B Preferred Stock
will be canceled and cease to exist under the Charter, and the Company will have
no outstanding class of preferred stock but will have 5,000,000 shares of
preferred stock authorized and available for issuance.
The authorized preferred stock may be issued from time to time in one or
more designated series or classes. Subject to the provisions of the Charter and
limitations prescribed by law, the Board of Directors, without further action or
vote by the shareholders, is authorized to establish the voting, dividend,
redemption, conversion, liquidation, and other relative provisions as may be
provided in a particular series or class. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, adversely affect the voting power
of the holders of Common Stock and, under certain circumstances, make it more
difficult for a third party to acquire, or discourage a third party from
acquiring, a majority of the outstanding voting stock of the Company. The
Company has no present intention to issue any series or class of preferred
stock.
TRANSFER AGENT AND REGISTRAR
SunTrust Bank, Atlanta, is the transfer agent and registrar for the Common
Stock.
REGISTRATION AGREEMENT
Certain private investors entered into a registration agreement dated April
2, 1992, as amended (the "Registration Agreement"). Pursuant thereto, the
holders of at least 66 2/3% of certain of the Registrable Shares after a
Qualified Initial Public Offering (as those terms are defined in the
Registration Agreement), may by written notice demand registration on Form S-1
or any similar long-form registration under the Securities Act of up to all of
the Registrable Shares owned by such holders. These holders of Registrable
Shares are entitled to only one such long-form demand registration. In
connection with the equity financing of preferred stock in November 1996, the
purchasers of preferred stock became parties to the Registration Agreement. As a
result, shares of Class A Common Stock issued upon conversion of the Series B
Preferred Stock have been included in the definition of Registrable Shares, and
as such, have certain registration rights. The holders of the shares of Class A
Common Stock issued upon conversion of the Series B Preferred Stock are entitled
to two demand registrations. In addition, any holder or holders of Registrable
Shares may demand registration of any or all of their Registrable Shares on or
after the date upon which the Company has become entitled as a registrant to use
Form S-3 or any similar short-form registration. This short-form demand
registration right may be invoked on unlimited occasions, provided the aggregate
offering value of the Registrable Shares requested to be registered is at least
$1,000,000. The shareholders are also entitled to unlimited "piggyback"
registration rights whenever the Company proposes to register any of its
securities under the Securities Act (other than on Forms S-4 or S-8 or any
successor forms). These "piggyback" registration rights entitle these
shareholders to include any of their Registrable Shares in any registration
statement which the Company proposes to file, including the registration
statement of which this Prospectus is a part, subject to certain limitations
generally imposed by the managing underwriter regarding the number of shares to
be included in the offering.
SHAREHOLDERS' AGREEMENTS
Substantially all shareholders who purchased the Company's Class A Common
Stock in connection with its acquisitions of ambulatory surgery centers and
physician practices and other investments entered into shareholders' agreements
with the Company. The shareholders' agreements provide for "piggyback"
registration rights. See "Shares Eligible for Future Sale." In March 1997, the
Board of Directors waived the provision in the shareholders' agreements
prohibiting the shareholders from effecting any public sale or distribution of
such shares for 180 days following the effective date of any underwritten sale
registered under the Securities Act by the Company of its securities for its own
account. Except with respect to the registration rights of such shareholders,
the shareholders' agreements terminate upon the closing of this Offering. The
registration rights granted pursuant to the shareholders' agreements terminate
upon the later of three years after the date of the shareholders' agreement or
six months following the closing of this Offering.
48
<PAGE> 52
CERTAIN PROVISIONS OF THE CHARTER, BYLAWS, AND TENNESSEE LAW
General. The provisions of the Charter, the Bylaws, and Tennessee
statutory law described in this section may delay or make more difficult
acquisitions or changes of control of the Company that are not approved by the
Board of Directors. Such provisions have been implemented to enable the Company,
particularly (but not exclusively) in the initial years of its existence as an
independent, publicly-owned company, to develop its business in a manner that
will foster its long-term growth without the disruption of the threat of a
takeover not deemed by the Board of Directors to be in the best interests of the
Company and its shareholders.
Classified Board of Directors. The Bylaws provide that the number of
directors shall be no fewer than three or more than 12, with the exact number to
be established by the Board of Directors and subject to change from time to time
as determined by the Board of Directors. The Charter provides for the
classification of the Board of Directors. Under the terms of the Charter, the
members of the Board of Directors are divided into three classes, serving
staggered three-year terms. As a result, one-third of the Board of Directors
will be elected each year. See "Management." This provision could prevent a
party who acquires control of a majority of the outstanding voting stock from
obtaining control of the Board of Directors until the second annual
shareholders' meeting following the date the acquiror obtains the controlling
stock interest. This provision may have the effect of discouraging a potential
acquiror from making a tender offer or otherwise attempting to obtain control of
the Company, and could also increase the likelihood that incumbent directors
will retain their positions.
The Charter provides that directors may be removed only for "cause" and
only by the affirmative vote of the holders of a majority of the voting power of
all the shares of the Company's capital stock then entitled to vote in the
election of directors, voting together as a single class, unless the vote of a
special voting group is otherwise required by law. "Cause" is defined in the
Charter as: (i) a felony conviction of a director or the failure of a director
to contest prosecution for a felony; (ii) conviction of a crime involving moral
turpitude; or (iii) willful and continued misconduct or gross negligence by a
director in the performance of his or her duties as a director. The Charter also
provides that in order to call a special meeting of shareholders, written
demands of the holders of at least 15% of the voting power of each class of the
Common Stock must be received. These provisions, in conjunction with the
provision of the Bylaws authorizing the Board of Directors to fill vacant
directorships, may prevent shareholders from removing incumbent directors
without cause and filling the resulting vacancies with their own nominees.
Advance Notice for Shareholder Proposals or Making Nominations at
Meetings. The Bylaws establish an advance notice procedure for shareholder
proposals to be brought before a meeting of shareholders of the Company and for
nominations by shareholders of candidates for election as directors at an annual
meeting or a special meeting at which directors are to be elected. Subject to
any other applicable requirements, only such business may be conducted at a
meeting of shareholders as has been brought before the meeting by, or at the
direction of, the Board of Directors, or by a shareholder who has given to the
Secretary timely written notice in proper form, of the shareholder's intention
to bring that business before the meeting. The presiding officer at such meeting
has the authority to make such determinations. Only persons who are selected and
recommended by the Board of Directors, or the committee of the Board of
Directors designated to make nominations, or who are nominated by a shareholder
who has given timely written notice, in proper form, to the Secretary prior to a
meeting at which directors are to be elected will be eligible for election as
directors.
To be timely, notice of nominations or other business to be brought before
any meeting must be received by the Secretary not later than 120 days in advance
of the mailing date of the Company's proxy statement for the previous year's
annual meeting or, in the case of special meetings, at the close of business on
the tenth day following the date on which notice of such meeting is first given
to shareholders.
The notice of any shareholder proposal or nomination for election as
director must set forth various information required under the Bylaws. The
person submitting the notice of nomination and any person acting in concert with
such person must provide, among other things, the name and address under which
they appear on the Company's books (if they so appear) and the class and number
of shares of the Company's capital stock that are beneficially owned by them.
49
<PAGE> 53
Amendment of the Bylaws and Charter. Except with respect to amendments to
the Bylaws or Charter relating to the classified structure of the Board of
Directors which are required to be approved by the affirmative vote of
two-thirds of the voting power of the shares entitled to vote in the election of
directors, the Bylaws provide that a majority of the members of the Board of
Directors who are present at any regular or special meeting or the holders of a
majority of the voting power of all shares of the Company's capital stock
represented at a regular or special meeting have the power to amend, alter,
change, repeal, or restate the Bylaws.
Except as may be set forth in resolutions providing for any class or series
of preferred stock, any proposal to amend, alter, change, or repeal any
provision of the Charter requires approval by the affirmative vote of both a
majority of the members of the Board of Directors then in office and the holders
of a majority of the voting power of all of the shares of the Company's capital
stock entitled to vote on the amendments, with shareholders entitled to
dissenters' rights as a result of the charter amendment voting together as a
single class. Shareholders entitled to dissenters' rights as a result of a
charter amendment are those whose rights would be materially and adversely
affected because the amendment (i) alters or abolishes a preferential right of
the shares; (ii) creates, alters, or abolishes a right in respect of redemption;
(iii) alters or abolishes a preemptive right; (iv) excludes or limits the right
of the shares to vote on any matter, or to cumulate votes other than a
limitation by dilution through issuance of shares or other securities with
similar voting rights; or (v) reduces the number of shares held by such holder
to a fraction if the fractional share is to be acquired for cash. In general,
however, no shareholder is entitled to dissenters' rights if the security he or
she holds is listed on a national securities exchange or the Nasdaq National
Market.
Tennessee Law. The Combination Act provides, among other things, that any
corporation to which the Combination Act applies, including the Company, shall
not engage in any "business combination" with an "interested shareholder" for a
period of five years following the date that such shareholder became an
interested shareholder unless prior to such date the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the shareholder becoming an interested shareholder.
The Combination Act defines "business combination," generally, to mean any:
(i) merger or consolidation; (ii) share exchange; (iii) sale, lease, exchange,
mortgage, pledge, or other transfer (in one transaction or a series of
transactions) of assets representing 10% or more of (A) the market value of
consolidated assets, (B) the market value of the corporation's outstanding
shares or (C) the corporation's consolidated net income; (iv) issuance or
transfer of shares from the corporation to the interested shareholder; (v) plan
of liquidation; (vi) transaction in which the interested shareholder's
proportionate share of the outstanding shares of any class of securities is
increased; or (vii) financing arrangements pursuant to which the interested
shareholder, directly or indirectly, receives a benefit except proportionately
as a shareholder.
The Combination Act defines "interested shareholder," generally, to mean
any person who is the beneficial owner, either directly or indirectly, of 10% or
more of any class or series of the outstanding voting stock, or any affiliate or
associate of the corporation who has been the beneficial owner, either directly
or indirectly, of 10% or more of the voting power of any class or series of the
corporation's stock at any time within the five year period preceding the date
in question. Consummation of a business combination that is subject to the
five-year moratorium is permitted after such period if the transaction (i)
complies with all applicable charter and bylaw requirements and applicable
Tennessee law and (ii) is approved by at least two-thirds of the outstanding
voting stock not beneficially owned by the interested shareholder, or when the
transaction meets certain fair price criteria. The fair price criteria include,
among others, the requirement that the per share consideration received in any
such business combination by each of the shareholders is equal to the highest of
(i) the highest per share price paid by the interested shareholder during the
preceding five-year period for shares of the same class or series plus interest
thereon from such date at a treasury bill rate less the aggregate amount of any
cash dividends paid and the market value of any dividends paid other than in
cash since such earliest date, up to the amount of such interest, (ii) the
highest preferential amount, if any, such class or series is entitled to receive
on liquidation, or (iii) the market value of the shares on either the date the
business combination is announced or the date when the interested shareholder
reaches the 10% threshold, whichever is higher, plus interest thereon less
dividends as noted above.
50
<PAGE> 54
The Tennessee Control Share Acquisition Act (the "Acquisition Act")
prohibits certain shareholders from exercising in excess of 20% of the voting
power in a corporation acquired in a "control share acquisition," as defined in
the Acquisition Act, unless such voting rights have been previously approved by
the disinterested shareholders of the corporation. The Company has not elected
to make the Acquisition Act applicable to it. No assurance can be given that
such election, which must be expressed in a charter or bylaw amendment, will or
will not be made in the future.
The Tennessee Greenmail Act (the "Greenmail Act") prohibits the Company
from purchasing or agreeing to purchase any of its securities, at a price in
excess of fair market value, from a holder of 3% or more of any class of such
securities who has beneficially owned such securities for less than two years,
unless such purchase has been approved by the affirmative vote of a majority of
the outstanding shares of each class of voting stock issued by the Company or
the Company makes an offer of at least equal value per share to all holders of
shares of such class. The effect of the Greenmail Act may be to render more
difficult a change of control of the Company.
Other Change-of-Control Provisions. For a description of certain other
change-of-control provisions, see "Management -- Employment Agreements" and
"-- Stock Incentive Plans."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding an
aggregate of 9,494,173 shares of Class A Common Stock (9,944,173 shares if the
Underwriters' over-allotment option is exercised in full) and 4,787,131 shares
of Class B Common Stock. The 3,700,000 shares of Class A Common Stock sold in
the Offering will be freely tradeable without restriction under the Securities
Act unless acquired by "affiliates" of the Company as that term is defined in
Rule 144 under the Securities Act, which sales would be subject to the resale
limitations of Rule 144. In addition, the 743,000 shares of Class A Common Stock
that were issued to holders of AHC common stock in the Distribution are freely
tradeable without restriction or further registration under the Securities Act,
unless held by affiliates of the Company (which sales also would be subject to
certain resale limitations and other restrictions under Rule 144 described
below).
Of the remaining 5,051,173 outstanding shares of Class A Common Stock,
4,784,962 have not been issued in transactions registered under the Securities
Act, which means that under current law, absent registration or an exemption
from registration other than Rule 144, such shares are "restricted securities"
as that term is defined in Rule 144 under the Securities Act and are eligible
for sale or transfer only in accordance with Rule 144. Substantially all of
these shares of Class A Common Stock have met the one-year holding period
requirement of Rule 144 and therefore are eligible for sale thereunder.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for at least one year (including, if the shares are transferred, the
holding period of any prior owner except an affiliate) is entitled to sell in
"broker's transactions" or to market makers, within any three-month period, a
number of shares that does not exceed the greater of (i) 1% of then outstanding
shares of the Class A Common Stock (approximately 51,882 shares as of June 10,
1998) or (ii) generally, the average weekly trading volume in the Class A Common
Stock during the four calendar weeks preceding the filing of a Form 144 with
respect to such sale, and subject to certain other limitations and restrictions.
In addition, a person who is not deemed to have been an affiliate of the Company
at any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, would be entitled
to sell such shares under Rule 144(k) without regard to the volume and other
requirements described above. Shares of Class A Common Stock that would
otherwise be deemed "restricted securities" could be sold at any time through an
effective registration statement relating to such shares of Class A Common
Stock. Substantially all of the shares of Class A Common Stock that are believed
to be "restricted securities" as of the date of this Prospectus have satisfied a
one-year holding period.
Pursuant to the Registration Agreement, certain shareholders of the Company
have several demand and unlimited "piggyback" registration rights. In addition,
the other shareholders of the Company are entitled to
51
<PAGE> 55
unlimited "piggyback" registration rights in connection with any proposed
registration of equity securities by the Company (with certain specified
exceptions) pursuant to shareholders' agreements entered into between the
Company and these shareholders. For a more complete description of these
registration rights, see "Description of Capital Stock."
As of the date of this Prospectus, the Company has outstanding options to
purchase 1,350,809 shares of Class A Common Stock. The Company has filed a
registration statement on Form S-8 with respect to these options and
approximately 834,000 of these options are currently exercisable and may be
resold in the public market. See "Management -- Stock Incentive Plans."
No assurance can be given that market sales of shares or the availability
of shares for sale will not have an effect on the market price prevailing from
time to time. Sales of substantial amounts of Class A Common Stock in the public
market, or the perception that such sales could occur, could adversely affect
the prevailing market price of the Class A Common Stock.
52
<PAGE> 56
UNDERWRITING
Pursuant to the Underwriting Agreement and subject to the terms and
conditions thereof, the Underwriters named below, acting through J.C. Bradford &
Co., Piper Jaffray Inc. and Morgan Keegan & Company, Inc. as representatives of
the several Underwriters (the "Representatives"), have agreed, severally, to
purchase from the Company the number of shares of Class A Common Stock set forth
below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
NAME OF UNDERWRITERS SHARES
- -------------------- ---------
<S> <C>
J.C. Bradford & Co.......................................... 1,260,000
Piper Jaffray Inc........................................... 1,260,000
Morgan Keegan & Company, Inc................................ 630,000
Robert W. Baird & Co. Incorporated.......................... 50,000
J.J.B. Hilliard, W.L. Lyons, Inc............................ 50,000
Legg Mason Wood Walker, Incorporated........................ 50,000
McDonald & Company Securities, Inc.......................... 50,000
Raymond James & Associates, Inc............................. 50,000
The Robinson-Humphrey Company, LLC.......................... 50,000
Scott & Stringfellow, Inc................................... 50,000
SunTrust Equitable Securities Corporation................... 50,000
Sutro & Co. Incorporated.................................... 50,000
Vector Securities International, Inc........................ 50,000
Wheat First Securities, Inc................................. 50,000
---------
Total............................................. 3,700,000
=========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all shares of Class A Common
Stock offered hereby, if any of such shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose initially to offer the shares of Class A Common Stock to the public at
the 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 $0.25 per share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $0.10 per share to certain brokers or dealers. After the Offering, the public
offering price and concessions may be changed by the Representatives.
The Offering of the shares of Class A Common Stock is made for delivery
when, as and if accepted by the Underwriters and subject to prior sale and to
withdrawal, cancellation or modification of the offer without notice. The
Underwriters reserve the right to reject any order for the purchase of shares.
The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of the effectiveness of the Offering, to purchase up
to an aggregate of 450,000 additional shares of Class A Common Stock to cover
over-allotments, if any. To the extent the Underwriters exercise the option,
each of the Underwriters will have a firm commitment to purchase approximately
the same percentage thereof which the number of shares of Class A Common Stock
to be purchased by it shown in the table above bears to the total number of
shares in such table, 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 the
shares of Class A Common Stock offered hereby. If purchased, the Underwriters
will sell these additional shares on the same terms as those on which the
3,700,000 shares are being offered.
The Company, its executive officers and directors and a holder of 440,682
shares of Class A Common Stock have agreed with the Representatives that they
will not, except in limited circumstances, without the prior written consent of
J.C. Bradford & Co. issue, sell, transfer, assign, or otherwise dispose of any
of the
53
<PAGE> 57
Class A Common Stock or options, warrants, or rights to acquire Class A Common
Stock owned by them prior to the expiration of 120 days from the date of this
Prospectus.
The Underwriting Agreement provides that the Company generally will
severally indemnify the Underwriters and their controlling persons, if any,
against certain liabilities, including civil liabilities under the Securities
Act, or will contribute to payments that the Underwriters or any such
controlling persons may be required to make in respect thereof.
In connection with the Offering, the Underwriters and other persons
participating in the Offering may engage in transactions that stabilize,
maintain or otherwise affect the price of Common Stock. Specifically, the
Underwriters may over-allot in connection with the Offering, creating a short
position in Common Stock for their own account. To cover over-allotments or to
stabilize the price of Common Stock, the Underwriters may bid for and purchase,
shares of Common Stock in the open market. The Underwriters may also impose a
penalty bid whereby they may reclaim selling concessions allowed to an
underwriter or a dealer for distributing Common Stock in the Offering, if the
Underwriters repurchase previously distributed Common Stock in transactions to
cover their short position, in stabilization transactions or otherwise. Finally,
the Underwriters may bid for and purchase, shares of Common Stock in market
making transactions. These activities may stabilize or maintain the market price
of Common Stock above market levels that may otherwise prevail. The Underwriters
are not required to engage in these activities and may end any of these
activities at any time.
J.C. Bradford & Co. has from time to time provided investment banking and
financial advisory services to the Company for which it has received customary
compensation.
LEGAL MATTERS
The validity of the shares of Class A Common Stock are being passed upon
for the Company by Bass, Berry & Sims PLC, Nashville, Tennessee. Certain members
of Bass, Berry & Sims PLC beneficially own 136,631 shares of Class A Common
Stock and 10,088 shares of Class B Common Stock. Certain legal matters will be
passed upon for the Underwriters by Waller Lansden Dortch & Davis, A
Professional Limited Liability Company.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and 1997, and for each year in the three-year period ended December 31,
1997 and the related financial statement schedule included in this Prospectus
and Registration Statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report thereon appearing elsewhere
herein, and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The financial statements of South Denver Endoscopy Center, Inc. as of
December 31, 1997 and for the year then ended and the related financial
statement schedule included in this Prospectus and Registration Statement have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report thereon appearing elsewhere herein, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The combined financial statements of Boswell Eye Center, LLC as of December
31, 1996 and 1997, and for each of the two years ended December 31, 1997 and the
related financial statement schedule included in this Prospectus and
Registration Statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report thereon appearing elsewhere herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The statements of earnings, retained earnings and cash flows of The
Endoscopy Center, Inc. for the years ended December 31, 1996 and 1997 and the
related financial statement schedule included in this Prospectus and
Registration Statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report thereon appearing elsewhere herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
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<PAGE> 58
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Class A Common Stock offered
hereby (the "Registration Statement"). This Prospectus, which is a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Class A Common Stock, reference
is hereby made to the Registration Statement and the exhibits and schedules
filed as part thereof. Statements contained in this Prospectus concerning the
provisions or contents of any contract, agreement or any other document referred
to herein are not necessarily complete. With respect to each such contract,
agreement or document filed as an exhibit to the Registration Statement,
reference is made to such exhibit for a more complete description of the matters
involved. A copy of the Registration Statement, including exhibits and schedules
thereto, as well as such periodic reports, proxy statements, and other
information filed by the Company with the Commission, may be inspected and
copied at the public reference facilities maintained by the Commission located
at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the following Regional Offices of the Commission: Chicago Regional
Office, Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois
60661; and New York Regional Office, Seven World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of prescribed fees. The Commission maintains an Internet web
site (http://www.sec.gov) that contains periodic reports, proxy and information
statements and other information regarding registrants, including the Company.
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files periodic reports, proxy statements, and
other information with the Commission. Such periodic reports, proxy statements
and other information are available for inspection and copying at the public
reference facilities and other regional offices referred to above. Copies of
such materials may be obtained from the Public Reference Section of the
Commission upon payment of prescribed fees. The Common Stock is listed on the
Nasdaq National Market, and such periodic reports, proxy statements and other
information may be inspected at the offices of The Nasdaq Stock Market, 1735 K
Street, N.W., Washington, D.C. 20006.
55
<PAGE> 59
AMSURG CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and
1997................................................... F-3
Consolidated Statements of Operations for each of the
years in the three-year period ended December 31,
1997................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity
for each of the years in the three-year period ended
December 31, 1997...................................... F-5
Consolidated Statements of Cash Flows for each of the
years in the three-year period ended December 31,
1997................................................... F-6
Notes to the Consolidated Financial Statements............ F-7
Pro Forma Financial Information
Unaudited Pro Forma Combined Financial Information Basis
of Presentation........................................ F-20
Pro Forma Combined Balance Sheet as of December 31,
1997................................................... F-21
Pro Forma Combined Statement of Operations for the year
ended December 31, 1997................................ F-22
Pro Forma Combined Statement of Operations for the three
months ended March 31, 1998............................ F-23
Notes to Pro Forma Consolidated Financial Information
(Unaudited)............................................ F-24
South Denver Endoscopy Center, Inc.
Independent Auditors' Report.............................. F-25
Balance Sheets as of December 31, 1997 and March 31,
1998................................................... F-26
Statements of Earnings and Retained Earnings for the year
ended December 31, 1997 and the three months ended
March 31, 1997 and 1998................................ F-27
Statements of Cash Flows for the year ended December 31,
1997 and the three months ended March 31, 1997 and
1998................................................... F-28
Notes to Financial Statements............................. F-29
Boswell Eye Center, LLC
Independent Auditors' Report.............................. F-31
Combined Balance Sheets as of December 31, 1996 and 1997
and March 31, 1998..................................... F-32
Combined Statements of Earnings for the years ended
December 31, 1996 and 1997 and the three months ended
March 31, 1997 and 1998................................ F-33
Combined Statements of Cash Flows for the years ended
December 31, 1996 and 1997 and the three months ended
March 31, 1997 and 1998................................ F-34
Notes to Combined Financial Statements.................... F-35
The Endoscopy Center, Inc.
Independent Auditors' Report.............................. F-37
Statements of Earnings and Retained Earnings for the years
ended December 31, 1995 and 1996 and the eight months
ended August 31, 1996 and 1997......................... F-38
Statements of Cash Flows for the years ended December 31,
1995 and 1996 and the eight months ended August 31,
1996 and 1997.......................................... F-39
Notes to Financial Statements............................. F-40
Financial Statement Schedule -- AmSurg Corp.
Independent Auditors' Report.............................. S-1
Schedule II -- Valuation and Qualifying Accounts.......... S-2
Financial Statement Schedule -- South Denver Endoscopy
Center, Inc.
Independent Auditors' Report.............................. S-3
Schedule II -- Valuation and Qualifying Accounts.......... S-4
Financial Statement Schedule -- Boswell Eye Center, LLC
Independent Auditors' Report.............................. S-5
Schedule II -- Valuation and Qualifying Accounts.......... S-6
Financial Statement Schedule -- The Endoscopy Center, Inc.
Independent Auditors' Report.............................. S-7
Schedule II -- Valuation and Qualifying Accounts.......... S-8
</TABLE>
F-1
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
AmSurg Corp.
Nashville, Tennessee
We have audited the accompanying consolidated balance sheets of AmSurg
Corp. and subsidiaries as of December 31, 1996 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of AmSurg Corp. and subsidiaries
as of December 31, 1996 and 1997 and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
February 17, 1998 (April 30, 1998 as to Note 15)
F-2
<PAGE> 61
AMSURG CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------- -----------
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 3,192,408 $ 3,406,787 $ 3,772,047
Accounts receivable, net of allowance of $1,272,651,
$1,436,468 and $1,771,596, respectively............ 5,640,946 8,220,616 10,344,915
Supplies inventory.................................... 554,839 905,992 990,749
Deferred income taxes (note 11)....................... 303,000 390,000 390,000
Prepaid and other current assets...................... 680,761 1,020,835 940,345
----------- ----------- -----------
Total current assets.................................. 10,371,954 13,944,230 16,438,056
Long-term receivables and deposits (note 4)............. 643,516 479,012 880,902
Property and equipment, net (notes 5, 7 and 8).......... 12,335,892 19,248,464 20,655,711
Intangible assets, net (notes 4 and 6).................. 31,302,096 41,566,684 44,783,750
----------- ----------- -----------
Total assets.................................. $54,653,458 $75,238,390 $82,758,419
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 7)............ $ 2,616,714 $ 1,330,595 $ 1,446,506
Accounts payable...................................... 1,307,069 922,188 1,293,033
Accrued salaries and benefits......................... 998,460 1,018,844 1,148,161
Other accrued liabilities............................. 635,456 1,235,626 835,400
Current income taxes payable.......................... 82,586 125,396 553,394
----------- ----------- -----------
Total current liabilities............................. 5,640,285 4,632,649 5,276,494
Long-term debt (note 7)................................. 9,218,281 24,969,718 30,060,171
Deferred income taxes (note 11)......................... 765,000 1,185,000 1,185,000
Minority interest....................................... 5,673,960 9,191,896 10,215,884
Preferred stock, no par value, 5,000,000 shares
authorized, 916,666, 916,666 and 416,666 shares
outstanding, respectively (note 9).................... 4,982,057 5,267,672 3,207,767
Shareholders' equity (note 3, 10 and 12):
Common stock:
Class A, no par value, 20,000,000 shares authorized
9,199,525, 4,758,091 and 5,145,966 shares
outstanding, respectively........................ 26,064,085 14,636,331 16,723,980
Class B, no par value, 4,800,000 shares authorized,
4,787,131 shares outstanding..................... -- 13,528,981 13,528,981
Retained earnings..................................... 2,309,790 2,099,491 2,799,315
Deferred compensation on restricted stock (note 12)... -- (273,348) (239,173)
----------- ----------- -----------
Total shareholders' equity............................ 28,373,875 29,991,455 32,813,103
----------- ----------- -----------
Commitments and contingencies (note 5, 8, 12 and 13)
Total liabilities and shareholders' equity.... $54,653,458 $75,238,390 $82,758,419
=========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE> 62
AMSURG CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (note 2)............... $22,388,739 $34,898,496 $57,413,812 $12,591,148 $17,828,648
Operating expenses:
Salaries and benefits (note
12)........................ 6,243,134 11,613,504 17,363,440 3,971,664 5,367,341
Other operating expenses (note
12)........................ 7,557,655 11,546,562 20,352,442 4,450,793 6,383,712
Depreciation and
amortization............... 2,396,796 3,000,183 4,944,483 1,087,263 1,568,407
Net loss on sale of assets
(note 4)................... -- 30,811 1,424,690 2,321,168 42,914
----------- ----------- ----------- ----------- -----------
Total operating
expenses............ 16,197,585 26,191,060 44,085,055 11,830,888 13,362,374
----------- ----------- ----------- ----------- -----------
Operating income...... 6,191,154 8,707,436 13,328,757 760,260 4,466,274
Minority interest............... 3,938,364 5,433,588 9,084,132 1,947,911 2,807,075
Other (income) and expenses:
Interest expense, net of
interest income of $95,640,
$139,531 and $69,088,
$18,776 and $50,044,
respectively............... 626,750 808,332 1,553,508 308,179 492,825
Distribution cost (note 3).... -- -- 841,801 -- --
----------- ----------- ----------- ----------- -----------
Earnings (loss) before
income taxes........ 1,626,040 2,465,516 1,849,316 (1,495,830) 1,166,374
Income tax expense (note 11).... 578,000 985,000 1,774,000 329,000 466,550
----------- ----------- ----------- ----------- -----------
Net earnings (loss)... 1,048,040 1,480,516 75,316 (1,824,830) 699,824
Accretion of preferred stock
discount (note 9)............. -- 22,057 285,615 67,565 --
----------- ----------- ----------- ----------- -----------
Net earnings (loss)
available to common
shareholders........ $ 1,048,040 $ 1,458,459 $ (210,299) $(1,892,395) $ 699,824
=========== =========== =========== =========== ===========
Earnings (loss) per common share
(note 10):
Basic......................... $ 0.13 $ 0.17 $ (0.02) $ (0.20) $ 0.07
Diluted....................... $ 0.12 $ 0.16 $ (0.02) $ (0.20) $ 0.07
Weighted average number of
shares and share equivalents
outstanding (note 10):
Basic......................... 8,173,511 8,689,480 9,453,205 9,360,240 9,673,447
Diluted....................... 8,580,974 9,082,535 9,453,205 9,360,240 10,347,306
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE> 63
AMSURG CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
DEFERRED
COMMON STOCK RETAINED COMPENSATION
------------------------ EARNINGS ON RESTRICTED
SHARES AMOUNT (DEFICIT) STOCK TOTAL
---------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994................. 7,744,801 $19,754,382 $ (196,709) $ -- $19,557,673
Issuance of stock....................... 356,826 1,197,279 -- -- 1,197,279
Issuance of stock in conjunction with
acquisitions.......................... 200,850 676,200 -- -- 676,200
Net earnings............................ -- -- 1,048,040 -- 1,048,040
---------- ----------- ---------- --------- -----------
Balance December 31, 1995................. 8,302,477 21,627,861 851,331 -- 22,479,192
Issuance of stock....................... 512,239 2,366,262 -- -- 2,366,262
Issuance of stock in conjunction with
acquisitions.......................... 384,809 2,069,962 -- -- 2,069,962
Net earnings available to common
shareholders.......................... -- -- 1,458,459 -- 1,458,459
---------- ----------- ---------- --------- -----------
Balance December 31, 1996................. 9,199,525 26,064,085 2,309,790 -- 28,373,875
Issuance of stock....................... 146,087 934,273 -- (273,348) 660,925
Issuance of stock in conjunction with
acquisitions.......................... 300,863 1,847,376 -- -- 1,847,376
Acquisition of stock.................... (101,253) (680,422) -- -- (680,422)
Net loss available to common
shareholders.......................... -- -- (210,299) -- (210,299)
---------- ----------- ---------- --------- -----------
Balance December 31, 1997................. 9,545,222 28,165,312 2,099,491 (273,348) 29,991,455
Issuance of stock (unaudited)........... 5,792 18,481 -- -- 18,481
Issuance of stock in conjunction with
acquisitions (unaudited).............. 1,131 9,263 -- -- 9,263
Redemption of preferred stock
(unaudited)........................... 380,952 2,059,905 -- -- 2,059,905
Net earnings (unaudited)................ -- -- 699,824 -- 699,824
Amortization of deferred compensation on
restricted stock (unaudited).......... -- -- -- 34,175 34,175
---------- ----------- ---------- --------- -----------
Balance March 31, 1998 (unaudited) 9,933,097 $30,252,961 $2,799,315 $(239,173) $32,813,103
========== =========== ========== ========= ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE> 64
AMSURG CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)................... $ 1,048,040 $ 1,480,516 $ 75,316 $(1,824,830) $ 699,824
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Minority interest................... 3,938,364 5,433,588 9,084,132 1,947,911 2,807,075
Distributions to minority
partners.......................... (3,840,787) (5,084,294) (8,907,875) (1,719,822) (2,825,098)
Depreciation and amortization....... 2,396,796 3,000,183 4,944,483 1,087,263 1,568,407
Amortization of deferred
compensation on restricted
stock............................. -- -- -- -- 34,175
Deferred income taxes............... 213,000 249,000 333,000 -- --
Net loss (gain) on sale of assets... -- (30,811) 1,424,690 2,321,168 42,914
Increase (decrease) in cash, net of
effects of acquisitions, due to
changes in:
Accounts receivable, net.......... (467,620) (1,353,365) (1,620,141) (611,293) (1,594,191)
Supplies inventory................ (73,413) (128,248) (212,403) 35,045 (24,403)
Prepaid and other current
assets......................... (110,443) (213,838) (572,455) (183,703) 59,812
Other assets...................... (109,360) (266,801) (803,022) (101,424) (58,096)
Accounts payable.................. 241,428 648,292 (384,881) 541,402 370,395
Accrued expenses and other
liabilities.................... 568,525 (43,734) 322,870 66,826 47,539
Other, net........................ 106,220 156,001 273,593 12,555 (43,737)
----------- ------------ ------------ ----------- -----------
Net cash flows provided by
operating activities........... 3,910,750 3,846,489 3,957,307 1,571,098 1,084,616
Cash flows from investing activities:
Acquisition of interest in surgery
centers............................. (3,186,512) (12,669,794) (12,643,331) (6,030,569) (4,562,773)
Acquisition of property and
equipment........................... (1,831,445) (3,863,052) (10,578,551) (1,943,151) (2,420,369)
Proceeds from sale of assets.......... -- -- 1,978,462 -- 641,078
Decrease (increase) in long-term
receivables......................... (846) 137,582 57,504 5,085 14,557
----------- ------------ ------------ ----------- -----------
Net cash flows used in
investing activities......... (5,018,803) (16,395,264) (21,185,916) (7,968,635) (6,327,507)
Cash flows from financing activities:
Proceeds from long-term borrowings.... 2,164,949 10,544,700 17,629,000 6,176,000 5,172,850
Repayment on long-term borrowings..... (999,929) (7,261,534) (3,524,641) (825,267) (385,640)
Net proceeds from issuance of
preferred stock..................... -- 4,960,000 -- -- --
Net proceeds from issuance of common
stock............................... 1,197,279 2,366,262 524,216 133,776 18,481
Proceeds from capital contributions by
minority partners................... 476,693 1,681,324 2,952,507 184,506 804,431
Financing cost incurred............... (11,345) (19,230) (138,094) (10,051) (1,971)
----------- ------------ ------------ ----------- -----------
Net cash flows provided by
financing activities......... 2,827,647 12,271,522 17,442,988 5,658,964 5,608,151
----------- ------------ ------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents........................... 1,719,594 (277,253) 214,379 (738,573) 365,260
Cash and cash equivalents, beginning of
period................................ 1,750,067 3,469,661 3,192,408 3,192,408 3,406,787
----------- ------------ ------------ ----------- -----------
Cash and cash equivalents, end of
period................................ $ 3,469,661 $ 3,192,408 $ 3,406,787 $ 2,453,835 $ 3,772,047
=========== ============ ============ =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE> 65
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION
AmSurg Corp. (the "Company"), through its wholly owned subsidiaries, owns
majority interests primarily between 51% and 70% in limited partnerships and
limited liability companies ("LLCs") which own and operate practice-based
ambulatory surgery centers and physician practices. The Company also has
majority ownership interests in other partnerships and LLCs formed to develop
additional centers. The consolidated financial statements include the accounts
of the Company and its subsidiaries and the majority owned limited partnerships
and LLCs in which the Company is the general partner or member. Consolidation of
such partnerships and LLCs is necessary as the Company has 51% or more of the
financial interest, is the general partner or majority member with all the
duties, rights and responsibilities thereof and is responsible for the
day-to-day management of the partnership or LLC. The limited partner or minority
member responsibilities are to supervise the delivery of medical services with
their rights being restricted to those which protect their financial interests,
such as approval of the acquisition of significant assets or incurring debt
which they, as physician limited partners or members, are required to guarantee
on a pro rata basis based upon their respective ownership interests. All
material intercompany profits, transactions and balances have been eliminated.
All subsidiaries and minority owners are herein referred to as partnerships and
partners, respectively.
B. CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised principally of demand deposits at
banks and other highly liquid short-term investments with maturities less than
three months when purchased.
C. OTHER CURRENT ASSETS
Other current assets are comprised of prepaid expenses and other
receivables.
D. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment held under capital
leases is stated at the present value of minimum lease payments at the inception
of the related leases. Depreciation for buildings and improvements is recognized
under the straight-line method over 20 years, or for leasehold improvements,
over the remaining term of the lease plus renewal options. Depreciation for
moveable equipment is recognized over useful lives of five to ten years.
E. INTANGIBLE ASSETS
Excess of Cost over Net Assets of Purchased Operations
Excess of cost over net assets of purchased operations is being amortized
over 25 years. The Company has consistently assessed impairment of the excess of
cost over net assets of purchased operations and other long-lived assets in
accordance with criteria consistent with the provisions of Statement of
Financial Accounting Standard ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Whenever events
or changes in circumstances indicate that the carrying amount of long-term
assets may not be recoverable, management assesses whether or not an impairment
loss should be recorded by comparing estimated undiscounted future cash flows
with the assets' carrying amount at the partnership level. If the assets'
carrying amount is in excess of the estimated undiscounted future cash flows, an
impairment loss is recognized as the excess of the carrying amount over
estimated future cash flows discounted at an applicable rate. Intangibles and
other long-lived assets to be disposed of are reported at the lower of the
carrying amount or fair value less cost to sell.
F-7
<PAGE> 66
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred Pre-opening Costs
Deferred pre-opening costs consist of costs incurred for surgery centers
while under development. Deferred pre-opening costs are amortized over one year,
starting upon the commencement date of operations.
Other Intangible Assets
Other intangible assets consist of deferred organization costs and deferred
financing costs of the Company and the entities included in the Company's
consolidated financial statements. Deferred organization costs are amortized
over five years and deferred financing costs are amortized over the term of the
related debt.
F. INCOME TAXES
The Company files a consolidated federal income tax return. Income taxes
are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
G. EARNINGS PER SHARE
Effective December 31, 1997, the Company has adopted the provisions of SFAS
No. 128 "Earnings Per Share" and has restated all previously reported amounts to
conform to the new standard. Basic earnings (loss) per share is computed by
dividing net earnings (loss) available to common shareholders by the combined
weighted average number of Class A and Class B common shares while diluted
earnings (loss) per share is computed by dividing net earnings (loss) available
to common shareholders by the weighted average number of such common shares and
potentially dilutive shares.
H. STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25 "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123 "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No.
123.
I. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
requires disclosure of the fair value of certain financial instruments. Cash and
cash equivalents, receivables, notes receivable and payables are reflected in
the financial statements at cost which approximates fair value. Management
believes that the carrying amounts of long-term debt approximate market value,
because it believes the terms of its borrowings approximate terms which it would
incur currently.
F-8
<PAGE> 67
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
J. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
K. RECLASSIFICATIONS
Distributions to minority partners, disclosed as a financing activity in
prior years' consolidated statements of cash flows, is classified as an
operating activity in order to present cash flows provided by operating
activities more comparably to industry practices. Certain other prior year
amounts have been reclassified to conform to the 1997 presentation.
L. RECENT ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" and No. 131 "Disclosures about Segments of an Enterprise
and Related Information" become effective for the Company for the year ended
December 31, 1998. The Company is continuing to evaluate the effects of adopting
these two statements, but does not expect the adoption of either pronouncement
to have a material effect on the Company's consolidated financial statements.
M. UNAUDITED INTERIM INFORMATION
The unaudited interim financial statements include all adjustments,
consisting only of normal recurring adjustments, which management considers
necessary for a fair presentation of the financial position and results of
operations. The results of operations for the three-month period ended March 31,
1998 are not necessarily indicative of the results that may be expected for a
full year.
2. REVENUE RECOGNITION
Revenues for the years ended December 31, 1995, 1996 and 1997 are comprised
of the following:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Surgery centers................................. $21,641,743 $28,950,498 $47,803,933
Physician practices............................. -- 5,155,148 8,677,522
Other........................................... 746,996 792,850 932,357
----------- ----------- -----------
Revenues........................................ $22,388,739 $34,898,496 $57,413,812
=========== =========== ===========
</TABLE>
Surgery center revenues consist of the billing for the use of the Centers'
facilities (the "usage fee") directly to the patient or third party payer. The
usage fee excludes any amounts billed for physicians' services which are billed
separately by the physicians to the patient or third party payer.
Physician practice revenues consist of the billing for physician services
of the Company's two majority owned physician practices acquired in 1996 and
1997. The billings are made by the practice directly to the patient or third
party payer.
Revenues from surgery centers and physician practices are recognized on the
date of service, net of estimated contractual allowances from third party
medical service payers including Medicare and Medicaid. During the years ended
December 31, 1995, 1996 and 1997 approximately 37%, 36% and 37%, respectively,
of the Company's revenues were derived from the provision of services to
patients covered under Medicare and
F-9
<PAGE> 68
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Medicaid. Concentration of credit risk with respect to other payers is limited
due to the large number of such payers.
3. PUBLIC DISTRIBUTION OF COMMON STOCK
The Company operated as a majority owned subsidiary of American Healthcorp,
Inc. ("AHC") from 1992 until the distribution by AHC to its stockholders of the
shares of the AmSurg common stock owned by it (the "Distribution") on December
3, 1997. Prior to the Distribution, the Company effected a recapitalization
pursuant to which every three shares of the Company's then outstanding common
stock were converted into one share of Class A Common Stock. Immediately
following the Recapitalization, AHC exchanged a portion of its shares of Class A
Common Stock for shares of Class B Common Stock. The principal purpose of the
Distribution was to enable the Company to have access to debt and equity capital
markets as an independent, publicly traded company. Upon the Distribution, the
Company became a publicly traded company. All shares and earnings per share data
included herein have been adjusted to reflect the recapitalization. Expenses
incurred in connection with the Distribution are reflected as distribution cost
in the consolidated statement of operations for the year ended December 31,
1997.
4. ACQUISITIONS AND DISPOSITIONS
A. ACQUISITIONS
The Company, through wholly owned subsidiaries and in separate
transactions, acquired a majority interest in two, four and five practice-based
surgery centers during 1995, 1996 and 1997, respectively. In addition, the
Company acquired through wholly owned subsidiaries one physician practice and
related entities in each of 1996 and 1997. Consideration paid for the acquired
interests consisted of cash, common stock, note payable or a combination
thereof. Total consideration paid in 1995, 1996 and 1997 for all acquisitions
was $4,415,000, $13,561,661 and $14,471,503, respectively, of which the Company
assigned $3,976,358, $12,289,386 and $13,738,220, respectively, to excess of
cost over net assets of purchased operations. The acquisitions were accounted
for as purchases, and the accompanying consolidated financial statements include
the results of their operations from the dates of acquisition.
An acquisition which occurred in 1995 was structured such that if certain
operating results were not achieved, the purchase price would be adjusted.
Subsequent operations of the center did not meet the predefined levels, and the
purchase price adjustment, which is reflected as a long-term receivable in the
accompanying consolidated balance sheets, is being repaid to the Company over a
thirty-month period.
B. PRO FORMA INFORMATION
The unaudited consolidated pro forma results for the years ended December
31, 1996 and 1997, assuming all 1996 and 1997 acquisitions had been consummated
on January 1, 1996, are as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Revenues.................................................... $51,287,000 $60,090,000
Net earnings (loss) available to common shareholders........ 2,216,000 (16,000)
Earnings per common share
Basic..................................................... 0.24 0.00
Diluted................................................... 0.23 0.00
Weighted average number of shares and share equivalents
Basic..................................................... 9,189,000 9,587,000
Diluted................................................... 9,583,000 9,587,000
</TABLE>
F-10
<PAGE> 69
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
C. DISPOSITIONS
In two separate transactions in 1997, the Company sold its investment in a
partnership that owned two surgery centers acquired in 1994 and a surgery center
building and equipment which the Company leased to a physician practice. In
conjunction with the sale of the surgery center building and equipment, the
Company also terminated its management agreement with the physician practice for
the surgery center in which it had no ownership interest but had managed since
1994. The net loss associated with these transactions was $1,494,000.
D. SUBSEQUENT ACQUISITIONS
In January 1998, the Company, through a wholly owned subsidiary, acquired a
majority interest in a practiced-based surgery center. Consideration paid for
the acquired interest consisted of cash of $1,400,000, of which the Company
assigned approximately $970,000 to excess of cost over net assets of purchased
operations.
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Land and improvements....................................... $ 98,540 $ 98,540
Building and improvements................................... 7,017,163 10,264,481
Moveable equipment.......................................... 8,725,140 13,820,039
Construction in progress.................................... 316,384 1,180,250
----------- -----------
16,157,227 25,363,310
Less accumulated depreciation and amortization.............. (3,821,335) (6,114,846)
----------- -----------
Property and equipment, net................................. $12,335,892 $19,248,464
=========== ===========
</TABLE>
At December 31, 1997, the Company and its partnerships had unfunded
construction and equipment purchase commitments for centers under development of
approximately $3,100,000 in order to complete construction in progress.
6. INTANGIBLE ASSETS
Intangible assets at December 31, 1996 and 1997 consist of the following:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Excess of cost over net assets of purchased operations, net
of accumulated amortization of $2,757,394 and $4,123,482,
respectively.............................................. $30,771,784 $40,636,399
Deferred pre-opening cost, net of accumulated amortization
of $66,095 and $336,091, respectively..................... 220,942 614,944
Other intangible assets, net of accumulated amortization of
$336,308 and $388,108, respectively....................... 309,370 315,341
----------- -----------
Intangible assets, net...................................... $31,302,096 $41,566,684
=========== ===========
</TABLE>
F-11
<PAGE> 70
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1997 is comprised of the following:
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
$35,000,000 credit agreement at prime or 1.75% above LIBOR
(average rate of 7.5% at December 31, 1997), due January
10, 2001.................................................. $3,157,657 $22,399,935
Term loan at prime or 1.75% above LIBOR..................... 5,030,590 --
Other debt at an average rate of 8.3%, due through September
23, 2003.................................................. 2,508,828 2,847,048
Capitalized lease arrangements at an average rate of 10.0%,
due through March 1, 2002 (see note 8).................... 1,137,920 1,053,330
---------- -----------
11,834,995 26,300,313
Less current portion........................................ 2,616,714 1,330,595
---------- -----------
Long-term debt............................................ $9,218,281 $24,969,718
========== ===========
</TABLE>
On December 19, 1997, the Company amended its credit agreement. Under the
terms of the newly amended agreement, all borrowings outstanding under the
Company's term loan with the same lending institutions were converted to its
revolving credit facility. The borrowings under the credit facility are
guaranteed by the wholly owned subsidiaries of the Company, and in some
instances, the underlying assets of certain developed centers. The credit
agreement permits the Company to borrow up to $35,000,000 to finance the
Company's acquisition and development projects at prime or 1.75% above LIBOR or
a combination thereof, provides for a fee of .35% on unused commitments,
prohibits the payment of dividends and contains covenants relating to the ratio
of debt to net worth, operating performance and minimum net worth. The Company
was in compliance with all covenants at December 31, 1997.
Certain partnerships and LLCs included in the Company's consolidated
financial statements have loans with local lending institutions which are
collateralized by certain assets of the centers with a book value of
approximately $6,300,000. The Company and the partners or members have
guaranteed payment of the loans.
Principal payments required on long-term debt in the five years subsequent
to December 31, 1997 are $1,330,595, $1,118,876, $693,653, $22,957,821 and
$199,368.
8. LEASES
The Company has entered into various building and equipment operating
leases and equipment capital leases for its surgery centers in operation and
under development and for office space, expiring at various dates through 2014.
Future minimum lease payments at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITALIZED
EQUIPMENT OPERATING
YEAR ENDED DECEMBER 31, LEASES LEASES
- ----------------------- ----------- -----------
<S> <C> <C>
1998........................................................ $ 537,415 $ 3,473,344
1999........................................................ 391,495 3,195,189
2000........................................................ 192,124 2,782,336
2001........................................................ 55,709 2,460,708
2002........................................................ 13,927 1,727,441
Thereafter.................................................. -- 5,136,659
---------- -----------
Total minimum rentals............................. 1,190,670 $18,775,677
===========
Less amounts representing interest at rates ranging from
10.0% to 10.2%............................................ (137,340)
----------
Capital lease obligations......................... $1,053,330
==========
</TABLE>
F-12
<PAGE> 71
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, equipment with a cost of $1,669,134 and accumulated
amortization of $760,630 was held under capital lease. The Company and its
limited partners have guaranteed payment of the leases. Rental expense for
operating leases for the years ended December 31, 1995, 1996 and 1997 was
$1,201,000, $1,775,000 and $3,093,000 (see note 12).
9. PREFERRED STOCK
Preferred stock, net of issuance costs, is comprised of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Series A Redeemable Preferred Stock, 500,000 shares
outstanding............................................... $1,774,290 $2,059,905
Series B Convertible Preferred Stock, 416,666 shares
outstanding............................................... 3,207,767 3,207,767
---------- ----------
$4,982,057 $5,267,672
========== ==========
</TABLE>
On November 20, 1996, the Company issued to unaffiliated institutional
investors a combination of redeemable and convertible preferred stock for net
proceeds of $4,960,000. The Series A Redeemable Preferred Stock, with a stated
amount of $3,000,000, was to pay a cumulative dividend of 8% commencing November
21, 1998. Subsequent to December 31, 1997, the holders of the Series A
Redeemable Preferred Stock converted their preferred shares into 380,952 shares
of Class A Common Stock using a conversion ratio based on market price of the
Class A Common Stock pursuant to the provisions of the Company's Charter. The
Series B Convertible Preferred Stock, with a stated amount of $2,500,000, is
convertible into that number of shares of Class A Common Stock that approximates
6% of the equity of the Company determined as of November 20, 1996, with that
percentage being ratably increased to 8% of the equity of the Company if an
event of liquidity has not occurred by November 20, 2000. An event of liquidity
is defined as an initial public offering of common stock or sale of the Company
yielding net cash proceeds to the Company of at least $25,000,000, or in the
event the Company has completed a spin-off, yielding net proceeds of $20,000,000
to the Company and/or its shareholders. If such events of liquidity do not occur
by November 20, 2002, the holders of the Series B Convertible Preferred Stock
have the right to require the Company to redeem the stock at current market
price as defined by the Company's Charter. The preferred stock was recorded at
its fair value, net of issuance costs. From the time of issuance, the Series A
Redeemable Preferred Convertible Stock has been accreted toward its stated
amount, including potential dividends, over the redemption term. The Series B
Preferred Stock is not being accreted because management expects a conversion
upon an event of liquidity.
10. SHAREHOLDERS' EQUITY
A. COMMON STOCK
From the time of the Company's inception, the Company has sold Class A
Common Stock to AHC, partners and members of certain of its partnerships and
LLCs and other private investors at fair value. In addition, the Company has
issued shares of Class A Common Stock in connection with acquisitions of surgery
center assets. On December 3, 1997, the Company issued Class B Common Stock in
connection with the Distribution (see note 3). Class B Common Stock differs from
Class A Common Stock only in that it has ten votes per share in the election and
removal of directors of the Company, while the Class A Common Stock has one vote
per share. Other than the election and removal of directors of the Company, the
Class A Common Stock and the Class B Common Stock have equal voting and other
rights. The Company does not have the right to issue additional Class B Common
Stock.
F-13
<PAGE> 72
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
B. EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominators of
basic and diluted earnings per share:
<TABLE>
<CAPTION>
EARNINGS (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------- ------------- ---------
<S> <C> <C> <C>
For the year ended December 31, 1995:
Basic earnings per share:
Earnings available to common shareholders... $1,048,040 8,173,511 $0.13
Effect of dilutive securities options.......... -- 407,463
---------- ---------
Diluted earnings per share:
Earnings available to common shareholders... $1,048,040 8,580,974 0.12
========== =========
For the year ended December 31, 1996:
Net earnings................................... $1,480,516
Less accretion of preferred stock.............. 22,057
----------
Basic earnings per share:
Earnings available to common shareholders... 1,458,459 8,689,480 0.17
Effect of dilutive securities options.......... -- 393,055
---------- ---------
Diluted earnings per share:
Earnings available to common shareholders... $1,458,459 9,082,535 0.16
========== =========
For the year ended December 31, 1997:
Net earnings................................... $ 75,316
Less accretion of preferred stock.............. 285,615
----------
Basic and diluted loss per share:
Loss available to common shareholders....... $ (210,299) 9,453,205 (0.02)
========== =========
</TABLE>
Options to purchase 1,174,849 shares of common stock at prices ranging from
$0.75 to $8.70, representing common share equivalents of 335,927 under the
treasury stock method, were outstanding at December 31, 1997 but were not
included in the computation of diluted earnings per share for the year then
ended because to do so would have been anti-dilutive to the net loss per share
available to common shareholders. The options will expire at various dates
through December 2007. The effect of the conversion of 500,000 shares of Series
A Redeemable Preferred Stock to 380,952 shares of Class A Common Stock, which
occurred subsequent to December 31, 1997 (see note 9), has also been excluded
from the computation of diluted earnings per share for the year ended December
31, 1997 because to do so would have been anti-dilutive after giving
consideration to the elimination of related accretion of preferred stock.
C. STOCK OPTIONS
The Company has two stock option plans under which it has granted
non-qualified options to purchase shares of Class A Common Stock to employees
and outside directors. Options are granted at market value on the date of the
grant and vest over 4 years at the rate of 25% per year. Options have a term of
10 years from the date of grant. As of December 31, 1997, 491,232 shares were
reserved for future options.
F-14
<PAGE> 73
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity for the years ended December 31, 1995, 1996 and 1997
is summarized below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at December 31, 1994............................ 650,867 $1.71
Options granted........................................... 35,000 3.36
---------
Outstanding at December 31, 1995............................ 685,867 1.80
Options granted........................................... 229,750 5.01
Options exercised......................................... (2,917) 2.70
Options terminated........................................ (5,917) 3.21
---------
Outstanding at December 31, 1996............................ 906,783 2.61
Options granted........................................... 294,033 6.70
Options exercised......................................... (1,500) 3.44
Options terminated........................................ (24,467) 5.21
---------
Outstanding at December 31, 1997............................ 1,174,849 3.56
=========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING (YRS.) PRICE EXERCISABLE PRICE
--------------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.75 -- $1.50....................... 344,000 4.3 $0.75 344,000 $0.75
1.50 -- 3.00....................... 217,526 5.3 2.59 215,026 2.58
3.00 -- 4.50....................... 113,493 6.8 3.33 78,459 3.32
4.50 -- 6.00....................... 329,832 8.6 5.32 78,447 5.13
6.00 -- 7.50....................... 94,998 9.3 6.15 66,666 6.15
7.50 -- 8.70....................... 75,000 9.9 8.70 -- N/A
--------- -------
0.75 -- 8.70....................... 1,174,849 6.6 2.61 782,598 2.41
========= =======
</TABLE>
The Company accounts for its stock options issued to employees and outside
directors pursuant to APB No. 25. Accordingly, no compensation expense has been
recognized in connection with the issuance of stock options. The estimated
weighted average fair values of the options at the date of grant using the
Black-Scholes option pricing model as promulgated by SFAS No. 123 in 1995, 1996
and 1997 were $1.80, $2.73 and $3.93 per share, respectively. In applying the
Black-Scholes model, the Company assumed no dividends, an expected life for the
options of seven years and a forfeiture rate of 3% in 1995, 1996 and 1997 and an
average risk free interest rate of 6.6% in 1995, 6.2% in 1996 and 6.4% in 1997.
The Company also assumed a volatility rate of 46% and 49% in 1995 and 1996,
respectively, based upon an average of comparable companies, and 54% in 1997,
based upon the volatility rate of AHC. Had the Company used the Black-Scholes
estimates to determine compensation expense for the options granted in the years
ended December 31, 1995, 1996 and 1997 net income and net income per share
attributable to common shareholders would have been reduced to the following pro
forma amounts.
F-15
<PAGE> 74
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ---------
<S> <C> <C> <C>
Net earnings available to common shareholders:
As reported...................................... $1,048,040 $1,458,459 $(210,299)
Pro forma........................................ 1,028,040 1,241,874 (690,359)
Basic earnings (loss) per share available to common
shareholders:
As reported...................................... 0.13 0.17 (0.02)
Pro forma........................................ 0.13 0.14 (0.07)
Diluted earnings (loss) per share available to
common shareholders:
As reported...................................... 0.12 0.16 (0.02)
Pro forma........................................ 0.12 0.14 (0.07)
</TABLE>
In 1994, the Company issued warrants to purchase its common stock to AHC.
These warrants were exercised February 26, 1996 for 85,907 shares at $2.70 per
share. The warrants were issued in return for AHC's prior guaranty of Company
debt.
11. INCOME TAXES
Income tax expense for the years ended December 31, 1995, 1996 and 1997 is
comprised of the following:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- ----------
<S> <C> <C> <C>
Current:
Federal............................................. $301,000 $593,000 $1,188,000
State............................................... 64,000 143,000 253,000
Deferred.............................................. 213,000 249,000 333,000
-------- -------- ----------
Income tax expense............................... $578,000 $985,000 $1,774,000
======== ======== ==========
</TABLE>
Total income tax expense for the years ended December 31, 1995, 1996 and
1997 differed from the amount computed by applying the U.S. Federal income tax
rate of 34 percent to earnings before income taxes as a result of the following:
<TABLE>
<CAPTION>
1995 1996 1997
--------- -------- ----------
<S> <C> <C> <C>
Statutory Federal income tax......................... $ 553,000 $838,000 $ 629,000
State income taxes, net of Federal income tax
benefit............................................ 60,000 132,000 188,000
Increase (decrease) in valuation allowance........... (124,000) 49,000 (26,000)
Non-deductible distribution cost and net loss on sale
of assets.......................................... -- -- 812,000
Other................................................ 89,000 (34,000) 171,000
--------- -------- ----------
Income tax expense................................. $ 578,000 $985,000 $1,774,000
========= ======== ==========
</TABLE>
F-16
<PAGE> 75
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for uncollectible accounts...................... $297,000 $ 354,000
State net operating losses................................ 60,000 69,000
Other..................................................... 6,000 36,000
-------- ----------
Gross deferred tax assets.............................. 363,000 459,000
Valuation allowance....................................... (60,000) (34,000)
-------- ----------
Net deferred tax assets................................ 303,000 425,000
Deferred tax liabilities:
Property and equipment, principally due to difference in
depreciation........................................... 66,000 95,000
Excess of cost over net assets of purchased operations,
principally due to differences in amortization......... 699,000 1,125,000
-------- ----------
Gross deferred tax liabilities............................ 765,000 1,220,000
-------- ----------
Net deferred tax liability................................ $462,000 $ 795,000
======== ==========
</TABLE>
The net deferred tax liability at December 31, 1996 and 1997, is recorded
as follows:
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Current deferred income tax asset........................... $303,000 $ 390,000
Noncurrent deferred income tax liability.................... 765,000 1,185,000
-------- ----------
Net deferred tax liability........................ $462,000 $ 795,000
======== ==========
</TABLE>
The Company has provided a valuation allowance on its gross deferred tax
asset primarily related to state net operating losses to the extent that
management does not believe that it is more likely than not that such asset will
be realized.
12. RELATED PARTY TRANSACTIONS
Included in other operating expenses for the years ended December 31, 1995,
1996 and 1997 is $186,215, $213,820 and $382,467, respectively, paid to AHC for
management and financial services provided by AHC to the Company. These expenses
were incurred pursuant to an agreement under which AHC was paid for the services
of AHC's chief executive officer and chief financial officer as well as ongoing
accounting and tax services for surgery center and corporate operations. Upon
the Distribution, the Company issued to AHC's chief executive officer and chief
financial officer, who also serve as directors of the Company, restricted shares
of Class A Common Stock valued at approximately $350,000, in accordance with an
agreement in which they are to provide advisory services to the Company through
December 3, 1999. Deferred compensation associated with the restricted stock is
amortized over the term of the agreement.
The Company also rents approximately 15,000 square feet of office space
from AHC pursuant to a sublease which expires December 1999. Included in other
operating expenses for the years ended December 31, 1996 and 1997 is $163,212
and $271,194, respectively, related to this sublease.
The Company leases space for certain surgery centers from its physician
partners affiliated with its centers at rates the Company believes approximate
fair market value. Payments on these leases were $871,054, $1,205,849 and
$2,198,802 for the years ended December 31, 1995, 1996 and 1997, respectively.
The Company reimburses certain of its limited partners for salaries and
benefits related to time spent by employees of their practices on activities of
the centers. Total reimbursement of such salary and benefit costs
F-17
<PAGE> 76
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
totaled $3,538,925, $4,616,745 and $7,024,657 for the years ended December 31,
1995, 1996 and 1997, respectively.
The Company believes that the foregoing transactions are in its best
interests. It is the Company's current policy that all transactions by the
Company with officers, directors, five percent shareholders and their affiliates
will be entered into only if such transactions are on terms no less favorable to
the Company than could be obtained from unaffiliated parties, are reasonably
expected to benefit the Company and are approved by a majority of the
disinterested independent members of the Company's Board of Directors.
13. COMMITMENTS AND CONTINGENCIES
The Company and its partnerships are insured with respect to medical
malpractice risk on a claims made basis. Management is not aware of any claims
against it or its partnerships which would have a material financial impact.
The Company or its wholly owned subsidiaries, as general partners in the
limited partnerships, are responsible for all debts incurred but unpaid by the
partnership. As manager of the operations of the partnership, the Company has
the ability to limit its potential liabilities by curtailing operations or
taking other operating actions.
In the event of a change in current law which would prohibit the
physicians' current form of ownership in the partnerships or LLCs, the Company
is obligated to purchase the physicians' interests in the partnerships or LLCs.
The purchase price to be paid in such event is generally the greater of the
physicians' capital account or a multiple of earnings.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended December 31, 1995,
1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash paid during the year for:
Interest...................................... $ 550,725 $ 909,884 $ 1,583,963
=========== =========== ===========
Income taxes, net of refunds.................. $ 74,105 $ 970,309 $ 1,398,190
=========== =========== ===========
Noncash investing and financing activities:
Effect of acquisitions:
Assets acquired, net of cash............... $ 5,680,262 $17,181,505 $15,253,504
Liabilities assumed........................ (1,187,550) (2,441,749) (762,797)
Issuance of common stock................... (676,200) (2,069,962) (1,847,376)
Issuance of note payable................... (630,000) -- --
----------- ----------- -----------
Payment for assets acquired................ $ 3,186,512 $12,669,794 $12,643,331
=========== =========== ===========
Capital lease obligations incurred to acquire
equipment..................................... $ 306,630 $ -- $ 333,041
Forgiveness of debt and treasury stock received
in connection with sale of a partnership
interest...................................... $ -- $ -- $ 808,070
=========== =========== ===========
</TABLE>
15. SUBSEQUENT EVENTS
On March 31, 1998, the Company, through a wholly-owned subsidiary, acquired
a majority interest in a practice-based surgery center. Consideration paid for
the acquired interest was $3,125,553, consisting primarily of cash, of which the
Company assigned approximately $2,900,000 to excess of cost over net assets of
purchased operations.
F-18
<PAGE> 77
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Also on March 31, 1998, a partnership in which the Company, through a
wholly-owned subsidiary, owned a 51% interest, sold certain assets comprising a
surgery center developed in 1995 for approximately $640,000, and incurred a net
loss of $42,914.
On April 30, 1998, the Company through a wholly owned subsidiary, acquired
a 60% interest in a physician practice-based surgery center for approximately
$5,400,000, of which the Company assigned approximately $4,900,000 to excess of
cost over net assets of purchased operations.
16. UNAUDITED SUBSEQUENT EVENTS
In May 1998, the Company's Board of Directors approved a plan to dispose of
the Company's interests in the two specialty physician practices in which it
owns a majority interest as part of an overall strategy to exit the practice
management business and focus solely on the development, acquisition and
operation of ambulatory surgery centers and specialty networks. While the
Company's past strategy for network development included the ownership of
related physician practices, the Company's experience in specialty network
development has made it clear that physician practice ownership is not necessary
for the successful development of these networks. Because of this change in
strategy and the fact that the ownership of physician practices is management
intensive and produces lower profit margins than surgery centers, the Company
believes that its capital and management resources are better allocated to the
development and acquisition of surgery centers and networks. In addition, the
Company believes that the ownership of only two physician practices does not
allow for the economies of scale and growth opportunities needed to be
successful in the physician practice management business.
In conjunction with the plan of disposal of these practices, the Company
will reduce the carrying value of the long-lived assets held for sale by
approximately $5,400,000 in the second quarter of 1998, based on the estimated
sales proceeds less estimated costs to sell. The Company will recognize a
deferred income tax benefit of approximately $1,800,000 associated with the
estimated loss. The remaining carrying value of the net assets of the practices
is approximately $1,700,000.
The Company expects to dispose of these practice interests through a sale.
Although the Company is currently in negotiations regarding the possible sale of
one of the two practices, there are no definitive agreements or arrangements
with regard thereto. Therefore, there can be no assurance that the Company will
sell these operations; however, the Company believes that the estimated disposal
loss will be adequate in the sale of the practices.
A summary of the information about the operations of the physician
practices for the years ended December 31, 1995, 1996 and 1997 and for the three
months ended March 31, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues....................... $ -- $5,155,148 $8,814,724 $2,216,891 $2,242,916
Operating expenses............. -- 4,979,142 7,956,189 1,976,238 1,917,911
Minority interest.............. -- -- 327,287 71,074 73,444
Interest expense............... -- 90,912 101,797 29,801 14,834
---------- ---------- ---------- ---------- ----------
Contribution
margin............. $ -- $ 85,094 $ 429,451 $ 139,778 $ 236,727
========== ========== ========== ========== ==========
</TABLE>
Concurrent with the Company's decision to exit the physician practice
management business, one of the Company's physician practices received
notification from a payer with which it has a capitated contract for
gastroenterology services covering approximately 120,000 lives that the contract
would not be renewed beyond the June 30, 1998 anniversary date of the contract.
The payer has advised the Company that it plans to negotiate a new contract. At
this time, the Company cannot determine the outcome of these negotiations;
however, an unfavorable outcome in these negotiations may have an adverse impact
on the results of operations of the Company during the period this practice is
held prior to disposal.
F-19
<PAGE> 78
AMSURG CORP.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
BASIS OF PRESENTATION
The unaudited pro forma balance sheet of AmSurg Corp. as of March 31, 1998,
is presented to show the effects of an April 1998 acquisition, as if it had
occurred on March 31, 1998. The unaudited pro forma combined statements of
operations are presented to show the effects of the 1997 and 1998 acquisitions
as if they had occurred on January 1, 1997. The pro forma information is based
on the historical financial statements of the Company and the acquired centers,
giving effect to the acquisitions under the purchase method of accounting, and
the assumptions and adjustments in the accompanying notes to the pro forma
consolidated financial information. The allocation of the purchase price is
preliminary, but management does not believe it will change materially.
The unaudited pro forma financial information does not purport to represent
what the Company's financial position or results of operations would actually
have been had the transactions in fact occurred on the dates indicated above,
nor to project the Company's financial position or results of operations for any
future date or period. In the opinion of the Company's management, all
adjustments necessary for a fair presentation have been made. This unaudited pro
forma financial information should be read in conjunction with the accompanying
notes and the consolidated financial statements of AmSurg Corp. and the related
notes included elsewhere herein.
F-20
<PAGE> 79
AMSURG CORP.
PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1998
(ALL AMOUNTS EXPRESSED IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
EFFECT OF PRO
BOSWELL ACQUISITIONS FORMA
EYE AND RELATED COMBINED
HISTORICAL CENTER, LLC FINANCING TOTALS
---------- -------------- ------------ --------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 3,772 $ 511 $(1,911)(1) $ 2,372
Accounts receivable, net.......................... 10,345 519 -- 10,864
Other current assets.............................. 2,321 92 (22)(2) 2,391
------- ------ ------- -------
Total current assets...................... 16,438 1,122 (1,933) 15,627
Long-term receivables and deposits.................. 881 -- -- 881
Property and equipment, net......................... 20,655 244 -- 20,899
Intangible assets, net.............................. 44,784 -- 4,900(3) 49,684
------- ------ ------- -------
Total assets.............................. $82,758 $1,366 $ 2,967 $87,091
======= ====== ======= =======
Current liabilities:
Current portion of long-term debt................. $ 1,447 $ 37 $ (37)(4) $ 1,447
Other current liabilities......................... 3,829 159 (159)(4) 3,829
------- ------ ------- -------
Total current liabilities................. 5,276 196 (196) 5,276
Long-term debt...................................... 30,060 111 3,889(5) 34,060
Deferred income taxes............................... 1,185 -- -- 1,185
Minority interest................................... 10,216 -- 333(6) 10,549
Preferred stock..................................... 3,208 -- -- 3,208
Shareholders' equity................................ 32,813 1,059 (1,059)(7) 32,813
------- ------ ------- -------
Total liabilities and shareholders'
equity.................................. $82,758 $1,366 $ 2,967 $87,091
======= ====== ======= =======
</TABLE>
F-21
<PAGE> 80
AMSURG CORP.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(ALL AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THE SOUTH DENVER INDIVIDUALLY
ENDOSCOPY ENDOSCOPY BOSWELL EYE INSIGNIFICANT PRO FORMA
HISTORICAL CENTER, INC. CENTER, INC. CENTER, LLC ACQUISITIONS ADJUSTMENTS
---------- ------------ ------------ --------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue........................... $57,414 $2,090 $2,092 $5,032 $2,253 $ --
Operating expenses:
Salaries and benefits........... 17,363 470 373 1,024 481 155(8)
Other operating expenses........ 20,352 501 574 2,161 838 3(9)
Depreciation and amortization... 4,944 -- 65 107 192 301(10)
Net loss on sale of assets
(a)........................... 1,425 -- -- -- -- --
------- ------ ------ ------ ------ -------
Total operating
expenses................ 44,084 971 1,012 3,292 1,511 459
------- ------ ------ ------ ------ -------
Operating income.......... 13,330 1,119 1,080 1,740 742 (459)
Minority interest................. 9,084 -- -- -- -- 2,236(6)
Other (income) and expense:
Interest expense, net of
interest income............... 1,554 -- -- 21 (35) 923(11)
Distribution cost (b)........... 842 -- -- -- -- --
------- ------ ------ ------ ------ -------
Earnings before income
taxes................... 1,850 1,119 1,080 1,719 777 (3,618)
Income tax expense................ 1,774 -- -- -- -- 431(12)
------- ------ ------ ------ ------ -------
Net earnings.............. 76 1,119 1,080 1,719 777 (4,049)
Accretion of preferred stock
discount........................ 286 -- -- -- -- --
------- ------ ------ ------ ------ -------
Net earnings (loss)
attributable to common
shareholders............ $ (210) $1,119 $1,080 $1,719 $ 777 $(4,049)
======= ====== ====== ====== ====== =======
Earnings (loss) per common share:
Basic........................... $ (0.02)(c)
Diluted......................... $ (0.02)(c)
Weighted average number of shares
and share equivalents
outstanding:
Basic........................... 9,453 135(13)
Diluted......................... 9,453 471(14)
<CAPTION>
PRO FORMA
COMBINED
TOTALS
---------
<S> <C>
Revenue........................... $68,881
Operating expenses:
Salaries and benefits........... 19,866
Other operating expenses........ 24,429
Depreciation and amortization... 5,609
Net loss on sale of assets
(a)........................... 1,425
-------
Total operating
expenses................ 51,329
-------
Operating income.......... 17,552
Minority interest................. 11,320
Other (income) and expense:
Interest expense, net of
interest income............... 2,463
Distribution cost (b)........... 842
-------
Earnings before income
taxes................... 2,927
Income tax expense................ 2,205
-------
Net earnings.............. 722
Accretion of preferred stock
discount........................ 286
-------
Net earnings (loss)
attributable to common
shareholders............ $ 436
=======
Earnings (loss) per common share:
Basic........................... $ 0.05(d)
Diluted......................... $ 0.04(d)
Weighted average number of shares
and share equivalents
outstanding:
Basic........................... 9,588
Diluted......................... 9,924
</TABLE>
- ---------------
(a) Includes a loss attributable to the sale of a partnership interest, net of a
gain on the sale of a surgery center building and equipment, which had an
impact after taxes of reducing historical and pro forma basic and diluted
net earnings per share by $0.16 for the year ended December 31, 1997.
(b) Reflects costs incurred related to the distribution of the Company's common
stock, which had an impact of reducing historical and pro forma basic and
diluted net earnings per share by $0.09 for the year ended December 31,
1997.
(c) Without giving effect to the items reflected in footnotes (a) and (b) above,
basic and diluted earnings per common share would have been $0.24 and
$0.23, respectively, for the year ended December 31, 1997.
(d) Without giving effect to the items reflected in footnotes (a) and (b) above
pro forma basic and diluted earnings per common share would have been $0.31
and $0.29, respectively, for the year ended December 31, 1997.
F-22
<PAGE> 81
AMSURG CORP.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SOUTH DENVER INDIVIDUALLY PRO FORMA
ENDOSCOPY BOSWELL EYE INSIGNIFICANT PRO FORMA COMBINED
HISTORICAL CENTER, INC. CENTER, LLC ACQUISITION ADJUSTMENTS TOTALS
---------- ------------ --------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue.................................. $17,829 $ 598 $1,468 $ 143 $ -- $20,038
Operating expenses:
Salaries and benefits.................. 5,367 141 251 29 39(8) 5,827
Other operating expenses............... 6,384 130 550 52 -- 7,116
Depreciation and amortization.......... 1,568 18 25 15 44(10) 1,670
Net loss on sale of assets............. 43 -- -- -- -- 43
------- ------ ------ ------ ------- -------
Total operating expenses......... 13,362 289 826 96 83 14,656
------- ------ ------ ------ ------- -------
Operating income................. 4,467 309 642 47 (83) 5,382
Minority interest........................ 2,807 -- -- -- 450(5) 3,257
Other (income) and expense:
Interest expense, net of interest
income............................... 493 -- 5 1 147(11) 646
------- ------ ------ ------ ------- -------
Earnings before income taxes..... 1,167 309 637 46 (680) 1,479
Income tax expense....................... 467 -- -- -- 125(12) 592
------- ------ ------ ------ ------- -------
Net earnings..................... $ 700 $ 309 $ 637 $ 46 $ (805) $ 887
======= ====== ====== ====== ======= =======
Earnings per common share:
Basic.................................. $ 0.07 $ 0.09
Diluted................................ $ 0.07 $ 0.09
Weighted average number of shares and
share equivalents outstanding:
Basic.................................. 9,673 1(13) 9,674
Diluted................................ 10,347 1(13) 10,348
</TABLE>
F-23
<PAGE> 82
AMSURG CORP.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
In 1997 the Company acquired majority interests in the assets and certain
liabilities comprising the business operations of five surgery centers and one
physician practice. Through April 1998, the Company acquired majority interests
in the assets and certain liabilities comprising the business operations of
three surgery centers. The accompanying pro forma consolidated balance sheet
includes the purchased assets and assumed liabilities and effects of financing,
as if a surgery center acquired in April 1998 had been acquired on March 31,
1998. The accompanying pro forma consolidated statements of operations reflects
the pro forma results of operations of the Company, as if the surgery centers
and physician practice had been acquired on January 1, 1997. Two acquisitions
were completed in early 1997, and therefore the results of their operations for
the year ended December 31, 1997 are included in the historical amounts.
PRO FORMA ADJUSTMENTS
The adjustments reflected in the pro forma consolidated statement of
operations are as follows:
1. To reflect cash used to fund acquisitions, net of cash not
acquired.
2. To reflect other current assets not acquired.
3. To reflect additional excess of cost over net assets acquired
resulting from acquisitions.
4. To reflect obligations of acquired entities not assumed.
5. To reflect additional long-term debt used to finance acquisitions,
net of long-term debt not assumed.
6. To reflect minority owners' interest in earnings of acquired
operations.
7. To eliminate equity of acquired entities.
8. To reflect $275,000 in additional corporate general and
administrative salary costs as a result of an increase in the number of
centers managed, net of $120,000 in salaries based on a reduction in salary
expense allocated to the surgery center following the acquisition, for the
year ended December 31, 1997, and $39,000 in additional corporate general
and administrative salary costs as a result of an increase in the number of
centers managed for the three months ended March 31, 1998.
9. To reflect $36,000 in additional miscellaneous general and
administrative cost as a result of increase in number of centers managed,
net of $33,000 in reduced rent expense pursuant to new lease agreements.
10. To reflect amortization of additional excess of cost over net
assets of purchased operations assets and differences in depreciation of
purchased equipment.
11. To reflect interest on acquisition-related borrowings.
12. To record estimated additional federal and state income taxes at a
combined rate of 40%, as a result of the incremental increase in earnings
before income taxes.
13. To reflect weighted average shares for stock issued in
acquisition.
14. To reflect weighted average shares for stock issued in acquisition
and the effect of potential common shares due to existing securities
options which are dilutive upon consideration of the adjusted pro forma net
earnings.
F-24
<PAGE> 83
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
South Denver Endoscopy Center, Inc.
We have audited the accompanying balance sheet of South Denver Endoscopy
Center, Inc. (the "Center") as of December 31, 1997, and the related statements
of earnings and retained earnings and cash flows for the year then ended. These
financial statements are the responsibility of the Center's management. Our
responsibility is to express an opinion on these 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, such financial statements present fairly, in all material
respects, the financial position of the Center as of December 31, 1997, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
April 24, 1998
F-25
<PAGE> 84
SOUTH DENVER ENDOSCOPY CENTER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 24,105 $414,080
Accounts receivable, net of allowance for uncollectible
accounts of $62,587 and $79,693, respectively.......... 333,505 272,946
Supplies inventory........................................ 15,000 13,000
Prepaid expenses.......................................... 600 3,664
-------- --------
Total current assets.............................. 373,210 703,690
Organization cost, net of accumulated amortization of
$15,572 and $16,546, respectively......................... 3,895 2,921
Equipment, net of accumulated depreciation of $110,619 and
$128,202, respectively.................................... 258,654 242,581
-------- --------
Total............................................. $635,759 $949,192
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $182,624 $181,733
Accrued expenses.......................................... 9,099 14,708
-------- --------
Total current liabilities......................... 191,723 196,441
Shareholders' equity:
Retained earnings......................................... 444,036 752,751
-------- --------
Total............................................. $635,759 $949,192
======== ========
</TABLE>
See notes to financial statements.
F-26
<PAGE> 85
SOUTH DENVER ENDOSCOPY CENTER, INC.
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED MARCH 31,
DECEMBER 31, ---------------------
1997 1997 1998
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Revenue.................................................... $ 2,092,392 $ 485,068 $ 598,138
Expenses:
Salaries and benefits.................................... 372,872 80,866 141,171
Supplies and other operating expenses.................... 442,380 99,836 93,980
Rent expense (Note 2).................................... 71,185 16,117 17,795
Bad debt expense......................................... 61,181 14,384 17,920
Depreciation and amortization............................ 65,068 17,686 18,557
----------- --------- ---------
Total expenses................................... 1,012,686 228,889 289,423
----------- --------- ---------
Net earnings............................................... 1,079,706 256,179 308,715
Retained earnings, beginning of period..................... 390,867 390,867 444,036
Distributions to shareholders.............................. (1,026,537) (226,532) --
----------- --------- ---------
Retained earnings, end of period........................... $ 444,036 $ 420,514 $ 752,751
=========== ========= =========
</TABLE>
See notes to financial statements.
F-27
<PAGE> 86
SOUTH DENVER ENDOSCOPY CENTER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED MARCH 31,
DECEMBER 31, --------------------
1997 1997 1998
------------ --------- --------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 1,079,706 $ 256,179 $308,715
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation........................................... 61,175 16,712 17,583
Amortization of organization cost...................... 3,893 974 974
(Increase) decrease in accounts receivable............. (77,214) 7,389 60,559
Increase in supplies inventory......................... (5,500) (2,500) 2,000
Increase in prepaid assets............................. (241) (4,137) (3,064)
Increase (decrease) in accounts payable................ 1,382 (10,252) (891)
Increase in accrued expenses........................... 2,599 2,276 5,609
----------- --------- --------
Net cash provided by operating activities......... 1,065,800 266,641 391,485
Cash flows from financing activities:
Shareholders' distributions............................... (1,026,537) (226,532) --
----------- --------- --------
Cash flows from investing activities:
Purchase of equipment..................................... (19,254) -- (1,510)
----------- --------- --------
Net increase in cash........................................ 20,009 40,109 389,975
Cash at beginning of period................................. 4,096 4,096 24,105
----------- --------- --------
Cash at end of period....................................... $ 24,105 $ 44,205 $414,080
=========== ========= ========
</TABLE>
See notes to financial statements.
F-28
<PAGE> 87
SOUTH DENVER ENDOSCOPY CENTER, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The South Denver Endoscopy Center, Inc. ("SDEC") began operations in 1994
in Englewood, Colorado (a suburb of Denver). SDEC is owned by a group of
shareholders who perform endoscopy procedures through their related physician
practice.
Revenue Recognition. Revenue consists of the billing for the use of SDEC
facilities (the "usage fee") directly to the patient or third party payer. The
usage fee excludes amounts billed for physicians' services, which are billed
separately by the physicians to the patient or third party payer. Revenues are
reported at the estimated net realizable amounts from patients, third-party
payers and others, including Medicare. Such revenues are recognized as the
related services are performed. Contractual adjustments resulting from
agreements with various organizations to provide services for amounts which
differ from billed charges, are recorded as deductions from patient service
revenues. During 1997, approximately 22% of the Center's revenues were provided
to patients covered under Medicare. Amounts which are determined to be
uncollectible are charged against the allowance for uncollectible accounts.
Equipment. Equipment acquisitions are recorded at cost. Depreciation is
provided over the estimated useful life and is computed using the straight-line
method. The estimated useful life for the depreciation of equipment is 5-10
years.
Income Taxes. SDEC has elected Subchapter S status of the Internal Revenue
Code, and accordingly, income taxes are the responsibility of the individual
shareholders of SDEC. Therefore, no provision for income taxes has been
reflected by SDEC.
Management 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 the estimates.
Unaudited Interim Information. The unaudited interim financial statements
include all adjustments, consisting only of normal recurring adjustments, which
management considers necessary for a fair presentation of the financial position
and results of operations. The results of operations for the three-month period
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for a full year.
2. RELATED PARTY TRANSACTIONS
For the year ended December 31, 1997, the shareholders of SDEC owned 100%
of SDEC as well as 100% of the South Denver Gastroenterology Center (SDGC). SDGC
provides SDEC with billing, collection, accounts payable and other bookkeeping
services. A monthly overhead charge is paid by SDEC in the amount of $2,000.
Total expense incurred for these services of $24,000 has been included in the
statement of earnings and retained earnings for the year ended December 31,
1997.
In addition, the SDGC maintains a defined benefit pension plan as well as a
profit sharing plan which is open to all employees of SDEC. Employees may
participate after completing 2 years of service. SDGC is responsible for making
the contributions to the plans on behalf of the SDEC. Contributions in the
amounts of $5,933 and $10,563 were contributed to the pension plan and profit
sharing plan, respectively during 1997.
F-29
<PAGE> 88
SOUTH DENVER ENDOSCOPY CENTER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. COMMITMENTS AND CONTINGENCIES
The SDEC leases facility space under a five year operating lease that
expires on January 31, 1999. Total rental expense for 1997 was approximately
$71,000. The following is a schedule by year of the future minimum lease
payments under the operating lease as of December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C>
1998........................................................ $68,000
1999........................................................ 5,720
</TABLE>
4. SUBSEQUENT EVENT
Effective March 31, 1998, AmSurg Holdings, Inc. ("Holdings"), a subsidiary
of AmSurg Corp. ("AmSurg") acquired from SDEC a fifty-one percent ownership
interest in the assets and assumed certain liabilities comprising the business
operations of the endoscopy center.
Pursuant to the terms of the Asset Purchase Agreement, dated as of March
18, 1998, by and among Holdings, AmSurg and SDEC, Holdings paid $3,116,290 in
cash and AmSurg issued 1,131 shares of its Class A Common Stock to SDEC.
Following the asset purchase, Holdings and SDEC contributed their respective
ownership in the assets of the center into a newly formed limited liability
company, The Englewood ASC, LLC, and received proportionate membership therein.
F-30
<PAGE> 89
INDEPENDENT AUDITORS' REPORT
Board of Directors and Members
Boswell Eye Center, LLC
Sun City, Arizona
We have audited the accompanying combined balance sheets of Boswell Eye
Center, LLC as of December 31, 1996 and 1997, and the related combined
statements of earnings and retained earnings and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of Boswell Eye Center, LLC as of
December 31, 1996 and 1997 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
May 6, 1998
F-31
<PAGE> 90
BOSWELL EYE CENTER, LLC
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................................... $ 80,383 $ 97,747 $ 510,524
Accounts receivable, net of allowance for uncollectible
accounts of $45,393, $28,511 and $20,861,
respectively......................................... 361,866 592,838 519,214
Prepaid expenses........................................ 6,691 6,924 21,642
Supplies inventory...................................... 48,714 62,632 70,076
-------- ---------- ----------
Total current assets............................ 497,654 760,141 1,121,456
Furniture and equipment, net (Note 2)..................... 353,523 246,115 244,425
Other assets.............................................. 4,600 2,300 --
-------- ---------- ----------
Total........................................... $855,777 $1,008,556 $1,365,881
======== ========== ==========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable........................................ $153,204 $ 84,508 $ 159,130
Note payable -- current portion (Note 3)................ 106,150 36,980 36,980
-------- ---------- ----------
Total current liabilities....................... 259,354 121,488 196,110
Note payable (Note 3)..................................... 156,822 123,433 110,644
Commitments and contingencies (Note 4)
Members' equity:
Capital................................................. 9,000 9,000 9,000
Retained earnings....................................... 430,601 754,635 1,050,127
-------- ---------- ----------
Total members' equity........................... 439,601 763,635 1,059,127
-------- ---------- ----------
Total........................................... $855,877 $1,008,556 $1,365,881
======== ========== ==========
</TABLE>
See notes to financial statements.
F-32
<PAGE> 91
BOSWELL EYE CENTER, LLC
COMBINED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------- -----------------------
1996 1997 1997 1998
----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues...................................... $ 4,460,677 $ 5,032,149 $1,296,892 $1,467,813
Expenses:
Supplies and other operating expenses....... 1,609,488 1,785,911 455,963 472,458
Salaries and benefits....................... 1,012,588 1,024,131 242,794 250,802
Rent expense................................ 232,267 229,899 57,830 57,119
Bad debt expense............................ 220,532 145,271 37,710 20,261
Depreciation................................ 105,650 107,408 27,313 24,882
Interest expense............................ 28,852 20,752 5,763 4,799
----------- ----------- ---------- ----------
Total expenses...................... 3,209,377 3,313,372 827,373 830,321
----------- ----------- ---------- ----------
Net earnings.................................. 1,251,300 1,718,777 469,519 637,492
Retained earnings, beginning of period........ 446,800 430,601 430,601 754,635
Distributions to Members...................... (1,267,499) (1,394,743) (319,494) (342,000)
----------- ----------- ---------- ----------
Retained earnings, end of period.............. $ 430,601 $ 754,635 $ 580,626 $1,050,127
=========== =========== ========== ==========
</TABLE>
See notes to financial statements.
F-33
<PAGE> 92
BOSWELL EYE CENTER, LLC
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------- ---------------------
1996 1997 1997 1998
----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................. $ 1,251,300 $ 1,718,777 $ 469,519 $ 637,492
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation.............................. 105,650 107,408 27,313 24,882
Decrease (increase) in accounts
receivable.............................. 35,102 (230,972) (68,990) 73,624
Increase in supplies inventory............ (5,488) (13,918) (13,918) (7,444)
(Increase) decrease in prepaid expenses... 303 (233) (15,022) (14,718)
Decrease in other assets.................. 2,342 2,300 2,300 2,300
(Decrease) increase in accounts payable... (13,844) (68,696) 123,372 74,622
----------- ----------- --------- ---------
Net cash provided by operating
activities......................... 1,375,365 1,514,666 524,574 790,758
Cash flows from investing activities:
Payments for equipment additions............. -- -- -- (23,192)
----------- ----------- --------- ---------
Cash flows from financing activities:
Principal payments on notes payable.......... (99,439) (102,559) (22,405) (12,789)
Members' distributions....................... (1,267,499) (1,394,743) (319,494) (342,000)
----------- ----------- --------- ---------
Net cash used in financing
activities......................... (1,366,938) (1,497,302) (341,899) (354,789)
----------- ----------- --------- ---------
Net increase in cash........................... 8,427 17,364 182,675 412,777
Cash at beginning of period.................... 71,956 80,383 80,383 97,747
----------- ----------- --------- ---------
Cash at end of period.......................... $ 80,383 $ 97,747 $ 263,058 $ 510,524
=========== =========== ========= =========
Supplemental disclosure of cash flow
information:
Cash paid during the year for interest......... $ 28,852 $ 20,752 $ 5,763 $ 4,799
=========== =========== ========= =========
</TABLE>
F-34
<PAGE> 93
BOSWELL EYE CENTER, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Boswell Eye Center, LLC (the "Center") owns and operates an
ophthalmology surgery center in Sun City, Arizona. The Center is owned by a
group of physicians who perform ophthalmic procedures at the Center through
their related physician practices.
The accompanying financial statements have been prepared on the accrual
basis of accounting and include the accounts and transactions of the Boswell Eye
Center, LLC and the Boswell Eye Institute, Inc. which are under common control.
Significant intercompany balances and transactions have been eliminated.
Furniture and equipment. Furniture and equipment are stated at cost less
accumulated depreciation. Depreciation for furniture and equipment is recognized
on the straight line method over five to seven years, and for leasehold
improvements over the remaining term of the lease plus renewal options.
Revenue recognition. Revenues consist of the billing of the use of the
Center's facilities (the "usage fee") directly to the patient or third-party
payer. The usage fee excludes amounts billed for physicians' services, which are
billed separately by the physicians to the patient or third-party payer.
Revenues are reported at the estimated net realizable amounts from patients,
third-party payers and others, including Medicare. Such revenues are recognized
as the related services are performed. Contractual adjustments resulting from
agreements with various organizations to provide services for amounts which
differ from billed charges, are recorded as deductions from patient service
revenues. During the years ended December 31, 1996 and 1997, approximately 52%
and 48%, respectively, of the Center's revenues were provided to patients
covered under Medicare. Amounts that are determined to be uncollectible are
charged against the allowance for uncollectible accounts.
Income taxes. The Center has elected SubChapter S status of the Internal
Revenue Code, and accordingly, income taxes are the responsibility of the
individual members of the Center. Therefore, no provision for income taxes has
been reflected in the accompanying financial statements.
Management 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 liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements an the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from the estimates.
Unaudited interim information. The unaudited interim financial statements
include all adjustments, consisting only of normal recurring adjustments which
management considers necessary for a fair presentation of the financial position
and results of operations. The results of operations for the three-month period
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for a full year.
2. FURNITURE AND EQUIPMENT
Furniture and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Medical equipment............................... $ 1,116,666 $ 1,116,666 $ 1,139,859
Leasehold improvements.......................... 486,290 486,290 486,290
Furniture and fixtures.......................... 247,498 247,498 247,498
Office equipment................................ 54,584 54,584 54,584
----------- ----------- -----------
1,905,038 1,905,038 1,928,231
Less accumulated depreciation................... (1,551,515) (1,658,923) (1,683,806)
----------- ----------- -----------
$ 353,523 $ 246,115 $ 244,425
=========== =========== ===========
</TABLE>
F-35
<PAGE> 94
BOSWELL EYE CENTER, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTE PAYABLE
The note payable bears interest at 9% and is due in monthly installments
through June 2001.
4. COMMITMENTS AND CONTINGENCIES
The center operates under a facilities lease expiring April 1999. The
following is a schedule of future minimum lease payments under the facilities
lease, which is classified as an operating lease:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C>
1998........................................................ $228,478
1999........................................................ 66,639
--------
$295,117
========
</TABLE>
5. SUBSEQUENT EVENT
Effective May 1, 1998, AmSurg Holdings, Inc. ("Holdings"), a subsidiary of
AmSurg Corp. ("AmSurg") acquired from the Center a sixty percent ownership
interest in the assets comprising the business operations of the Center.
Pursuant to the terms of the Asset Purchase Agreement, dated as of April 30,
1998, by and among Holdings, AmSurg, and the Center, Holdings paid $5,400,000 in
cash as consideration for the sixty percent ownership interest in the Center.
Following the asset purchase, Holdings and the Center contributed their
respective ownership in the assets of the Center into a newly formed limited
liability company, The Sun City Ophthalmology ASC, LLC, and received
proportionate membership therein.
F-36
<PAGE> 95
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
The Endoscopy Center, Inc.
Independence, Missouri
We have audited the accompanying statements of earnings and retained
earnings and cash flows of The Endoscopy Center, Inc. for the years ended
December 31, 1995 and 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
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations and cash flows of The Endoscopy Center, Inc.
for the years ended December 31, 1995 and 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
October 7, 1997
F-37
<PAGE> 96
THE ENDOSCOPY CENTER, INC.
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED DECEMBER 31, AUGUST 31,
------------------------- ------------------------
1995 1996 1996 1997
----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues..................................... $ 2,836,600 $ 3,122,033 $ 1,953,144 $2,090,308
Expenses:
Salaries and benefits (note 2)............. 491,112 507,417 317,440 470,278
Supplies and other operating expenses...... 338,397 452,182 282,885 255,584
Rent expense (note 2)...................... 230,825 299,583 199,722 200,656
Bad debt expense........................... 168,029 56,335 35,243 44,503
----------- ----------- ----------- ----------
Total expenses..................... 1,228,363 1,315,517 835,290 971,021
----------- ----------- ----------- ----------
Net earnings....................... 1,608,237 1,806,516 1,117,854 1,119,287
Retained earnings, beginning of period....... 153,760 451,469 451,469 449,862
Distributions to stockholders................ (1,310,528) (1,808,123) (1,128,268) (949,855)
----------- ----------- ----------- ----------
Retained earnings, end of period... $ 451,469 $ 449,862 $ 441,055 $ 619,294
=========== =========== =========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-38
<PAGE> 97
THE ENDOSCOPY CENTER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED EIGHT MONTHS ENDED
DECEMBER 31, AUGUST 31,
----------------------- -----------------------
1995 1996 1996 1997
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flow from operations:
Net earnings................................ $1,608,237 $1,806,516 $1,117,854 $1,119,287
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of organization cost........... 71 71 47 47
Decrease (increase) in accounts
receivable............................... (220,594) (38,136) 84,016 (32,213)
Increase in supplies inventory.............. (5,174) (2,133) (1,290) (733)
Increase (decrease) in accounts payable..... (2) 21,967 42,685 (20,956)
Increase (decrease) in amount due to related
party.................................... 33,559 3,801 193 (8,530)
---------- ---------- ---------- ----------
Net cash provided by operating
activities............................. 1,416,097 1,792,086 1,243,505 1,056,902
---------- ---------- ---------- ----------
Cash flows from financing activities:
Stockholders' distribution.................. (1,310,528) (1,808,123) (1,128,268) (949,855)
Increase (decrease) in distribution
withholdings............................. 78,525 29,830 (78,525) (108,355)
Decrease in outstanding checks in excess of
deposits................................. (4,731) -- -- --
---------- ---------- ---------- ----------
Net cash used by financing activities.... (1,236,734) (1,778,293) (1,206,793) (1,058,210)
---------- ---------- ---------- ----------
Net increase (decrease) in cash............... 179,363 13,793 36,712 (1,308)
Cash, beginning of period..................... -- 179,363 179,363 193,156
---------- ---------- ---------- ----------
Cash, end of period........................... $ 179,363 $ 193,156 $ 216,075 $ 191,848
========== ========== ========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-39
<PAGE> 98
THE ENDOSCOPY CENTER, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND EIGHT MONTHS ENDED AUGUST 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Endoscopy Center Inc. ("TEC") began operations in 1994 and operates two
gastrointestinal surgery centers in Independence and Kansas City, Missouri. TEC
is owned by a group of stockholders which perform gastroenterology procedures at
the centers through their related physician practice.
A. REVENUE RECOGNITION
Revenue consists of the billing for the use of TEC's facilities (the "usage
fee") directly to the patient or third-party payor. The usage fee excludes
amounts billed for physicians' services, which are billed separately by the
physicians to the patient or third-party payor. Revenues are reported at the
estimated net realizable amounts from patients, third-party payors and others,
including Medicare and Medicaid. Such revenues are recognized as the related
services are performed. Contractual adjustments resulting from agreements with
various organizations to provide services for amounts which differ from billed
charges, are recorded as deductions from patient service revenues. During the
1995, 1996 and 1997 periods, approximately 29%, 39% and 28%, respectively, of
the Centers' revenues were provided to patients covered under Medicare and
Medicaid. Amounts, which are determined to be uncollectible, are charged against
the allowance for uncollectible accounts.
B. AMORTIZATION
Amortization of organization cost is provided on a straight-line basis over
four years.
C. INCOME TAXES
TEC has elected Subchapter S status of the Internal Revenue Code, and
accordingly, income taxes are the responsibility of the individual stockholders
of TEC. Therefore, no provision for income taxes has been reflected by TEC.
D. MANAGEMENT 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 the estimates.
E. UNAUDITED INTERIM INFORMATION
The unaudited interim financial statements include all adjustments,
consisting only of normal recurring adjustments, which management considers
necessary for a fair presentation of the financial position and results of
operations. The results of operations for the eight month periods ended August
31, 1996 and 1997 are not necessarily indicative of the results that may be
expected for a full year.
2. RELATED PARTY TRANSACTIONS
Both centers rent equipment and furniture and one center occupies space
provided by an entity which is owned by the same group of stockholders which own
TEC. Included in the statement of earnings and retained earnings is a charge of
$156,571, $200,993, $133,995 and $133,587 for the years ended December 31, 1995
and 1996 and the eight months ended August 31, 1996 and 1997, respectively,
related to these lease arrangements, which management believes reflects the fair
value of space and rental items provided. In addition, the
F-40
<PAGE> 99
THE ENDOSCOPY CENTER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
employees of TEC are leased from the related physician practice. Charges
associated with this arrangement are reflected as salaries and benefits in the
statements of earnings and retained earnings.
3. SUBSEQUENT EVENT
Effective September 1, 1997, AmSurg Holdings, Inc. ("Holdings"), a
subsidiary of AmSurg Corp. ("AmSurg") acquired from TEC a sixty percent
ownership interest in the assets comprising the business operations of two
gastrointestinal surgery centers.
Pursuant to the terms of the Asset Purchase Agreement, dated as of
September 2, 1997, by and among Holdings, AmSurg and TEC, Holdings paid
$5,652,205 in cash and AmSurg issued 280,367 shares of its common stock to TEC.
Following the asset purchase, Holdings and TEC contributed their respective
ownership in the assets of the centers in a newly formed limited liability
company, The Independence ASC, LLC, and received proportionate membership
therein.
F-41
<PAGE> 100
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
AmSurg Corp.
Nashville, Tennessee
We have audited the consolidated financial statements of AmSurg Corp. (the
"Company") as of December 31, 1996 and 1997 and for each of the years in the
three-year period ended December 31, 1997, and have issued our report thereon
dated February 17, 1998; such report is included elsewhere in this Form S-1. Our
audits also included the consolidated financial statement schedule of the
Company, listed in Item 16. This consolidated financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
February 17, 1998
S-1
<PAGE> 101
AMSURG CORP.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COST AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS(2) PERIOD
---------- ---------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR UNCOLLECTIBLE
ACCOUNTS INCLUDED UNDER THE
BALANCE SHEET CAPTION "ACCOUNTS
RECEIVABLE":
Year ended December 31, 1995....... $ 300,403 $ 694,078 $ 58,974 $ 597,827 $ 455,628
========== ========== ======== ========== ==========
Year ended December 31, 1996....... $ 455,628 $1,227,315 $366,636 $ 776,928 $1,272,651
========== ========== ======== ========== ==========
Year ended December 31, 1997....... $1,272,651 $1,534,992 $673,758 $2,044,933 $1,436,468
========== ========== ======== ========== ==========
</TABLE>
- ---------------
(1) Valuation of allowance for uncollectible accounts at the acquisition of
AmSurg physician practice-based ambulatory surgery centers and physician
practices. Between 51% and 70% was charged to excess of cost over net assets
of purchased companies. See note 4 of Notes to the Consolidated Financial
Statements.
(2) Charge-off against allowance.
S-2
<PAGE> 102
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
South Denver Endoscopy Center, Inc.
We have audited the financial statements of South Denver Endoscopy Center,
Inc. (the "Center") as of and for the year ended December 31, 1997, and have
issued our report thereon dated April 24, 1998; such report is included
elsewhere in this Registration Statement. Our audit also included the financial
statement schedule of the Center, listed in Item 16 of this Registration
Statement. This financial statement schedule is the responsibility of the
Center's management. Our responsibility is to express an opinion based on our
audit. In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
April 24, 1998
S-3
<PAGE> 103
SCHEDULE II
SOUTH DENVER ENDOSCOPY CENTER, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES DEDUCTIONS(1) OF PERIOD
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS INCLUDED UNDER
THE BALANCE SHEET CAPTION "ACCOUNTS RECEIVABLE"
Year ended December 31, 1997....................... $ 54,419 $ 61,181 $53,013 $ 62,587
</TABLE>
- ---------------
(1) Charge-off against reserve.
S-4
<PAGE> 104
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Boswell Eye Center, LLC
Sun City, Arizona
We have audited the financial statements of Boswell Eye Center, LLC (the
"Center") as of and for the years ended December 31, 1996 and 1997, and have
issued our report thereon dated May 6, 1998; such report is included elsewhere
in this Registration Statement. Our audit also included the financial statement
schedule of the Center, listed in Item 16 of this Registration Statement. This
financial statement schedule is the responsibility of the Center's management.
Our responsibility is to express an opinion based on our audit. In our opinion,
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
May 6, 1998
S-5
<PAGE> 105
SCHEDULE II
BOSWELL EYE CENTER, LLC -- SUN CITY, ARIZONA
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES DEDUCTIONS(1) OF PERIOD
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS INCLUDED UNDER
THE BALANCE SHEET CAPTION "ACCOUNTS RECEIVABLE"
Year ended December 31, 1996....................... $ 22,965 $220,532 $198,104 $ 45,393
======== ======== ======== ========
Year ended December 31, 1997....................... $ 45,393 $145,271 $162,153 $ 28,511
======== ======== ======== ========
</TABLE>
- ---------------
(1) Charge-off against reserve.
S-6
<PAGE> 106
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
The Endoscopy Center, Inc.
Independence, Missouri
We have audited the financial statements of The Endoscopy Center, Inc. (the
"Center") as of and for the years ended December 31, 1995 and 1996, and have
issued our report thereon dated October 7, 1997; such report is included
elsewhere in this Registration Statement. Our audit also included the financial
statement schedule of the Center, listed in Item 16 of this Registration
Statement. This financial statement schedule is the responsibility of the
Center's management. Our responsibility is to express an opinion based on our
audit. In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
October 7, 1997
S-7
<PAGE> 107
SCHEDULE II
THE ENDOSCOPY CENTER INC -- INDEPENDENCE, MISSOURI
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES DEDUCTIONS(1) OF PERIOD
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS INCLUDED UNDER
THE BALANCE SHEET CAPTION "ACCOUNTS RECEIVABLE"
Year ended December 31, 1995....................... $ 59,811 $168,029 $31,032 $196,808
======== ======== ======= ========
Year ended December 31, 1996....................... $196,808 $ 56,335 $92,995 $160,148
======== ======== ======= ========
</TABLE>
- ---------------
(1) Charge-off against reserve.
S-8
<PAGE> 108
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING DESCRIBED HEREIN AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS 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 A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THOSE SPECIFICALLY OFFERED HEREBY OR OF ANY SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE AN OFFER OR
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 4
Price Range of Common Stock and
Dividend Policy..................... 11
Use of Proceeds....................... 11
Capitalization........................ 12
Selected Financial Data............... 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 14
Business.............................. 23
Management............................ 35
Principal Shareholders................ 44
Certain Relationships and Related
Transactions........................ 45
Description of Capital Stock.......... 46
Shares Eligible for Future Sale....... 51
Underwriting.......................... 53
Legal Matters......................... 54
Experts............................... 54
Available Information................. 55
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
3,700,000 SHARES
(AMSURG LOGO)
CLASS A COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
J.C. BRADFORD & CO.
PIPER JAFFRAY INC.
MORGAN KEEGAN & COMPANY, INC.
JUNE 12, 1998
======================================================
