<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 23, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
AMSURG CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TENNESSEE 8060 62-1493316
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
ONE BURTON HILLS BOULEVARD
SUITE 350
NASHVILLE, TN 37215
(615) 665-1283
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------------
KEN P. MCDONALD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AMSURG CORP.
ONE BURTON HILLS BOULEVARD
SUITE 350
NASHVILLE, TN 37215
(615) 665-1283
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
<TABLE>
<S> <C>
CYNTHIA Y. REISZ J. CHASE COLE
BASS, BERRY & SIMS PLC WALLER LANSDEN DORTCH & DAVIS, PLLC
2700 FIRST AMERICAN CENTER 2100 NASHVILLE CITY CENTER
NASHVILLE, TENNESSEE 37238 NASHVILLE, TENNESSEE 37219
(615) 742-6200 (615) 244-6380
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
------------------.
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
=====================================================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock, no par
value............................ 4,255,000 $10.375 $44,145,625 $13,023
=====================================================================================================================
</TABLE>
(1) Includes 555,000 shares of Class A Common Stock subject to the Underwriters'
over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
SUBJECT TO COMPLETION, DATED APRIL 23, 1998
3,700,000 SHARES
AMSURG CORP.
CLASS A COMMON STOCK
Of the 3,700,000 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"), 3,500,000 shares are being sold by the Company and up to 200,000
shares are being sold by certain shareholders of the Company (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
receive any of the proceeds from the sale of shares of Class A Common Stock by
the Selling Shareholders.
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 April 22, 1998, the last reported sale prices of the Class A
Common Stock and the Class B Common Stock were $10.63 and $10.75 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 PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2) SELLING SHAREHOLDERS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............ $ $ $ $
- -----------------------------------------------------------------------------------------------------------------------------
Total(3)............. $ $ $ $
=============================================================================================================================
</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 555,000 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 $ , the Underwriting Discount will
total $ and the Proceeds to Company will total $ . 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 , 1998.
---------------------
J.C. BRADFORD & CO.
PIPER JAFFRAY INC.
MORGAN KEEGAN & COMPANY, INC.
, 1998
<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 607,500 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 March 31, 1998, the Company owned a majority interest in 41
surgery centers and a minority interest in one center in 18 states and the
District of Columbia. The Company also had eight 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 in combination
with practice-based ambulatory surgery centers strategically located in markets
serving the
1
<PAGE> 5
managed care organizations' members. While the Company currently owns majority
interests in two physician practices, the Company does not intend to acquire any
additional interests in physician practices in the future.
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............................... 3,500,000 shares
Class A Common Stock offered by the
Selling Shareholders.................. 200,000 shares
Common Stock to be outstanding after
the Offering:
Class A Common Stock................ 9,253,463 shares(1)
Class B Common Stock................ 4,787,131 shares
Use of proceeds by the Company........ Repayment of indebtedness, working
capital and other general corporate
purposes.
Nasdaq National Market symbols:
Class A Common Stock................ AMSGA
Class B Common Stock................ AMSGB
- ---------------
(1) Excludes 1,355,192 shares of Class A Common Stock reserved for issuance upon
the exercise of stock options granted as of April 15, 1998 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,
------------------------------------------
PRO FORMA
1995 1996 1997 1997(1)
------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $22,389 $34,898 $57,414 $68,415
Operating expenses:
Salaries and benefits..................................... 6,243 11,613 17,363 19,892
Other operating expenses.................................. 7,558 11,547 20,352 24,300
Depreciation and amortization............................. 2,397 3,000 4,944 5,639
Net loss on sale of assets................................ -- 31 1,425(2) 1,425(2)
------- ------- ------- -------
Total operating expenses........................... 16,198 26,191 44,084 51,256
------- ------- ------- -------
Operating income................................... 6,191 8,707 13,330 17,159
Minority interest........................................... 3,938 5,433 9,084 11,134
Other (income) and expenses:
Interest expense, net..................................... 627 808 1,554 2,520
Distribution cost......................................... -- -- 842(3) 842(3)
------- ------- ------- -------
Earnings (loss) before income taxes................ 1,626 2,466 1,850 2,663
Income tax expense.......................................... 578 985 1,774 2,099
------- ------- ------- -------
Net earnings (loss)................................ 1,048 1,481 76 564
Accretion of preferred stock discount....................... -- 22 286 286
------- ------- ------- -------
Net earnings (loss) available to common
shareholders..................................... $ 1,048 $ 1,459 $ (210) $ 278
======= ======= ======= =======
Earnings (loss) per common share:
Basic..................................................... $ 0.13 $ 0.17 $ (0.02)(4) $ 0.03(5)
Diluted................................................... $ 0.12 $ 0.16 $ (0.02)(4) $ 0.03(5)
Weighted average number of shares and share equivalents
outstanding:
Basic..................................................... 8,174 8,689 9,453 9,648
Diluted................................................... 8,581 9,083 9,453 9,984
CENTER DATA:
Procedures.................................................. 55,344 71,323 101,819
Centers at end of year...................................... 18 27 39
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA(6) AS ADJUSTED(7)
------- ------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 9,312 $ 9,884 $12,658
Total assets................................................ 75,238 85,667 88,441
Long-term debt, less current portion........................ 24,970 33,802 2,570
Minority interest........................................... 9,192 10,130 10,130
Preferred stock............................................. 5,268 5,268 --
Shareholders' equity........................................ 29,991 30,540 69,814
</TABLE>
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(1) Reflects the effect of all completed and probable acquisitions (five surgery
centers and one physician practice in 1997 and three surgery centers in
1998) occurring and expected to occur after the beginning of the period as
if such transactions had occurred at January 1, 1997. 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 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 (2) 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 (2) and (3) above,
basic and diluted earnings per common share would have been $0.29 and $0.28,
respectively, for the year ended December 31, 1997.
(6) Reflects the effect of two completed acquisitions and one probable
acquisition of surgery centers occurring and expected to occur subsequent to
December 31, 1997 as if such transactions had occurred as of December 31,
1997.
(7) Reflects the effect of the application of net proceeds to the Company of
this Offering, assuming a public offering price of $10.38 and the conversion
of the Series A Redeemable Preferred Stock. 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%
and 37% of its revenues in 1995, 1996 and 1997, 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. See "Business -- Government
Regulation -- Reimbursement."
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 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
6
<PAGE> 10
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 or any other state in which the Company may
own an interest in a physician group practice 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.
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."
7
<PAGE> 11
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
Management 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
December 31, 1997 contains an intangible asset designated as excess of cost over
net assets of purchased operations totaling $40.6 million. Using an amortization
period of 25 years, amortization expense relating to this intangible asset will
be approximately $1.8 million per year. Purchases of interests in practice-based
surgery centers or physician practices 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
$1.9 million in connection with one partnership. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Note 4 to
the Consolidated Financial Statements."
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
8
<PAGE> 12
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 9,253,463 shares of Class A Common
Stock (9,808,463 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 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 4,810,463 outstanding shares of Class A Common Stock,
4,753,298 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
9
<PAGE> 13
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 April 22, 1998)..................... 10.63 8.75 10.75 8.88
</TABLE>
On April 22, 1998, the last reported sale prices for the Class A Common
Stock and the Class B Common Stock were $10.63 and $10.75 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, at an assumed public offering price of $10.38 per share, are
estimated to be $34.0 million ($39.5 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 Company will not receive
any proceeds from the sale of Class A Common Stock by the Selling Shareholders.
Approximately $28.0 million of the net proceeds will be used to repay borrowings
under the revolving credit facility of the Company's Second Amended and Restated
Loan Agreement, as amended (the "Loan Agreement"). Borrowings under the Loan
Agreement bear interest at a rate equal to the prime rate or 1.75% above LIBOR
or a combination thereof at the Company's option, plus a 0.35% fee on unused
commitments, and mature in January 2001. The Company expects to increase the
amount of available borrowings under the Loan Agreement from $35.0 million to
$50.0 million prior to the completion of the Offering. 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." The Company intends to use the
balance of the net proceeds for working capital and for other general corporate
purposes, including the development and acquisition of surgery centers. Pending
such uses, the net proceeds will be invested in short-term, investment-grade or
government, interest-bearing securities.
11
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1997 on an actual basis and as adjusted to reflect (i) the issuance
and sale by the Company of the 3,500,000 shares of Class A Common Stock offered
hereby, at an assumed public offering price of $10.38 per share, and the
application of the estimated net proceeds received by the Company therefrom as
described under "Use of Proceeds"; and (ii) the conversion of the Series A
Redeemable Preferred Stock (the "Series A Preferred Stock") into 380,952 shares
of Class A Common Stock. 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 DECEMBER 31, 1997
---------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt........................... $ 1,331 $ 1,331
Long-term debt, less current portion........................ 24,970 2,570
Preferred Stock, no par value, 5,000,000 shares authorized
Series A Preferred Stock, 500,000 shares issued and
outstanding............................................ 2,060 --
Series B Preferred Stock, 416,666 shares issued and
outstanding............................................ 3,208 --
------- -------
Total preferred stock............................. 5,268 --
Shareholders' equity:
Class A Common Stock, 20,000,000 shares authorized,
4,758,091 and 9,246,540 shares issued and outstanding,
respectively(1)........................................ 14,636 53,910
Class B Common Stock, 4,800,000 shares authorized,
4,787,131 shares issued and outstanding................ 13,529 13,529
------- -------
Retained earnings......................................... 2,099 2,099
Deferred compensation on restricted stock................. (273) (273)
Total shareholders' equity........................ 29,991 69,265
------- -------
Total capitalization......................... $61,560 $73,166
======= =======
</TABLE>
- ---------------
(1) Excludes 1,174,849 shares of Class A Common Stock issuable upon the exercise
of outstanding stock options with a weighted average exercise price per
share of $3.56.
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 set forth below reflect the effect of all completed
and probable acquisitions (five surgery centers and one physician practice in
1997 and three surgery centers in 1998) occurring and expected to occur after
the beginning of the period as if such transactions were completed at January 1,
1997. The pro forma balance sheet data at December 31, 1997 set forth below
reflect the effect of two completed acquisitions and one probable acquisition of
surgery centers occurring or expected to occur in 1998 as if such transactions
had been completed as of December 31, 1997. 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,
------------------------------------------------------------
PRO FORMA
---------
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................... $ 6,558 $13,784 $22,389 $34,898 $57,414 $68,415
Operating expenses:
Salaries and benefits.................................... 2,307 4,092 6,243 11,613 17,363 19,892
Other operating expenses................................. 3,002 5,091 7,558 11,547 20,352 24,300
Depreciation and amortization............................ 665 1,309 2,397 3,000 4,944 5,639
Net loss on sale of assets............................... -- -- -- 31 1,425(1) 1,425(1)
------- ------- ------- ------- ------- -------
Total operating expenses........................... 5,974 10,492 16,198 26,191 44,084 51,256
------- ------- ------- ------- ------- -------
Operating income................................... 584 3,292 6,191 8,707 13,330 17,159
Minority interest.......................................... 1,121 2,464 3,938 5,433 9,084 11,134
Other (income) and expenses:
Interest expense, net.................................... 2 151 627 808 1,554 2,520
Distribution cost........................................ -- -- -- -- 842(2) 842(2)
------- ------- ------- ------- ------- -------
Earnings (loss) before income taxes................ (539) 677 1,626 2,466 1,850 2,663
Income tax expense......................................... -- 26 578 985 1,774 2,099
------- ------- ------- ------- ------- -------
Net earnings (loss)................................ (539) 651 1,048 1,481 76 564
Accretion of preferred stock discount...................... -- -- -- 22 286 286
------- ------- ------- ------- ------- -------
Net earnings (loss) available to common
shareholders..................................... $ (539) $ 651 $ 1,048 $ 1,459 $ (210) $ 278
======= ======= ======= ======= ======= =======
Earnings (loss) per common share:
Basic.................................................... $ (0.11) $ 0.09 $ 0.13 $ 0.17 $ (0.02)(3) $ 0.03(4)
Diluted.................................................. $ (0.11) $ 0.09 $ 0.12 $ 0.16 $ (0.02)(3) $ 0.03(4)
Weighted average number of shares and share equivalents
outstanding:
Basic.................................................... 4,737 6,999 8,174 8,689 9,453 9,648
Diluted.................................................. 4,737 7,313 8,581 9,083 9,453 9,984
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
PRO FORMA
---------
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 993 $ 2,557 $ 2,931 $ 4,732 $ 9,312 $ 9,884
Total assets................................................ 14,637 27,065 35,106 54,653 75,238 85,667
Long-term debt, less current portion........................ 640 3,520 4,786 9,218 24,970 33,802
Minority interest........................................... 601 2,019 3,010 5,674 9,192 10,130
Preferred stock............................................. -- -- -- 4,982 5,268 5,268
Shareholders' equity........................................ 12,055 19,558 22,479 28,374 29,991 30,540
</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) 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."
(3) Without giving effect to the items reflected in footnotes (1) and (2) above,
basic and diluted earnings per common share would have been $0.24 and $0.23,
respectively, for the year ended December 31, 1997.
(4) Without giving effect to the items reflected in footnotes (1) and (2) above,
basic and diluted earnings per common share would have been $0.29 and $0.28,
respectively, for the year ended December 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 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; and its ability to maintain favorable relations with
its physician partners.
OVERVIEW
The Company develops, acquires and operates practice-based ambulatory
surgery centers in partnership with physician practice groups. As of December
31, 1997, the Company owned a majority interest (51% or greater) in 39 surgery
centers, 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 years ended December 31,
1995, 1996 and 1997. 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>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Centers in operation, beginning of period................... 14 18 27
New center acquisitions..................................... 2 6 5
New development centers placed in operation................. 2 3 10
Centers sold................................................ -- -- (3)
-- -- --
Centers in operation, end of period......................... 18 27 39
== == ==
Centers under development, end of period.................... 13 20 10
== == ==
</TABLE>
Thirty of the surgery centers in operation as of December 31, 1997 perform
gastrointestinal endoscopy procedures; six centers perform ophthalmology
procedures; one center performs otolaryngology 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.
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. All third party payer contracts
under which
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<PAGE> 18
the two physician group practices provide professional services are entered into
by the group practice entities in which the Company is the general partner and
owns a majority interest.
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 and physician practices. As of December 31, 1997, these networks
had not generated any revenues.
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% and 37% of its net revenues from governmental healthcare programs, including
Medicare and Medicaid, in 1995, 1996 and 1997, respectively. The Medicare
program currently pays ambulatory surgery centers and physicians in accordance
with fee schedules which are prospectively determined.
Approximately 10% and 11% of the Company's revenues for 1996 and 1997,
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 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.
15
<PAGE> 19
The Company's sources of revenues as a percentage of total revenues for the
years ended December 31, 1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Surgery centers............................................. 97% 83% 83%
Physician practices......................................... -- 15 15
Other....................................................... 3 2 2
--- --- ---
Total................................................ 100% 100% 100%
=== === ===
</TABLE>
RESULTS OF OPERATIONS
The following table shows certain statement of operations items expressed
as a percentage of revenues for the years ended December 31, 1995, 1996 and
1997:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Revenues.................................................. 100.0% 100.0% 100.0%
Operating expenses:
Salaries and benefits................................... 27.9 33.3 30.2
Other operating expenses................................ 33.7 33.1 35.5
Depreciation and amortization........................... 10.7 8.6 8.6
Net loss on sale of assets.............................. -- -- 2.5
----- ----- -----
Total operating expenses........................ 72.3 75.0 76.8
----- ----- -----
Operating income................................ 27.7 25.0 23.2
Minority interest......................................... 17.6 15.6 15.8
Other (income) and expenses:
Interest expense, net of interest income................ 2.8 2.3 2.7
Distribution cost....................................... -- -- 1.5
----- ----- -----
Earnings before income taxes.................... 7.3 7.1 3.2
Income tax expense........................................ 2.6 2.9 3.1
----- ----- -----
Net earnings.................................... 4.7 4.2 0.1
Accretion of preferred stock discount..................... -- -- 0.5
----- ----- -----
Net earnings (loss) available to common
shareholders.................................. 4.7% 4.2% (0.4)%
===== ===== =====
</TABLE>
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. 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.
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.
16
<PAGE> 20
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. 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 $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.
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.
17
<PAGE> 21
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.
QUARTERLY STATEMENT OF OPERATIONS DATA
The following table presents certain quarterly statement of operations data
for the years ended December 31, 1996 and 1997. 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
---------------------------------- --------------------------------------
Q1 Q2 Q3 Q4 Q1(1) Q2 Q3(2)(3) Q4(3)
------ ------ ------ ------- ------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <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
Earning (loss) before
income taxes............ 589 605 470 802 (1,496) 1,014 1,478 854
Net earnings (loss)
available to common
shareholders............ 353 364 282 460 (1,892) 537 862 283
Basic and diluted earnings
(loss) per common
share................... 0.04 0.04 0.03 0.05 (0.20) 0.06 0.09 0.03
</TABLE>
- ---------------
18
<PAGE> 22
(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 December 31, 1997, the Company had working capital of $9.3 million
compared to $4.7 million in 1996. Operating activities for 1997 generated $4.0
million in cash flow from operations compared to $3.8 million in 1996. Cash and
cash equivalents at December 31, 1996 and 1997 were $3.2 million and $3.4
million, respectively.
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.
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.
At December 31, 1997, the Company's partnerships and limited liability
companies had unfunded construction and equipment purchase commitments for
centers under development of approximately $3.1 million, of which the Company
expects that approximately $1.6 million 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 December
31, 1997, borrowings under the Loan Agreement were $22.4 million, are due in
January 2001 and are guaranteed by the wholly owned subsidiaries of the Company,
and in some instances, the underlying assets of certain developed centers. The
Loan Agreement permits the Company to borrow up to $35.0 million to finance the
Company's acquisition and development projects at a rate equal to the prime rate
or 1.75% above LIBOR or a combination thereof at the Company's option, provides
for a fee of 0.35% 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. The Company expects to increase the amount of
available borrowings under the Loan Agreement from $35.0 million to $50.0
million prior to the completion of the Offering.
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 subsequent to December 31,
1997 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
19
<PAGE> 23
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 607,500 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 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
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 still evaluating 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.
20
<PAGE> 24
BUSINESS
The Company develops, acquires and operates practice-based ambulatory
surgery centers, in partnership with physician practice groups, throughout the
United States. As of March 31, 1998, the Company owned a majority interest in 41
surgery centers and a minority interest in one center in 18 states and the
District of Columbia. The Company also had eight 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 March 31, 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
21
<PAGE> 25
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. In
addition, the Company has acquired two physician practices, a urology
specialty group and a gastrointestinal and primary care specialty group, in
Miami, Florida, one of which is a partner with the Company in a
practice-based ambulatory surgery center. The other physician practice is
developing an ambulatory surgery center with the Company. The Company does
not plan to acquire any additional interests in physician practices in the
future.
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
22
<PAGE> 26
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 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
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<PAGE> 27
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 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 March 31, 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
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
</TABLE>
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<PAGE> 29
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 March 31, 1998, 32 of the Company's centers
in operation performed gastrointestinal endoscopy procedures, eight 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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<PAGE> 30
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. These networks
had not generated any revenues as of March 31, 1998. Each specialty physician
network is formed either as a limited 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.
As part of its network development strategy, in January 1996 the Company
acquired a 70% ownership interest in the assets of Gastroenterology Group of
South Florida ("GGSF") a Miami-based gastroenterology and primary care practice
with a large managed care contract covering approximately 120,000 lives. The
Company and certain GGSF physicians are partners in a practice-based endoscopy
center. Using GGSF as a base, the Company has developed a gastroenterology
physician network in south Florida and expects to add additional surgery centers
and covered lives as a result of this expansion. Also, the Company has
established four ophthalmology/eye care networks located in Knoxville,
Tennessee; Montgomery, Alabama; Cleveland, Ohio; and Abilene, Texas.
Also as part of its network development strategy, in January 1997 the
Company acquired a 60% ownership interest in the assets of Miami Urological
Associates, a urology practice in Miami, Florida that has contracts with two
managed care payers to provide physician and certain outpatient procedures for
approximately 170,000 covered lives. The Company and Miami Urological Associates
have entered into a partnership to develop an ambulatory surgery center for the
urology practice.
While two of the Company's specialty physician networks include physician
practices that are majority-owned by the Company, the Company does not believe
that ownership of physician practices is required in order to establish a
specialty physician network. The Company does not intend to acquire additional
interests in physician practices.
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.
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<PAGE> 31
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 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.
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<PAGE> 32
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.
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
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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 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
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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;
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
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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.
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 of the centers
and the physician practices in operation at March 31, 1998 lease space ranging
from 1,200 to 7,800 square feet with remaining lease terms ranging from two to
18 years. Two centers in operation at March 31, 1998 are located in buildings
owned indirectly by the Company.
EMPLOYEES
As of December 31, 1997, the Company and its affiliated entities employed
approximately 250 persons, 200 of whom were full-time employees and 50 of whom
were part-time employees. Of the above, 64 were employed at the Company's
headquarters in Nashville, Tennessee. In addition, approximately 190 employees
are leased on a full-time basis and 110 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.
32
<PAGE> 36
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.
33
<PAGE> 37
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................... 57 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 1998)
Steven I. Geringer................ 52 Director (Class I director with term expiring in 1998)
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.
34
<PAGE> 38
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
35
<PAGE> 39
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, each Outside Director received
a grant of Outside Director Restricted Stock having an aggregate fair market
value on such date equal in value to $10,000.
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<PAGE> 40
EXECUTIVE COMPENSATION
The following table provides information as to annual, long-term or other
compensation during fiscal years 1997, 1996 and 1995 for the persons who, at the
end of fiscal year 1997, were the Chief Executive Officer and the other four
most highly compensated executive officers of the Company (collectively, the
"Named Executive Officers"). Prior to the Distribution, Thomas G. Cigarran
served as Chief Executive Officer of the Company but received no compensation
from or with respect to the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS/
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
- --------------------------- ---- --------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Ken P. McDonald.......................... 1997 $156,253 $ 13,461 88,333 $4,000(1)
President and Chief 1996 139,050 41,905 68,333 4,000
Executive Officer 1995 125,050 25,386 -- 4,000
Claire M. Gulmi.......................... 1997 124,796 9,984 16,666 --
Senior Vice President, 1996 100,000 28,292 6,667 --
Chief Financial Officer 1995 86,292 22,652 -- --
and Secretary
Royce D. Harrell......................... 1997 138,190 11,055 8,333 --
Senior Vice President, 1996 130,788 38,471 8,333 --
Operations 1995 124,538 36,708 -- --
Rodney H. Lunn........................... 1997 139,597 26,872 38,333 4,320(2)
Senior Vice President, 1996 132,108 29,169 5,000 4,320
Center Development 1995 125,818 18,205 -- 4,320
David L. Manning......................... 1997 139,597 7,782 43,333 4,320(2)
Senior Vice President, 1996 132,108 106,460 8,333 4,320
Development 1995 125,818 26,384 -- 4,320
</TABLE>
- ---------------
(1) Forgiveness of debt.
(2) Automobile allowance.
37
<PAGE> 41
OPTION/STOCK APPRECIATION RIGHTS GRANTS IN LAST FISCAL YEAR
The following table provides information as to options granted to the Named
Executive Officers during fiscal year 1997. No Stock Appreciation Rights
("SARs") were awarded in fiscal year 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
--------------------------------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF PERCENT OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS/SARS EXERCISE APPRECIATION
UNDERLYING GRANTED TO OR BASE FOR OPTION TERM
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION ---------------------------
NAME GRANTED(#) FISCAL YEAR ($/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,
38
<PAGE> 42
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 918,624 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 hereof, non-qualified stock options for the purchase of
868,262 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 $2.50 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 April 15, 1998, options for
the purchase of 470,266 shares of Class A Common Stock were outstanding at a
weighted average exercise price per share of $7.63.
39
<PAGE> 43
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 20,667 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
40
<PAGE> 44
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> 45
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.
PRINCIPAL AND SELLING 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 Selling Shareholder,
(ii) each director, (iii) each Named Executive Officer, (iv) all directors and
executive officers as a group and (v) 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 April 15, 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 CLASS A COMMON STOCK
COMMON BENEFICIALLY OWNED
CLASS A CLASS B PERCENT STOCK TO AFTER THE OFFERING
COMMON PERCENT OF COMMON OF BE SOLD IN ---------------------
NAME STOCK(1) CLASS STOCK CLASS THE OFFERING NUMBER PERCENT
- ---- --------- ---------- ------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Electra Investment Trust
P.L.C.(2)................. 718,872(3) 12.5% -- -- -- 718,872(3) 7.8%
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............. 59,584(6) 1.0 -- -- -- 59,584(6) *
Claire M. Gulmi............. 20,000(7) * -- -- -- 20,000(7) *
Royce D. Harrell............ 90,750(8) 1.6 -- -- -- 90,750(8) 1.0
Rodney H. Lunn(9)........... 280,145(10) 4.7 59 * -- 280,145(10) 3.0
David L. Manning(11)........ 287,332(12) 4.8 -- -- -- 287,332(12) 3.0
Thomas G. Cigarran(13)...... 83,081 1.4 363,554 7.6 -- 83,081 *
James A. Deal............... 29,004(14) * 179,728(15) 3.8 -- 29,004(14) *
Steven I. Geringer.......... 9,572(16) * -- -- -- 9,572(16) *
Debora A. Guthrie........... 180,968(17) 3.1 890 * -- 180,968(17) 2.0
Henry D. Herr............... 54,657 * 221,558 4.6 -- 54,657 *
Bergein F. Overholt, M.D.... 136,333(18) 2.4 340 * -- 136,333(18) 1.5
All directors and executive
officers as a group (11
persons).................. 1,231,426 19.3 766,134 16.0 -- 1,051,981 12.5
Selling Shareholders
as a group................ 200,000(19)
</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 April 15, 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
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<PAGE> 46
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 April 15, 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 441,816 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 59,584 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 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) 179,718 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.
(19) Represents the Company's estimate of shares that will be included in this
Offering pursuant to the exercise of "piggyback" registration rights. See
"Description of Capital Stock -- Shareholders' Agreements."
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<PAGE> 47
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 pays
compensation of $200,000 to Mr. Cigarran and $150,000 to Mr. Herr during the
two-year term of the Advisory Agreements. The compensation is payable 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 to be paid as
compensation vested immediately, one-third will vest upon 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.
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<PAGE> 48
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.
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 April 15, 1998, 5,145,966 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 April 15, 1998, stock options
for the purchase of 1,355,192 shares of Class A Common Stock are outstanding, of
which options to purchase 834,286 shares of Class A Common Stock having an
average exercise price of $2.59 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 April 15, 1998, the Company's executive officers and directors or
their affiliates beneficially own approximately 19.3% 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> 49
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> 50
outstanding Series B Preferred Stock will be converted into approximately
607,500 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.
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<PAGE> 51
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.
48
<PAGE> 52
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.
49
<PAGE> 53
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 9,253,463 shares of Class A Common Stock (9,808,463 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 4,810,463 outstanding shares of Class A Common Stock,
4,753,298 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 share 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 51,460 shares as of April 15,
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
50
<PAGE> 54
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 April 15, 1998, the Company has outstanding options to purchase
1,355,192 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.
51
<PAGE> 55
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 and the Selling Shareholders 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..........................................
Piper Jaffray Inc...........................................
Morgan Keegan & Company, Inc................................
-------
Total.............................................
=======
</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 and the Selling Shareholders have 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 $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ 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 555,000 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 and its executive officers, directors and the Selling
Shareholders 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 Class A Common
Stock or options, warrants, or rights to acquire Class A Common Stock owned by
them prior to the expiration of 90 days from the date of this Prospectus.
The Underwriting Agreement provides that the Company and the Selling
Shareholders 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
52
<PAGE> 56
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 and the Selling Shareholders by Bass, Berry & Sims PLC,
Nashville, Tennessee. Certain members of Bass, Berry & Sims PLC beneficially own
136,431 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 of the years 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.
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.
53
<PAGE> 57
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-19
Pro Forma Combined Balance Sheet as of December 31,
1997................................................... F-20
Pro Forma Combined Statement of Operations for the year
ended December 31, 1997................................ F-21
Notes to the Pro Forma Consolidated Financial Information
(Unaudited)............................................ F-22
The Endoscopy Center, Inc.
Independent Auditors' Report.............................. F-23
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-24
Statements of Cash Flows for the years ended December 31,
1995 and 1996 and the eight months ended August 31,
1996 and 1997.......................................... F-25
Notes to Financial Statements............................. F-26
Financial Statement Schedule -- AmSurg Corp.
Independent Auditors' Report.............................. S-1
Schedule II -- Valuation and Qualifying Accounts.......... S-2
Financial Statement Schedule -- The Endoscopy Center, Inc.
Independent Auditors' Report.............................. S-3
Schedule II -- Valuation and Qualifying Accounts.......... S-4
</TABLE>
F-1
<PAGE> 58
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 (March 31, 1998 as to Note 15)
F-2
<PAGE> 59
AMSURG CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,192,408 $ 3,406,787
Accounts receivable, net of allowance of $1,272,651 and
$1,436,468, respectively............................... 5,640,946 8,220,616
Supplies inventory........................................ 554,839 905,992
Deferred income taxes (note 11)........................... 303,000 390,000
Prepaid and other current assets.......................... 680,761 1,020,835
----------- -----------
Total current assets...................................... 10,371,954 13,944,230
Long-term receivables and deposits (note 4)................. 643,516 479,012
Property and equipment, net (notes 5, 7 and 8).............. 12,335,892 19,248,464
Intangible assets, net (notes 4 and 6)...................... 31,302,096 41,566,684
----------- -----------
Total assets...................................... $54,653,458 $75,238,390
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 7)................ $ 2,616,714 $ 1,330,595
Accounts payable.......................................... 1,307,069 922,188
Accrued salaries and benefits............................. 998,460 1,018,844
Other accrued liabilities................................. 635,456 1,235,626
Current income taxes payable.............................. 82,586 125,396
----------- -----------
Total current liabilities................................. 5,640,285 4,632,649
Long-term debt (note 7)..................................... 9,218,281 24,969,718
Deferred income taxes (note 11)............................. 765,000 1,185,000
Minority interest........................................... 5,673,960 9,191,896
Preferred stock, no par value, 5,000,000 shares authorized,
916,666 shares outstanding (note 9)....................... 4,982,057 5,267,672
Shareholders' equity (note 3, 10 and 12):
Common stock:
Class A, no par value, 20,000,000 shares authorized
9,199,525 and 4,758,091 shares outstanding,
respectively.......................................... 26,064,085 14,636,331
Class B, no par value, 4,800,000 shares authorized,
4,787,131 shares outstanding.......................... -- 13,528,981
Retained earnings......................................... 2,309,790 2,099,491
Deferred compensation on restricted stock (note 12)....... -- (273,348)
----------- -----------
Total shareholders' equity................................ 28,373,875 29,991,455
----------- -----------
Commitments and contingencies (note 5, 8, 12 and 13)
Total liabilities and shareholders' equity........ $54,653,458 $75,238,390
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE> 60
AMSURG CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues (note 2)....................................... $22,388,739 $34,898,496 $57,413,812
Operating expenses:
Salaries and benefits (note 12)....................... 6,243,134 11,613,504 17,363,440
Other operating expenses (note 12).................... 7,557,655 11,546,562 20,352,442
Depreciation and amortization......................... 2,396,796 3,000,183 4,944,483
Net loss on sale of assets (note 4)................... -- 30,811 1,424,690
----------- ----------- -----------
Total operating expenses...................... 16,197,585 26,191,060 44,085,055
----------- ----------- -----------
Operating income.............................. 6,191,154 8,707,436 13,328,757
Minority interest....................................... 3,938,364 5,433,588 9,084,132
Other (income) and expenses:
Interest expense, net of interest income of $95,640,
$139,531 and $69,088, respectively................. 626,750 808,332 1,553,508
Distribution cost (note 3)............................ -- -- 841,801
----------- ----------- -----------
Earnings before income taxes.................. 1,626,040 2,465,516 1,849,316
Income tax expense (note 11)............................ 578,000 985,000 1,774,000
----------- ----------- -----------
Net earnings.................................. 1,048,040 1,480,516 75,316
Accretion of preferred stock discount (note 9).......... -- 22,057 285,615
----------- ----------- -----------
Net earnings (loss) available to common
shareholders................................ $ 1,048,040 $ 1,458,459 $ (210,299)
=========== =========== ===========
Earnings (loss) per common share (note 10):
Basic................................................. $ 0.13 $ 0.17 $ (0.02)
Diluted............................................... $ 0.12 $ 0.16 $ (0.02)
Weighted average number of shares and share equivalents
outstanding (note 10):
Basic................................................. 8,173,511 8,689,480 9,453,205
Diluted............................................... 8,580,974 9,082,535 9,453,205
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE> 61
AMSURG CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<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
========== =========== ========== ========= ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE> 62
AMSURG CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings........................................ $ 1,048,040 $ 1,480,516 $ 75,316
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Minority interest................................ 3,938,364 5,433,588 9,084,132
Distributions to minority partners............... (3,840,787) (5,084,294) (8,907,875)
Depreciation and amortization.................... 2,396,796 3,000,183 4,944,483
Deferred income taxes............................ 213,000 249,000 333,000
Net loss (gain) on sale of assets................ -- (30,811) 1,424,690
Increase (decrease) in cash, net of effects of
acquisitions, due to changes in:
Accounts receivable, net....................... (467,620) (1,353,365) (1,620,141)
Supplies inventory............................. (73,413) (128,248) (212,403)
Prepaid and other current assets............... (110,443) (213,838) (572,455)
Other assets................................... (109,360) (266,801) (803,022)
Accounts payable............................... 241,428 648,292 (384,881)
Accrued expenses and other liabilities......... 568,525 (43,734) 322,870
Other, net..................................... 106,220 156,001 273,593
----------- ------------ ------------
Net cash flows provided by operating
activities.................................. 3,910,750 3,846,489 3,957,307
Cash flows from investing activities:
Acquisition of interest in surgery centers.......... (3,186,512) (12,669,794) (12,643,331)
Acquisition of property and equipment............... (1,831,445) (3,863,052) (10,578,551)
Proceeds from sale of assets........................ -- -- 1,978,462
Decrease (increase) in long-term receivables........ (846) 137,582 57,504
----------- ------------ ------------
Net cash flows used in investing
activities................................ (5,018,803) (16,395,264) (21,185,916)
Cash flows from financing activities:
Proceeds from long-term borrowings.................. 2,164,949 10,544,700 17,629,000
Repayment on long-term borrowings................... (999,929) (7,261,534) (3,524,641)
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
Proceeds from capital contributions by minority
partners......................................... 476,693 1,681,324 2,952,507
Financing cost incurred............................. (11,345) (19,230) (138,094)
----------- ------------ ------------
Net cash flows provided by financing
activities................................ 2,827,647 12,271,522 17,442,988
----------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents......................................... 1,719,594 (277,253) 214,379
Cash and cash equivalents, beginning of year.......... 1,750,067 3,469,661 3,192,408
----------- ------------ ------------
Cash and cash equivalents, end of year................ $ 3,469,661 $ 3,192,408 $ 3,406,787
=========== ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE> 63
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> 64
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> 65
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.
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 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
F-9
<PAGE> 66
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 practiced-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.
F-10
<PAGE> 67
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
B. PRO FORMA INFORMATION
The unaudited consolidated pro forma results for the years ended December
31, 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>
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.
F-11
<PAGE> 68
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
F-12
<PAGE> 69
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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
F-13
<PAGE> 70
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-14
<PAGE> 71
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-15
<PAGE> 72
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
<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> 73
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 totaled
$3,538,925, $4,616,745 and $7,024,657 for the years ended December 31, 1995,
1996 and 1997, respectively.
F-17
<PAGE> 74
AMSURG CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company believes that the foregoing transactions are in its best
interests. It is the Company's 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 consisted of cash of $3,116,290 and 1,131 shares of Class
A Common Stock valued at $9,263, of which the Company assigned approximately
$2,900,000 to excess of cost over net assets of purchased operations.
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, which approximated
book value.
F-18
<PAGE> 75
AMSURG CORP.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
BASIS OF PRESENTATION
The unaudited pro forma balance sheet of AmSurg Corp. as of December 31,
1997, is presented to show the effects of 1998 completed and probable
acquisitions, as if they had occurred on December 31, 1997. The unaudited pro
forma combined statement of operations is presented to show the effects of the
1997 and 1998 acquisitions (completed and probable) 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-19
<PAGE> 76
AMSURG CORP.
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1997
(ALL AMOUNTS EXPRESSED IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS ACQUIRED
--------------------------------------------- EFFECT OF PRO
SOUTH DENVER BOSWELL INDIVIDUALLY ACQUISITIONS FORMA
ENDOSCOPY EYE INSIGNIFICANT AND RELATED COMBINED
HISTORICAL CENTER, INC. CENTER, L.L.C. ACQUISITION FINANCING TOTALS
---------- ------------ -------------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents...... $ 3,407 $ 39 $ 98 $ 14 $ (695)(1) $ 2,863
Accounts receivable, net....... 8,220 339 510 191 -- 9,260
Other current assets........... 2,317 20 80 86 -- 2,503
------- ------- ------- ------ ------ -------
Total current assets... 13,944 398 688 291 (695) 14,626
Long-term receivables and
deposits....................... 479 -- -- -- -- 479
Property and equipment, net...... 19,248 187 187 567 -- 20,189
Intangible assets, net........... 41,567 4 -- 83 8,719(2) 50,373
------- ------- ------- ------ ------ -------
Total assets........... $75,238 $ 589 $ 875 $ 941 $8,024 $85,667
======= ======= ======= ====== ====== =======
Current liabilities:
Current portion of long-term
debt........................ $ 1,330 $ -- $ 37 $ -- $ (37)(3) $ 1,330
Other current liabilities...... 3,302 156 29 34 (109)(3) 3,412
------- ------- ------- ------ ------ -------
Total current
liabilities.......... 4,632 156 66 34 (146) 4,742
Long-term debt................... 24,970 -- 123 91 8,618(4) 33,802
Deferred income taxes............ 1,185 -- -- -- -- 1,185
Minority interest................ 9,192 -- -- -- 938(5) 10,130
Preferred stock.................. 5,268 -- -- -- -- 5,268
Shareholders' equity............. 29,991 433 686 816 (1,386)(6) 30,540
------- ------- ------- ------ ------ -------
Total liabilities and
shareholders'
equity............... $75,238 $ 589 $ 875 $ 941 $8,024 $85,667
======= ======= ======= ====== ====== =======
</TABLE>
F-20
<PAGE> 77
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 PRO FORMA
ENDOSCOPY ENDOSCOPY BOSWELL EYE INSIGNIFICANT PRO FORMA COMBINED
HISTORICAL CENTER, INC. CENTER, INC. INSTITUTE, INC. ACQUISITIONS ADJUSTMENTS TOTALS
---------- ------------ ------------ --------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................... $57,414 $2,090 $1,957 $4,646 $2,308 $ -- $68,415
Operating expenses:
Salaries and benefits... 17,363 470 401 1,022 481 155(7) 19,892
Other operating
expenses.............. 20,352 501 472 2,152 838 (15)(8) 24,300
Depreciation and
amortization.......... 4,944 -- 73 -- 192 430(9) 5,639
Net loss on sale of
assets (a)............ 1,425 -- -- -- -- -- 1,425
------- ------ ------ ------ ------ ------- -------
Total operating
expenses........ 44,084 971 946 3,174 1,511 570 51,256
------- ------ ------ ------ ------ ------- -------
Operating
income.......... 13,330 1,119 1,011 1,472 797 (570) 17,159
Minority interest......... 9,084 -- -- -- -- 2,050(5) 11,134
Other (income) and
expense:
Interest expense, net of
interest income....... 1,554 -- (12) (7) 20 965(10) 2,520
Distribution cost (b)... 842 -- -- -- -- -- 842
------- ------ ------ ------ ------ ------- -------
Earnings (loss)
before income
taxes........... 1,850 1,119 1,023 1,479 777 (3,585) 2,663
Income tax expense........ 1,774 -- -- -- -- 325(11) 2,099
------- ------ ------ ------ ------ ------- -------
Net earnings
(loss).......... 76 1,119 1,023 1,479 777 (3,910) 564
Accretion of preferred
stock discount.......... 286 -- -- -- -- -- 286
------- ------ ------ ------ ------ ------- -------
Net earnings
(loss)
attributable to
common
shareholders.... $ (210) $1,119 $1,023 $1,479 $ 777 $(3,910) $ 278
======= ====== ====== ====== ====== ======= =======
Earnings (loss) per common
share:
Basic................... $ (0.02)(c) $ 0.03(d)
Diluted................. $ (0.02)(c) $ 0.03(d)
Weighted average number of
shares and share
equivalents outstanding:
Basic................... 9,453 195(12) 9,648
Diluted................. 9,453 531(13) 9,984
</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,
basic and diluted earnings per common share would have been $0.29 and
$0.28, respectively, for the year ended December 31, 1997.
F-21
<PAGE> 78
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. In the first quarter of 1998, the Company acquired majority
interests in the assets and certain liabilities comprising the business
operations of two surgery centers. An additional acquisition of a surgery center
is considered probable in April of 1998. The accompanying pro forma consolidated
balance sheet includes the purchased assets and assumed liabilities and effects
of financing, as if the surgery centers acquired in the first quarter of 1998
and expected to be acquired in April 1998 had been acquired on December 31,
1997. The accompanying pro forma consolidated statement 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 additional excess of cost over net assets acquired
resulting from acquisitions.
3. To reflect obligations of acquired entities not assumed.
4. To reflect additional long-term debt used to finance acquisitions,
net of long-term debt not assumed.
5. To reflect minority owners' interest in earnings of acquired
operations.
6. To reflect common stock valued at $549,000 issued in acquisition,
net of equity of acquired entities.
7. To reflect $275,000 in additional corporate general and
administrative salary costs as a result of increase in number of centers
managed, net of $120,000 in salaries paid to previous employees which are
discontinued upon acquisition.
8. To reflect $36,000 in additional miscellaneous general and
administrative cost as a result of increase in number of centers managed,
net of $51,000 in reduced rent expense pursuant to new lease agreements.
9. To reflect amortization of additional excess of cost over net
assets of purchased operations assets and differences in depreciation of
purchased equipment.
10. To reflect interest on acquisition-related borrowings.
11. 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.
12. To reflect weighted average shares for stock issued in
acquisition.
13. 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-22
<PAGE> 79
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-23
<PAGE> 80
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-24
<PAGE> 81
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 investing 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..................... -- 179,363 179,363 193,165
---------- ---------- ---------- ----------
Cash, end of period........................... $ 179,363 $ 193,156 $ 216,075 $ 191,848
========== ========== ========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-25
<PAGE> 82
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-26
<PAGE> 83
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-27
<PAGE> 84
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> 85
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> 86
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-3
<PAGE> 87
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-4
<PAGE> 88
======================================================
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, THE SELLING SHAREHOLDERS 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.............................. 21
Management............................ 34
Principal and Selling Shareholders.... 42
Certain Relationships and Related
Transactions........................ 44
Description of Capital Stock.......... 45
Shares Eligible for Future Sale....... 50
Underwriting.......................... 52
Legal Matters......................... 53
Experts............................... 53
Available Information................. 53
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
3,700,000 SHARES
AMSURG CORP.
CLASS A COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
J.C. BRADFORD & CO., PIPER JAFFRAY INC., MORGAN KEEGAN & COMPANY, INC.
, 1998
======================================================
<PAGE> 89
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemized estimate of fees and expenses
payable by the Registrant in connection with the Offering described in the
Registration Statement, other than underwriting discounts and commissions. All
fees and expenses are estimated with the exception of the SEC and NASD fees.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 13,023
NASD fee.................................................... 4,915
Nasdaq Stock Market fee..................................... 17,500
Accounting fees and expenses................................ 100,000
Legal fees and expenses..................................... 125,000
Printing and engraving expenses............................. 125,000
Blue sky fees and expenses.................................. 2,500
Transfer agent and registrar fees........................... 2,500
Miscellaneous fees and expenses............................. 9,562
--------
Total..................................................... $400,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Tennessee Business Corporation Act ("TBCA") provides that a corporation
may indemnify any director or officer against liability incurred in connection
with a proceeding if (i) the director or officer acted in good faith, (ii) the
director or officer reasonably believed, in the case of conduct in his or her
official capacity with the corporation, that such conduct was in the
corporation's best interest, or, in all other cases, that his or her conduct was
not opposed to the best interests of the corporation, and (iii) in connection
with any criminal proceeding, the director or officer had no reasonable cause to
believe that his or her 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 is adjudged to be liable to the corporation.
Similarly, the TBCA prohibits indemnification in connection with any proceeding
charging improper personal benefit to director or officer, if such director or
officer is adjudged liable on the basis that a personal benefit was improperly
received. In cases where the director or officer is wholly successful, on the
merits or otherwise, in the defense of any proceeding instigated because of his
or her status as a director or officer of a corporation, the TBCA mandates that
the corporation indemnify the director or officer against reasonable expenses
incurred in the proceeding. Notwithstanding the foregoing, the TBCA provides
that a court of competent jurisdiction, upon application, may order that a
director or officer be indemnified for reasonable expense if, in consideration
of all relevant circumstances, the court determines that such individual is
fairly and reasonably entitled to indemnification, whether or not the standard
of conduct set forth above was met.
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 the Company's 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
II-1
<PAGE> 90
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 of 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.
At present, there is no litigation or proceeding involving a director or
officer of the Company as to which indemnification is being sought, not is the
Company aware of any threatened litigation that may result in claims for
indemnification by any officer or director.
Pursuant to the Management Agreement, 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 has in effect an executive liability insurance policy which
will provide coverage for its directors and officers. Under this policy, the
insurer agrees 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.
The proposed form of the Underwriting Agreement filed as Exhibit 1 to this
Registration Statement contains certain provisions relating to the
indemnification of the Company and its controlling persons by the Underwriters
and relating to the indemnification of the Underwriters by the Company, its
controlling persons and the Selling Shareholders.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the period beginning February 1, 1994 and ending on the date of this
Prospectus, the Company has issued the following securities:
(A) At various times since February 1, 1994, the Company has sold an
aggregate of 2,415,388 shares of common stock to certain founding
shareholders and AHC for per share stock prices ranging from $2.94 to
$5.37. These purchases were primarily used to fund the continued operations
of the Company, including acquisitions and development of surgery centers
during that period. On February 26, 1996, AHC exercised warrants issued to
it by the Company for the purchase of 85,906 shares of Class A Common Stock
at a per share exercise price of $2.70. The warrants were issued in
consideration for AHC's guaranty of the Company's debt.
(B) At various times since February 1, 1994, the Company has granted
options to purchase shares of Company Class A Common Stock to various
employees and directors. Options to purchase 4,417 shares of Class A Common
Stock were exercised in 1996 and 1997 at per share prices ranging from
$2.52 to $4.68.
(C) At various times since February 1, 1994, the Company has sold an
aggregate of 1,536,739 shares of Class A Common Stock to physician
practices and individual physicians as partial consideration
II-2
<PAGE> 91
in connection with the acquisitions of surgery centers and in private
placements to physician partners in connection with the development of
surgery centers. The per share prices of these sales ranged from $2.94 to
$8.19.
(D) On November 20, 1996, the Company sold an aggregate of 500,000
shares of Series A Preferred Stock and 416,666 shares of Series B Preferred
Stock to three investors in a private placement. The per share price for
the Series A Preferred Stock and Series B Preferred Stock was $6.00 for an
aggregate sale price of $5,500,000.
(E) On March 14, 1997, the Company sold an aggregate of 8,460 shares
of Class A Common Stock to Steven I. Geringer, a newly elected director, at
a per share price of $6.15.
(F) On December 3, 1997, the Company issued shares of Class A Common
Stock and Class B Common Stock in the 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, and in an exchange in
which AHC exchanged a portion of its shares of Class A Common Stock for
shares of newly issued Class B Common Stock.
(G) On March 3, 1998, the Company issued 380,952 shares of Class A
Common Stock to the holders of the Series A Redeemable Preferred Stock upon
conversion of such preferred stock pursuant to the terms of the Charter.
The shares described in (A) through (E) above were issued without
registration under the Securities Act in reliance upon the exemptions from
registration afforded by Section 4(2) of the Securities Act and Regulation D of
the Securities Act. The shares described in (F) and (G) above were issued
without registration under the Securities Act in reliance upon the exemption
from registration afforded by Section 3(a)(9) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of the Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1 -- Form of Underwriting Agreement
2.1 -- Amended and Restated Distribution Agreement (incorporated by
reference to Exhibit 2.1 to the Registration Statement on
Form 10, as amended (filed with the Commission on March 11,
1997))
2.2 -- Exchange Agreement (incorporated by reference to Exhibit 2.2
to the Registration Statement on Form 10, as amended (filed
with the Commission on March 11, 1997))
3.1 -- Amended and Restated Charter of Registrant (incorporated by
reference to Exhibit 3.1 of the Company's Registration
Statement on Form 10, as amended (filed with the Commission
on March 11, 1997))
3.2 -- Amended and Restated Bylaws of Registrant (incorporated by
reference to Exhibit 3.2 of the Company's Registration
Statement on Form 10, as amended (filed with the Commission
on March 11, 1997))
4.1 -- Specimen Class A Common Stock certificate (incorporated by
reference to Exhibit 4.1 of the Company's Registration
Statement on Form 10, as amended (filed with the Commission
on March 11, 1997))
4.2 -- Specimen Class B Common Stock certificate (incorporated by
reference to Exhibit 4.2 of the Company's Registration
Statement on Form 10, as amended (filed with the Commission
on March 11, 1997))
4.3 -- Article 7 of the Registrant's Amended and Restated Charter
(included in Exhibit 3.1)
4.4 -- Form of Shareholders' Agreement between the Company and
certain investors (incorporated by reference to Exhibit 4.3
of the Company's Registration Statement on Form 10, as
amended (filed with the Commission on March 11, 1997))
</TABLE>
II-3
<PAGE> 92
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
4.5 -- Preferred Stock Purchase Agreement dated as of November 20,
1996 by and among the Company, Electra Investment Trust
P.L.C., Capitol Health Partners, L.P. and Michael E.
Stephens (incorporated by reference to Exhibit 4.4 of the
Company's Registration Statement on Form 10, as amended
(filed with the Commission on March 11, 1997))
5* -- Opinion of Bass, Berry & Sims PLC
10.1 -- Form of Management and Human Resources Agreement between the
Company and AHC (incorporated by reference to Exhibit 10.1
of the Company's Registration Statement on Form 10, as
amended (filed with the Commission on March 11, 1997))
10.2 -- Registration Agreement dated April 2, 1992, as amended
November 30, 1992 and November 20, 1996, among the Company
and certain named investors therein (incorporated by
reference to Exhibit 10.2 of the Company's Registration
Statement on Form 10, as amended (filed with the Commission
on March 11, 1997))
10.3 -- Form of Indemnification Agreement between the Company and
its directors, executive officers and advisors (incorporated
by reference to Exhibit 10.3 of the Company's Registration
Statement on Form 10, as amended (filed with the Commission
on March 11, 1997))
10.4 -- Second Amended and Restated Loan Agreement dated as of April
15, 1997 among the Company, SunTrust Bank, Nashville, N.A.,
and NationsBank of Tennessee, N.A., as amended on May 6,
1997 and on September 2, 1997 (incorporated by reference to
Exhibit 10.4 of the Company's Registration Statement on Form
10, as amended (filed with the Commission on March 11,
1997))
10.5 -- Third Amendment to Second Amended and Restated Loan
Agreement dated December 19, 1997 (incorporated by reference
to Exhibit 10.5 to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1997)
10.6 -- Sublease dated as of June 9, 1996 between AHC and the
Company (incorporated by reference to Exhibit 10.5 of the
Company's Registration Statement on Form 10, as amended
(filed with the Commission on March 11, 1997))
10.7 -- 1992 Stock Option Plan (incorporated by reference to Exhibit
10.7 of the Company's Registration Statement on Form 10, as
amended (filed with the Commission on March 11, 1997))
10.8 -- 1997 Stock Incentive Plan (incorporated by reference to
Exhibit 10.8 of the Company's Registration Statement on Form
10, as amended (filed with the Commission on March 11,
1997))
10.9 -- Form of Employment Agreement with executive officers
(incorporated by reference to Exhibit 10.9 of the Company's
Registration Statement on Form 10, as amended (filed with
the Commission on March 11, 1997))
10.10 -- Form of Advisory Agreement with Thomas G. Cigarran and Henry
D. Herr (incorporated by reference to Exhibit 10.10 of the
Company's Registration Statement on Form 10, as amended
(filed with the Commission on March 11, 1997))
10.11 -- Agreement dated as of April 11, 1997 between the Company and
Rodney H. Lunn (incorporated by reference to Exhibit 10.11
of the Company's Registration Statement on Form 10, as
amended (filed with the Commission on March 11, 1997))
10.12 -- Agreement dated of April 11, 1997 between the Company and
David L. Manning (incorporated by reference to Exhibit 10.12
of the Company's Registration Statement on Form 10, as
amended (filed with the Commission on March 11, 1997))
10.13 -- Asset Purchase Agreement dated September 2, 1997 among the
Company, AmSurg Holdings, Inc., The Endoscopy Center, Inc.
and the shareholders thereof (incorporated by reference to
Exhibit 2 to the Current Report on Form 8-K dated September
2, 1997)
10.14 -- Asset Purchase Agreement dated January 30, 1998 among AmSurg
Holdings, Inc., Arizona Ophthalmology Surgery, LLC and the
shareholders thereof (incorporated by reference to Exhibit 2
to the Current Report on Form 8-K dated January 30, 1998)
</TABLE>
II-4
<PAGE> 93
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.15 -- Asset Purchase Agreement dated March 18, 1998 among the
Company, AmSurg Holdings, Inc., South Denver Endoscopy
Center, Inc. and the shareholders thereof (incorporated by
reference to Exhibit 2 to the Current Report on Form 8-K
dated April 14, 1998)
21 -- Subsidiaries of the Registrant
23.1 -- Consent of Deloitte & Touche LLP -- AmSurg Corp.
23.2 -- Consent of Deloitte & Touche LLP -- The Endoscopy Center,
Inc.
23.3* -- Consent of Bass, Berry & Sims PLC (to be included in Exhibit
5)
24 -- Power of Attorney (included in signature page)
</TABLE>
- ---------------
* To be filed by amendment
(b) Financial Statement Schedules.
Schedule II -- AmSurg Corp. Valuation and Qualifying Accounts
Schedule II -- The Endoscopy Center, Inc. -- Independence,
Missouri -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit, or proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered hereunder, the
Registrant will, unless in the opinion of its counsel the question has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 94
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Nashville, Tennessee on April 23,
1998.
AMSURG CORP.
By: /s/ KEN P. MCDONALD
------------------------------------
Ken P. McDonald
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature to the
Registration Statement appears below hereby constitutes and appoints Ken P.
McDonald and Claire M. Gulmi, and each of them, with full power to act without
the other, as his attorney-in-fact, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities (until revoked in writing) to sign any and all amendments to this
Registration Statement (including post-effective amendments and amendments
thereto) and any registration statement relating to the same offering as this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, and, in each case, to file the same
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
each of them full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ KEN P. MCDONALD President and Chief Executive April 23, 1998
- ----------------------------------------------------- Officer (Principal Executive
Ken P. McDonald Officer)
/s/ CLAIRE M. GULMI Senior Vice President, Chief April 23, 1998
- ----------------------------------------------------- Financial Officer and
Claire M. Gulmi Secretary (Principal Financial
and Accounting Officer)
/s/ THOMAS G. CIGARRAN Chairman of the Board April 23, 1998
- -----------------------------------------------------
Thomas G. Cigarran
/s/ JAMES A. DEAL Director April 23, 1998
- -----------------------------------------------------
James A. Deal
/s/ STEVEN I. GERINGER Director April 23, 1998
- -----------------------------------------------------
Steven I. Geringer
</TABLE>
II-6
<PAGE> 95
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Director April , 1998
- -----------------------------------------------------
Debora A. Guthrie
/s/ HENRY D. HERR Director April 23, 1998
- -----------------------------------------------------
Henry D. Herr
/s/ BERGEIN F. OVERHOLT, M.D. Director April 23, 1998
- -----------------------------------------------------
Bergein F. Overholt, M.D.
</TABLE>
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<PAGE> 96
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1 -- Form of Underwriting Agreement
2.1 -- Amended and Restated Distribution Agreement (incorporated by
reference to Exhibit 2.1 to the Registration Statement on
Form 10, as amended (filed with the Commission on March 11,
1997))
2.2 -- Exchange Agreement (incorporated by reference to Exhibit 2.2
to the Registration Statement on Form 10, as amended (filed
with the Commission on March 11, 1997))
3.1 -- Amended and Restated Charter of Registrant (incorporated by
reference to Exhibit 3.1 of the Company's Registration
Statement on Form 10, as amended (filed with the Commission
on March 11, 1997))
3.2 -- Amended and Restated Bylaws of Registrant (incorporated by
reference to Exhibit 3.2 of the Company's Registration
Statement on Form 10, as amended (filed with the Commission
on March 11, 1997))
4.1 -- Specimen Class A Common Stock certificate (incorporated by
reference to Exhibit 4.1 of the Company's Registration
Statement on Form 10, as amended (filed with the Commission
on March 11, 1997))
4.2 -- Specimen Class B Common Stock certificate (incorporated by
reference to Exhibit 4.2 of the Company's Registration
Statement on Form 10, as amended (filed with the Commission
on March 11, 1997))
4.3 -- Article 7 of the Registrant's Amended and Restated Charter
(included in Exhibit 3.1)
4.4 -- Form of Shareholders' Agreement between the Company and
certain investors (incorporated by reference to Exhibit 4.3
of the Company's Registration Statement on Form 10, as
amended (filed with the Commission on March 11, 1997))
4.5 -- Preferred Stock Purchase Agreement dated as of November 20,
1996 by and among the Company, Electra Investment Trust
P.L.C., Capitol Health Partners, L.P. and Michael E.
Stephens (incorporated by reference to Exhibit 4.4 of the
Company's Registration Statement on Form 10, as amended
(filed with the Commission on March 11, 1997))
5* -- Opinion of Bass, Berry & Sims PLC
10.1 -- Form of Management and Human Resources Agreement between the
Company and AHC (incorporated by reference to Exhibit 10.1
of the Company's Registration Statement on Form 10, as
amended (filed with the Commission on March 11, 1997))
10.2 -- Registration Agreement dated April 2, 1992, as amended
November 30, 1992 and November 20, 1996, among the Company
and certain named investors therein (incorporated by
reference to Exhibit 10.2 of the Company's Registration
Statement on Form 10, as amended (filed with the Commission
on March 11, 1997))
10.3 -- Form of Indemnification Agreement between the Company and
its directors, executive officers and advisors (incorporated
by reference to Exhibit 10.3 of the Company's Registration
Statement on Form 10, as amended (filed with the Commission
on March 11, 1997))
10.4 -- Second Amended and Restated Loan Agreement dated as of April
15, 1997 among the Company, SunTrust Bank, Nashville, N.A.,
and NationsBank of Tennessee, N.A., as amended on May 6,
1997 and on September 2, 1997 (incorporated by reference to
Exhibit 10.4 of the Company's Registration Statement on Form
10, as amended (filed with the Commission on March 11,
1997))
10.5 -- Third Amendment to Second Amended and Restated Loan
Agreement dated December 19, 1997 (incorporated by reference
to Exhibit 10.5 to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1997)
</TABLE>
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<PAGE> 97
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.6 -- Sublease dated as of June 9, 1996 between AHC and the
Company (incorporated by reference to Exhibit 10.5 of the
Company's Registration Statement on Form 10, as amended
(filed with the Commission on March 11, 1997))
10.7 -- 1992 Stock Option Plan (incorporated by reference to Exhibit
10.7 of the Company's Registration Statement on Form 10, as
amended (filed with the Commission on March 11, 1997))
10.8 -- 1997 Stock Incentive Plan (incorporated by reference to
Exhibit 10.8 of the Company's Registration Statement on Form
10, as amended (filed with the Commission on March 11,
1997))
10.9 -- Form of Employment Agreement with executive officers
(incorporated by reference to Exhibit 10.9 of the Company's
Registration Statement on Form 10, as amended (filed with
the Commission on March 11, 1997))
10.10 -- Form of Advisory Agreement with Thomas G. Cigarran and Henry
D. Herr (incorporated by reference to Exhibit 10.10 of the
Company's Registration Statement on Form 10, as amended
(filed with the Commission on March 11, 1997))
10.11 -- Agreement dated as of April 11, 1997 between the Company and
Rodney H. Lunn (incorporated by reference to Exhibit 10.11
of the Company's Registration Statement on Form 10, as
amended (filed with the Commission on March 11, 1997))
10.12 -- Agreement dated of April 11, 1997 between the Company and
David L. Manning (incorporated by reference to Exhibit 10.12
of the Company's Registration Statement on Form 10, as
amended (filed with the Commission on March 11, 1997))
10.13 -- Asset Purchase Agreement dated September 2, 1997 among the
Company, AmSurg Holdings, Inc., The Endoscopy Center, Inc.
and the shareholders thereof (incorporated by reference to
Exhibit 2 to the Current Report on Form 8-K dated September
2, 1997)
10.14 -- Asset Purchase Agreement dated January 30, 1998 among AmSurg
Holdings, Inc., Arizona Ophthalmology Surgery, LLC and the
shareholders thereof (incorporated by reference to Exhibit 2
to the Current Report on Form 8-K dated January 30, 1998)
10.15 -- Asset Purchase Agreement dated March 18, 1998 among the
Company, AmSurg Holdings, Inc., South Denver Endoscopy
Center, Inc. and the shareholders thereof (incorporated by
reference to Exhibit 2 to the Current Report on Form 8-K
dated April 14, 1998)
21 -- Subsidiaries of the Registrant
23.1 -- Consent of Deloitte & Touche LLP -- AmSurg Corp.
23.2 -- Consent of Deloitte & Touche LLP -- The Endoscopy Center,
Inc.
23.3* -- Consent of Bass, Berry & Sims PLC (to be included in Exhibit
5)
24 -- Power of Attorney (included in signature page)
</TABLE>
- ---------------
* To be filed by amendment
II-9
<PAGE> 1
EXHIBIT 1
AMSURG CORP.
3,700,000 SHARES OF CLASS A COMMON STOCK
UNDERWRITING AGREEMENT
_________ ___, 1998
J.C. BRADFORD & CO., L.L.C.
PIPER JAFFRAY INC.
MORGAN KEEGAN & COMPANY, INC.
As Representatives of the Several Underwriters
c/o J.C. Bradford & Co.
J.C. Bradford Financial Center
330 Commerce Street
Nashville, Tennessee 37201
Ladies and Gentlemen:
Amsurg Corp., a Tennessee corporation (the "Company"), and certain
shareholders of the Company identified on Schedule II hereto (the "Selling
Shareholders") propose to sell to the several underwriters named in Schedule I
hereto (the "Underwriters"), for whom you are acting as the representatives (the
"Representatives"), 3,500,000 and 200,000 shares, respectively (collectively,
the "Firm Shares"), of the Class A Common Stock, no par value per share (the
"Class A Common Stock"), of the Company. The Company proposes to grant to the
Underwriters an option to purchase up to 555,000 additional shares of Class A
Common Stock as provided for in Section 3 of this Agreement for the purpose of
covering over-allotments (the "Option Shares"). The Underwriters, severally and
not jointly, are willing to purchase the Firm Shares set forth opposite their
respective names on Schedule I hereto and their pro-rata share of the Option
Shares in the event the Representatives elect to exercise the over-allotment
taken in whole or in part. The Firm Shares and the Option Shares purchased
pursuant to this Underwriting Agreement (the "Agreement") are collectively
referred to herein as the "Shares."
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each of the Underwriters that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission"), under the Securities Act of 1933, as
amended (the "Securities Act"), a registration statement on Form S-1
(Registration No. 333-_________), including the related preliminary
prospectus relating to the Shares. Copies of such registration
statement and any amendments, including any post-effective amendments,
and all forms of the related prospectuses contained therein and any
supplements thereto, have been delivered to you. Such registration
statement, including the
<PAGE> 2
prospectus, Part II, all financial schedules and exhibits thereto, all
information deemed to be a part of such registration statement pursuant
to Rule 430A under the Rules and Regulations (as hereinafter defined)
and any related registration statement filed pursuant to Rule 462(b)
under the Rules and Regulations, at the time when they became
effective, are herein referred to as the "Registration Statement," and
the prospectus included as part of the Registration Statement on file
with the Commission that discloses all the information that was omitted
from the prospectus pursuant to Rule 430A under the Rules and
Regulations on the date that the Registration Statement became
effective and in the form filed pursuant to Rule 424(b) Rules and
Regulations, is herein referred to as the "Final Prospectus." The
prospectus included as part of the Registration Statement on the date
when the Registration Statement became effective is referred to herein
as the "Effective Prospectus." Any prospectus included in the
Registration Statement and in any amendment thereto prior to the date
on which the Registration Statement became effective is referred to
herein as a "Preliminary Prospectus." For purposes of this Agreement,
"Rules and Regulations" means the rules and regulations promulgated by
the Commission under either the Securities Act or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as applicable.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus and no proceeding for
that purpose has been instituted or threatened by the Commission or the
securities authority of any state or other jurisdiction. Each
Preliminary Prospectus, at the time of filing thereof, complied with
the requirements of the Securities Act and the Rules and Regulations,
and did not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading; except that the foregoing does
not apply to statements or omissions made in reliance upon and in
conformity with written information furnished to the Company by any
Underwriter through J.C. Bradford & Co. ("Bradford") specifically for
use therein (it being understood that the only information so provided
is the information included in the last paragraph on the cover page and
in the third, fourth, fifth and eighth paragraphs under the caption
"Underwriting" in the Preliminary, Effective and Final Prospectus).
When the Registration Statement becomes effective and at all times
subsequent thereto up to and including the First Closing Date (as
hereinafter defined), (i) the Registration Statement, the Effective
Prospectus and the Final Prospectus and any amendments or supplements
thereto will contain all statements which are required to be stated
therein in accordance with the Securities Act and the Rules and
Regulations and will comply with the requirements of the Securities Act
and the Rules and Regulations, and (ii) neither the Registration
Statement, the Effective Prospectus nor the Final
2
<PAGE> 3
Prospectus nor any amendment or supplement thereto will include any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; except that the foregoing does not apply to statements
or omissions made in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through
Bradford specifically for use therein (it being understood that the
only information so provided is the information included in the last
paragraph on the cover page and in the third, fourth, fifth and eighth
paragraphs under the caption "Underwriting" in the Final Prospectus).
(c) The Company is duly organized and validly existing and in
good standing under the laws of the jurisdiction of its incorporation
or organization with full power and authority to own its properties and
conduct its business as now conducted and is duly qualified or
authorized to do business and is in good standing in all jurisdictions
wherein the nature of its business or the character of property owned
or leased may require it to be authorized or qualified to do business,
except where failure to obtain such authorization or qualification
would not have a material adverse effect on the Company's condition
(financial or otherwise). The Company holds all licenses, consents and
approvals, and has satisfied all eligibility and other similar
requirements imposed by federal, state and local regulatory bodies,
administrative agencies or other governmental bodies, agencies or
officials, in each case as required for the conduct of the business in
which it is engaged and is contemplated to be engaged as set forth in
the Effective Prospectus.
(d) All of the consolidated corporations, partnerships
(including, without limitation, general and limited partnerships) and
limited liability companies in which the Company has a direct or
indirect ownership interest are listed in Schedule III to this
Agreement (collectively, the "Subsidiaries"). Each Subsidiary that is a
corporation (a "Corporate Subsidiary") has been duly organized and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, with corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement. Each Corporate
Subsidiary is duly qualified and in good standing as a foreign
corporation authorized to do business in each other jurisdiction in
which the nature of its business or its ownership or leasing of
property requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the Company's
condition (financial or otherwise). All of the outstanding shares of
capital stock of each Corporate Subsidiary have been duly authorized
and validly issued, are fully paid and non-assessable, were not issued
in violation of or subject to any preemptive or similar rights, and,
except as set forth on Schedule 1(d), are owned by the Company
directly, or indirectly through one
3
<PAGE> 4
of the other Subsidiaries, free and clear of all security interests,
liens, encumbrances and equities and claims; and no options, warrants
or other rights to purchase, agreements or other obligations to issue
or other rights to convert any obligations into shares of capital stock
or ownership interests in any Corporate Subsidiary are outstanding.
(e) Each Subsidiary that is a partnership (a "Partnership")
has been duly organized, is validly existing as a partnership under the
laws of its jurisdiction of organization and has the power and
authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement. Each Partnership
is duly qualified as a foreign partnership authorized to do business in
each other jurisdiction in which the nature of its business or its
ownership or leasing of property requires such qualification, except
where the failure to be so qualified would not have a material adverse
effect on the Company's condition (financial or otherwise). The capital
contributions with respect to the outstanding units of each Partnership
have been made to the Partnership. Except as set forth in Schedule
1(e), the general and limited partnership interests therein held
directly or indirectly by the Company are owned free and clear of all
security interests, liens, encumbrances and equities and claims; and no
options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into
ownership interests in any Partnership are outstanding. Each
partnership agreement pursuant to which the Company or a Subsidiary
holds an interest in a Partnership is in full force and effect and
constitutes the legal, valid and binding agreement of the parties
thereto, enforceable against such parties in accordance with the terms
thereof, except as enforcement thereof may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of
creditors' rights generally. There has been no material breach of or
default under, and no event which with notice or lapse of time would
constitute a material breach of or default under, such partnership
agreements by the Company or any Subsidiary or, to the Company's
knowledge, any other party to such agreements.
(f) Each Subsidiary that is a limited liability company (an
"LLC") has been duly organized, is validly existing as a limited
liability company under the laws of its jurisdiction of organization
and has the limited liability company power and authority to own, lease
and operate its properties and to conduct its business as described in
the Registration Statement. Each LLC is duly qualified as a foreign
limited liability company authorized to do business in each other
jurisdiction in which the nature of its business or its ownership or
leasing of property requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on
the Company's condition (financial or otherwise). The capital
contributions with respect to the outstanding
4
<PAGE> 5
membership interests of each LLC have been made to the LLC. All
outstanding membership interests in the LLCs were issued and sold in
compliance with the applicable operating agreements or such LLCs and
all applicable federal and state securities laws, and, except as set
forth in Schedule 1(f), the membership interests therein held directly
or indirectly by the Company are owned free and clear of all security
interests, liens, encumbrances and equities and claims; and no options,
warrants or other rights to purchase, agreements or other obligations
to issue or other rights to convert any obligations into ownership
interests in any LLC are outstanding. Each operating agreement pursuant
to which the Company or a Subsidiary holds a membership interest in an
LLC is in full force and effect and constitutes the legal, valid and
binding agreement of the parties thereto, enforceable against such
parties in accordance with the terms thereof, except as enforcement
thereof may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally. There has
been no material breach of or default under, and no event which with
notice or lapse of time would constitute a material breach of or
default under, such operating agreements by the Company or any
Subsidiary or, to the Company's knowledge, any other party to such
agreements.
(g) Except to the extent disclosed in the Prospectus, each of
the centers described in the Prospectus as owned by the Company is
owned and operated by a Subsidiary in which the Company directly or
indirectly owns at least 51% of the outstanding ownership interests.
Except as disclosed in the Prospectus, there are no consensual
encumbrances or restrictions on the ability of any Subsidiary (i) to
pay any dividends or make any distributions on such Corporate
Subsidiary's capital stock, such Partnership's partnership interests or
such LLC's membership interests or to pay any indebtedness owed to the
Company or any other Subsidiary, (ii) to make any loans or advances to,
or investments in, the Company or any other Subsidiary, or (iii) to
transfer any of its property or assets to the Company or any other
Subsidiary.
(h) The capitalization of the Company as of March 31, 1998 is
as set forth under the caption "Capitalization" in the Effective
Prospectus and the Final Prospectus, and the Company's capital stock
conforms to the description thereof contained under the caption
"Description of Capital Stock" in the Effective Prospectus and the
Final Prospectus. All the issued shares of the Company's Class A Common
Stock have been duly authorized and validly issued, and are fully paid
and nonassessable. None of the issued shares of the Company's Class A
Common Stock have been issued in violation of any preemptive or similar
rights. The Shares to be sold by the Company hereunder have been duly
and validly authorized and, upon issuance and delivery and payment
therefor in the manner herein described, will be validly issued, fully
paid and nonassessable. Except as set forth in the Effective
5
<PAGE> 6
Prospectus and the Final Prospectus, (i) the Company does not have
outstanding any options to purchase, or any rights or warrants to
subscribe for, or any securities or obligations convertible into, or
any contracts or commitments to issue or sell, any shares of capital
stock, and (ii) there are no preemptive rights or other rights to
subscribe for or to purchase, or any restriction upon the transfer of,
any shares of capital stock pursuant to the Company's charter, bylaws
or any agreement or other instrument to which the Company is a party or
by which it may be bound. Neither the filing of the Registration
Statement nor the issuance, offer or sale of the Shares as contemplated
by this Agreement gives rise to any rights, other than those which have
been waived or satisfied, for or relating to the registration of any
shares of Common Stock or any other securities of the Company. The
Underwriters will receive good and marketable title to the Shares to be
issued and delivered hereunder, free and clear of all liens,
encumbrances, claims, security interests, restrictions, shareholders'
agreements, voting trusts or any other claims of third parties
whatsoever.
(i) The form of stock certificate to be used to evidence the
Class A Common Stock will be in due and proper form and will comply
with all applicable legal requirements.
(j) All offers and sales by the Company of the Company's
securities prior to the date hereof were at all relevant times duly
registered or the subject of an available exemption from the
registration requirements of the Securities Act and were duly
registered or the subject of an available exemption from the
registration requirements of the applicable state securities or Blue
Sky laws, and any private placement memoranda delivered in connection
with offers and sales of the Company's securities prior to the date
hereof did not include any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements
therein not misleading.
(k) The Company has full legal right, power and authority to
enter into this Agreement and to sell and deliver the Shares to be sold
by it to the Underwriters as provided herein, and this Agreement has
been duly authorized, executed and delivered by the Company and
constitutes a valid and binding agreement of the Company enforceable
against the Company in accordance with its terms. No consent, approval,
authorization or order of any court or governmental agency or body or
third party is required for the performance of this Agreement by the
Company or the consummation by the Company of the transactions
contemplated hereby, except such as have been obtained and such as may
be required by the National Association of Securities Dealers, Inc.
(the "NASD") or under the Securities Act or state securities or Blue
Sky laws in connection with the purchase and distribution of the Shares
by the Underwriters. The issuance and sale of the Shares by
6
<PAGE> 7
the Company, the Company's performance of this Agreement and the
consummation of the transactions contemplated hereby will not result in
a breach or violation of, or conflict with, any of the terms and
provisions of, or constitute a default by the Company under, any
indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which the Company is a party or to which the
Company or any of its properties is subject, the charter, bylaws or
other governing instruments of the Company or any statute or any
judgment, decree, order, rule or regulation of any court or
governmental agency or body applicable to the Company or any of its
properties. The Company is not in violation of its charter, bylaws or
other governing instruments or any law, administrative rule or
regulation or arbitrators' or administrative court decree, judgment or
order or in violation or default (there being no existing state of
facts which with notice or lapse of time or both would constitute a
default) in the performance or observance of any material obligation,
agreement, covenant or condition contained in any contract, indenture,
deed of trust, mortgage, loan agreement, note, lease, agreement or
other instrument or permit to which it is a party or by which it or any
of its properties is or may be bound.
(l) The historical financial statements, together with the
related schedules and notes, of the Company, included in the
Registration Statement, the Effective Prospectus and the Final
Prospectus, conform to the requirements of the Securities Act and the
Rules and Regulations. Such financial statements fairly present the
financial position of the Company at the respective dates indicated in
accordance with generally accepted accounting principles applied on a
consistent basis for the periods indicated. The financial and
statistical data set forth in the Effective Prospectus and the Final
Prospectus fairly present the information set forth therein on the
basis stated in the Effective Prospectus and the Final Prospectus.
Deloitte & Touche, LLP, whose reports are included in the Effective
Prospectus and the Final Prospectus, are independent accountants as
required by the Securities Act and the Rules and Regulations. The other
financial statements and schedules included in or as schedules to the
Registration Statement, the Effective Prospectus and the Final
Prospectus conform to the requirements of the Act and the Regulations
and present fairly the information presented therein for the periods
shown. The unaudited pro forma financial statements and notes thereto
are in conformity with generally accepted accounting principles and are
presented on the basis of appropriate and reasonable pro forma
adjustments.
(m) Subsequent to December 31, 1997, the Company and the
Subsidiaries have not sustained any material loss or interference with
its business or properties from fire, flood, hurricane, accident or
other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, which is not
disclosed in the Effective
7
<PAGE> 8
Prospectus and the Final Prospectus; and subsequent to the respective
dates as of which information is given in the Registration Statement,
the Effective Prospectus and the Final Prospectus, (i) the Company and
the Subsidiaries have not incurred any material liabilities or
obligations, direct or contingent, or entered into any transactions not
in the ordinary course of business, and (ii) there has not been any
issuance of options, warrants or rights to purchase interests or the
capital stock of the Company and the Subsidiaries, or any material
adverse change, or any development involving a prospective material
adverse change, in the general affairs, management, business,
prospects, financial position, net worth or results of operations of
the Company and the Subsidiaries, except in each case as described in
the Effective Prospectus and the Final Prospectus.
(n) Except as described in the Effective Prospectus and the
Final Prospectus, there is not pending, or to the knowledge of the
Company threatened, any legal or governmental action, suit, proceeding,
inquiry or investigation, to which the Company, the Subsidiaries or any
of the Company's officers or directors is a party, or to which its
property is subject, before or brought by any court or governmental
agency or body, wherein an unfavorable decision, ruling or finding
could prevent or materially hinder the consummation of this Agreement
or result in a material adverse change in the business condition
(financial or other), prospects, financial position, net worth or
results of operations of the Company.
(o) 4,055,000 shares of Class A Common Stock, including
the Shares, have been approved for listing on the Nasdaq National
Market (the "Nasdaq National Market"), subject to official notice of
issuance.
(p) Neither the Company nor any of its directors, officers or
controlling persons, has taken or will take, directly or indirectly,
any action resulting in a violation of Regulation M under the Exchange
Act, or designed to cause or result under the Exchange Act or otherwise
in, or which has constituted or which reasonably might be expected to
constitute, the stabilization or manipulation of the price of any
securities of the Company or facilitation of the sale or resale of the
Shares.
(q) There are no contracts or other documents required by the
Securities Act or by the Rules and Regulations to be described in the
Registration Statement, the Effective Prospectus or the Final
Prospectus or to be filed as exhibits to the Registration Statement
which have not been described or filed as required. All such contracts
to which the Company and the Subsidiaries are a party have been duly
authorized, executed and delivered by the Company and the Subsidiaries,
constitute valid and binding agreements of the Company and the
Subsidiaries and are enforceable against the Company and the
Subsidiaries in accordance with the terms thereof. The
8
<PAGE> 9
Company and the Subsidiaries have performed all obligations required to
be performed by them, and are neither in default nor have they received
notice of any default or dispute under, any such contract or other
material instrument to which they are a party or by which their
property is bound or affected. To the best knowledge of the Company, no
other party under any such contract or other material instrument to
which the Company and the Subsidiaries are a party is in default in any
material respect thereunder.
(r) Except as described in the Effective Prospectus and the
Final Prospectus, the Company and the Subsidiaries have good and
marketable title to all real and material personal property owned by
them, free and clear of all liens, charges, encumbrances or defects,
except those reflected in the financial statements hereinabove
described. The real and personal property and buildings referred to in
the Effective Prospectus and the Final Prospectus which are leased from
others by the Company and the Subsidiaries are held under valid,
subsisting enforceable leases. The Company and the Subsidiaries own or
lease all such properties as is necessary to the Company's operations
as now conducted.
(s) The Company's system of internal accounting controls is
sufficient to meet the broad objectives of internal accounting controls
insofar as those objectives pertain to the prevention or detection of
errors or irregularities in amounts that would be material in relation
to the Company's financial statements.
(t) The Company and the Subsidiaries have filed all foreign,
federal, state and local income and franchise tax returns required to
be filed through the date hereof and have paid all taxes shown as due
thereon to the extent such taxes have become due and are not being
contested in good faith; and there is no tax deficiency that has been,
nor does the Company have knowledge of any tax deficiency which is
likely to be, asserted against the Company or any of the Subsidiaries
which, if determined adversely, could materially and adversely affect
the earnings, assets, affairs, business prospects or condition
(financial or other) of the Company.
(u) The Company and its Subsidiaries have operated and
currently operate their business in conformity with all applicable
laws, rules and regulations of each jurisdiction in which they conduct
business, except where the failure to so be in compliance would not
reasonably be expected to, individually or in the aggregate, have a
material adverse effect on the Company's condition (financial or
otherwise). The Company and each of the Subsidiaries and its affiliated
physician practices hold all material certificates, consents,
exemptions, orders, licenses, authorizations, accreditations, permits
or other approvals or rights from all governmental authorities, all
self-regulatory organizations, all governmental and private accrediting
bodies and all courts and other tribunals (collectively, "Permits")
which are necessary to own their properties and to conduct their
businesses, including, without limitation, such permits as are required
(i) under such federal and state healthcare laws as are applicable to
the Company and its Subsidiaries and (ii) with respect to those
facilities operated by the Company or any Subsidiary that participate
in Medicare and/or Medicaid, to receive reimbursement thereunder,
except for such failures to have Permits which would not reasonably be
expected to, individually or in the aggregate, result in a material
adverse effect. The Company and each of its Subsidiaries have fulfilled
and performed all of their material obligations with respect to such
Permits, and no event or change in condition has occurred which allows,
or after notice or lapse of time would allow, revocation or termination
thereof or results in any other material impairment of the rights of
the holder of any such Permit, except as to such qualifications as may
be set forth in the Prospectus and except for such failures which would
not reasonably be expected to, individually or in the aggregate, result
in a material adverse effect on the Company's condition (financial or
otherwise). During the period for which financial statements are
included in the Prospectus, denials by third party payers of claims for
reimbursement for services rendered by the Company, its Subsidiaries or
its affiliated physician practices have not had a material adverse
effect on the Company's condition (financial or otherwise). Neither the
Company nor any of its Subsidiaries or its affiliated physician
practices has failed to file with applicable regulatory authorities any
statement, report, information or form required by any applicable law,
regulation or order, except where the failure to be so in compliance
would not reasonably be expected to, individually or in the aggregate,
have a material adverse effect on the Company's condition (financial or
otherwise), all such filings or submissions were in material compliance
with applicable laws when filed and no material deficiencies have been
asserted by any regulatory commission, agency or authority with respect
to any such filings or submissions.
9
<PAGE> 10
(v) Neither the Company nor any of its Subsidiaries is in
violation of any federal, state, local or foreign law or regulation
relating to occupational safety and health or to the storage, handling
or transportation of hazardous or toxic materials, and the Company and
the Subsidiaries have received all permits, licenses or other approvals
required of them under applicable federal, state and foreign
occupational safety and health and environmental laws and regulations
to conduct their respective businesses, and the Company and the
Subsidiaries are in compliance with all terms and conditions of any
such permit, license or approval, except for any such violation of law
or regulation, failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions of such
permits, licenses or approvals which would not result in a material
adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or prospects of the Company.
(w) Neither the Company nor any of its Subsidiaries has failed
to file with the applicable regulatory authorities any statements,
reports, information or forms required by all applicable laws,
regulations or orders; all such filings or submissions were in
compliance with applicable laws when filed, and no material
deficiencies have been asserted by any regulatory commission, agency or
authority with respect to such filings or submissions. Neither the
Company nor any of its Subsidiaries has failed to maintain in full
force and effect any licenses, registrations or permits necessary or
proper for the conduct of their respective businesses, or received any
notification that any revocation or limitation thereof is threatened or
pending, and there is not to the knowledge of the Company pending any
change under any law, regulation, license or permit which could
materially adversely affect the business, operations, property or
business prospects of the Company and the Subsidiaries. Neither the
Company nor any of its Subsidiaries has received any notice of
violation of or been threatened with a charge of violating or is under
investigation with respect to a possible violation of any provision of
any law, regulation or order.
(x) No labor dispute exists or is imminent with any of the
employees of the Company and the Subsidiaries or otherwise which could
materially adversely affect the Company. The Company is not aware of
any existing or imminent labor disturbance by employees of the Company
and the Subsidiaries which could be expected to materially adversely
affect the condition (financial or otherwise), results of operations,
properties, affairs, management, business affairs or business prospects
of the Company. The Company and the Subsidiaries are in compliance with
all federal, state and local employment and labor laws, including but
not limited to, laws relating to non-discrimination in hiring,
promotion and pay of employees.
10
<PAGE> 11
(y) The Company and its Subsidiaries and affiliated practice
groups own or possess all licenses, patents, copyrights, trademarks,
service marks and trade names currently employed by it in connection
with the businesses currently operated or proposed to be operated by
them, and none of such parties has received any notice of
infringement of or conflict with asserted rights of others with respect
to any of the foregoing which, alone or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, could result in
any material adverse change in the condition, financial or otherwise,
or in the earnings, business affairs or business prospects of the
Company.
(z) The Company and its Subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in
which they are engaged and in which they propose to engage, and the
Company has no reason to believe that it and the Subsidiaries will not
be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as
may be necessary to continue its business.
(aa) Neither the Company, its Subsidiaries, nor any director,
officer, agent, employee or other person acting on behalf of the
Company has (i) used, or authorized the use of, any corporate or other
funds for unlawful payments, contributions, gifts or entertainment,
(ii) made unlawful expenditures relating to political activity to
government officials or others, or (iii) established or maintained any
unlawful or unrecorded funds in violation of any federal, state, local
or foreign law or regulation, including Section 30A of the Exchange
Act. Neither the Company nor any director, officer, agent, employee or
other person acting on behalf of the Company has accepted or received
any unlawful contributions, payments, gifts or expenditures.
(bb) The Company is not, will not become as a result of the
transactions contemplated hereby, and does not intend to conduct its
business in a manner that would cause it to become, an "investment
company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940.
(cc) Except as disclosed in the Registration Statement and the
Effective Prospectus, there are no business relationships or related
party transactions required to be disclosed therein by Item 404 of
Regulation S-K promulgated by the Commission.
(dd) The accounts receivable of the Company and its
Subsidiaries have been and will continue to be adjusted to reflect
reimbursement policies of third party payors such as Medicare,
Medicaid, MediCal, Blue Cross/Blue Shield, private insurance companies,
health maintenance organizations,
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<PAGE> 12
preferred provider organizations, managed care systems and other third
party payors. The accounts receivable relating to such third party
payors do not and shall not exceed amounts the Company and its
Subsidiaries are entitled to receive, subject to adjustments to reflect
reimbursement policies of third party payors and normal discounts in
the ordinary course of business.
(ee) None of the Company nor any of its officers, directors or
stockholders, or to the knowledge of the Company, any employee, member,
partner, contractor or other agent of the Company or any of its
Subsidiaries or affiliated physician practices, has ever been excluded
from participation in a federal health care program for the provision
of items or services for which payment may be made under such a
program, nor has engaged on behalf of the Company in any of the
following: (i) knowingly and willfully making or causing to be made a
false statement or representation of a material fact in any
applications for any benefit or payment under the Medicare or Medicaid
program or from any third party (where applicable federal or state law
prohibits such payments to third parties); (ii) knowingly and willfully
making or causing to be made any false statement or representation of a
material fact for use in determining rights to any benefit or payment
under the Medicare or Medicaid program or from any third party (where
applicable federal or state law prohibits such payments to third
parties); (iii) failing to disclose knowledge by a claimant of the
occurrence of any event affecting the initial or continued right to any
benefit or payment under the Medicare or Medicaid program or from any
third party (where applicable federal or state law prohibits such
payments to third parties) on its own behalf or on behalf of another,
with intent to secure such benefit or payment fraudulently; (iv)
knowingly and willfully offering, paying, soliciting or receiving any
remuneration (including any kickback bribe or rebate), directly or
indirectly overtly or covertly, in cash or in kind (a) 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 by Medicare or Medicaid or any third party (where
applicable federal or state law prohibits such payments to third
parties), or (b) in return for purchasing, leasing or ordering or
arranging for or recommending the purchasing, leasing or ordering of
any good, facility, service, or item for which payment may be made in
whole or in part by Medicare or Medicaid or any third party (where
applicable federal or state law prohibits such payments to third
parties.
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<PAGE> 13
2. Representations and Warranties of the Selling Shareholders. Each of
the Selling Shareholders, severally and not jointly, represents and warrants to
and agrees with, each of the Underwriters that:
(a) Such Selling Shareholder, at the First Closing Date, will
have good and marketable title to the Shares set forth in Schedule II
to be sold by such Selling Shareholder, free and clear of any liens,
encumbrances, equities and claims (other than as imposed by the
Securities Act or this Agreement), and full right, power and authority
to effect the sale and delivery of such Shares; and upon the delivery
of and payment for the Shares to be sold by such Selling Shareholder
pursuant to this Agreement, good and marketable title thereto, free and
clear of any liens, encumbrances, equities and claims, of any kind,
will be transferred to the Underwriters.
(b) Such Selling Shareholder has duly executed and delivered
the Custody Agreement and Power of Attorney in the form previously
delivered to the Representatives, appointing the persons named therein,
and each of them as such Selling Shareholder's attorney-in-fact (the
"Attorney-in-Fact") and as custodian (the "Custodian"). The
Attorney-in-Fact is authorized to execute, deliver and perform this
Agreement on behalf of such Selling Shareholder, to deliver the Shares
to be sold by such Selling Shareholder hereunder, to accept payment
therefor, and otherwise to act on behalf of such Selling Shareholder in
connection with this Agreement, including payment from the Offering
proceeds of expenses incurred on behalf of such Selling Shareholder.
Certificates, in suitable form for transfer by delivery or accompanied
by duly executed instruments of transfer or assignment in blank,
representing the Shares to be sold by such Selling Shareholder
hereunder have been deposited with the Custodian pursuant to the
Custody Agreement and Power of Attorney for the purpose of delivery
pursuant to this Agreement. Such Selling Shareholder agrees that the
shares of Common Stock represented by the certificates on deposit with
the Custodian are subject to the interest of the Underwriters
hereunder, that the arrangements made for such custody and the
appointment of the Attorney-in-Fact are to that extent irrevocable, and
that the obligations of such Selling Shareholder hereunder shall not be
terminated except as provided in this Agreement and the Custody
Agreement and Power of Attorney. If such Selling Shareholder should die
or become incapacitated, or if any other event should occur, before the
delivery of the Shares of such Selling Shareholder hereunder, the
certificates for such Shares deposited with the Custodian shall be
delivered by the Custodian in accordance with the terms and conditions
of this Agreement as if such death, incapacity or other event had not
occurred, regardless of whether the Custodian or the Attorney-in-Fact
shall have received notice thereof.
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<PAGE> 14
(c) Such Selling Shareholder, acting through his duly
authorized Attorney-in-Fact, has duly executed and delivered this
Agreement and the Custody Agreement and Power of Attorney; this
Agreement constitutes a legal, valid and binding obligation of such
Selling Shareholder, all authorizations and consents necessary for the
execution and delivery of this Agreement and the Custody Agreement and
Power of Attorney on behalf of such Selling Shareholder and for the
sale and delivery of the Shares to be sold by such Selling Shareholder
hereunder have been given, except as may be required by the Securities
Act or state securities laws; and such Selling Shareholder has the
legal capacity and full right, power and authority to execute this
Agreement and the Custody Agreement and Power of Attorney.
(d) The performance of this Agreement and the Custody
Agreement and Power of Attorney and the consummation of the
transactions contemplated hereby and thereby by such Selling
Shareholder will not result in a breach or violation of, or conflict
with, any of the terms or provisions of, or constitute a default by
such Selling Shareholder under, any indenture, mortgage, deed of trust,
trust (constructive or other), loan agreement, lease, franchise,
license or other agreement or instrument to which such Selling
Shareholder or any of his or its properties is bound, or any statute,
judgment, decree, order, rule or regulation of any court or
governmental agency or body applicable to such Selling Shareholder or
any of his, her or its properties.
(e) Such Selling Shareholder has not distributed nor, other
than as permitted by the Securities Act and the Rules and Regulations,
will distribute any prospectus or other offering material in connection
with the offer and sale of the Shares other than any Preliminary
Prospectus filed with the Commission or the Final Prospectus or other
material permitted by the Securities Act.
(f) Such Selling Shareholder has reviewed and is familiar with
the Registration Statement and the Preliminary Prospectus. To the
knowledge of such Selling Shareholder, the Preliminary Prospectus does
not include an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(h) At the time the Registration Statement becomes effective
(i) such parts of the Registration Statement and any amendments and
supplements thereto as specifically refer to such Selling Shareholder
will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading, and (ii) such parts of the
Effective Prospectus and Final Prospectus as specifically refer to such
Selling Shareholder will not include an untrue statement of a material
fact or omit to state a material fact
14
<PAGE> 15
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(i) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory body, administrative or
other governmental body is necessary in connection with the execution
and delivery of this Agreement by such Selling Shareholder, and the
consummation by such Selling Shareholder of the transactions herein
contemplated (other than as required by the Securities Act, state
securities laws and the NASD).
(j) Any certificates signed by or on behalf of such Selling
Shareholder as such and delivered to the Representatives or to counsel
for the Representatives shall be deemed a representation and warranty
by such Selling Shareholder to each Underwriter as to the matters
covered thereby.
(k) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Internal Revenue Code of
1986, as amended, with respect to the transactions herein contemplated,
such Selling Shareholder agrees to deliver to you prior to or at the
First Closing Date (as hereinafter defined) a properly completed and
executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department
regulations in lieu thereof).
(l) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action resulting in a violation of
Regulation M under the Exchange Act which has constituted or which
reasonably might be expected to constitute, the stabilization or
manipulation of the price of any securities of the Company or
facilitation of the sale or resale of the Shares.
3. Purchase, Sale and Delivery of the Shares.
(a) On the basis of the representations, warranties,
agreements and covenants herein contained and subject to the terms and
conditions herein set forth, the Company and the Selling Shareholders,
severally and not jointly, in the amount set forth on Schedule II
hereto, agree to sell to the several Underwriters 3,500,000 and
200,000, Firm Shares, respectively, and each of the Underwriters,
severally and not jointly, agrees to purchase at a purchase price of
$______ per share, the number of Firm Shares set forth opposite such
Underwriter's name in Schedule I hereto.
(b) The Company hereby grants to the Underwriters an option to
purchase, solely for the purpose of covering over-allotments in the
sale of Firm Shares, all or any portion of the Option Shares at the
purchase price per share set forth above. The option granted hereby may
be exercised as to all or any part of the Option Shares at any time
within 30 days after the date of the Final Prospectus. The Underwriters
shall not be under any obligation
15
<PAGE> 16
to purchase any Option Shares prior to the exercise of such option. The
option granted hereby may be exercised by the Underwriters by Bradford
giving written notice to the Company setting forth the number of Option
Shares to be purchased and the date and time for delivery of and
payment for such Option Shares and stating that the Option Shares
referred to therein are to be used for the purpose of covering
over-allotments in connection with the distribution and sale of the
Firm Shares. If such notice is given prior to the First Closing Date
(as hereinafter defined), the date set forth therein for such delivery
and payment shall not be earlier than two full business days thereafter
or the First Closing Date, whichever occurs later. If such notice is
given on or after the First Closing Date, the date set forth therein
for such delivery and payment shall not be earlier than three full
business days thereafter. In either event, the date so set forth shall
not be more than four full business days after the date of such notice.
The date and time set forth in such notice is herein called the "Option
Closing Date." Upon exercise of the option, the Company shall become
obligated to sell to the Underwriters, and, subject to the terms and
conditions herein set forth, the Underwriters shall become obligated to
purchase, for the account of each Underwriter, from the Company,
severally and not jointly, the number of Option Shares specified in
such notice. Option Shares shall be purchased for the accounts of the
Underwriters in proportion to the number of Firm Shares set forth
opposite such Underwriter's name in Schedule I hereto, except that the
respective purchase obligations of each Underwriter shall be adjusted
so that no Underwriter shall be obligated to purchase fractional Option
Shares.
(c) Certificates in definitive form for the Firm Shares which
each Underwriter has agreed to purchase hereunder shall be delivered by
or on behalf of the Company to the Underwriters for the account of such
Underwriter against payment by such Underwriter or on its behalf of the
purchase price therefor by wire transfer of immediately available funds
to the order of the Company, at the offices of Bradford, 330 Commerce
Street, Nashville, Tennessee 37201, or at such other place as may be
agreed upon by Bradford and the Company, at 10:00 A.M., Nashville time,
on the third full business day after this Agreement becomes effective,
or, at the election of the Underwriters, on the fourth full business
day after this Agreement becomes effective, if it becomes effective
after 4:30 P.M. Eastern time, or at such other time not later than the
seventh full business day thereafter as the Underwriters and the
Company may determine, such time of delivery against payment being
herein referred to as the "First Closing Date." The First Closing Date
and the Option Closing Date are herein individually referred to as the
"Closing Date" and collectively referred to as the "Closing Dates."
Certificates in definitive form for the Option Shares which each
Underwriter shall have agreed to purchase hereunder shall be similarly
delivered by or on behalf of the Company on the Option Closing Date.
The certificates in definitive form for the Shares to be delivered will
be in good delivery form
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<PAGE> 17
and in such denominations and registered in such names as Bradford may
request not less than 48 hours prior to the First Closing Date or the
Option Closing Date, as the case may be. Such certificates will be made
available for checking and packaging at a location in New York, New
York as may be designated by Bradford, at least 24 hours prior to the
First Closing Date or the Option Closing Date, as the case may be. It
is understood that Bradford may (but shall not be obligated to) make
payment on behalf of any Underwriter or Underwriters for the Shares to
be purchased by such Underwriter or Underwriters. No such payment shall
relieve such Underwriter or Underwriters from any of its or their
obligations hereunder.
4. Offering by the Underwriters. After the Registration Statement
becomes effective, the several Underwriters propose to offer for sale to the
public the Firm Shares and any Option Shares which may be sold at the price and
upon the terms set forth in the Final Prospectus.
5. Covenants of the Company and the Selling Shareholders.
(a) The Company covenants and agrees with each of the
Underwriters that:
(i) The Company shall comply with the provisions of
and make all requisite filings with the Commission pursuant to
Rules 424 and 430A of the Rules and Regulations and shall
notify the Representatives promptly (in writing, if requested)
of all such filings. The Company shall notify the
Representatives promptly of any request by the Commission for
any amendment of or supplement to the Registration Statement,
the Effective Prospectus or the Final Prospectus or for
additional information; the Company shall prepare and file
with the Commission, promptly upon the Underwriters' request,
any amendments of or supplements to the Registration
Statement, the Effective Prospectus or the Final Prospectus
which, in the Underwriters' opinion, may be necessary or
advisable in connection with the distribution of the Shares;
and the Company shall not file any amendment of or supplement
to the Registration Statement, the Effective Prospectus or the
Final Prospectus which is not approved by the Representatives
after reasonable notice thereof. The Company shall advise the
Representatives promptly of the issuance by the Commission or
any jurisdiction or other regulatory body of any stop order or
other order suspending the effectiveness of the Registration
Statement, suspending or preventing the use of any Preliminary
Prospectus, the Effective Prospectus or the Final Prospectus
or suspending the qualification of the Shares for offering or
sale in any jurisdiction, or of the institution of any
proceedings for any such purpose; and the Company shall use
its best efforts to prevent the
17
<PAGE> 18
issuance of any stop order or other such order and, should a
stop order or other such order be issued, to obtain as soon as
possible the lifting thereof.
(ii) The Company will take or cause to be taken all
necessary action and furnish to whomever the Representatives
direct, such information as may be reasonably required in
qualifying the Shares for offer and sale under the securities
or Blue Sky laws of such jurisdictions as the Underwriters may
designate and will continue such qualifications in effect for
as long as may be reasonably necessary to complete the
distribution of the Shares.
(iii) Within the time during which a Final Prospectus
relating to the Shares is required to be delivered under the
Securities Act, the Company shall comply with all requirements
imposed upon it by the Securities Act, as now and hereafter
amended, and by the Rules and Regulations, as from time to
time in force, so far as is necessary to permit the
continuance of sales of or dealings in the Shares as
contemplated by the provisions hereof and the Final
Prospectus. If during such period any event occurs as a result
of which the Final Prospectus as then amended or supplemented
would include an untrue statement of a material fact or omit
to state a material fact necessary to make the statements
therein, in the light of the circumstances then existing, not
misleading, or if during such period it is necessary to amend
the Registration Statement or supplement the Final Prospectus
to comply with the Securities Act, the Company shall promptly
notify the Representatives and shall amend the Registration
Statement or supplement the Final Prospectus (at the expense
of the Company) so as to correct such statement or omission or
effect such compliance.
(iv) The Company will furnish without charge to the
Representatives and make available to the Underwriters copies
of the Registration Statement (four of which shall be signed
and shall be accompanied by all exhibits), each Preliminary
Prospectus, the Effective Prospectus and the Final Prospectus,
and all amendments and supplements thereto, including any
prospectus or supplement prepared after the effective date of
the Registration Statement, in each case as soon as available
and in such quantities as the Underwriters may reasonably
request.
(v) The Company will (A) deliver to the
Representatives at such office or offices as the
Representatives may designate as many copies of the
Preliminary Prospectus and Final Prospectus as the
Representatives may reasonably request, (B) for a period of
not more than nine months after the Registration Statement
becomes effective,
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<PAGE> 19
send to the Representatives as many additional copies of the
Final Prospectus and any supplement thereto as the
Representatives may reasonably request, and (C) following nine
months after the Registration Statement becomes effective,
send to the Representatives at their expense as many
additional copies of the Final Prospectus and any supplement
hereto as the Representative may reasonably request.
(vi) The Company shall make generally available to
its security holders, in the manner contemplated by Rule
158(b) under the Rules and Regulations as promptly as
practicable and in any event no later than 45 days after the
end of its fiscal quarter in which the first anniversary of
the effective date of the Registration Statement occurs, an
earnings statement satisfying the provisions of Section 11(a)
of the Securities Act covering a period of at least 12
consecutive months beginning after the effective date of the
Registration Statement.
(vii) The Company will apply the net proceeds from
the sale of the Shares to be sold by it as set forth under the
caption "Use of Proceeds" in the Final Prospectus and will
timely report such use of proceeds in its periodic reports
filed pursuant to sections 13(a) and 15(d) of the Exchange Act
in accordance with Rule 463 of the Securities Act or any
successor provision.
(viii) During a period of five years from the
effective date of the Registration Statement or such longer
period as the Representatives may reasonably request, the
Company will furnish to the Representatives copies of all
reports and other communications (financial or other)
furnished by the Company to its shareholders and, as soon as
available, copies of any reports or financial statements
furnished or filed by the Company to or with the Commission or
any national securities exchange or over-the-counter market on
which any class of securities of the Company may be listed for
trading.
(ix) The Company will, from time to time, after the
effective date of the Registration Statement file with the
Commission such reports as are required by the Securities Act,
the Exchange Act and the Rules and Regulations, and shall also
file with foreign, state and other governmental securities
commissions in jurisdictions where the Shares have been sold
by the Underwriters (as the Representatives shall have advised
the Company in writing) such reports as are required to be
filed by the securities acts and the regulations of those
jurisdictions.
(x) Except pursuant to this Agreement or with the
Representatives' written consent, for a period of 120 days
from the effective date of the Registration Statement, the
Company will not,
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<PAGE> 20
and the Company has provided agreements (the "Lockup
Agreements") executed by each of its officers, directors and
5% or greater Shareholders providing that for a period of 120
days from the effective date of the Registration Statement,
such person will not, offer for sale, sell (other than the
issuance by the Company of shares of Common Stock pursuant to
acquisitions or the exercise of options granted pursuant to
existing employee benefit plans and agreements), grant any
options (other than pursuant to existing employee benefit
plans and agreements), rights or warrants with respect to any
shares of Common Stock, securities convertible into shares of
Common Stock or any other capital stock of the Company, or
otherwise dispose of, directly or indirectly, any shares of
Common Stock or such other securities or capital stock.
(xi) Neither the Company nor any of its directors,
officers or controlling persons, has taken or will take,
directly or indirectly, any action resulting in a violation of
Regulation M under the Exchange Act, or designed to cause or
result in, or which has constituted or which reasonably might
be expected to constitute, the stabilization or manipulation
of the price of any securities of the Company or facilitation
of the sale or resale of the Shares.
(xii) The Company will either conduct its business
and operations as described in the Final Prospectus or, if the
Company makes any material change to its business or
operations as so conducted, promptly disclose such change
generally to the Company's security holders.
(xiii) The Company will use its best efforts to
effect the listing of the Class A Common Stock, subject to
notice of issuance, on the Nasdaq National Market on or before
the effective date of the Registration Statement.
(b) Each of the Selling Shareholders, severally and not
jointly, covenants and agrees with each of the Underwriters that:
(i) Such Selling Shareholder will cooperate to the
extent necessary to cause the Registration Statement or any
post-effective amendment thereto to become effective at the
earliest possible time.
(ii) Such Selling Shareholder will pay all federal
and other taxes, if any, on the transfer or sale of the Shares
being sold by such Selling Shareholder to the Underwriters.
(iii) Such Selling Shareholder will do or perform
all things required to be done or performed by such Selling
Shareholder prior to
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<PAGE> 21
the First Closing Date to satisfy all conditions precedent to
the delivery of the Shares pursuant to this Agreement or the
Power of Attorney and Custody Agreement.
(iv) Such Selling Shareholder has delivered to the
Company an agreement pursuant to which such Selling
Shareholder has agreed that during the period of 120 days from
the date the Registration Statement is declared effective
under the Securities Act, such Selling Shareholder will not,
without your prior written consent, offer, pledge, issue,
sell, contract to sell, grant any option for the sale of, or
otherwise dispose of (or announce any offer, pledge, sale,
grant of an option to purchase or other disposition), directly
or indirectly, any shares of Common Stock or securities
convertible into, exercisable or exchangeable for, shares of
Common Stock.
(v) Such Selling Shareholder will not (i) take,
directly or indirectly, prior to the termination of the
underwriting syndicate contemplated by this Agreement, any
action designed to cause or to result in, or that might
reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to
facilitate the sale or resale of any of the Shares, (ii) sell,
bid for, purchase or pay anyone any compensation for the
solicitation of purchases of, the Shares or (iii) pay or agree
to pay to any person any compensation for soliciting another
to purchase any other securities of the Company.
(vi) Such Selling Shareholder will deliver to the
Custodian on or prior to the First Closing Date a properly
completed and executed United States Treasury Department Form
W-9 (or other applicable form or statement specified by
Treasury Department Regulations in lieu thereof).
(vii) Such Selling Shareholder will furnish any
documents, instruments or other information which you may
reasonably request in connection with the sale and transfer of
the Shares.
(viii) Such Selling Shareholder will use such Selling
Shareholder's best efforts to comply or cause to be complied
with the conditions to the obligations of the Underwriters in
Section 7 hereof insofar as such conditions relate to such
Selling Shareholder.
6. Expenses. The Company agrees with each of the Selling Shareholders
and the Underwriters that (a) whether or not the transactions contemplated by
this Agreement are consummated or this Agreement becomes effective or is
terminated, the Company will pay all fees and expenses incident to the
performance of the obligations of the Company hereunder, including, but not
limited to, (i) the
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<PAGE> 22
Commission's registration fee, (ii) the expenses of printing (or reproduction)
and distributing the Registration Statement (including the financial statements
therein and all amendments and exhibits thereto), each Preliminary Prospectus,
the Effective Prospectus, the Final Prospectus, any amendments or supplements
thereto, any Marketing Materials (as hereinafter defined) and this Agreement and
other underwriting documents, including Underwriter's Questionnaires,
Underwriter's Powers of Attorney, Blue Sky Memoranda, Agreements Among
Underwriters and Selected Dealer Agreements, (iii) fees and expenses of
accountants and counsel for the Company, (iv) expenses of registration or
qualification of the Shares under state Blue Sky and securities laws, including
the fees and disbursements of counsel to the Underwriters in connection
therewith, (v) filing fees paid or incurred by the Underwriters in connection
with filings with the NASD, (vi) expenses of listing the outstanding Common
Stock on the Nasdaq National Market, (vii) all travel, lodging and reasonable
living expenses incurred by the Company in connection with marketing, dealer and
other meetings attended by the Company and the Underwriters in marketing the
Shares, (viii) the costs and charges of the Company's transfer agent and
registrar and the cost of preparing the certificates for the Shares, and (ix)
all other costs and expenses incident to the performance of its obligations
hereunder not otherwise provided for in this Section; and (b) all out-of-pocket
expenses, including counsel fees, disbursements and expenses, incurred by the
Underwriters in connection with investigating, preparing to market and marketing
the Shares and proposing to purchase and purchasing the Shares under this
Agreement, will be borne and paid by the Company if the sale of the Shares
provided for herein is not consummated (i) by reason of the termination of this
Agreement by the Underwriters pursuant to Section 14(b)(ii) or (iv) of this
Agreement or (ii) because of any failure or refusal on the part of the Company
or any Selling Shareholder to comply with the terms or fulfill any of the
conditions of this Agreement.
The provisions of this Section shall not affect any agreement that the
Company and the Selling Shareholders may have for the sharing of such costs and
expenses; provided, however, the Underwriters may deem the Company to be the
primary obligor with respect to all costs, fees, and expenses to be paid
hereunder by the Company and the Selling Shareholders.
7. Conditions of the Underwriters' Obligations. The respective
obligations of the Underwriters to purchase and pay for the Firm Shares shall be
subject to the accuracy of the representations and warranties of the Company
herein as of the date hereof and as of the Closing Date as if made on and as of
the Closing Date, to the accuracy of the statements of the Company's officers
made pursuant to the provisions hereof, to the performance by the Company and
the Selling Shareholders of all of their respective covenants and agreements
hereunder and to the following additional conditions:
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<PAGE> 23
(a) The Registration Statement and all post-effective
amendments thereto shall have become effective not later than 5:30
P.M., Washington, D.C. time, on the day following the date of this
Agreement, or such later time and date as shall have been consented to
by the Representatives and all filings required by Rule 424 and Rule
430A of the Securities Act Rules shall have been made; no stop order
suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been
instituted or threatened or, to the knowledge of the Company or the
Underwriters, shall be contemplated by the Commission; any request of
the Commission for additional information (to be included in the
Registration Statement or the Final Prospectus or otherwise) shall have
been complied with to the Representatives' satisfaction; and the NASD,
upon review of the terms of the public offering of the Shares, shall
not have objected to such offering, such terms or the Underwriters'
participation in the same.
(b) No Representative shall have advised the Company that the
Registration Statement, Preliminary Prospectus, the Effective
Prospectus or Final Prospectus, or any amendment or any supplement
thereto, contains an untrue statement of fact which, in the
Representatives' reasonable judgment, is material, or omits to state a
fact which, in the Representatives' reasonable judgment, is material
and is required to be stated therein or necessary to make the
statements therein not misleading and the Company shall not have cured
such untrue statement of fact or omission.
(c) The Representatives shall have received an opinion, dated
the Closing Date, from Bass, Berry & Sims PLC, counsel for the Company,
to the effect that:
(i) Each of the Company and the Corporate
Subsidiaries has been duly organized and is validly existing
as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with corporate power and
authority to own or lease its properties and conduct its
business as described in the Registration Statement, each of
the Company and the Corporate Subsidiaries is duly qualified
to transact business as a foreign corporation and in good
standing in those states where a failure to so qualify would
have a material adverse effect on the Company; and the
outstanding shares of capital stock of each of the Corporate
Subsidiaries have been duly authorized and validly issued and
are fully paid and non-assessable and are owned by the Company
or a Corporate Subsidiary; and, to the best of such counsel's
knowledge, the outstanding shares of capital stock of each of
the Subsidiaries is owned free and clear of all liens,
encumbrances and equities and claims, and no options, warrants
or other fights to purchase, agreements or other obligations
to issue or other rights to convert any obligations into any
shares of capital stock or of ownership interests in the
Corporate Subsidiaries are outstanding.
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(ii) Each of the Partnerships has been duly
organized and is an existing partnership under the laws of the
jurisdiction of its organization, with the power and authority
to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and
Prospectus, and is duly qualified to conduct its business;
each of the Partnerships is qualified as a foreign partnership
in those states listed on a schedule thereto; to the best of
such counsel's knowledge, the partnership interests in the
Partnerships held directly or indirectly by the Company are
free and clear of all liens, encumbrances and equities and
claims, and no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to
convert any obligations into any ownership interests in the
Partnerships are outstanding.
(iii) Each of the LLCs has been duly organized and is
an existing limited liability company under the laws of the
jurisdiction of its organization, with the power and authority
to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and
Prospectus, and is duly qualified to conduct its business;
each of the LLCs is qualified as a foreign limited liability
company in those states listed on a schedule thereto; to the
best of such counsel's knowledge, the membership interests in
the LLCs held directly or indirectly by the Company are free
and clear of all liens, encumbrances and equities and claims,
and no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to
convert any obligations into any ownership interests in the
LLCs are outstanding.
(iv) As of the dates specified therein, the Company
had historically authorized and issued capital stock as set
forth under the caption "Capitalization" in the Final
Prospectus. All of the outstanding shares of Common Stock have
been duly authorized and are validly issued, fully paid and
nonassessable, and the Shares to be sold by the Company have
been duly authorized, and upon issuance thereof and payment
therefor as provided herein, will be validly issued, fully
paid and nonassessable; none of the issued shares have been
issued in violation of or subject to any preemptive rights
provided for by law, any agreement known to such counsel or
the Company's charter. To such counsel's knowledge, the
Company does not have outstanding any options to purchase, or
any rights or warrants to subscribe for, or any securities or
obligations convertible into, or any
24
<PAGE> 25
contracts or commitments to issue or sell any shares of
capital stock, and there are no preemptive rights or other
rights to subscribe for or purchase any shares of the capital
stock of the Company, or any restriction upon the transfer of,
the Shares pursuant to the Company's charter or bylaws or any
agreement or other instrument known to such counsel to which
the Company is a party or by which it may be bound, except as
described in the Effective Prospectus and Final Prospectus.
Neither the filing of the Registration Statement nor the offer
or sale of the Shares as contemplated by this Agreement gives
rise to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any Common
Stock or any other securities of the Company. The Underwriters
will receive good and marketable title to the Shares to be
issued and delivered by the Company pursuant to this
Agreement, free and clear of all liens, encumbrances, claims,
security interests, restrictions, shareholders agreements,
voting trusts and the rights of any third party whatsoever.
The capital stock of the Company and the Shares conform to the
description thereof contained in the Final Prospectus. All
offers and sales of the Company's interests and securities
prior to the date hereof were made in reliance upon available
exemptions from the registration requirements of the
Securities Act and the registration requirements of applicable
state securities or Blue Sky laws or, if not exempt, properly
registered in compliance with such laws.
(v) The form of stock certificate to be used to
evidence the Class A Common Stock will be in due and proper
form and will comply with all applicable legal requirements
under the Tennessee Business Corporation Act.
(vi) No consent, approval, authorization or order of
any court or governmental agency or body or third party is
required for the performance of this Agreement by the Company
or the consummation by the Company of the transactions
contemplated hereby, except such as have been obtained under
the Securities Act and such as may be required by the NASD and
under state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by several
Underwriters, as to which such counsel need not express an
opinion. The performance of this Agreement by the Company and
the consummation by the Company of the transactions
contemplated hereby will not (a) conflict with or result in a
breach or violation by the Company or any of its Subsidiaries
of any of the terms or provisions of, or constitute a default
by the Company or any of its Subsidiaries under, any material
contract, agreement, indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which
either the Company or any of its Subsidiaries is a party or to
which either the Company or any of its Subsidiaries or their
properties is subject, the charter or bylaws of the Company,
any statute, or any
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<PAGE> 26
judgment, decree, order, rule or regulation of any court or
governmental agency or body applicable to the Company (except
that such counsel need not express an opinion as to whether
performance of the indemnification or contribution provisions
of this Agreement would be permitted); or (b) to such
counsel's knowledge, result in the creation or imposition or
any lien, charge, claim or encumbrance upon any property or
asset of the Company or its Subsidiaries, respectively.
(vii) The Company has full legal right and all
corporate power and authority to enter into this Agreement and
to issue, sell and deliver the Shares to be sold by it to the
Underwriters as provided herein, and this Agreement has been
duly authorized, executed and delivered by the Company and
constitutes the valid and legally binding obligation of the
Company enforceable against the Company in accordance with its
terms.
(viii) Except as described in the Final Prospectus,
there is not pending or threatened, any action, suit,
proceeding, inquiry or investigation, to which the Company or
any of the Subsidiaries are a party, or to which the property
of the Company or any of the Subsidiaries are subject, before
or brought by any court or governmental agency or body, which,
if determined adversely to the Company or any of the
Subsidiaries, could likely result in any material adverse
change in the business, financial position, net worth or
results of operations, or could materially adversely affect
the properties or assets, of the Company or any of the
Subsidiaries.
(ix) No default exists, and no event has occurred
which with notice or after the lapse of time to cure or both,
would constitute a default, in the due performance and
observance of any term, covenant or condition of any material
indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which either the Company or
any of its Subsidiaries is a party or to which their
respective properties are subject, or of the charter or bylaws
of the Company.
(x) There are no contracts or documents of the
Company known to such counsel which are required to be filed
as exhibits to the Registration Statement by the Securities
Act or by the Rules and Regulations which have not been so
filed.
(xi) The Company is not an "investment company" or
an entity "controlled" by an "investment company," as such
terms are defined in the Investment Company Act of 1940, as
amended.
(xii) The Registration Statement and all
post-effective amendments thereto have become effective under
the Securities Act, and, no stop order suspending the
effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been instituted or
are threatened, pending or contemplated by the Commission. All
filings required by Rule 424 and Rule 430A of the
26
<PAGE> 27
Rules and Regulations have been made; the Registration
Statement, the Effective Prospectus and Final Prospectus, and
any amendments or supplements thereto, as of their respective
effective or issue dates, complied as to form in all material
respects with the requirements of the Securities Act and the
Rules and Regulations; the descriptions in the Registration
Statement, the Effective Prospectus and the Final Prospectus
of statutes, regulations, legal and governmental proceedings,
and contracts and other documents are accurate in all material
respects and present fairly in all material respects the
information purported to be summarized; and counsel does not
know of any pending or threatened legal or governmental
proceedings, statutes or regulations required to be described
in the Final Prospectus which are not described as required
nor of any contracts or documents of a character required to
be described in the Registration Statement or the Final
Prospectus or to be filed as exhibits to the Registration
Statement which are not described and filed as required.
(xiii) To such counsel's knowledge in the course of
their representation, neither the Company, its Subsidiaries
nor any of the affiliated physician practices is in violation
of any material laws applicable to the Company or any of the
Subsidiaries or any of the affiliated physician practices or
of any decree of any court or governmental agency or body
having jurisdiction over the Company or any of the
Subsidiaries. To such counsel's knowledge, neither the
Company, its Subsidiaries nor any of the affiliated physician
practices is in violation of applicable state licensure,
Medicare or Medicaid requirements, which violation is likely
to have a material adverse effect on the Company's condition
(financial or otherwise).
(xiv) The Company and each of its Subsidiaries have
all necessary Permits (except where the failure to have such
Permits, individually or in the aggregate, would not have a
material adverse effect on the business, operations or
financial condition of the Company and the Subsidiaries taken
as a whole), to own their respective properties and to conduct
their respective businesses as now being conducted, and as
described in the Registration Statement and Prospectus,
including, without limitation, such Permits as are required
(a) under applicable law and (b) with respect to those
centers owned or operated by the Company or any Subsidiary
that participate in Medicare and/or Medicaid, to receive
reimbursement thereunder.
(xv) The descriptions of statutes and regulations
under the captions "Risk Factors - Contingent Purchase
Obligations," "Risk Factors - Risks Associated with Capitated
Payment Arrangements," "Risk
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<PAGE> 28
Factors - Dependence on Third-Party Reimbursement; Risk of Fee
Reductions or Exclusion from Managed Care Arrangements," "Risk
Factors - Risk Associated with Medicare -Medicaid Illegal
Remuneration ("anti-kickback") Laws," "Risk Factors - Risks
Associated with Physician Self-Referral Laws," "Risk Factors -
Risk Related to Laws Governing Corporate Practice of
Medicine," "Risk Factors - Risk or Potential Applicability of
Insurance Regulations and Antitrust Laws," "Risk Factors -
Risk of Compliance with Other Governmental Regulation" and
"Business - Government Regulation," in the Prospectus have
been reviewed by such counsel and fairly summarize such
statutes and regulations in all material respects.
28
<PAGE> 29
In addition to the matters set forth above, such opinion shall also
include a statement to the effect that nothing has come to the attention of such
counsel which leads them to believe that the Registration Statement, the
Effective Prospectus and the Final Prospectus or any amendment or supplement
thereto contains an untrue statement of a material fact or omits to state a
material fact necessary to make the statements therein not misleading in light
of the circumstances under which they were made (except that such counsel need
express no view as to financial statements, schedules and other financial or
statistical information included therein).
(d) The Representatives shall have received an opinion, dated
the Closing Date, of counsel for the Selling Shareholders, reasonably
acceptable to the Representatives, to the effect that:
(i) This Agreement and the Custody Agreement and
Power of Attorney have been duly authorized (in the case of
corporate or partnership Selling Shareholders), executed and
delivered by or on behalf of each of the Selling Shareholders
and constitute valid and binding agreements of such Selling
Shareholders in accordance with their terms, subject to limits
on remedies, specific performance and bankruptcy and
insolvency laws.
(ii) The sale of the Shares to be sold by each
Selling Shareholder hereunder and the compliance by such
Selling Shareholder with all of the provisions of this
Agreement, the Custody Agreement and the Power of Attorney and
the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or
violation of any terms or provisions of, or constitute a
default under any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which such
Selling Shareholder is a party or by which such Selling
Shareholder is bound or to which any of the property or assets
of such Selling Shareholder is subject, or any statute, order,
rule or regulation of any court or governmental agency or body
applicable to such Selling Shareholder or the property of such
Selling Shareholder.
(iii) No consent, approval, authorization or order of
any regulatory, administrative or other governmental body is
required for the consummation of the transactions contemplated
by this Agreement in connection with the Shares to be sold by
each Selling Shareholder hereunder, except which have been
duly obtained and in full force and effect, such as have been
obtained under the Securities Act and such as
29
<PAGE> 30
may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of such Shares
by the Underwriters, as to which such counsel need express no
opinion.
(iv) Each of the Selling Shareholders has the full
right, power and authority to sell, transfer and deliver such
Shares pursuant to this Agreement. By delivery of a
certificate or certificates therefor, the Selling Shareholders
will transfer to the Underwriters valid title to such shares,
free and clear of any pledge, lien, security interest, charge,
claim, equity or encumbrance of any kind.
The opinions to be rendered pursuant to paragraphs (c) and (d) may be
limited to federal law, and as to foreign and state law matters, to the laws of
the states or jurisdictions in which such counsel is admitted to practice. Such
counsel may rely upon opinions of other counsel in rendering such opinions
provided that such counsel shall state that they believe that both the
Representatives and they are justified in relying upon such opinions and that
such counsel is reasonably satisfactory to you.
(e) The Underwriters shall have received an opinion or
opinions, dated the Closing Date, of Waller Lansden Dortch & Davis, A
Professional Limited Liability Company, counsel for the Underwriters,
with respect to the Registration Statement and the Final Prospectus,
and such other related matters as the Underwriters may require, and the
Company shall have furnished to such counsel such documents as they may
reasonably request for the purpose of enabling them to pass upon such
matters.
(f) The Representatives shall have received from Deloitte &
Touche, LLP, a letter dated the date hereof and, at the Closing Date, a
second letter dated the Closing Date, in form and substance
satisfactory to the Representatives, stating that they are independent
public accountants with respect to the Company and its subsidiaries
within the meaning of the Securities Act and the applicable Rules and
Regulations, and containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial
information of the Company contained in the Registration Statement and
the Prospectus.
In the event that the letters to be delivered referred to above set
forth any such changes, decreases or increases, it shall be a further condition
to the obligations of the Underwriters that the Underwriters shall have
determined, after discussions with officers of Company responsible for financial
and accounting matters and with Deloitte & Touche, LLP that such changes,
decreases or increases as are set forth in such letters do not reflect a
material adverse change in the total assets, shareholders' equity or long-term
debt of Company as compared with the amounts shown in the latest balance sheets
of Company included in the Final Prospectus, or a material
30
<PAGE> 31
adverse change in revenues or net income of Company, in each case as compared
with the corresponding period of the prior year.
(g) There shall have been furnished to the Representatives a
certificate, dated the Closing Date and addressed to you, signed by the
Chief Executive Officer and Chief Financial Officer of the Company, to
the effect that:
(i) the representations and warranties of the
Company in Section 1 of this Agreement are true and correct,
as if made at and as of the Closing Date, and the Company has
complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or
prior to the Closing Date;
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued, and no proceedings
for that purpose have been initiated or are pending, or to
their knowledge, threatened under the Securities Act;
(iii) all filings required by Rule 424 and Rule 430A
of the Rules and Regulations have been made;
(iv) they have carefully examined the Registration
Statement, the Effective Prospectus and the Final Prospectus,
and any amendments or supplements thereto, and such documents
do not include any untrue statement of a material fact or omit
to state any material fact required to be stated therein or
necessary to make the statements therein not misleading in
light of the circumstances under which they were made; and
(v) since the effective date of the Registration
Statement, there has occurred no event required to be set
forth in an amendment or supplement to the Registration
Statement, the Effective Prospectus or the Final Prospectus
which has not been so set forth.
(h) The representations and warranties of each Selling
Shareholder in Section 2 of this Agreement shall be true and correct as
of the Closing Date and such Selling Shareholders shall deliver to the
Representatives a certificate to that effect, dated the Closing Date,
signed by such Selling Shareholder or his or its duly appointed
Attorney-in-Fact.
(i) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Final Prospectus, and
except as stated therein, the Company has not sustained any material
loss or interference with its business or properties from fire, flood,
hurricane, accident or other calamity, whether or not covered by
insurance, or from any
31
<PAGE> 32
labor dispute or any court or governmental action, order or decree, or
become a party to or the subject of any litigation which is material to
the Company, nor shall there have been any material adverse change, or
any development involving a prospective material adverse change, in the
business, properties, key personnel, capitalization, prospects, net
worth, results of operations or condition (financial or other) of the
Company, which loss, interference, litigation or change, in the
Representatives' reasonable judgment shall render it inadvisable to
commence or continue the offering of the Shares at the offering price
to the public set forth on the cover page of the Prospectus or to
proceed with the delivery of the Shares.
(j) The Shares shall be listed on the Nasdaq National Market.
(k) The Representatives shall have received the Lockup
Agreements.
All such opinions, certificates, letters and documents delivered
pursuant to this Agreement will comply with the provisions hereof only if they
are reasonably satisfactory to the Representatives and their counsel. The
Company shall furnish to the Representatives such conformed copies of such
opinions, certificates, letters and documents in such quantities as the
Representatives shall reasonably request.
The respective obligations of the Underwriters to purchase and pay for
the Option Shares shall be subject, in their discretion, to the conditions of
this Section 7, except that all references to the "Closing Date" shall be deemed
to refer to the Option Closing Date, if it shall be a date other than the
Closing Date.
8. Condition of the Company's and the Selling Shareholder's
Obligations. The obligations hereunder of the Company and the Selling
Shareholders are subject to the condition set forth in Section 7(a) hereof.
9. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, and each person, if any, who controls any Underwriter
within the meaning of the Securities Act, against any losses, claims,
damages or liabilities to which such Underwriter or controlling person
may become subject under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based in whole or in part upon: (i) any
inaccuracy in the representations and warranties of the Company or the
Selling Shareholders contained herein; (ii) any failure of the Company
or the Selling Shareholders to perform their obligations hereunder or
under law; (iii) any untrue statement or alleged untrue statement of
any material fact contained in (A) the Registration Statement, any
Preliminary Prospectus, the Effective Prospectus or Final Prospectus,
or any amendment or supplement thereto, (B) any audio or visual
32
<PAGE> 33
materials supplied by the Company expressly for use in connection with
the marketing of the Shares, including without limitation, slides,
videos, films and tape recordings (the "Marketing Materials") or (C) in
any Blue Sky application or other written information furnished by the
Company or the Selling Shareholders filed in any state or other
jurisdiction in order to qualify any or all of the Shares under the
securities laws thereof (a "Blue Sky Application"); (iv) or the
omission or alleged omission to state in the Registration Statement,
any Preliminary Prospectus, the Effective Prospectus or Final
Prospectus or any amendment or supplement thereto, any Marketing
Materials or Blue Sky Application a material fact required to be stated
therein or necessary to make the statements therein not misleading; or
(v) any act or failure to act or any alleged act or failure to act by
any Underwriter in connection with, or relating to in any manner to,
the Shares or the offering contemplated hereby, and which is included
as part of or referred to in any loss, claim, damage, liability or
action arising out of or based upon matters covered by clause (i),
(ii), (iii) or (iv) above (provided that the Company shall not be
liable under this clause (v) to the extent that it is determined in a
final judgment by a court of competent jurisdiction that such loss,
claim, damage, liability or action resulted directly from any such acts
or failures to act undertaken or omitted to be taken by such
Underwriter through its gross negligence or willful misconduct); and
will reimburse each Underwriter and each such controlling person for
any legal or other expenses reasonably incurred by such Underwriter or
such controlling person in connection with investigating or defending
any such loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage, or liability
arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration
Statement, the Preliminary Prospectus, the Effective Prospectus or
Final Prospectus, or any amendment or supplement thereto, or any
Marketing Materials or Blue Sky Application in reliance upon and in
conformity with written information furnished to the Company by any
Underwriter specifically for use therein (it being understood that the
only information so provided is the information included in the last
paragraph on the cover page and in the third, fourth, fifth and eighth
paragraphs under the caption "Underwriting" in any Preliminary
Prospectus and the Final Prospectus and the Effective Prospectus).
(b) The Selling Shareholders, severally and not jointly, agree
to indemnify and hold harmless each Underwriter, and each person, if
any, who controls any Underwriter within the meaning of the Securities
Act, against any losses, claims, damages or liabilities to which such
Underwriter or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based
in whole or in part upon: (i) any inaccuracy
33
<PAGE> 34
in the representations and warranties of the Company or such Selling
Shareholder contained herein; (ii) any failure of the Company or such
Selling Shareholder to perform their obligations hereunder or under
law; (iii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement, any
Preliminary Prospectus, the Effective Prospectus or Final Prospectus,
or any amendment or supplement thereto, (B) any Marketing Materials or
(C) in any Blue Sky Application furnished by the Company or such
Selling Shareholder; or (iv) the omission or alleged omission to state
the Registration Statement, any Preliminary Prospectus, the Effective
Prospectus or Final Prospectus or any amendment or supplement thereto,
any Marketing Materials or Blue Sky Application a material fact
required to be stated therein or necessary to make the statements
therein not misleading; or (v) any act or failure to act or any alleged
act or failure to act by any Underwriter in connection with, or
relating to in any manner to, the Shares or the offering contemplated
hereby, and which is included as part of or referred to in any loss,
claim, damage, liability or action arising out of or based upon matters
covered by clause (i), (ii), (iii) or (iv) above (provided that the
Company shall not be liable under this clause (v) to the extent that it
is determined in a final judgment by a court of competent jurisdiction
that such loss, claim, damage, liability or action resulted directly
from any such acts or failures to act undertaken or omitted to be taken
by such Underwriter through its gross negligence or willful
misconduct);and will reimburse each Underwriter and each such
controlling person for any legal or other expenses reasonably incurred
by such Underwriter or such controlling person in connection with
investigating or defending any such loss, claim, damage, liability or
action as such expenses are incurred; provided, however, that such
Selling Shareholder will not be liable in any such case to the extent
that any such loss, claim, damage, or liability arises out of or is
based upon any untrue statement or alleged statement or omission or
alleged omission made in the Registration Statement, the Preliminary
Prospectus, the Effective Prospectus or Final Prospectus, or any
amendment or supplement thereto, or any Marketing Materials or Blue Sky
Application in reliance upon and in conformity with written information
furnished to the Company by any Underwriter specifically for use
therein (it being understood that the only information so provided is
the information included in the last paragraph on the cover page and in
the third, fourth, fifth and eighth paragraphs under the caption
"Underwriting" in any Preliminary Prospectus and the Final Prospectus
and the Effective Prospectus).
(c) Notwithstanding the foregoing provisions of Section 9(a)
and (b), the parties agree that the indemnification obligations of each
Selling Shareholder under this Section 9, with respect to any matter
that such Selling Shareholder and the Company are both required to
indemnify the Underwriters hereunder, shall be subject to the
determination by the
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<PAGE> 35
Representatives, on behalf of the Underwriters, that, in the
Representatives' reasonable commercial judgment, the Company is or may
be unable to discharge fully its obligations to the Underwriters
hereunder; provided, however, that such Selling Shareholder's
obligations shall (i) be limited to such Selling Shareholder's
proportion of the Firm Shares as set forth on Schedule II, times the
aggregate amount to which the Underwriters are entitled to
indemnification, and (ii) shall be liable in any such case only to the
extent of the total net proceeds (before deducting expenses) received
from the Underwriters by such Selling Shareholder in connection with
the sale of the Shares hereunder. To the extent the Company is or may
be able, in the Representatives' reasonable commercial judgment, to
discharge the Company's obligations to the Underwriters with respect to
any matter that the Company is required to indemnify the Underwriters
hereunder, the Underwriters shall to such extent, first seek
indemnification from the Company.
(d) Each Underwriter, will indemnify and hold harmless each of
the Selling Shareholders, the Company, each of its directors, each of
the Company's officers who signed the Registration Statement and each
person, if any, who controls the Company within the meaning of the
Securities Act against any losses, claims, damages or liabilities to
which such Selling Shareholders, the Company or any such director,
officer or controlling person may become subject, under the Securities
Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Preliminary
Prospectus, the Effective Prospectus or Final Prospectus, or any
amendment or supplement thereto, any Marketing Materials or any Blue
Sky Application, or arise out of or are based upon the omission or the
alleged omission to state in the Registration Statement, any
Preliminary Prospectus, the Effective Prospectus or Final Prospectus,
or any amendment or supplement thereto, any Marketing Materials or any
Blue Sky Application a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in
reliance upon and in conformity with written information furnished to
the Company by any Underwriter specifically for use therein (it being
understood that the only information so provided is the information
included in the last paragraph on the cover page and in the third,
fourth, fifth and eighth paragraphs under the caption "Underwriting" in
any Preliminary Prospectus and in the Effective Prospectus and the
Final Prospectus).
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(e) Promptly after receipt by an indemnified party under this
Section 9 of notice of the commencement of any action, including
governmental proceedings, such indemnified party will, if a claim in
respect thereof is to be made against the indemnifying party under this
Section 9 notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party
hereunder unless the indemnifying party has been materially prejudiced
thereby and in any event shall not relieve it from liability otherwise
than under this Section 9. In case any such action is brought against
any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to
participate therein, and to the extent that it may wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified
party; and after notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under
this Section 9 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof other
than reasonable costs of investigation except that the indemnified
party shall have the right to employ separate counsel if, in the
indemnified party's reasonable judgment, it is advisable for the
indemnified party to be represented by separate counsel, and in that
event the fees and expenses of separate counsel shall be paid by the
indemnifying party.
(f) In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in the
preceding part of this Section 9 is for any reason held to be
unavailable to the Underwriters, the Company or the Selling
Shareholders or is insufficient to hold harmless an indemnified party,
then the Company and the Selling Shareholders shall contribute to the
damages paid by the Underwriters, and the Underwriters shall contribute
to the damages paid by the Company and the Selling Shareholders;
provided, however, that no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f)) of the
Securities Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. The amount of such
contribution shall (i) be in such proportion as shall be appropriate to
reflect the relative benefits received by the Company and the Selling
Shareholders on the one hand and the Underwriters on the other from the
offering of the Shares or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, be in such proportion as is
appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Company and the
Selling Shareholders on the one hand and the Underwriters on the other
with respect to the statements or omissions which resulted in such
loss, claim, damage or liability, or action in respect thereof, as well
as any other relevant equitable considerations. The relative benefits
received by the Company and the Selling Shareholders on the one hand
and
36
<PAGE> 37
the Underwriters on the other with respect to such offering shall be
deemed to be in the same proportion as the total net proceeds from the
offering of the Shares purchased under this Agreement (before deducting
expenses) received by the Company and the Selling Shareholders, in the
case of the Company and the Selling Shareholders, and the total
underwriting discounts and commissions received by the Underwriters
with respect to the Shares purchased under this Agreement, in the case
of the Underwriters, bear to the total gross proceeds from the offering
of the Shares under this Agreement, in each case as set forth in the
Prospectus. The relative fault shall be determined by reference to
whether the untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to
information supplied by the Company, the Selling Shareholders or the
Underwriters, the intent of the parties and their relative knowledge,
access to information and opportunity to correct or prevent such
statement or omission. The Company, the Selling Shareholders and the
Underwriters agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation (even
if the Underwriters were treated as one entity for such purpose).
Notwithstanding the foregoing, (i) no Underwriter or person controlling
such Underwriter shall be obligated to make contribution hereunder
which in the aggregate exceeds the underwriting discount applicable to
the Shares purchased by such Underwriter under this Agreement, less the
aggregate amount of any damages which such Underwriter and its
controlling persons have otherwise been required to pay in respect of
the same or any similar claim and (ii) no Selling Shareholder shall be
required to contribute any amount in excess of the aggregate amount for
which such Selling Shareholder is obligated to provide indemnification
pursuant to Section 9(c). The Underwriters' obligations and the Selling
Shareholders' obligations to contribute hereunder are several in
proportion to their respective obligations and not joint. For purposes
of this Section, each person, if any, who controls an Underwriter
within the meaning of Section 15 of the Securities Act shall have the
same rights to contribution as such Underwriters, and each director of
the Company, each officer of the Company who signed the Registration
Statement, and each person, if any, who controls the Company or a
Selling Shareholder within the meaning of Section 15 of the Securities
Act shall have the same rights to contribution as the Company or the
Selling Shareholders, as the case may be.
(g) No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending
or threatened action, suit or proceeding in respect of which any
indemnified party is a party or is (or would be, if a claim were to be
made against such indemnified party) entitled to indemnity hereunder,
unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject
matter of such action, suit or proceeding.
37
<PAGE> 38
10. Default of Underwriters. If any Underwriter defaults in its
obligation to purchase Shares hereunder and if the total number of Shares which
such defaulting Underwriter agreed but failed to purchase is ten percent or less
of the total number of Shares to be sold hereunder, the non-defaulting
Underwriters shall be obligated severally to purchase (in the respective
proportions which the number of Shares set forth opposite the name of each
non-defaulting Underwriter in Schedule I hereto bears to the total number of
Shares set forth opposite the names of all the non-defaulting Underwriters), the
Shares which such defaulting Underwriter or Underwriters agreed but failed to
purchase. If any Underwriter so defaults and the total number of Shares with
respect to which such default or defaults occur is more than ten percent of the
total number of Shares to be sold hereunder, and arrangements satisfactory to
the other Underwriters, the Company and the Selling Shareholders for the
purchase of such Shares by other persons (who may include the non-defaulting
Underwriters) are not made within 36 hours after such default, this Agreement,
insofar as it relates to the sale of the Shares, will terminate without
liability on the part of the non-defaulting Underwriters or the Company or the
Selling Shareholders except for (i) the provisions of Section 9 hereof, and (ii)
the expenses to be paid or reimbursed by the Company pursuant to Section 6. As
used in this Agreement, the term "Underwriter" includes any person substituted
for an Underwriter under this Section 10. Nothing herein shall relieve a
defaulting Underwriter from liability for its default.
11. Default by the Selling Shareholders. If the Selling Shareholders
shall fail to sell and deliver the number of Firm Shares that the Selling
Shareholders are obligated to sell, the Representatives may, at their option, by
notice to the Company, either (a) require the Company to sell and deliver such
number of shares of Common Stock as to which the Selling Shareholders have
defaulted, or (b) elect to purchase the Firm Shares and the Option Shares that
the Company and the non-defaulting Selling Shareholders have agreed to sell
pursuant to this Agreement.
In the event of a default under this Section that does not result in
the termination of this Agreement, the Representatives shall have the right to
postpone the First Closing Date or Option Closing Date for a period not
exceeding seven days in order to effect any required changes in the Registration
Statement or Prospectus or in any other documents or arrangements. No action
taken pursuant to this Section shall relieve the Company or the Selling
Shareholder so defaulting from liability, if any, in respect of such default.
12. Survival Clause. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Selling
Shareholders, the Company or their officers and the Underwriters set forth in
this Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement shall remain in full force and effect, regardless of (a) any
investigation made by or on behalf of the Company, any of its officers or its
directors, any Underwriter or any
38
<PAGE> 39
controlling person, (b) any termination of this Agreement and (c) delivery of
and payment for the Shares.
13. Effective Date. This Agreement shall become effective at whichever
of the following times shall first occur: (i) at 11:30 am Washington D.C. time,
on the next full business day following the date in which the Registration
Statement becomes effective or (ii) at such time after the Registration
Statement has become effective as the Representatives shall release the Firm
Shares for sale to the public; provided, however, that the provisions of
Sections 6,9,12, and 13 hereof shall at all times be effective. For purposes of
this Section 13, the Firm Shares shall be deemed to have been so released upon
the release by the Representatives for publication, at any time after the
Registration Statement has become effective, of any newspaper advertisement
relating to the Firm Shares or upon the release by the Representatives of
telegrams offering the Firm Shares for sale to securities dealers, whichever may
occur first.
14. Termination.
(a) The Company's obligations under this Agreement may be
terminated by the Company by notice to the Representatives (i) at any
time before it becomes effective in accordance with Section 13 hereof,
or (ii) in the event that the condition set forth in Section 8 shall
not have been satisfied at or prior to the First Closing Date.
(b) This Agreement may be terminated by the Representatives by
notice to the Company (i) at any time before it becomes effective in
accordance with Section 13 hereof; (ii) in the event that at or prior
to the First Closing Date the Company or any Selling Shareholder shall
have failed, refused or been unable to perform any agreement on the
part of the Company or such Selling Shareholder to be performed
hereunder or any other condition to the obligations of the Underwriters
hereunder is not fulfilled; (iii) if at or prior to the Closing Date
trading in securities on the NYSE, the Nasdaq National Market, the
American Stock Exchange or the over-the-counter market shall have been
suspended or materially limited or minimum or maximum prices shall have
been established on either of such exchanges or such market, or a
banking moratorium shall have been declared by Federal or state
authorities; (iv) if at or prior to the Closing Date trading in
securities of the Company shall have been suspended; or (v) if there
shall have been such a material adverse change in general economic,
political or financial conditions or if the effect of international
conditions on the financial markets in the United States shall be such
as, in your reasonable judgment, makes it inadvisable to commence or
continue the offering of the Shares at the offering price to the public
set forth on the cover page of the Prospectus or to proceed with the
delivery of the Shares.
39
<PAGE> 40
(c) Termination of this Agreement pursuant to this Section 14
shall be without liability of any party to any other party other than
as provided in Sections 6 and 9 hereof.
15. Notices. All communications hereunder shall be in writing and, if
sent to any of the Underwriters, shall be mailed or delivered or telegraphed and
confirmed in writing to the Underwriters in care of J. C. Bradford & Co., J. C.
Bradford Financial Center, 330 Commerce Street, Nashville, Tennessee 37201,
Attention: Robert S. Doolittle, or if sent to the Company shall be mailed,
delivered or telegraphed and confirmed in writing to the Company at One Burton
Hills Boulevard, Suite 350, Nashville, Tennessee 37215, Attention: Ken P.
McDonald, or if sent to the Selling Shareholders shall be mailed, delivered or
telegraphed and confirmed in writing to ___________________________________ as
Attorney-in-Fact for the Selling Shareholders.
16. Miscellaneous. This Agreement shall inure to the benefit of and be
binding upon the Underwriters, the Company and the Selling Shareholders their
respective successors and legal representatives. Nothing expressed or mentioned
in this Agreement is intended or shall be construed to give any other person any
legal or equitable right, remedy or claim under or in respect of this Agreement.
This Agreement and all conditions and provisions hereof are intended to be for
the sole and exclusive benefit of the Company, the Selling Shareholders and the
Underwriters and for the benefit of no other person except that (a) the
representations and warranties and indemnities of the Company and the Selling
Shareholder contained in this Agreement shall also be for the benefit of any
person or persons who control any Underwriter within the meaning of Section 15
of the Securities Act, and (b) the indemnities by the Underwriters shall also be
for the benefit of the directors of the Company, officers of the Company who
have signed the Registration Statement and any person or persons who control the
Company within the meaning of Section 15 of the Securities Act. No purchaser of
Shares from any Underwriter will be deemed a successor because of such purchase.
The validity and interpretation of this Agreement shall be governed by the laws
of the State of Tennessee. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. The Representatives
hereby represent and warrant to the Company that the Representative have
authority to act hereunder on behalf of the Underwriters, and any action
hereunder taken by the Representatives shall be binding upon all the
Underwriters.
40
<PAGE> 41
If the foregoing is in accordance with your understanding of our
agreement, please indicate your acceptance thereof in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
among the Company, each of the Selling Shareholders and each of the
Underwriters.
Very truly yours,
AMSURG CORP.
By:
--------------------------------------
Title:
----------------------------------
SELLING SHAREHOLDERS
By:
--------------------------------------
Attorney-in-Fact for each of the Selling
Shareholders listed in Schedule II
hereto
41
<PAGE> 42
Confirmed and accepted as of
the date first above written.
J.C. BRADFORD & CO., L.L.C.
By:
-------------------------------------
PIPER JAFFRAY, INC.
By:
-------------------------------------
MORGAN KEEGAN & COMPANY, INC.
By:
-------------------------------------
42
<PAGE> 43
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Underwriter Number of Firm Shares to be Purchased
- ----------- -------------------------------------
<S> <C>
J.C. Bradford & Co.
Piper Jaffray, Inc.
Morgan Keegan & Company, Inc.
------------------------
Total
========================
</TABLE>
43
<PAGE> 44
SCHEDULE II
SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
Selling Shareholder Number of Shares to be Sold
- ------------------- ---------------------------
<S> <C>
------------------------
Total
========================
</TABLE>
44
<PAGE> 1
EXHIBIT 21
SUBSIDIARY LIST
AS OF APRIL 23, 1998
PAGE (1 OF 6)
<TABLE>
<CAPTION>
STATE OF OWNERSHIP
NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE
------------------ ------------ -------- ----------
<S> <C> <C> <C>
AmSurg KEC, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of TN AmSurg KEC, Inc. 51%
Knoxville, L.P.
AmSurg EC Topeka, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of TN AmSurg EC Topeka, Inc. 60%
Topeka, L.P.
AmSurg EC St. Thomas, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of St. TN AmSurg EC St. Thomas, 60%
Thomas, L.P. Inc.
AmSurg EC Centennial, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of TN AmSurg EC Centennial, 60%
Centennial, L.P. Inc.
AmSurg EC Beaumont, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of TN AmSurg EC Beaumont, 51%
Southeast Texas, L.P. Inc.
AmSurg EC Santa Fe, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of TN AmSurg EC Santa Fe, 60%
Santa Fe, L.P. Inc.
AmSurg EC Washington, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of TN AmSurg EC Washington, 60%
Washington D.C., L.P. Inc.
AmSurg Torrance, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of the TN AmSurg Torrance, Inc. 51%
South Bay, L.P.
AmSurg Encino, Inc. TN AmSurg Corp. 100%
</TABLE>
<PAGE> 2
EXHIBIT 21
SUBSIDIARY LIST
AS OF APRIL 23, 1998
PAGE (2 OF 6)
<TABLE>
<CAPTION>
STATE OF OWNERSHIP
NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE
------------------ ------------ -------- ----------
<S> <C> <C> <C>
The Valley Endoscopy Center, TN AmSurg Encino, Inc. 51%
L.P.
AmSurg Brevard, Inc. TN AmSurg Corp. 100%
The Ophthalmology Center of TN AmSurg Brevard, Inc. 51%
Brevard, L.P.
AmSurg Sebastopol, Inc. TN AmSurg Corp. 100%
The Sebastopol ASC, L.P. TN AmSurg Sebastopol, Inc. 60%
AmSurg ENT Brevard, Inc. TN AmSurg Corp. 100%
The ENT Center of Brevard, TN AmSurg ENT Brevard, 51%
L.P. Inc.
AmSurg Abilene, Inc. TN AmSurg Corp. 100%
The Abilene ASC, L.P. TN AmSurg Abilene, Inc. 60%
AmSurg West Tennessee, Inc. TN AmSurg Corp. 100%
AmSurg Lakeland, Inc. TN AmSurg Corp. 100%
AmSurg SWFLA, Inc. TN AmSurg Corp. 100%
AmSurg Lorain, Inc. TN AmSurg Corp. 100%
The Loraine ASC, L.P. TN AmSurg Lorain, Inc. 51%
AmSurg Maryville, Inc. TN AmSurg Corp. 100%
The Maryville ASC TN AmSurg Maryville, Inc. 51%
AmSurg Miami, Inc. TN AmSurg Corp. 100%
The Miami ASC, L.P. TN AmSurg Miami, Inc. 70%
AmSurg North Platte, Inc. TN AmSurg Corp. 100%
AmSurg Fort Collins, Inc. TN AmSurg Corp. 100%
AmSurg Hanford, Inc. TN AmSurg Corp. 100%
</TABLE>
<PAGE> 3
EXHIBIT 21
SUBSIDIARY LIST
AS OF APRIL 23, 1998
PAGE (3 OF 6)
<TABLE>
<CAPTION>
STATE OF OWNERSHIP
NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE
------------------ ------------ -------- ----------
<S> <C> <C> <C>
The Hanford ASC, L.P. TN AmSurg Hanford, Inc. 63%
AmSurg Dallas, Inc. TN AmSurg Corp. 100%
AmSurg Port Arthur, Inc. TN AmSurg Corp. 100%
AmSurg Melbourne, Inc. TN AmSurg Corp. 100%
The Melbourne ASC, L.P. TN AmSurg Melbourne, Inc. 51%
AmSurg Chicago, Inc. TN AmSurg Corp. 100%
The Chicago Endoscopy ASC, TN AmSurg Chicago, Inc. 51%
L.P.
AmSurg Hillmont, Inc. TN AmSurg Corp. 100%
The Hillmont ASC, L.P. TN AmSurg Hillmont, Inc. 51%
AmSurg Northwest Florida, TN AmSurg Corp. 100%
Inc.
The Northwest Florida ASC, TN AmSurg Northwest 51%
L.P. Florida, Inc.
AmSurg Palmetto, Inc. TN AmSurg Corp. 100%
The Palmetto ASC, L.P. TN AmSurg Palmetto, Inc. 51%
AmSurg Hallandale, Inc. TN AmSurg Corp. 100%
The Hallandale Surgery ASC, TN AmSurg Hallandale, Inc. 51%
L.P.
AmSurg Ocala, Inc. TN AmSurg Corp. 100%
The Ocala Endoscopy ASC, TN AmSurg Ocala, Inc. 51%
L.P.
AmSurg South Florida TN AmSurg Corp. 100%
Network, Inc.
</TABLE>
<PAGE> 4
EXHIBIT 21
SUBSIDIARY LIST
AS OF APRIL 23, 1998
PAGE (4 OF 6)
<TABLE>
<CAPTION>
STATE OF OWNERSHIP
NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE
------------------ ------------ -------- ----------
<S> <C> <C> <C>
The GI Network of South TN AmSurg South Florida 51%
Florida, L.P. Network, Inc.
AmSurg Largo, Inc. TN AmSurg Corp. 100%
The Largo Urology ASC, L.P. TN AmSurg Largo, Inc. 40%
AmSurg Dade County, Inc. TN AmSurg Corp. 100%
Gastroenterology Group of TN AmSurg Dade County, 70%
South Florida Inc.
AmSurg Panama City, Inc. TN AmSurg Corp. 100%
AmSurg Miami Urology, Inc. TN AmSurg Corp. 100%
The Miami Urology Group, TN AmSurg Miami Urology, 60%
L.P. Inc.
The Miami Urology ASC, L.P. TN AmSurg Miami Urology, 60%
Inc.
AmSurg Crystal River, Inc. TN AmSurg Corp. 100%
The Crystal River Endoscopy TN AmSurg Crystal River, 51%
ASC, L.P. Inc.
AmSurg Abilene Eye, Inc. TN AmSurg Corp. 100%
The Abilene Eye ASC, L.P. TN AmSurg Abilene Eye, 51%
Inc.
AmSurg Holdings, Inc. TN AmSurg Corp. 100%
The Knoxville Ophthalmology TN AmSurg Holdings, Inc. 60%
ASC, LLC
The West Monroe Endoscopy TN AmSurg Holdings, Inc. 55%
ASC, LLC
The Montgomery Eye Surgery TN AmSurg Holdings, Inc. 51%
Center, LLC
</TABLE>
<PAGE> 5
EXHIBIT 21
SUBSIDIARY LIST
AS OF APRIL 23, 1998
PAGE (5 OF 6)
<TABLE>
<CAPTION>
STATE OF OWNERSHIP
NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE
------------------ ------------ -------- ----------
<S> <C> <C> <C>
The Evansville ASC, LLC TN AmSurg Holdings, Inc. 40%
The Sidney ASC, LLC TN AmSurg Holdings, Inc. 51%
The Cleveland ASC, LLC TN AmSurg Holdings, Inc. 51%
The Milwaukee ASC, LLC TN AmSurg Holdings, Inc. 51%
The Pinnacle Eye Care TN AmSurg Holdings, Inc. 51%
Network, LLC
The Alabama Eye Care TN AmSurg Holdings, Inc. 51%
Network, LLC
The Columbia ASC, LLC TN AmSurg Holdings, Inc. 51%
The Wichita Orthopaedic TN AmSurg Holdings, Inc. 51%
ASC, LLC
The Minneapolis Endoscopy TN AmSurg Holdings, Inc. 51%
ASC, LLC
The West Glen Endoscopy TN AmSurg Holdings, Inc. 40%
Center, LLC
West Texas Eyecare Network, TN AmSurg Holdings, Inc. 51%
LLC
Cleveland Eyecare Network, TN AmSurg Holdings, Inc. 51%
LLC
The Willoughby ASC, LLC TN AmSurg Holdings, Inc. 51%
The Chevy Chase ASC, LLC TN AmSurg Holdings, Inc. 51%
The Oklahoma City ASC, LLC TN AmSurg Holdings, Inc. 51%
The Mountain West TN AmSurg Holdings, Inc. 51%
Gastroenterology ASC, LLC
The Cincinnati ASC, LLC TN AmSurg Holdings, Inc. 51%
The Fayetteville ASC, LLC TN AmSurg Holdings, Inc. 51%
</TABLE>
<PAGE> 6
EXHIBIT 21
SUBSIDIARY LIST
AS OF APRIL 23, 1998
PAGE (6 OF 6)
<TABLE>
<CAPTION>
STATE OF OWNERSHIP
NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE
------------------ ------------ -------- ----------
<S> <C> <C> <C>
The Independence ASC, LLC TN AmSurg Holdings, Inc. 60%
AmSurg Northern Kentucky TN AmSurg Holdings, Inc. 100%
GI, LLC
AmSurg Louisville GI, LLC TN AmSurg Holdings, Inc. 100%
AmSurg Kentucky TN AmSurg Holdings, Inc. 100%
Ophthalmology, LLC
The Union City ASC, LLC TN AmSurg Holdings, Inc. 51%
AmSurg El Paso, Inc. TN AmSurg Corp. 100%
The El Paso ASC, LLC TN AmSurg Holdings, Inc. 51%
The Phoenix Ophthalmology TN AmSurg Holdings, Inc. 51%
ASC, LLC
The Toledo Endoscopy ASC, TN AmSurg Holdings, Inc. 51%
LLC
The Englewood ASC, LLC TN AmSurg Holdings, Inc. 51%
</TABLE>
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of AmSurg Corp. on
Form S-1 of our report dated February 17, 1998 (March 31, 1998 as to Note 15)
appearing in the Prospectus, which is part of this Registration Statement, and
of our report dated February 17, 1998 relating to the financial statement
schedule appearing elsewhere in this Registration Statement.
We also consent to the reference to us under the headings "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
April 22, 1998
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of AmSurg Corp. on Form
S-1 of our report dated October 7, 1997 (relating to the financial statements
of The Endoscopy Center, Inc.) appearing in the Prospectus, which is part of
this Registration Statement, and of our report dated October 7, 1997 relating
to the financial statement schedule appearing elsewhere in this Registration
Statement.
We also consent to the reference to us under the headings "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
Nashville, Tennessee
April 22, 1998
