-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NMMx8Z7nbWY/BrY/lyTeMmWkTqAcR4sizftPr3ltmVxEadTfz78CtxlTKyy98gt/ IlXAD4QOpNQlu17EkWNONw== 0000950144-98-006695.txt : 19980521 0000950144-98-006695.hdr.sgml : 19980521 ACCESSION NUMBER: 0000950144-98-006695 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19980520 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMSURG CORP CENTRAL INDEX KEY: 0000895930 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 621493316 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-50813 FILM NUMBER: 98628649 BUSINESS ADDRESS: STREET 1: ONE BURTON HILLS BLVD. STREET 2: STE 350 CITY: NASHVILLE STATE: TN ZIP: 37215 BUSINESS PHONE: 6156651283 MAIL ADDRESS: STREET 1: ONE BURTON HILLS BLVD. STREET 2: SUITE 350 CITY: NASHVILLE STATE: TN ZIP: 37215 S-1/A 1 AMSURG FORM S-1/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1998 REGISTRATION NO. 333-50813 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- AMSURG CORP. (Exact name of registrant as specified in its charter) TENNESSEE 8060 62-1493316 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
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: 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
--------------------- 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. [ ] --------------------- 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. ================================================================================ 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 MAY 20, 1998 3,700,000 SHARES (AMSURG LOGO) CLASS A COMMON STOCK All of the shares of Class A Common Stock, no par value per share (the "Class A Common Stock") of AmSurg Corp. (the "Company") offered hereby (the "Offering") are being sold by the Company. The Company has two classes of common stock, the Class A Common Stock, which is offered hereby, and the Class B Common Stock, no par value per share (the "Class B Common Stock" and, together with the Class A Common Stock, the "Common Stock"). The Class A Common Stock and the Class B Common Stock are identical in all respects except that in the election and removal of directors the Class A Common Stock has one vote per share and the Class B Common Stock has 10 votes per share. See "Description of Capital Stock." The Class A Common Stock and the Class B Common Stock are traded on the Nasdaq Stock Market's National Market (the "Nasdaq National Market") under the symbols "AMSGA" and "AMSGB," respectively. On May 18, 1998, the last reported sale prices of the Class A Common Stock and the Class B Common Stock were $10.13 and $10.13 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.
=================================================================================================================== PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - ------------------------------------------------------------------------------------------------------------------- Per Share............................ $ $ $ - ------------------------------------------------------------------------------------------------------------------- Total(3)............................. $ $ $ ===================================================================================================================
(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 June , 1998. --------------------- J.C. BRADFORD & CO. PIPER JAFFRAY INC. MORGAN KEEGAN & COMPANY, INC. , 1998 3 [Map of United States depicting Surgery Centers, Surgery Centers Under Development and Networks at May 1, 1998. Map depicts 45 Surgery Centers in 20 states and Washington, D.C.; 6 Surgery Centers Under Development in 5 states; 5 Networks in 5 states.] 4 (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." 5 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 May 1, 1998, the Company owned a majority interest in 44 surgery centers and a minority interest in one center in 20 states and the District of Columbia. The Company also had six centers under development, had executed letters of intent to develop or acquire six additional centers and had two centers awaiting certificate of need ("CON") approval. The Company believes that it is a leader in the ownership and operation of practice-based ambulatory surgery centers. The Company's centers are licensed for outpatient surgery, are generally equipped and staffed for a single medical specialty and are usually located in or adjacent to the offices of a physician group practice. The Company has targeted ownership in centers that perform gastrointestinal endoscopy, ophthalmology, urology, orthopaedics or otolaryngology procedures. Surgical procedures associated with these specialties include many types of high volume, lower-risk procedures that are appropriate for the practice-based setting. The Company believes its single specialty centers have significantly lower capital and operating costs than hospital and freestanding ambulatory surgery center alternatives that are designed to accommodate a broader array of surgical specialties and procedures. In addition, the practice-based surgery center provides a more convenient setting for the patient and for the physician performing the procedure. In recent years, government programs, private insurance companies, managed care organizations and self-insured employers have implemented various cost-containment measures to limit the growth of healthcare expenditures. These cost-containment measures, together with technological advances, have resulted in a significant shift in the delivery of healthcare services away from traditional inpatient hospitals to more cost-effective alternate sites, including ambulatory surgery centers. According to SMG Marketing Group Inc.'s Freestanding Outpatient Surgery Center Directory (June 1997), an industry publication, outpatient surgical procedures represented approximately 69% of all surgical procedures performed in the United States in 1996. The number of outpatient surgery cases increased 54% from 3.1 million in 1993 to 4.8 million in 1996. As of December 31, 1996, there were 2,425 freestanding ambulatory surgery centers in the United States, of which 171 were owned by hospitals and 607 were owned by corporate entities. The remaining 1,647 centers were independently owned, primarily by physicians. The Company's strategy focuses on providing high volume, lower-risk ambulatory surgery services in single specialty settings, which results in lower costs, improved operating efficiencies and greater convenience and appeal to patients, physicians, private and governmental payers and managed care organizations. The Company intends to continue to grow through the acquisition of existing centers and the development of new centers. In addition, the Company's center operations are designed to enhance physician productivity and maximize the efficient use of the centers. Furthermore, the Company believes that it can make its centers more attractive to managed care organizations through the development of single specialty physician networks 1 6 in combination with practice-based ambulatory surgery centers strategically located in markets serving the managed care organizations' members. While the Company currently owns majority interests in two physician practices, in May 1998 the Board of Directors approved a plan for the Company to dispose of its physician practice interests as part of the Company's overall strategy to exit the practice management business and focus solely on the development, acquisition and operation of ambulatory surgery centers and specialty networks. The Company typically owns its surgery centers through limited or general partnerships or limited liability companies in which a subsidiary of the Company is a general partner or member and holds a majority interest. The other partners of the partnerships or members of the limited liability companies are physician practice groups that generally have offices adjacent to or in close proximity to the surgery center. In development projects, the capital contributed by the physicians and the Company, together with bank financing, provides the partnership or limited liability company with the funds necessary to construct and equip the surgery center and to provide initial working capital. The start-up specialty physician networks are also owned through limited partnerships or limited liability companies in which a subsidiary of the Company is a general partner or member and holds a majority interest. The other partners or members are individual physicians who provide the medical services to the patient population covered by contracts which the network will seek to enter into with managed care payers. These entities are funded by the Company and the physicians on a pro rata basis based on their ownership interests. The Company was a majority-owned subsidiary of American Healthcorp, Inc. ("AHC") from 1992 until December 3, 1997 when AHC distributed to its stockholders all of its holdings of AmSurg common stock (the "Distribution"). As a result of the Distribution, the Company became an independent public company. The Company was incorporated in Tennessee in April 1992. Its principal executive offices are located at One Burton Hills Boulevard, Nashville, Tennessee 37215. Its telephone number is (615) 665-1283. THE OFFERING Class A Common Stock offered by the Company............................... 3,700,000 shares Common Stock to be outstanding after the Offering: Class A Common Stock................ 9,462,391 shares(1) Class B Common Stock................ 4,787,131 shares Use of proceeds....................... 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 7 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND CENTER DATA)
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ------------------------------------------ ---------------------------------------- PRO FORMA PRO FORMA 1995 1996 1997 1997(1) 1997 1998 1998(1) ------- ------- ------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues............................. $22,389 $34,898 $57,414 $68,881 $12,591 $17,829 $20,038 Operating expenses: Salaries and benefits.............. 6,243 11,613 17,363 19,866 3,972 5,367 5,827 Other operating expenses........... 7,558 11,547 20,352 24,429 4,451 6,384 7,116 Depreciation and amortization...... 2,397 3,000 4,944 5,609 1,087 1,568 1,670 Net loss on sale of assets......... -- 31 1,425(2) 1,425(2) 2,321(3) 43 43 ------- ------- ------- ------- ------- ------- ------- Total operating expenses..... 16,198 26,191 44,084 51,329 11,831 13,362 14,656 ------- ------- ------- ------- ------- ------- ------- Operating income............. 6,191 8,707 13,330 17,552 760 4,467 5,382 Minority interest.................... 3,938 5,433 9,084 11,320 1,948 2,807 3,257 Other (income) and expenses: Interest expense, net.............. 627 808 1,554 2,463 308 493 646 Distribution cost.................. -- -- 842(4) 842(4) -- -- -- ------- ------- ------- ------- ------- ------- ------- Earnings (loss) before income taxes...................... 1,626 2,466 1,850 2,927 (1,496) 1,167 1,479 Income tax expense................... 578 985 1,774 2,205 329 467 592 ------- ------- ------- ------- ------- ------- ------- Net earnings (loss).......... 1,048 1,481 76 722 (1,825) 700 887 Accretion of preferred stock discount........................... -- 22 286 286 67 -- -- ------- ------- ------- ------- ------- ------- ------- Net earnings (loss) available to common shareholders..... $ 1,048 $ 1,459 $ (210) $ 436 $(1,892) $ 700 $ 887 ======= ======= ======= ======= ======= ======= ======= Earnings (loss) per common share: Basic.............................. $ 0.13 $ 0.17 $ (0.02)(5) $ 0.05(6) $ (0.20)(7) $ 0.07 $ 0.09 Diluted............................ $ 0.12 $ 0.16 $ (0.02)(5) $ 0.04(6) $ (0.20)(7) $ 0.07 $ 0.09 Weighted average number of shares and share equivalents outstanding: Basic.............................. 8,174 8,689 9,453 9,588 9,360 9,673 9,674 Diluted............................ 8,581 9,083 9,453 9,924 9,360 10,347 10,348 CENTER DATA: Procedures........................... 55,344 71,323 101,819 21,009 32,417 Centers at end of year............... 18 27 39 29 42
MARCH 31, 1998 ------------------------------------------- PRO FORMA PRO AS ACTUAL FORMA(8) ADJUSTED(9) ----------- ------------ -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) BALANCE SHEET DATA: Working capital............................................. $11,162 $10,351 $17,874 Total assets................................................ 82,758 87,091 94,614 Long-term debt, less current portion........................ 30,060 34,060 2,487 Minority interest........................................... 10,216 10,549 10,549 Preferred stock............................................. 3,208 3,208 -- Shareholders' equity........................................ 32,813 32,813 71,117
- --------------- (1) Reflects the effect of six acquisitions in 1997 and three acquisitions in 1998 occurring after the beginning of the period as if such transactions had occurred at the beginning of the period. See Unaudited Pro Forma Combined Statement of Operations. (2) Includes a loss attributable to the sale of a partnership interest, net of a gain on the sale of a surgery center building and equipment, which had an impact after taxes of reducing basic and diluted earnings per share by $0.16 for the year ended December 31, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 4 to the Consolidated Financial Statements. (3) Reflects an impairment loss attributable to the sale of a partnership interest, which had an impact after taxes of reducing basic and diluted earnings per share by $0.24 for the three months ended March 31, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 4 to the Consolidated Financial Statements. (4) Reflects cost incurred related to the Distribution, which reduced basic and diluted earnings per share by $0.09 for the year ended December 31, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (5) Without giving effect to the items reflected in footnotes (2) and (4) above, basic and diluted earnings per common share would have been $0.24 and $0.23, respectively, for the year ended December 31, 1997. (6) Without giving effect to the items reflected in footnotes (2) and (4) above, pro forma basic and diluted earnings per common share would have been $0.28 and $0.27, respectively, for the year ended December 31, 1997. (7) Without giving effect to the item reflected in footnote (3) above, basic and diluted earnings per common share would have been $0.05 and $0.04, respectively, for the three months ended March 31, 1997. (8) Reflects the effect of an acquisition of a surgery center occurring subsequent to March 31, 1998 as if such transaction had occurred as of March 31, 1998. (9) Reflects the effect of the application of net proceeds of this Offering, assuming a public offering price of $10.13. See "Use of Proceeds." 3 8 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 9 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 10 assurance that the Company will be able to negotiate satisfactory risk-sharing or capitated arrangements on behalf of its surgery centers, owned physician practices and specialty physician networks. See "Business." Dependence on Third-Party Reimbursement; Risk of Fee Reductions or Exclusion from Managed Care Arrangements. The Company is dependent upon private and governmental third-party sources of reimbursement for services provided to patients in its centers and physician practices. In addition to market and cost factors affecting the fee structure implemented by centers and practices operated by the Company, numerous Medicare and Medicaid regulations, cost containment and utilization decisions of third-party payers and other payment factors over which the Company has no control may adversely affect the amount of payment a center or practice may receive for its services. On or before January 1, 1999, outpatient surgery services will be reimbursed by Medicare under a revised prospective payment system, utilizing approximately 100 ambulatory patient classifications, rather than the eight codes currently utilized. There can be no assurance that the Company's revenues will not be adversely affected under this revised payment system. The Company derived approximately 37%, 36%, 37% and 40% of its revenues in 1995, 1996, 1997 and the three months ended March 31, 1998, respectively, from governmental healthcare programs, including Medicare and Medicaid. The market share growth of managed care has resulted in substantial competition among providers of services for inclusion in managed care contracting in some locations. Exclusion from participation in a managed care contract in a specific location can result in material reductions in patient volume and reimbursement to a physician practice or to a practice-based ambulatory surgery center. The Company's financial condition and results of operations may be adversely affected by fixed fee schedules, capitation payment arrangements, reduced payments to physicians generally, exclusion from participation in managed care programs or other changes in payments for healthcare services. In May 1998 the Company received notification from a payer with which one of its physician practices and surgery centers has a capitated contract for professional and surgical gastroenterology services covering approximately 120,000 lives that the contract would not be renewed beyond the June 30, 1998 anniversary date of the contract. The payer has advised the Company that it plans to negotiate a new contract. At this time, the Company cannot determine the outcome of these negotiations; however, an unfavorable outcome in these negotiations may have an adverse impact on the Company's results of operations. This contract contributed $676,000, or 5%, and $617,000, or 3%, to the Company's consolidated revenues in the three months ended March 31, 1997 and 1998, respectively. See "Business -- Government Regulation -- Reimbursement" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Sources of Revenues." Risks Associated with Medicare-Medicaid Illegal Remuneration ("anti-kickback") Laws. Federal anti-kickback laws prohibit the offer, payment, solicitation or receipt of any form of remuneration in return for the referral of Medicare or state health program patients or patient care opportunities, or in return for the purchase, lease or order of items or services that are covered by Medicare or state health programs. The anti-kickback statute is very broad in scope and its provisions are not well defined by existing case law or regulations. Violations of the anti-kickback laws may result in substantial civil or criminal penalties for individuals or entities. A violation of the anti-kickback law is a felony punishable by a fine of up to $25,000 or imprisonment for up to five years, or both. A violation may also result in civil penalties of up to $10,000 for each violation, plus three times the amount claimed and exclusion from participation in the Medicare and Medicaid programs. Such exclusion, if applied to the Company's surgery centers or networks, could result in significant loss of reimbursement and could have a material adverse effect on the Company. In July 1991, the Department of Health and Human Services ("DHHS") Inspector General issued final regulations identifying various "safe harbors," including two related to investment interests, which offer exemption from the anti-kickback laws. The structure of the partnerships and limited liability companies operating the Company's surgery centers and physician networks, as well as certain relationships with physician group practices, do not satisfy all of the requirements of either of the "investment interest" safe harbors or the "personal services and management contracts" safe harbor and, therefore, are not immune from government review or prosecution. Notwithstanding the Company's belief that the relationships of physician partners with the Company's surgery centers should not constitute illegal remuneration under the anti-kickback laws, no assurances can be given that a federal or state agency charged with enforcement of the anti-kickback laws and similar laws or a private party might not assert a contrary position or that new federal or state laws might not be enacted that would cause the physician partners' relationships with the Company's surgery centers to become illegal or result in 6 11 the imposition of penalties on the Company or certain of its facilities. Even the assertion of a violation could have a material adverse effect upon the financial condition and results of operations of the Company. See "Business -- Government Regulation -- Medicare-Medicaid Illegal Remuneration Provisions." Risks Associated with Physician Self-Referral Laws. At both the state and federal level, there are legislative restrictions on the ability of a physician to refer patients to healthcare entities when the physician (or immediate family member) has a financial relationship, directly or indirectly, with the entity receiving the referral. The financial relationship giving rise to prohibition on referrals may be either an ownership or investment interest or a compensatory arrangement. At the federal level, this legislation (42 USC sec.sec. 1395nn) is known as the "Stark bill" because of its sponsor, Representative Pete Stark. Originally, the Stark bill applied only to entities providing clinical laboratory services. However, as of January 1, 1995, the ban on physician financial relationships with healthcare entities extended to entities providing certain defined "designated health services" ("Stark II"). The Company believes physician ownership of practice-based ambulatory surgery centers to which they refer patients and physician networks is not prohibited under Stark II or other similar statutes recently enacted at the state level. However, these statutes are subject to different interpretations with respect to many important provisions. Violations of these "self-referral" laws may result in substantial civil or criminal penalties for individuals or entities, including large civil monetary penalties and exclusion from participation in the Medicare and Medicaid programs. Such exclusion, if applied to the Company's surgery centers, could result in significant loss of reimbursement and could have a material adverse effect on the Company. There can be no assurances that further judicial or agency interpretation of existing law or further legislative restrictions on physician ownership of healthcare entities will not be issued which could have a material adverse effect upon the financial condition and results of operations of the Company. See "Business -- Government Regulation -- Prohibition on Physician Ownership of Healthcare Facilities." Risks Related to Laws Governing Corporate Practice of Medicine. The laws of certain states in which the Company operates or may operate in the future do not permit business corporations to practice medicine, exercise control over physicians who practice medicine or engage in certain business practices such as fee-splitting with physicians. The Company is not required to obtain a license to practice medicine in any jurisdiction in which it owns and operates an ambulatory surgery center because the surgery centers are not engaged in the practice of medicine. The physician partners who utilize the center are individually licensed to practice medicine. The group practices, with the exception of the two physician practices majority owned by the Company, are not affiliated with the Company other than through the physicians' ownership in the partnerships and limited liability companies that own the surgery centers. The Company owns a majority interest in two group practices in Florida, a state which permits physicians to practice medicine through an entity that is not wholly-owned by physicians. A recent ruling by the Florida Board of Medicine that an agreement between a physician practice and a practice management company constituted impermissible fee-splitting, if upheld on judicial appeal, would cause the Company to restructure its relationship with one of the two group practices. The Company does not believe that any such restructuring would have a material adverse effect on the Company. There can be no assurance, however, that future changes in the law in Florida will not require the Company to restructure its ownership of these group practices and that such restructuring will not have a material adverse effect on the Company. See "Business -- Government Regulation -- Corporate Practice of Medicine." Risks of Potential Applicability of Insurance Regulations and Antitrust Laws. Laws in all states regulate the business of insurance and the operations of HMOs. Many states also regulate the establishment and operation of networks of healthcare providers. The Company believes that its operations are in compliance with these laws in the states in which it currently does business. The National Association of Insurance Commissioners (the "NAIC") has endorsed a policy proposing the state regulation of risk assumption by healthcare providers. The policy proposes prohibiting providers from entering into capitated payment or other risk sharing contracts except through HMOs or insurance companies. Several states have adopted regulations implementing the NAIC policy in some form. In states where such regulations have been adopted, healthcare providers will be precluded from entering into capitated contracts directly with employers and benefit plans other than HMOs or insurance companies. 7 12 The Company and its affiliated physician groups may in the future enter into additional contracts with managed care organizations, such as HMOs, whereby the Company and its affiliated physician groups would assume risk in connection with providing healthcare services under capitation arrangements. If the Company or its affiliated physician groups are considered to be in the business of insurance as a result of entering into such risk sharing arrangements, they could become subject to a variety of regulatory and licensing requirements applicable to insurance companies or HMOs, which could have a material adverse effect on the Company's ability to enter into such contracts. See "Business -- Government Regulation -- Insurance and Antitrust Laws." With respect to managed care contracts that do not involve capitated payments or some other form of financial risk sharing, federal and state antitrust laws restrict the ability of healthcare provider networks such as the Company's specialty physician networks to negotiate payments on a collective basis. Risks of Compliance with Other Government Regulation. All facets of the healthcare industry are highly regulated at the federal and state levels. The Company's ability to be profitable may be adversely affected by licensing and certification requirements, reimbursement restrictions or reductions and other governmental regulatory factors. In addition, the Company's ability to expand its services in the future may be adversely affected by health planning laws, including CON requirements, at the state and/or federal level. A number of other initiatives have developed during the past several years to reform various aspects of the healthcare system in the United States. There can be no assurance that current or future legislative initiatives or government regulation will not have a material adverse effect on the financial condition or results of operations of the Company or reduce the demand for its services. See "Business -- Government Regulation -- CONs and State Licensing." Prior Reliance on AHC. The Company historically relied upon AHC for certain corporate management, administrative and accounting services. The Company is now responsible for maintaining its own management, administrative and accounting functions, except for certain financial and accounting services provided by AHC on a transitional basis until December 1998 pursuant to the Administrative Services Agreement (as defined herein) and for certain advisory services provided by members of AHC senior management pursuant to advisory agreements expiring in December 1999. In particular, Thomas G. Cigarran, who was the Chairman and Chief Executive Officer of the Company, no longer serves as an officer of the Company, although he continues to serve as Chairman of the Board of Directors and is now an advisor to the Company. Henry D. Herr, who was Vice President and Secretary of the Company, now serves as a director and an advisor to the Company, but no longer serves as an officer of the Company. See "Certain Relationships and Related Transactions." Risks Related to Intangible Assets. As a result of purchase accounting for the Company's various acquisition transactions, the Company's balance sheet at March 31, 1998 contains an intangible asset designated as excess of cost over net assets of purchased operations totaling $44.1 million. Using an amortization period of 25 years, amortization expense relating to this intangible asset will be approximately $1.9 million per year. Purchases of interests in practice-based surgery centers that result in the recognition of additional intangible assets would cause amortization expense to increase further. On an ongoing basis, the Company evaluates, based upon projected undiscounted cash flows, whether facts and circumstances indicate any impairment of value of intangible assets and if the amortization period continues to be appropriate. As the underlying facts and circumstances subsequent to the date of acquisition can change, there can be no assurance that the value of such intangible assets will be realized by the Company. Any determination that a significant impairment has occurred would require the write-off of the impaired portion of unamortized intangible assets, which could have a material adverse effect on the Company's results of operations. In that regard, in 1997 the Company recorded an impairment loss which ultimately resulted in a net loss of $2.0 million in connection with one partnership and in the second quarter of 1998 the Company expects to record a charge of $3.6 million net of income tax benefit in conjunction with its plan to exit the physician practice management business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 4 and 16 to the Consolidated Financial Statements. 8 13 Proposed Treasury Regulation Regarding Tax Deduction for Amortization of Goodwill. Effective on August 10, 1993, Section 197 of the Internal Revenue Code of 1986, as amended (the "Code"), was enacted to allow goodwill and other intangible assets purchased after that date to be amortized over a fifteen-year period for tax purposes. Previously, no tax deduction was allowed for purchases of goodwill. On January 16, 1997, the Internal Revenue Service (the "IRS") published proposed regulations regarding Section 197 amortization of intangible assets including goodwill. The proposed regulations cover certain "anti-churning" provisions which deny a deduction for goodwill amortization in several situations, including situations in which the taxpayer acquired the goodwill in a transaction immediately before or after which the seller of the goodwill is related to the acquiring taxpayer. The anti-churning rules are designed to prevent taxpayers from converting existing goodwill for which an amortization deduction would not have been allowable prior to the enactment of Section 197 into an asset with respect to which Section 197 would currently allow an amortization deduction. These proposed regulations do not specifically contain an exception for the form of transaction that the Company has utilized in its acquisition of interests in practice-based ambulatory surgery centers and interests in physician practices. However, because the goodwill for which the Company has been claiming amortization deductions was purchased by the Company from unrelated parties after the effective date of Section 197 and, as per agreement with the sellers, the tax deduction for goodwill amortization is specifically allocated exclusively to the Company (and therefore, the seller receives no tax benefit from the amortization of the goodwill), the Company believes that the proposed regulations should not affect the Company's amortization deductions. Together with other taxpayers similarly affected, the Company will vigorously attempt to persuade the IRS to revise the proposed regulations to recognize that the methodology utilized by the Company is consistent with the intent of Section 197 and the anti-churning rules and to preserve the amortization deduction with respect to the Company's acquired goodwill. However, there can be no assurance that the proposed regulations will be amended or modified by the IRS. If the proposed regulations are adopted as currently written, it will not be clear whether the Company would be entitled to the deduction for the amortization of goodwill associated with the purchase of interests in practice-based surgery centers and physician practices and these deductions could be subject to challenge by the IRS. Loss of these tax deductions would have a material adverse effect on the Company's results of operations. Due to the lengthy public hearing and adoption process, the Company is not able to estimate a date by which the IRS will take action on the proposed regulations. Competition. The healthcare business is highly competitive. There are other companies in the same or similar business of developing, acquiring and operating practice-based ambulatory surgery centers, specialty physician networks and physician practices, or who may decide to enter the practice-based ambulatory surgery center business, the development of specialty physician networks or the acquisition of physician practices, who have greater financial, research, marketing and staff resources than the Company. In addition, the Company competes with other healthcare providers for contracting with managed care payers in each of its markets. There can be no assurance the Company can compete effectively with such entities. See "Business -- Competition." Risks Relating to Year 2000 Compliance. Many existing computer software programs and operating systems were designed such that the year 1999 is the maximum date that many computer systems will be able to process. The Company is addressing the potential problems posed by this limitation in its systems software to assure that the Company is prepared for the Year 2000. The Company also intends to seek verification from third parties with which it conducts material business, such as payers, that such parties will be Year 2000 compliant. If modifications and conversions to deal with Year 2000 issues are not completed on a timely basis by the Company or by third parties with which the Company conducts material business, such issues may have a material adverse effect on the results of operations of the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000." Shares Eligible for Future Sale. Upon completion of the Offering, the Company will have outstanding an aggregate of 9,462,391 shares of Class A Common Stock (10,017,391 shares if the Underwriters' over-allotment option is exercised in full) and 4,787,131 shares of Class B Common Stock. The 3,700,000 shares of Class A Common Stock sold in the Offering will be freely tradeable without restriction under the Securities Act of 1933, as amended (the "Securities Act") unless acquired by "affiliates" of the Company as that term is 9 14 defined in Rule 144 under the Securities Act, which shares would be subject to the resale limitations of Rule 144. In addition, the 743,000 shares of Class A Common Stock that were issued to holders of AHC common stock in the Distribution are freely tradeable without restriction or further registration under the Securities Act, unless held by affiliates of the Company (which shares also would be subject to certain resale limitations and other restrictions under Rule 144 described below). Of the remaining 5,019,391 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. 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 15 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.
CLASS A CLASS B COMMON STOCK COMMON STOCK --------------- --------------- HIGH LOW HIGH LOW ------ ----- ------ ----- 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 May 18, 1998)..................... 11.25 8.75 10.88 8.88
On May 18, 1998, the last reported sale prices for the Class A Common Stock and the Class B Common Stock were $10.13 and $10.13 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 $10.13 per share, are estimated to be $35.1 million ($40.4 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. Approximately $33.1 million of the net proceeds will be used to repay borrowings under the revolving credit facility of the Company's Third Amended and Restated Loan Agreement (the "Loan Agreement"). Borrowings under the Loan Agreement mature in January 2001, and bear interest at a rate equal to, at the Company's option, the prime rate or LIBOR plus a spread of 1.0% to 2.25%, depending upon borrowing levels. The Loan Agreement also provides for a fee ranging between .15% and .40% of unused commitments based on borrowing levels. The Company will have $50.0 million available for borrowing under the Loan Agreement upon completion of the Offering and application of the net proceeds. The indebtedness under the Loan Agreement was incurred primarily to finance the development and acquisition of surgery centers, and the Company intends to continue to utilize borrowings under the Loan Agreement for the same purpose. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 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 16 CAPITALIZATION The following table sets forth the capitalization of the Company at March 31, 1998 on an actual basis and as adjusted to reflect the issuance and sale by the Company of the 3,700,000 shares of Class A Common Stock offered hereby, at an assumed public offering price of $10.13 per share, and the application of the estimated net proceeds received by the Company therefrom as described under "Use of Proceeds." This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements, including the notes thereto, included elsewhere in this Prospectus.
AT MARCH 31, 1998 --------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Current portion of long-term debt........................... $ 1,447 $ 1,447 Long-term debt, less current portion........................ 30,060 2,487 Preferred Stock, no par value, 5,000,000 shares authorized: Series B Preferred Stock, 416,666 shares issued and outstanding............................................ 3,208 -- Shareholders' equity: Class A Common Stock, 20,000,000 shares authorized, 5,145,966 and 9,262,632 shares issued and outstanding, respectively(1)........................................ 16,724 55,028 Class B Common Stock, 4,800,000 shares authorized, 4,787,131 shares issued and outstanding................ 13,529 13,529 Retained earnings......................................... 2,799 2,799 Deferred compensation on restricted stock................. (239) (239) ------- ------- Total shareholders' equity........................ 32,813 71,117 ------- ------- Total capitalization......................... $67,528 $75,051 ======= =======
- --------------- (1) Excludes 1,330,524 shares of Class A Common Stock issuable upon the exercise of outstanding stock options at March 31, 1998 with a weighted average exercise price per share of $4.23. 12 17 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE) The following table sets forth selected consolidated financial data which have been derived from the Company's consolidated financial statements. The financial statements at and for the periods ended December 31, 1993 through 1997 have been audited. The pro forma combined statement of operations data for the year ended December 31, 1997 and the three months ended March 31, 1998 set forth below reflect the effect of six acquisitions in 1997 and three acquisitions in 1998 occurring subsequent to the beginning of the period as if such transactions were completed at January 1, 1997. The pro forma balance sheet data at March 31, 1998 set forth below reflect the effect of an acquisition of a surgery center occurring subsequent to March 31, 1998 as if such transaction had been completed as of March 31, 1998. Comparability of data on a year-to-year basis is affected by the number of centers acquired or opened in each year. All the information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes included elsewhere herein. See "Index to Financial Statements." The Company operated as a majority owned subsidiary of AHC until the Distribution. The historical financial information may not be indicative of the Company's future performance and does not necessarily reflect the financial position and results of operations of the Company had it operated as a separate, stand-alone entity prior to December 3, 1997.
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ------------------------------------------------------------ ------------------------------ PRO FORMA PRO FORMA 1993 1994 1995 1996 1997 1997 1997 1998 1998 ------- ------- ------- ------- ------- --------- ------- ------- --------- (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues......................... $ 6,558 $13,784 $22,389 $34,898 $57,414 $68,881 $12,591 $17,829 $20,038 Operating expenses: Salaries and benefits.......... 2,307 4,092 6,243 11,613 17,363 19,866 3,972 5,367 5,827 Other operating expenses....... 3,002 5,091 7,558 11,547 20,352 24,429 4,451 6,384 7,116 Depreciation and amortization................. 665 1,309 2,397 3,000 4,944 5,609 1,087 1,568 1,670 Net loss on sale of assets..... -- -- -- 31 1,425(1) 1,425(1) 2,321(2) 43 43 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses............... 5,974 10,492 16,198 26,191 44,084 51,329 11,831 13,362 14,656 ------- ------- ------- ------- ------- ------- ------- ------- ------- Operating income......... 584 3,292 6,191 8,707 13,330 17,552 760 4,467 5,382 Minority interest................ 1,121 2,464 3,938 5,433 9,084 11,320 1,948 2,807 3,257 Other (income) and expenses: Interest expense, net.......... 2 151 627 808 1,554 2,463 308 493 646 Distribution cost.............. -- -- -- -- 842(3) 842(3) -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- Earnings (loss) before income taxes........... (539) 677 1,626 2,466 1,850 2,927 (1,496) 1,167 1,479 Income tax expense............... -- 26 578 985 1,774 2,205 329 467 592 ------- ------- ------- ------- ------- ------- ------- ------- ------- Net earnings (loss)...... (539) 651 1,048 1,481 76 722 (1,825) 700 887 Accretion of preferred stock discount....................... -- -- -- 22 286 286 67 -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net earnings (loss) available to common shareholders........... $ (539) $ 651 $ 1,048 $ 1,459 $ (210) $ 436 $(1,892) $ 700 $ 887 ======= ======= ======= ======= ======= ======= ======= ======= ======= Earnings (loss) per common share: Basic.......................... $ (0.11) $ 0.09 $ 0.13 $ 0.17 $ (0.02)(4) $ 0.05(5) $ (0.20)(6) $ 0.07 $ 0.09 Diluted........................ $ (0.11) $ 0.09 $ 0.12 $ 0.16 $ (0.02)(4) $ 0.04(5) $ (0.20)(6) $ 0.07 $ 0.09 Weighted average number of shares and share equivalents outstanding: Basic.......................... 4,737 6,999 8,174 8,689 9,453 9,588 9,360 9,673 9,674 Diluted........................ 4,737 7,313 8,581 9,083 9,453 9,924 9,360 10,347 10,348
DECEMBER 31, MARCH 31, ----------------------------------------------- ------------------- PRO FORMA 1993 1994 1995 1996 1997 1998 1998 ------- ------- ------- ------- ------- ------- --------- (UNAUDITED) BALANCE SHEET DATA: Working capital........................................... $ 993 $ 2,557 $ 2,931 $ 4,732 $ 9,312 $11,162 $10,351 Total assets.............................................. 14,637 27,065 35,106 54,653 75,238 82,758 87,091 Long-term debt, less current portion...................... 640 3,520 4,786 9,218 24,970 30,060 34,060 Minority interest......................................... 601 2,019 3,010 5,674 9,192 10,216 10,549 Preferred stock........................................... -- -- -- 4,982 5,268 3,208 3,208 Shareholders' equity...................................... 12,055 19,558 22,479 28,374 29,991 32,813 32,813
- --------------- (1) Includes a loss attributable to the sale of a partnership interest, net of a gain on the sale of a surgery center building and equipment, which had an impact after taxes of reducing basic and diluted earnings per share by $0.16 for the year ended December 31, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 4 to the Consolidated Financial Statements. (2) Includes an impairment loss attributable to the sale of a partnership interest, which had an impact after taxes of reducing basic and diluted earnings per share by $0.24 for the three months ended March 31, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 4 to the Consolidated Financial Statements. (3) Reflects cost incurred related to the Distribution, which reduced basic and diluted earnings per share by $0.09 for the year ended December 31, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (4) Without giving effect to the items reflected in footnotes (1) and (3) above, basic and diluted earnings per common share would have been $0.24 and $0.23, respectively, for the year ended December 31, 1997. (5) Without giving effect to the items reflected in footnotes (1) and (3) above, pro forma basic and diluted earnings per common share would have been $0.28 and $0.27, respectively, for the year ended December 31, 1997. (6) Without giving effect to the item reflected in footnote (2) above, basic and diluted earnings per common share would have been $0.05 and $0.04, respectively, for the three months ended March 31, 1997. 13 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements. These statements, which have been included in reliance on the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, involve risks and uncertainties. The Company's actual operations and results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, the Company's ability to enter into partnership or operating agreements for new practice-based ambulatory surgery centers and new specialty physician networks; its ability to identify suitable acquisition candidates and negotiate and close acquisition transactions; its ability to obtain the necessary financing or capital on terms satisfactory to the Company in order to execute its expansion strategy; its ability to manage growth; its ability to contract with managed care payers on terms satisfactory to the Company for its existing centers and its centers that are currently under development; its ability to obtain and retain appropriate licensing approvals for its existing centers and centers currently under development; its ability to minimize start-up losses of its development centers; its ability to maintain favorable relations with its physician partners; and its ability to sell the two physician practices. OVERVIEW The Company develops, acquires and operates practice-based ambulatory surgery centers in partnership with physician practice groups. As of March 31, 1998, the Company owned a majority interest (51% or greater) in 41 surgery centers, owned a minority interest in one surgery center, owned a majority interest (60% or greater) in two physician practices and had established and was the majority owner (51%) of five start-up specialty physician networks. The Company operated as a majority-owned subsidiary of AHC from 1992 until the Distribution on December 3, 1997. Prior to the Distribution, the Company effected a recapitalization pursuant to which every three shares of the Company's then outstanding common stock were converted into one share of Class A Common Stock. Immediately following the Recapitalization, AHC exchanged a portion of its shares of Class A Common Stock for shares of Class B Common Stock. The principal purpose of the Distribution was to enable the Company to have access to debt and equity capital markets as an independent, publicly traded company. Upon the Distribution, the Company became a publicly traded company. The following table presents the changes in the number of surgery centers in operation and centers under development for the periods indicated. A center is deemed to be under development when a partnership or limited liability company has been formed with the physician group partner to develop the center.
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, -------------------- ------------ 1995 1996 1997 1997 1998 ---- ---- ---- ---- ---- Centers in operation, beginning of period................. 14 18 27 27 39 New center acquisitions................................... 2 6 5 2 2 New development centers placed in operation............... 2 3 10 -- 2 Centers sold.............................................. -- -- (3) -- (1) -- -- -- -- -- Centers in operation, end of period....................... 18 27 39 29 42 == == == == == Centers under development, end of period.................. 13 20 10 17 8 == == == == ==
Thirty-two of the surgery centers in operation as of March 31, 1998 perform gastrointestinal endoscopy procedures; eight centers perform ophthalmology procedures; one center performs orthopaedic procedures; and one center performs ophthalmology, urology, general surgery and otolaryngology procedures. The other partner or member in each partnership or limited liability company is in each case an entity owned by physicians who perform procedures at the center. 14 19 In addition, the Company has a majority interest in two physician practices which were acquired in January 1996 and January 1997, the other partners of which are entities owned by the principal physicians who provide professional medical services to patients of the practices. In May 1998, the Company's Board of Directors approved a plan to dispose of the Company's interests in these two specialty physician practices as part of an overall strategy to exit the practice management business and focus solely on the development, acquisition and operation of ambulatory surgery centers and specialty networks. Accordingly, the Company will record a charge of $3.6 million, net of income tax benefit of $1.8 million, in the second quarter of 1998 for the estimated loss on the disposal of these assets. Although the Company is currently in negotiations regarding the possible sale of one of the two practices, there are no definitive agreements or arrangements with regard thereto. Therefore, there can be no assurance that the Company will sell these operations; however, the Company believes that the estimated disposal loss will be adequate in the sale of the practices. See Note 16 of the Consolidated Financial Statements. The start-up specialty physician networks are owned through limited partnerships and limited liability companies in which the Company owns a majority interest. The other partners or members are individual physicians who will provide the medical services to the patient population covered by the contracts the network will seek to enter into with managed care payers. The Company does not expect that the specialty physician networks alone will be a significant source of income for the Company. These networks were and will be formed in selected markets primarily as a contracting vehicle for certain managed care arrangements to generate revenues for the Company's practice-based surgery centers. As of March 31, 1998, one network had secured a managed care contract and was operational. The Company intends to expand primarily through the development and acquisition of additional practice-based ambulatory surgery centers in targeted surgical specialties. In addition, the Company believes that its surgery centers, combined with the Company's relationships with specialty physician practices in the surgery centers' markets, will provide the Company with other opportunities for growth from specialty network development. By using its surgery centers as a base to develop specialty physician networks that are designed to serve large numbers of covered lives, the Company believes that it will strengthen its market position in contracting with managed care organizations. While the Company generally owns 51% to 70% of the entities that own the surgery center or physician group practice, the Company's consolidated statements of operations include 100% of the results of operations of the entities, reduced by the minority partners' share of the net earnings or loss of the surgery center/practice entities. SOURCES OF REVENUES The Company's principal source of revenues is a facility fee charged for surgical procedures performed in its surgery centers. This fee varies depending on the procedure, but usually includes all charges for operating room usage, special equipment usage, supplies, recovery room usage, nursing staff and medications. Facility fees do not include the charges of the patient's surgeon, anesthesiologist or other attending physicians, which are billed directly to third-party payers by such physicians. The Company's other significant source of revenues is the fee for physician services performed by the two physician group practices in which the Company owns a majority interest. Practice-based ambulatory surgery centers and physician practices such as those in which the Company owns a majority interest depend upon third-party reimbursement programs, including governmental and private insurance programs, to pay for services rendered to patients. The Company derived approximately 37%, 36%, 37% and 40% of its net revenues from governmental healthcare programs, including Medicare and Medicaid, in 1995, 1996, 1997 and the three months ended March 31, 1998, respectively. The Medicare program currently pays ambulatory surgery centers and physicians in accordance with fee schedules which are prospectively determined. Approximately 10%, 11% and 9% of the Company's revenues for 1996, 1997 and the three months ended March 31, 1998, respectively, were generated by capitated payment contracts with HMOs. These revenues generally were attributable to contracts held by physician practices and a surgery center in which the 15 20 Company holds a majority interest. These contracts require the practices to provide specialty physician and certain outpatient surgery services for the HMO members on an exclusive basis. These contracts do not require the practices to provide or to be at risk for hospital or other ancillary services such as laboratory or imaging services. The services required by these contracts are provided almost solely by surgery centers and the physician practices in which the Company owns a majority interest. Because the Company is only at risk for the cost of providing relatively limited healthcare services to these HMO members, the Company's risk of overutilization by HMO members is limited to the cost of the physician's time and the supply, drug and nursing staff expense required for outpatient surgery. In May 1998 the Company received notification from a payer with which one of its physician practices and surgery centers has a capitated contract for professional and surgical gastroenterology services covering approximately 120,000 lives that the contract would not be renewed beyond the June 30, 1998 anniversary date of the contract. The payer has advised the Company that it plans to negotiate a new contract. At this time, the Company cannot determine the outcome of these negotiations; however, an unfavorable outcome in these negotiations may have an adverse impact on the Company's results of operations. This contract contributed $676,000, or 5%, and $617,000, or 3%, to the Company's consolidated revenues in the three months ended March 31, 1997 and 1998, respectively. See Note 16 of the Consolidated Financial Statements. The Company's sources of revenues as a percentage of total revenues for the periods indicated are as follows:
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, -------------------- ------------ 1995 1996 1997 1997 1998 ---- ---- ---- ---- ---- Surgery centers................................. 97% 83% 83% 80% 87% Physician practices............................. -- 15 15 17 12 Other........................................... 3 2 2 3 1 --- --- --- --- --- Total.................................... 100% 100% 100% 100% 100% === === === === ===
RESULTS OF OPERATIONS The following table shows certain statement of operations items expressed as a percentage of revenues for the periods indicated:
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, ----------------------- -------------- 1995 1996 1997 1997 1998 ----- ----- ----- ----- ----- Revenues................................. 100.0% 100.0% 100.0% 100.0% 100.0% Operating expenses: Salaries and benefits.................. 27.9 33.3 30.2 31.6 30.1 Other operating expenses............... 33.7 33.1 35.5 35.4 35.8 Depreciation and amortization.......... 10.7 8.6 8.6 8.6 8.8 Net loss on sale of assets............. -- -- 2.5 18.4 0.2 ----- ----- ----- ----- ----- Total operating expenses....... 72.3 75.0 76.8 94.0 74.9 ----- ----- ----- ----- ----- Operating income............... 27.7 25.0 23.2 6.0 25.1 Minority interest........................ 17.6 15.6 15.8 15.5 15.8 Other (income) and expenses: Interest expense, net of interest income.............................. 2.8 2.3 2.7 2.4 2.8 Distribution cost...................... -- -- 1.5 -- -- ----- ----- ----- ----- ----- Earnings (loss) before income taxes........................ 7.3 7.1 3.2 (11.9) 6.5 Income tax expense....................... 2.6 2.9 3.1 2.6 2.6 ----- ----- ----- ----- ----- Net earnings (loss)............ 4.7 4.2 0.1 (14.5) 3.9 Accretion of preferred stock discount.... -- -- 0.5 0.5 -- ----- ----- ----- ----- ----- Net earnings (loss) available to common shareholders....... 4.7% 4.2% (0.4)% (15.0)% 3.9% ===== ===== ===== ===== =====
16 21 Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997 Revenues were $17.8 million in the three months ended March 31, 1998, an increase of $5.2 million, or 42%, over revenues in the comparable 1997 period. The increase is primarily attributable to additional centers in operation in the three months ended March 31, 1998. Same-center revenues in the three months ended March 31, 1998, increased by 14%. Same-center revenue growth resulted primarily from increased procedure volume. The Company anticipates further revenue growth during 1998 as a result of additional start-up and acquired centers expected to be placed in operation and from same-center revenue growth, net of a revenue reduction due to the expected disposition of the physician practices and any possible adverse impact of the renegotiated capitated contract, as discussed above. Salaries and benefits expense was $5.4 million in the three months ended March 31, 1998, an increase of $1.4 million, or 35%, over salaries and benefits expense in the comparable 1997 period. Other operating expenses were $6.4 million in the three months ended March 31, 1998, an increase of $1.9 million, or 43%, over other operating expenses in the comparable 1997 period. These increases resulted primarily from additional centers in operation, from an increase in corporate staff primarily to support growth in the number of centers in operation and anticipated future growth and from additional corporate costs associated with being a publicly traded company. The Company anticipates further increases in operating expenses in 1998, primarily due to additional start-up centers and acquired centers expected to be placed in operation, offset by the expected elimination of physician practice operating expenses upon the planned disposal of these practices. Typically, a start-up center will incur start-up losses during its initial months of operation and will experience lower revenues and operating margins than an established center until its case load increases to a more optimal operating level, which generally is expected to occur within 12 months after a center opens. Depreciation and amortization expense increased $481,000, or 44%, in the three months ended March 31, 1998, over the comparable 1997 period, primarily due to 13 additional surgery centers in operation in the three months ended March 31, 1998 compared to the comparable 1997 period. During the three months ended March 31, 1998, the Company incurred a net loss of $43,000 related to the sale of a surgery center to an unaffiliated third party. The Company does not believe that this sale will have a significant impact on the Company's future ongoing results of operations. During the comparable 1997 period, the Company recorded an impairment loss of $2.3 million, which ultimately resulted in a net loss of $2.0 million, in connection with a partnership that operated two surgery centers. The minority interest in earnings in the three months ended March 31, 1998, increased by $860,000, or 44%, over the comparable 1997 period primarily as a result of minority partners' interests in earnings of surgery centers recently added to operations and from increased same-center profitability. Interest expense increased $185,000, or 60%, during the three months ended March 31, 1998, over the comparable 1997 period due to debt assumed or incurred in connection with additional acquisitions of interests in surgery centers, together with the interest expense associated with newly opened start-up surgery centers financed partially with bank debt. The Company recognized income tax expense of $467,000 in the three months ended March 31, 1998, compared to $329,000 in the comparable 1997 period. In the three months ended March 31, 1997, the Company recognized no tax benefit associated with the net loss on sale of assets. The Company's effective tax rate in both periods was 40% of earnings prior to the impact of the net loss on sale of assets and differed from the federal statutory income tax rate of 34% primarily due to the impact of state income taxes. Accretion of preferred stock discount in the three months ended March 31, 1997 resulted from the issuance during November 1996 of redeemable preferred stock with a redemption amount of $3.0 million. The preferred stock was recorded at its fair market value, net of issuance costs. From the time of issuance, the Series A Redeemable Preferred Stock (the "Series A Preferred Stock") has been accreted toward its redemption value, including potential dividends, over the redemption term. During the three months ended March 31, 1998, the holders of this series of preferred stock elected to convert their preferred shares into 17 22 380,952 shares of Class A Common Stock pursuant to the provisions of the Company's Charter using a conversion ratio based on the market price of the Company's Class A Common Stock. Accordingly, the Company will no longer record accretion of preferred stock discount. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Revenues were $57.4 million in 1997, an increase of $22.5 million, or 65%, over revenues in 1996. The increase is primarily attributable to additional centers in operation in 1997 and the acquisition of a urology physician practice on January 1, 1997. Excluding the three centers which were disposed as described below, same-center revenues in 1997 increased by 6%. Same-center growth resulted from increased case volume and increases in fees. Salaries and benefits expense was $17.4 million in 1997, an increase of $5.7 million, or 50%, over salaries and benefits expense in 1996. Other operating expenses were $20.4 million in 1997, an increase of $8.8 million, or 76%, over other operating expenses in 1996. This increase resulted primarily from additional centers in operation, the acquisition of the interest in the urology physician practice and from an increase in corporate staff primarily to support growth in the number of centers in operation and anticipated future growth. Salaries and benefits expense and other operating expenses in the aggregate as a percentage of revenues remained comparable at 66% in 1997 and 1996. However, salaries and benefits expense as a percentage of revenues decreased in 1997 while other operating expenses as a percentage of revenues increased proportionately in 1997 compared to 1996, primarily due to the addition of contracted physician service expense for the physician practice acquired in January 1997 within other operating expenses. Depreciation and amortization expense increased $1.9 million, or 65%, in 1997 over 1996, primarily due to 12 additional surgery centers and one physician practice in operation in 1997 compared to 1996. Included in net loss on sale of assets in 1997 is a loss of approximately $2.0 million from the disposition of the Company's investment in a partnership that owned two surgery centers acquired in 1994. Various disagreements with the sole physician partner over the operation of these centers had adversely affected the operations of these centers. After a series of discussions and attempts to resolve these differences, the Company determined that the partners could not resolve their disagreements, and that, as a result, the carrying value of the assets associated with this partnership would not likely be fully recovered. The Company projected the undiscounted cash flows from these centers and determined these cash flows to be less than the carrying value of the long-lived assets attributable to this partnership. Accordingly, an impairment loss equal to the excess of the carrying value of the long-lived assets over the present value of the estimated future cash flows was recorded in the first quarter of 1997 in accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." In September 1997, the Company sold its interest in the partnership assets to its physician partner and recognized a partial loss recovery. The Company believes that it has good relationships with its other physician partners and that the loss attributable to the partnership discussed above resulted from a unique set of circumstances. In addition, net loss on sale of assets includes a pretax gain of approximately $460,000 from the sale in July 1997 of a surgery center building and equipment which the Company had leased to a gastrointestinal physician practice. Concurrently with the sale, the Company terminated its management agreement with the physician practice for the surgery center in which the Company had no ownership interest but had managed since 1994. The minority interest in earnings in 1997 increased by $3.7 million, or 67%, over 1996 primarily as a result of minority partners' interest in earnings at surgery centers recently added to operations and from increased same-center profitability. Interest expense increased $745,000, or 92%, in 1997 over 1996 due to debt assumed or incurred in connection with additional acquisitions of interests in surgery centers and a physician practice, together with the interest expense associated with newly opened start-up surgery centers financed partially with bank debt. Distribution cost in 1997 represents costs incurred by the Company related to effecting the Distribution. 18 23 The Company recognized income tax expense of $1.8 million in 1997, compared to $1.0 million in 1996. The Company has recognized no tax benefit associated with distribution cost and net loss on sale of assets, while certain tax aspects of the gain transaction recorded in July 1997 resulted in income tax expense of approximately $100,000. The Company's effective tax rate in both periods was 40% of earnings prior to the impact of distribution cost and net loss on sale of assets and differed from the federal statutory income tax rate of 34%, primarily due to the impact of state income taxes. Accretion of preferred stock discount resulted from the issuance during November 1996 of redeemable preferred stock with a redemption amount of $3.0 million. The preferred stock was recorded at its fair market value, net of issuance costs. From the time of issuance, the Series A Preferred Stock has been accreted toward its redemption value, including potential dividends, over the redemption term. Subsequent to December 31, 1997, using a conversion ratio based on the market price of the Company's Class A Common Stock, the holders of this preferred stock elected to convert their preferred shares into 380,952 shares of Class A Common Stock pursuant to the provisions of the Company's Charter. Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Revenues were $34.9 million in 1996, an increase of $12.5 million, or 56%, over revenues in 1995. The increase resulted primarily from the growth in the number of surgery centers in operation, the acquisition of a majority interest in a physician practice as of January 31, 1996 and an increase of 14% in same-center revenues for the 15 centers in operation since January 1, 1995. Salaries and benefits expense increased by $5.4 million, or 86%, while other operating expenses increased by $4.0 million, or 53%, in 1996 over 1995. These increases resulted primarily from the acquisition of the interest in a physician practice, additional centers in operation and an increase in corporate staff primarily to support growth in the number of centers in operation and anticipated future growth. Salaries and benefits expense and other operating expenses represented in the aggregate approximately 66% of revenues for 1996 as compared to approximately 62% of revenues for 1995. Physician group practices generally have lower operating margins than ambulatory surgery centers. Because the physician practice has both greater revenues and greater operating expenses as a percentage of revenues than any single center, its acquisition had a disproportionately large impact on operating margins. Depreciation and amortization expense increased $603,000, or 25%, in 1996 over 1995, primarily due to the acquisition of majority interests in additional surgery centers, the acquisition of the interest in a physician practice and new start-up surgery centers placed in operation. The increase of $182,000, or 29%, in interest expense in 1996 over 1995 is primarily attributable to debt assumed or incurred in connection with additional acquisitions of interests in surgery centers and a physician practice, together with the interest expense associated with newly opened start-up surgery centers financed partially with bank debt. Minority partners' interest in center earnings in 1996 rose to $5.4 million from $3.9 million in 1995, an increase of 38%, primarily as a result of minority partners' interest in earnings at surgery centers added to operations and from increased same-center profitability. Income tax expense increased 70% in 1996 to $985,000 as a result of increased income before income taxes and an increase in the Company's effective income tax rate to 40% from 36%. The increase in the effective income tax rate resulted from the utilization of prior period net operating loss carryforwards during 1995. The difference between the federal statutory income tax rate of 34% and the Company's effective income tax rates resulted primarily from the utilization of prior period net operating loss carryforwards in 1995 and the impact of state income taxes. 19 24 QUARTERLY STATEMENT OF OPERATIONS DATA The following table presents certain quarterly statement of operations data for the years ended December 31, 1996 and 1997 and the first quarter of 1998. The quarterly statement of operations data set forth below was derived from unaudited financial statements of the Company and includes all adjustments, consisting of only normal recurring adjustments, which the Company considers necessary for a fair presentation thereof. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year or predictive of future periods.
1996 1997 1998 ---------------------------------- -------------------------------------- ------- Q1 Q2 Q3 Q4 Q1(1) Q2 Q3(2)(3) Q4(3) Q1 ------ ------ ------ ------- ------- ------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues................... $7,133 $8,094 $8,774 $10,897 $12,591 $13,890 $14,566 $16,367 $17,829 Earning (loss) before income taxes............. 589 605 470 802 (1,496) 1,014 1,478 854 1,166 Net earnings (loss) available to common shareholders............. 353 364 282 460 (1,892) 537 862 283 700 Basic and diluted earnings (loss) per common share.................... 0.04 0.04 0.03 0.05 (0.20) 0.06 0.09 0.03 0.07
- --------------- (1) Includes an impairment loss of $2.3 million, or $0.24 per share on a diluted basis, on a partnership interest. (2) Includes a gain on sale of assets of $727,000, net of income taxes, or $0.08 per share on a diluted basis, attributable to a loss recovery on the sale of a partnership interest and gain on sale of a surgery center building and equipment. (3) Includes distribution cost of $458,000 and $384,000, or $0.05 and $0.04 per share on a diluted basis, respectively, incurred in the third and fourth quarters of 1997, respectively. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1998 and December 31, 1997, the Company had working capital of $11.2 million and $9.3 million compared to $4.8 million and $4.7 million in the comparable prior periods. Operating activities for 1997 generated $4.0 million in cash flow from operations compared to $3.8 million in 1996. Operating activities for the three months ended March 31, 1998 generated $1.1 million in cash flow from operations compared to $1.6 million in the comparable 1997 period. Cash and cash equivalents at March 31, 1998 and December 31, 1997 were $3.8 million and $3.4 million compared to $2.4 million and $3.2 million in the comparable prior periods. During 1997 the Company used $12.6 million to acquire interests in five additional practice-based ambulatory surgery centers and a urology physician practice. In addition, the Company made capital expenditures primarily for new start-up surgery centers and for new or replacement property at existing centers which totaled $10.6 million in 1997, of which $3.0 million was funded from the capital contributions of the Company's minority partners. The Company used its cash flow from operations and net borrowings on long-term debt of $14.1 million to fund its acquisition and development obligations. During the three months ended March 31, 1998, the Company used $4.6 million to acquire interests in two additional practice-based ambulatory surgery centers. In addition, the Company made capital expenditures primarily for new start-up surgery centers and for new or replacement property at existing centers which totaled $2.4 million in the three months ended March 31, 1998, of which $804,000 was funded from the capital contributions of the Company's minority partners. The Company used its cash flow from operations and net borrowings on long-term debt of $4.8 million to fund these acquisitions and development obligations. During 1997 the Company received cash proceeds of $2.0 million from the sale of a surgery center building and equipment and the sale of a partnership interest in two surgery centers. In addition, the Company received proceeds of $524,000 from the sale of common stock to its minority partners in 1997. During the three months ended March 31, 1998, the Company received cash proceeds of $641,000 from the sale of a surgery center. In addition, the Company received proceeds of $18,000 from the issuance of common stock. 20 25 At March 31, 1998, the Company's partnerships and limited liability companies had unfunded construction and equipment purchase commitments for centers under development of approximately $2.0 million, of which the Company expects that approximately $943,000 will be borrowed under the Loan Agreement (and guaranteed on a pro rata basis by the physicians), and that the remaining amount will be provided by the Company and the physician partners in proportion to their respective ownership interests in the partnerships and limited liability companies. The Company intends to fund its portion out of future cash flows from operations. Under the terms of the Loan Agreement, all borrowings outstanding under the Company's term loan were converted to its revolving credit facility. At March 31, 1998, borrowings under the Loan Agreement were $27.6 million, are due in January 2001 and are guaranteed by the wholly owned subsidiaries of the Company, and in some instances, are secured by the underlying assets of certain developed centers or the stock of the wholly owned subsidiaries of the Company. The Loan Agreement permits the Company to borrow up to $50.0 million to finance the Company's acquisition and development projects at a rate equal to, at the Company's option, the prime rate or LIBOR plus a spread of 1.0% to 2.25%, depending upon borrowing levels. The Loan Agreement also provides for a fee ranging between .15% and .40% of unused commitments based on borrowing levels. The Loan Agreement also prohibits the payment of dividends and contains covenants relating to the ratio of debt to net worth, operating performance and minimum net worth. The Company was in compliance with all covenants at March 31, 1998. On November 20, 1996, the Company issued shares of its Series A Preferred Stock and Series B Preferred Stock to certain unaffiliated institutional investors for net cash proceeds of approximately $5.0 million. The purpose of the offering was to fund the acquisition and development of surgery centers and to provide other working capital as needed prior to being in position to access capital markets as an independent public company. The Series A Preferred Stock, which had a liquidation value of $3.0 million and was subject to redemption at any time at the option of the Company, upon the occurrence of certain events and in 2002 at the option of the holders, was converted during the three months ended March 31, 1998 by its holders into 380,952 shares of Class A Common Stock using a conversion ratio based on market price of the Class A Common Stock pursuant to the provisions of the Company's Charter. Upon the occurrence of certain events, including an Initial Public Offering (as that term is defined in the Company's Charter), the Series B Preferred Stock will automatically convert into a number of shares of Class A Common Stock that approximates 6% of the equity of the Company determined as of November 20, 1996, with that percentage being ratably increased to 8% of the equity of the Company if a triggering event has not occurred by November 20, 2000. This Offering, if consummated, will constitute such a triggering event, and the Series B Preferred Stock will convert into approximately 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 21 26 updates to such software. The Company is also evaluating the impact of the Year 2000 on other computer technologies and software. All costs to evaluate and make modifications will be expensed as incurred and are not expected to have a significant impact on the Company's ongoing results of operations. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standard ("SFAS") No. 130 "Reporting Comprehensive Income" became effective for the Company during the first quarter of 1998 and its adoption did not have a material impact on the Company's financial reporting practices. SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" becomes effective for the Company for the year ended December 31, 1998. The Company is still evaluating the effects of adopting this statement, but does not expect its adoption to have a material effect on the Company's consolidated financial statements. Statement of Position ("SOP") No. 98-5 "Reporting on the Costs of Start-Up Activities" becomes effective for the Company for the year ended December 31, 1999. SOP No. 98-5 requires that start-up costs be expensed as incurred and that upon adoption, all deferred start-up costs be expensed as a cumulative effect of a change in accounting principle. The Company does not anticipate that the adoption of SOP No. 98-5 will have a material effect on the Company's financial position or ongoing results of operations. 22 27 BUSINESS The Company develops, acquires and operates practice-based ambulatory surgery centers, in partnership with physician practice groups, throughout the United States. As of May 1, 1998, the Company owned a majority interest in 44 surgery centers and a minority interest in one center in 20 states and the District of Columbia. The Company also had six centers under development, had executed letters of intent to develop or acquire six additional centers and had two centers awaiting CON approval. The Company believes that it is a leader in the ownership and operation of practice-based ambulatory surgery centers. The Company's centers are licensed for outpatient surgery, are generally equipped and staffed for a single medical specialty and are usually located in or adjacent to the offices of a physician group practice. The Company has targeted ownership in centers that perform gastrointestinal endoscopy, ophthalmology, urology, orthopaedics or otolaryngology procedures. Surgical procedures associated with these specialties include many types of high volume, lower-risk procedures that are appropriate for the practice-based setting. The Company believes its single specialty centers have significantly lower capital and operating costs than hospital and freestanding ambulatory surgery center alternatives that are designed to accommodate a broader array of surgical specialties and procedures. In addition, the practice-based surgery center provides a more convenient setting for the patient and for the physician performing the procedure. The Company is utilizing its surgery centers in selected markets as a base to develop start-up specialty physician networks that are designed to serve large numbers of covered lives and thus strengthen the Company's position in contracting with managed care organizations. As of May 1, 1998, the Company had established five start-up specialty physician networks, located in Alabama, Florida, Ohio, Tennessee and Texas. INDUSTRY OVERVIEW In recent years, government programs, private insurance companies, managed care organizations and self-insured employers have implemented various cost-containment measures to limit the growth of healthcare expenditures. These cost-containment measures, together with technological advances, have resulted in a significant shift in the delivery of healthcare services away from traditional inpatient hospitals to more cost-effective alternate sites, including ambulatory surgery centers. According to SMG Marketing Group Inc.'s Freestanding Outpatient Surgery Center Directory (June 1997), an industry publication, outpatient surgical procedures represented approximately 69% of all surgical procedures performed in the United States in 1996 and the number of outpatient surgery cases increased 54% from 3.1 million in 1993 to 4.8 million in 1996. As of December 31, 1996, there were 2,425 freestanding ambulatory surgery centers in the United States, of which 171 were owned by hospitals and 607 were owned by corporate entities. The remaining 1,647 centers were independently owned, primarily by physicians. The Company believes that the following factors have contributed to the growth of ambulatory surgery: Cost-Effective Alternative. Ambulatory surgery is generally less expensive than hospital inpatient surgery. In addition, the Company believes that surgery performed at a practice-based ambulatory surgery center is generally less expensive than hospital-based ambulatory surgery for a number of reasons, including lower facility development costs, more efficient staffing and space utilization and a specialized operating environment focused on cost containment. Interest in ambulatory surgery centers has grown as managed care organizations have continued to seek a cost-effective alternative to inpatient services. Physician and Patient Preference. The Company believes that many physicians prefer practice-based ambulatory surgery centers. The Company believes that such centers enhance physicians' productivity by providing them with greater scheduling flexibility, more consistent nurse staffing and faster turnaround time between cases, allowing them to perform more surgeries in a defined period of time. In contrast, hospitals and freestanding multi-specialty ambulatory surgery centers generally serve a broader group of physicians, including those involved with emergency procedures, resulting in postponed or delayed surgeries. Additionally, many physicians choose to perform surgery in a practice-based 23 28 ambulatory surgery center because their patients prefer the simplified admissions and discharge procedures and the less institutional atmosphere. New Technology. New technology and advances in anesthesia, which have been increasingly accepted by physicians, have significantly expanded the types of surgical procedures that are being performed in ambulatory surgery centers. Lasers, enhanced endoscopic techniques and fiber optics have reduced the trauma and recovery time associated with many surgical procedures. Improved anesthesia has shortened recovery time by minimizing post-operative side effects such as nausea and drowsiness, thereby avoiding, in some cases, overnight hospitalization. STRATEGY The Company believes it is a leader in the development, acquisition and operation of practice-based ambulatory surgery centers. The key components of the Company's strategy are: Develop and Acquire Practice-Based Ambulatory Surgery Centers. The Company expects to grow through a combination of acquisitions and development of single specialty centers throughout the United States. Although the Company historically has grown primarily by acquisition of existing centers, it anticipates that its future growth will come increasingly from development of new practice-based ambulatory surgery centers. Achieve Growth in Surgery Center Revenues and Profitability. The Company enhances physician productivity and promotes increased same-center revenues and profitability by creating operating efficiencies, including improved scheduling, group purchasing programs and the clinical efficiencies associated with operating a single specialty surgery center. In addition, the Company's operations are designed to attract additional managed care contracts by emphasizing convenience, a single specialty focus, lower cost procedures and the ability to contract for large numbers of covered lives. Develop Specialty Networks. Utilizing single specialty ambulatory surgery centers to provide a cost advantage, the Company's strategy has evolved to include the development and ownership of specialty physician networks which offer specialty physician services, as well as outpatient surgery procedures with wide geographic coverage to managed care payers. These specialty networks will be developed in selected markets to provide broad geographic patient access points in the market through the network participation of high quality and strategically located practices. As part of this strategy, the Company has established and is the majority owner of five start-up specialty physician networks. By establishing these networks, the Company believes it will be able to obtain additional contracts with managed care payers and increase the profitability of its surgery centers and associated physician practices. ACQUISITION AND DEVELOPMENT OF SURGERY CENTERS The Company's practice-based ambulatory surgery centers are licensed outpatient surgery centers generally equipped and staffed for a single medical specialty and generally are located in or adjacent to a physician group practice. The Company has targeted ownership in centers that perform gastrointestinal endoscopy, ophthalmology, urology, orthopaedics or otolaryngology procedures. These specialties perform many high volume, lower-risk procedures that are appropriate for the practice-based setting. The focus at each center on only the procedures in a single specialty results in these centers generally having significantly lower capital and operating costs than the costs of hospital and freestanding ambulatory surgery center alternatives that are designed to provide more intensive services in a broader array of surgical specialties. In addition, the practice-based surgery center, which is located in or adjacent to the group practice, provides a more convenient setting for the patient and for the physician performing the procedure. Improvements in technology are also enabling additional types of procedures to be performed in the practice-based setting. The Company's development staff identifies existing centers that are potential acquisition candidates and identifies physician practices that are potential partners for new center development in the medical specialties 24 29 which the Company has targeted for development. These candidates are evaluated against the Company's project criteria which include several factors such as the number of procedures currently being performed by the practice, competition from and the fees being charged by other surgical providers, relative competitive market position of the physician practice under consideration, and state CON requirements for development of a new center. In presenting the advantages to physicians of developing a new practice-based ambulatory surgery center in partnership with the Company, the Company's development staff emphasizes the proximity of a practice-based surgery center to a physician's office, the simplified administrative procedures, the ability to schedule consecutive cases without preemption by inpatient or emergency procedures, the rapid turnaround time between cases, the high technical competency of the center's clinical staff that performs only a limited number of specialized procedures and the availability of state-of-the-art surgical equipment. The Company also focuses on its expertise in developing and operating centers. In addition, as part of the Company's role as the general partner or manager of the surgery center partnerships and limited liability companies, the Company markets the centers to third party payers. In a development project, the Company, among other things, provides the following services: - Financial feasibility pro forma analysis; - Assistance in state CON approval process; - Site selection; - Assistance in space analysis and schematic floor plan design; - Analysis of local, state and federal building codes; - Negotiation of equipment financing with lenders; - Equipment budgeting, specification, bidding and purchasing; - Construction financing; - Architectural oversight; - Contractor bidding; - Construction management; and - Assistance with licensing, Medicare certification and third party payer contracts. The Company's ownership interests in practice-based ambulatory surgery centers generally are structured through limited or general partnerships or limited liability companies. The Company generally owns 51% to 70% of the partnerships or limited liability companies and acts as the general partner in each limited partnership. In development transactions, capital contributed by the physicians and the Company plus bank financing provides the partnership or limited liability company with the funds necessary to construct and equip a new surgery center and to provide initial working capital. As part of each development and acquisition transaction, the Company enters into a partnership agreement or, in the case of a limited liability company, an operating agreement with its physician group partner. Under these agreements, the Company receives a percentage of the net income and cash distributions of the entity equal to its percentage interest in the entity and has the right to the same percentage of the proceeds of a sale or liquidation of the entity. As sole general partner, the Company is generally liable for the debts of the partnership. These agreements generally provide that the Company will oversee the business and administrative operations of the surgery center, and that the physician group partner will provide the center with a medical director, and with certain specified services such as billing and collections, transcription, and accounts payable processing. In connection with the Company's management of the business operations at each center, the Company historically received a management fee paid by the partnership or limited liability company. The partnership or limited liability company also paid a physician group partner a medical director fee and a fee for providing certain administrative services to the center. Because the management fee usually approximates the value of services provided to the center by the physician practice, on an ongoing basis, the Company has structured its agreements so that the Company generally no longer provides for any of such fees. Now, the respective parties are required to provide the services pursuant to the terms of the partnership or operating 25 30 agreement. For start-up centers that are being developed, the partnership or limited liability company generally pays a fee to the Company for management of the planning, construction and opening of the center. In addition, these agreements typically provide that the partnership or limited liability company will lease certain non-physician personnel from the physician practice, who will provide services at the center. The cost of the salary and benefits of these personnel are reimbursed to the practice by the partnership or limited liability company. Certain significant aspects of the partnership's or limited liability company's governance are overseen by an operating board, which is comprised of equal representation by the Company and the physician partners. The partnership and operating agreements provide that if certain regulatory changes take place the Company will be obligated to purchase some or all of the minority interests of the physicians affiliated with the Company in the partnerships or limited liability companies which own and operate the Company's surgery centers. The regulatory changes that could trigger such an obligation include changes that: (i) make the referral of Medicare and other patients to the Company's surgery centers by physicians affiliated with the Company illegal; (ii) create the substantial likelihood that cash distributions from the partnership or limited liability company to the physicians associated therewith will be illegal; or (iii) cause the ownership by the physicians of interests in the partnerships or limited liability companies to be illegal. There can be no assurance that the Company's existing capital resources would be sufficient for it to meet the obligation, if it arises, to purchase minority interests held by physicians in the partnerships or limited liability companies which own and operate the Company's surgery centers. The determination of whether a triggering event has occurred is made by the concurrence of counsel for the Company and the physician partners or, in the absence of such concurrence, by independent counsel having an expertise in healthcare law and who is chosen by both parties. Such determination is therefore not within the control of the Company. While the Company has structured the purchase obligations to be as favorable as possible to the Company, the triggering of these obligations could have a material adverse effect on the financial condition and results of operations of the Company. See "-- Government Regulation." SURGERY CENTER LOCATIONS The following table sets forth certain information relating to centers in operation as of May 1, 1998. The Company generally owns 51% to 70% of the partnerships or limited liability companies that own and operate each of the centers. 26 31
YEAR OR DATE OPERATING OR ORIGINALLY ACQUISITION PROCEDURE LOCATION SPECIALTY OPENED DATE ROOMS - -------- --------- ---------- ----------- ------------ ACQUIRED CENTERS: Knoxville, Tennessee................. Gastroenterology 1987 Nov. 1992 7 Topeka, Kansas....................... Gastroenterology 1990 Nov. 1992 4 Nashville, Tennessee................. Gastroenterology 1989 Nov. 1992 3 Nashville, Tennessee................. Gastroenterology 1988 Dec. 1992 3 Washington, D.C...................... Gastroenterology 1990 Nov. 1993 3 Melbourne, Florida................... Ophthalmology 1986 Nov. 1993 3 Torrance, California................. Gastroenterology 1990 Feb. 1994 2 Sebastopol, California............... Ophthalmology 1988 Apr. 1994 2 Maryville, Tennessee................. Gastroenterology 1992 Jan. 1995 3 Miami, Florida....................... Gastroenterology 1995 Apr. 1995 7 Panama City, Florida................. Gastroenterology 1993 July 1996 3 Ocala, Florida....................... Gastroenterology 1993 Aug. 1996 3 Columbia, South Carolina............. Gastroenterology 1988 Oct. 1996 3 Wichita, Kansas...................... Orthopaedics 1991 Nov. 1996 3 Minneapolis, Minnesota............... Gastroenterology 1993 Nov. 1996 2 Crystal River, Florida............... Gastroenterology 1994 Jan. 1997 3 Abilene, Texas....................... Ophthalmology 1987 Mar. 1997 2 Fayetteville, Arkansas............... Gastroenterology 1992 May 1997 2 Independence, Missouri............... Gastroenterology 1994 Sept. 1997 2 Kansas City, Missouri................ Gastroenterology 1995 Sept. 1997 2 Phoenix, Arizona..................... Ophthalmology 1995 Jan. 1998 4 Denver, Colorado..................... Gastroenterology 1994 Mar. 1998 4 Sun City, Arizona.................... Ophthalmology 1984 Apr. 1998 6 DEVELOPED CENTERS: Santa Fe, New Mexico................. Gastroenterology May 1994 -- 3 Tarzana, California.................. Gastroenterology July 1994 -- 3 Beaumont, Texas...................... Gastroenterology Oct. 1994 -- 3 Abilene, Texas....................... Gastroenterology Dec. 1994 -- 3 Knoxville, Tennessee................. Ophthalmology June 1996 -- 2 West Monroe, Louisiana............... Gastroenterology June 1996 -- 2 Miami, Florida....................... Gastroenterology Sept. 1996 -- 3 Sidney, Ohio......................... Ophthalmology Dec. 1996 -- 3 Urology General Surgery Otolaryngology Montgomery, Alabama.................. Ophthalmology May 1997 -- 2 Willoughby, Ohio..................... Gastroenterology July 1997 -- 2 Milwaukee, Wisconsin................. Gastroenterology July 1997 -- 2 Chevy Chase, Maryland................ Gastroenterology July 1997 -- 2 Melbourne, Florida................... Gastroenterology Aug. 1997 -- 2 Lorain, Ohio......................... Gastroenterology Aug. 1997 -- 2 Hillmont, Pennsylvania............... Gastroenterology Oct. 1997 -- 2 Minneapolis, Minnesota............... Gastroenterology Nov. 1997 -- 2 Hialeah, Florida..................... Gastroenterology Dec. 1997 -- 3 Cleveland, Ohio...................... Ophthalmology Dec. 1997 -- 2 Evansville, Indiana.................. Ophthalmology Jan. 1998 -- 2 Cincinnati, Ohio..................... Gastroenterology Jan. 1998 -- 2 Salt Lake City, Utah................. Gastroenterology Apr. 1998 -- 2 Kansas City, Kansas.................. Gastroenterology Apr. 1998 -- 4
27 32 The Company's partnerships and limited liability companies lease certain of the real property in which its centers operate and the equipment used in certain of its centers, either from the physician partners or from unaffiliated parties. SURGERY CENTER OPERATIONS The Company generally designs, builds, staffs and equips each of its facilities to meet the specific needs of a single specialty physician practice group. The Company's typical ambulatory surgery center averages 3,000 square feet and is located adjacent to or in the immediate vicinity of the specialty physicians' offices. Each center developed by the Company typically has two to three operating or procedure rooms with areas for reception, preparation, recovery and administration. As of May 1, 1998, 34 of the Company's centers in operation performed gastrointestinal endoscopy procedures, nine centers performed ophthalmology procedures, one center performed orthopaedic procedures and one center performed ophthalmology, urology, general surgery and otolaryngology procedures. The procedures performed at the Company's centers generally do not require an extended recovery period following the procedures. The Company's centers are typically staffed with three to five clinical professionals and administrative personnel, some of whom may be shared with the physician practice group. The clinical staff includes nurses and surgical technicians. The types of procedures performed at each center depend on the specialty of the practicing physicians. The typical procedures performed or to be performed most commonly at the Company's centers in operation or under development within each specialty are: - Gastroenterology -- colonoscopy and endoscopy procedures - Ophthalmology -- cataracts and retinal laser surgery - Orthopaedics -- knee arthroscopy and carpal tunnel repair - Urology -- cystoscopy and biopsy - Otolaryngology -- myringotomy and tonsillectomy The Company markets its surgery centers and networks directly to third-party payers, including HMOs, preferred provider organizations ("PPOs"), other managed care organizations and employers. Payer-group marketing activities conducted by the Company's management and center administrators emphasize the high quality of care, cost advantages and convenience of the Company's surgery centers and are focused on making each center an approved provider under local managed care plans. In addition, the Company is pursuing relationships with selected physician groups in its markets in order to market a comprehensive specialty physician network that includes its surgery centers to managed care payers. JCAHO ACCREDITATION Twenty of the Company's surgery centers are currently accredited by the Joint Commission for the Accreditation of Healthcare Organizations ("JCAHO") and 17 additional surgery centers are scheduled for accreditation surveys during 1998. Of the accredited centers, all have received three-year certification with 15 of the 20 receiving commendation. The Company believes that JCAHO accreditation is the quality benchmark for managed care organizations. Many managed care organizations will not contract with a facility until it is JCAHO accredited. The Company believes that its historical performance in the accreditation process reflects the Company's commitment to providing high quality care in its surgery centers. SPECIALTY PHYSICIAN NETWORKS Managed care organizations with significant numbers of covered lives are seeking to direct large numbers of patients to high-quality, low-cost providers and provider groups. The Company believes that specialty physician networks that include its practice-based surgery centers are attractive to managed care organizations because of the geographic coverage of the network, the lower costs associated with treatment, the availability of the complete delivery system for a specific specialty and high levels of patient satisfaction. As a result, the Company believes the development of such networks will position it to capture an increased volume of managed care contracts, including capitated contracts, and will increase the market share and profitability of the Company's surgery centers and physician practices. 28 33 The Company does not expect that the specialty physician networks themselves will be a significant source of income for the Company. These networks were and will be formed primarily as a contracting vehicle to generate revenues for the Company's practice-based surgery centers and physician practices. As of March 31, 1998, the Company had established and was the majority owner and operator of five start-up specialty physician networks consisting of a gastroenterology network in Miami and four ophthalmology/eye care networks located in Knoxville, Tennessee; Montgomery, Alabama; Cleveland, Ohio; and Abilene, Texas. These networks had not generated any revenues as of March 31, 1998. Each specialty physician network is formed either as a limited partnership or limited liability company in which the Company owns a majority interest. Individual physicians practicing in the medical specialty on which the network focuses own the minority interests in the network. These minority physician owners, who may or may not be affiliated with a Company surgery center or physician practice, provide the medical services to the patient population covered by the contracts the network enters into with managed care payers. Following the establishment of a network, the Company provides management services and marketing services to the network in an effort to secure patient service contracts with managed care payers. Fees paid by these networks to the Company are nominal and generally are intended to cover only the Company's cost in providing such services. In addition, as part of its network development strategy, in January 1996 and January 1997 the Company acquired a majority interest in the assets of two physician practices in Miami, Florida. As a result of the Company's experience in developing specialty physician networks, the Company does not believe that ownership of physician practices is required in order to establish a specialty physician network. In May 1998, the Board of Directors approved a plan for the Company to dispose of its physician practice interests as part of an overall strategy to exit the practice management business and focus solely on the development, acquisition and operation of ambulatory surgery centers and specialty networks. REVENUES The Company's principal source of revenues is a facility fee charged for surgical procedures performed in its surgery centers. This fee varies depending on the procedure, but usually includes all charges for operating room usage, special equipment usage, supplies, recovery room usage, nursing staff and medications. Facility fees do not include the charges of the patient's surgeon, anesthesiologist or other attending physicians, which are billed directly to third-party payers by such physicians. The Company's other significant source of revenues is the fee for physician services performed by the two physician group practices in which the Company owns a majority interest. Practice-based ambulatory surgery centers and physician practices such as those in which the Company owns a majority interest depend upon third-party reimbursement programs, including governmental and private insurance programs, to pay for services rendered to patients. The Company derived approximately 37% of its net revenues from governmental healthcare programs, including Medicare and Medicaid, in 1997. The Medicare program currently pays ambulatory surgery centers and physicians in accordance with fee schedules which are prospectively determined. On or before January 1, 1999, outpatient surgery services will be reimbursed by Medicare under a revised prospective payment system, utilizing approximately 100 ambulatory patient classifications, rather than the eight codes currently utilized. There can be no assurance that the Company's revenues will not be adversely affected under this revised payment system. There may be continuing legislative and regulatory initiatives to limit the rate of increase in expenditures under the Medicare and Medicaid programs in an effort to curtail or reduce the federal budget deficit. These limitations, if enacted, may negatively impact the Company's revenues and operations. In addition to payment from governmental programs, ambulatory surgery centers derive a significant portion of their net revenues from private healthcare reimbursement plans. These plans include both standard indemnity insurance programs, as well as managed care structures such as PPOs, HMOs and other similar structures. The strengthening of managed care systems nationally has resulted in substantial competition among providers of services, including providers of surgery center services with greater financial resources and market penetration than the Company, to contract with these systems. The Company believes that all payers, both governmental and private, will continue their efforts over the next several years to reduce healthcare costs 29 34 and that their efforts generally will result in a less stable market for healthcare services. While no assurances can be given concerning the ultimate success of the Company's efforts to contract with healthcare payers, the Company believes that its position as a low-cost alternative for certain surgical procedures should enable the Company's centers to compete effectively in the evolving healthcare marketplace. Approximately 11% of the Company's revenues for 1997 were generated by capitated payment contracts with HMOs. These revenues generally were attributable to contracts held by physician practices and a surgery center in which the Company holds a majority interest. These contracts require the practices to provide specialty physician and certain outpatient surgery services for the HMO members on an exclusive basis. These contracts do not require the practices to provide or to be at risk for hospital or other ancillary services such as laboratory or imaging services. The services required by these contracts are provided almost solely by surgery centers and the physician practices in which the Company owns a majority interest. Because the Company is only at risk for the cost of providing relatively limited healthcare services to these HMO members, the Company's risk of overutilization by HMO members is limited to the cost of the physician's time and the supply, drug and nursing staff expense required for outpatient surgery. COMPETITION The Company encounters competition in two separate areas: competition with other companies for its physician partnership relationships and competition with other providers for patients and for contracting with managed care payers in each of its markets. Competition for Partnership Relationships. The Company believes that it does not have a direct competitor in the development of practice-based ambulatory surgery centers across the specialties of gastroenterology, ophthalmology, otolaryngology, urology, and orthopaedic surgery. There are, however, several large, publicly-held companies, or divisions or subsidiaries of large publicly-held companies, that develop freestanding multi-specialty surgery centers, and these companies may compete with the Company in the development of centers. Many physician groups develop surgery centers without a corporate partner. It is generally difficult, however, in the rapidly evolving healthcare industry, for a single practice to create effectively the efficient operations and marketing programs necessary to compete with other provider networks and companies. Because of this, as well as the financial investment necessary to develop surgery centers, physician groups are attracted to corporate partners, such as the Company. Other factors that may influence the physicians' decisions concerning the choice of a corporate partner are the potential corporate partner's experience, reputation and access to capital. There are several companies, many in niche markets, that acquire existing practice-based ambulatory surgery centers and specialty physician practices. Many of these competitors have greater resources than the Company. Most of the Company's competitors acquire centers through the acquisition of the related physician practice. The principal competitive factors that affect the ability of the Company and its competitors to acquire surgery centers are price, experience and reputation, access to capital and willingness to acquire a surgery center without acquiring the physician practice. While there are a few national networking companies that specialize in the establishment and operation of single specialty networks similar to the Company's networks, most networks are either multi-specialty or primary care based. The competitive factors the Company primarily experiences in the development of specialty networks include the ability to attract physician practice groups to the network and to achieve market penetration and geographic coverage. Competition for Patients and Managed Care Contracts. The Company believes that its surgery centers can provide lower-cost, high quality surgery in a more comfortable environment for the patient in comparison to hospitals and to freestanding surgery centers with which the Company competes for managed care contracts. In addition, the existence of the Company's specialty physician networks are designed to provide the geographic access within local markets that managed care companies desire. Competition for managed care 30 35 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 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 31 36 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 32 37 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 33 38 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-three of the centers and the physician practices in operation at May 1, 1998 lease space ranging from 1,200 to 13,500 square feet with remaining lease terms ranging from two to 18 years. Two centers in operation at May 1, 1998 are located in buildings owned indirectly by the Company. EMPLOYEES As of 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. 34 39 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. 35 40 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.
NAME AGE POSITION WITH THE COMPANY - ---- --- ------------------------- Ken P. McDonald................... 58 President, Chief Executive Officer and Director (Class II director with term expiring in 1999) Claire M. Gulmi................... 44 Senior Vice President, Chief Financial Officer and Secretary Royce D. Harrell.................. 52 Senior Vice President, Operations, and Assistant Secretary Rodney H. Lunn.................... 47 Senior Vice President, Center Development David L. Manning.................. 48 Senior Vice President, Development Thomas G. Cigarran................ 55 Chairman of the Board (Class III director with term expiring in 2000) James A. Deal..................... 47 Director (Class I director with term expiring in 2001) Steven I. Geringer................ 52 Director (Class I director with term expiring in 2001) Debora A. Guthrie................. 42 Director (Class III director with term expiring in 2000) Henry D. Herr..................... 51 Director (Class II director with term expiring in 1999) Bergein F. Overholt, M.D.......... 60 Director (Class III director with term expiring in 2000)
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. 36 41 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 37 42 Plan (the "1992 Plan") and the Company's 1997 Stock Incentive Plan (the "1997 Plan"). Members of the Compensation Committee are Debora A. Guthrie and Steven I. Geringer. Audit Committee. The principal functions of the Audit Committee are to recommend to the full Board of Directors the engagement or discharge of the Company's independent auditors; to review the nature and scope of the audit, including but not limited to a determination of the effectiveness of the audit effort through meetings held at least annually with the independent auditors of the Company and a determination through discussion with the auditors that no unreasonable restrictions were placed on the scope or implementation of their examinations; to review the qualifications and performance of the auditors, including but not limited to review of the plans and results of the auditing engagement and each professional service provided by the independent auditors; to review the financial organization and accounting practices of the Company, including but not limited to review of the Company's financial statements with the auditors and inquiry into the effectiveness of the Company's financial and accounting functions and internal controls through discussions with the auditors and the officers of the Company; and to recommend to the full Board of Directors policies concerning avoidance of employee conflicts of interest and to review the administration of such policies. Members of the Audit Committee are Debora A. Guthrie, James A. Deal and Henry D. Herr. COMPENSATION OF DIRECTORS Members of the Board of Directors, other than those who are employees of the Company, receive an annual fee of $10,000, adjusted annually to reflect changes in the Consumer Price Index, U.S. All City Average Report, of the U.S. Bureau of Labor Statistics (the "CPI") for their services as directors and as members of any committees of the Board of Directors on which they serve. In addition, each non-employee director is reimbursed for out-of-pocket expenses incurred in attending Board of Directors' meetings and committee meetings. Also, Outside Directors (as defined below) are eligible to receive annual restricted stock awards ("Outside Director Restricted Stock") pursuant to the 1997 Plan. An "Outside Director" is a member of the Board of Directors who is not an officer or employee of the Company, its subsidiaries or affiliates. A director serving as medical director of the Company but not as an employee of the Company will be treated as an Outside Director for purposes of the 1997 Plan. On the date of each annual meeting of shareholders of the Company, each Outside Director who is elected or reelected to the Board of Directors or who otherwise continues as a director shall automatically receive on the date of the annual meeting of shareholders a grant of that number of shares of restricted Class A Common Stock having an aggregate fair market value on such date equal to $10,000, adjusted annually for changes in the CPI. Members of the Board of Directors who are employees of the Company will not receive any additional compensation for their services as directors or as members of committees. Each grant of Outside Director Restricted Stock shall vest in increments of one-third of the shares of Class A Common Stock subject to such grant, with the first one-third increment vesting on the date of grant, the second one-third increment vesting on the first anniversary of the date of grant and the final one-third increment vesting on the second anniversary of the date of grant, if the grantee is still a member of the Board of Directors on each of such dates. Until the earlier of (i) five years from the date of grant and (ii) the date on which the Outside Director ceases to serve as a director of the Company, no Outside Director Restricted Stock may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, except by will or by the laws of descent and distribution. Upon termination of an Outside Director's service as a member of the Board of Directors for any reason other than death, disability or retirement, all shares of Outside Director Restricted Stock not vested at such time will be forfeited. Upon termination of an Outside Director's service as a member of the Board of Directors due to death, disability or retirement, all shares of Outside Director Restricted Stock will immediately vest. Pursuant to Section 9 of the 1997 Plan, during December 1997 and May 1998, each Outside Director received a grant of Outside Director Restricted Stock having an aggregate fair market value on such date equal in value to $10,000 on each of such dates. 38 43 EXECUTIVE COMPENSATION The following table provides information as to annual, long-term or other compensation during fiscal years 1997, 1996 and 1995 for the persons who, at the end of fiscal year 1997, were the Chief Executive Officer and the other four most highly compensated executive officers of the Company (collectively, the "Named Executive Officers"). Prior to the Distribution, Thomas G. Cigarran served as Chief Executive Officer of the Company but received no compensation from or with respect to the Company. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------ AWARDS/ ANNUAL COMPENSATION SECURITIES -------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($) - --------------------------- ---- --------- -------- ------------ --------------- Ken P. McDonald.......................... 1997 $156,253 $ 13,461 88,333 $4,000(1) President and Chief 1996 139,050 41,905 68,333 4,000 Executive Officer 1995 125,050 25,386 -- 4,000 Claire M. Gulmi.......................... 1997 124,796 9,984 16,666 -- Senior Vice President, 1996 100,000 28,292 6,667 -- Chief Financial Officer 1995 86,292 22,652 -- -- and Secretary Royce D. Harrell......................... 1997 138,190 11,055 8,333 -- Senior Vice President, 1996 130,788 38,471 8,333 -- Operations 1995 124,538 36,708 -- -- Rodney H. Lunn........................... 1997 139,597 26,872 38,333 4,320(2) Senior Vice President, 1996 132,108 29,169 5,000 4,320 Center Development 1995 125,818 18,205 -- 4,320 David L. Manning......................... 1997 139,597 7,782 43,333 4,320(2) Senior Vice President, 1996 132,108 106,460 8,333 4,320 Development 1995 125,818 26,384 -- 4,320
- --------------- (1) Forgiveness of debt. (2) Automobile allowance. 39 44 OPTION/STOCK APPRECIATION RIGHTS GRANTS IN LAST FISCAL YEAR The following table provides information as to options granted to the Named Executive Officers during fiscal year 1997. No Stock Appreciation Rights ("SARs") were awarded in fiscal year 1997.
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE --------------------------------------------------------- AT ASSUMED ANNUAL RATES NUMBER OF PERCENT OF OF STOCK PRICE SECURITIES TOTAL OPTIONS/SARS EXERCISE APPRECIATION UNDERLYING GRANTED TO OR BASE FOR OPTION TERM OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION --------------------------- NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 5%($) 10%($) - ---- ------------ ------------------ -------- ---------- ----------- ------------- 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
- --------------- (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
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 - ---- ----------- ------------- ----------- ------------- 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 --
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, 40 45 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. 41 46 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 42 47 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. 43 48 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. 44 49 PRINCIPAL SHAREHOLDERS The following tables set forth the "beneficial ownership," as that term is defined in the rules of the Securities and Exchange Commission (the "Commission") of the Company's capital stock of (i) each director, (ii) each Named Executive Officer, (iii) all directors and executive officers as a group and (iv) each other person known to be a "beneficial owner" of more than five percent (5%) of any class of capital stock of the Company based on information available to the Company on 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.
COMMON STOCK BENEFICIALLY OWNED PRIOR TO THE OFFERING CLASS A COMMON STOCK --------------------------------------------- BENEFICIALLY OWNED CLASS A CLASS B PERCENT AFTER THE OFFERING COMMON PERCENT OF COMMON OF --------------------- NAME STOCK(1) CLASS STOCK CLASS NUMBER PERCENT - ---- --------- ---------- ------- ------- --------- ------- Electra Investment Trust P.L.C.(2)...... 718,872(3) 12.5% -- -- 718,872(3) 7.6% Waddell & Reed, Inc.(4)................. 94,142 1.6 606,851 12.7% 94,142 1.0 The Capital Group Companies, Inc.(5).... -- -- 309,970 6.5 -- -- Ken P. McDonald......................... 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) 2.9 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) 1.9 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) 1.4 All directors and executive officers as a group (11 persons).................. 1,231,426 19.3 766,129 16.0 1,231,426 12.2
- --------------- * 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 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. 45 50 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENTS Until December 31, 1996, the Company and AHC were parties to a management agreement dated November 30, 1992 (the "1992 Management Agreement"), pursuant to which Henry D. Herr and Thomas G. Cigarran provided general supervision and business management services to the Company, and AHC provided accounting, financial and administrative services for the operations of the Company and each of the Company's surgery centers. Under the 1992 Management Agreement, the Company paid AHC $186,215 and $213,820 for the years ended December 31, 1995 and 1996, respectively. By letter agreement dated January 1, 1997 (the "1997 Letter Agreement"), AHC and the Company agreed to continue, on a modified basis, the arrangements provided under the 1992 Management Agreement. Under the 1997 Letter Agreement, the Company paid AHC an aggregate of $382,467 for these services during the fiscal year ended December 31, 1997. The 1997 Letter Agreement was terminated in December 1997. In December 1997, the Company and AHC entered into an administrative services agreement (the "Administrative Services Agreement") pursuant to which AHC provides certain financial and accounting services to the Company and its subsidiaries on a transitional basis, with the intent that the Company acquire the personnel, systems and expertise necessary to become self-sufficient in the provision of these services during the period beginning on the date of the Administrative Services Agreement and ending one year later (or earlier if so elected by the Company). Pursuant to the Administrative Services Agreement, AHC provides the Company with services, including processing payroll and associated payroll tax returns and accounts payable for the Company's corporate office, maintaining general accounting records for the Company's corporate operations and operations of the Company's subsidiaries (including the partnerships and limited liability companies), preparing the Company's consolidated financial statements, preparing the Company's corporate tax returns and tax returns for its subsidiaries, preparing estimated tax reports, and preparing financial statements in connection with periodic reports required to be filed by the Company with the Commission. Under the Administrative Services Agreement, as amended, the Company pays AHC $11,210 per month for all services provided thereunder, subject to adjustment as the Company assumes the responsibility for such services. In addition, in the absence of gross negligence on the part of AHC, the Company will indemnify and hold AHC, its directors, officers, employees and agents and any person who controls AHC within the meaning of the Securities Act harmless from and against any and all liabilities, claims or damages (including the cost of investigating any claim and reasonable attorneys' fees and disbursements) in connection with any services performed by AHC or any transactions or conduct in connection therewith. ADVISORY AGREEMENTS Effective as of December 1997, the Company entered into advisory agreements with Thomas G. Cigarran and Henry D. Herr (the "Advisory Agreements"), pursuant to which Messrs. Cigarran and Herr will provide certain continuing services to the Company through December 1999. Immediately prior to December 1997, Mr. Cigarran served as Chairman of the Board of the Company, and Mr. Herr served as Vice President and Secretary of the Company. Pursuant to the Advisory Agreements, Messrs. Cigarran and Herr provide advisory services to the senior management of the Company in the areas of strategy, operations, management and organizational development. As compensation for these services, the Company paid compensation of $200,000 to Mr. Cigarran and $150,000 to Mr. Herr in shares of Class A Common Stock, which shares were issued as restricted stock pursuant to the terms of the 1997 Plan. One-third of the shares paid as compensation vested immediately, one-third will vest on December 3, 1998 and the remaining one-third of the shares will vest on December 3, 1999. The Advisory Agreements provide that Messrs. Cigarran and Herr will not sell the shares of the Class A Common Stock received pursuant to the agreement until December 1999, subject to certain limited exceptions. The Advisory Agreements also contain certain non-compete and confidentiality provisions. In addition, Messrs. Cigarran and Herr are eligible to receive compensation as Outside Directors. Messrs. Cigarran and Herr also are entitled to indemnification as provided in the indemnification agreement that each entered into with the Company on the Distribution Date. 46 51 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. 47 52 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 48 53 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. 49 54 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. 50 55 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. 51 56 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 9,462,391 shares of Class A Common Stock (10,017,391 shares if the Underwriters' over-allotment option is exercised in full) and 4,787,131 shares of Class B Common Stock. The 3,700,000 shares of Class A Common Stock sold in the Offering will be freely tradeable without restriction under the Securities Act unless acquired by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act, which sales would be subject to the resale limitations of Rule 144. In addition, the 743,000 shares of Class A Common Stock that were issued to holders of AHC common stock in the Distribution are freely tradeable without restriction or further registration under the Securities Act, unless held by affiliates of the Company (which sales also would be subject to certain resale limitations and other restrictions under Rule 144 described below). Of the remaining 5,019,391 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 52 57 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. 53 58 UNDERWRITING Pursuant to the Underwriting Agreement and subject to the terms and conditions thereof, the Underwriters named below, acting through J.C. Bradford & Co., Piper Jaffray Inc. and Morgan Keegan & Company, Inc. as representatives of the several Underwriters (the "Representatives"), have agreed, severally, to purchase from the Company the number of shares of Class A Common Stock set forth below opposite their respective names:
NUMBER OF NAME OF UNDERWRITERS SHARES - -------------------- --------- J.C. Bradford & Co.......................................... Piper Jaffray Inc........................................... Morgan Keegan & Company, Inc................................ --------- Total............................................. 3,700,000 =========
In the Underwriting Agreement, the Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all shares of Class A Common Stock offered hereby, if any of such shares are purchased. The Company has been advised by the Representatives that the Underwriters propose initially to offer the shares of Class A Common Stock to the public at the offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ 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 and directors 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 120 days from the date of this Prospectus. The Underwriting Agreement provides that the Company generally will severally indemnify the Underwriters and their controlling persons, if any, against certain liabilities, including civil liabilities under the Securities Act, or will contribute to payments that the Underwriters or any such controlling persons may be required to make in respect thereof. In connection with the Offering, the Underwriters and other persons participating in the Offering may engage in transactions that stabilize, maintain or otherwise affect the price of Common Stock. Specifically, the Underwriters may over-allot in connection with the Offering, creating a short position in Common Stock for their own account. To cover over-allotments or to stabilize the price of Common Stock, the Underwriters may bid for and purchase, shares of Common Stock in the open market. The Underwriters may also impose a penalty bid whereby they may reclaim selling concessions allowed to an underwriter or a dealer for distributing 54 59 Common Stock in the Offering, if the Underwriters repurchase previously distributed Common Stock in transactions to cover their short position, in stabilization transactions or otherwise. Finally, the Underwriters may bid for and purchase, shares of Common Stock in market making transactions. These activities may stabilize or maintain the market price of Common Stock above market levels that may otherwise prevail. The Underwriters are not required to engage in these activities and may end any of these activities at any time. J.C. Bradford & Co. has from time to time provided investment banking and financial advisory services to the Company for which it has received customary compensation. LEGAL MATTERS The validity of the shares of Class A Common Stock are being passed upon for the Company by Bass, Berry & Sims PLC, Nashville, Tennessee. Certain members of Bass, Berry & Sims PLC beneficially own 136,431 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 in the three-year period ended December 31, 1997 and the related financial statement schedule included in this Prospectus and Registration Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report thereon appearing elsewhere herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The financial statements of South Denver Endoscopy Center, Inc. as of December 31, 1997 and for the year then ended and the related financial statement schedule included in this Prospectus and Registration Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report thereon appearing elsewhere herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The combined financial statements of Boswell Eye Center, LLC as of December 31, 1996 and 1997, and for each of the two years ended December 31, 1997 and the related financial statement schedule included in this Prospectus and Registration Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report thereon appearing elsewhere herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The statements of earnings, retained earnings and cash flows of The Endoscopy Center, Inc. for the years ended December 31, 1996 and 1997 and the related financial statement schedule included in this Prospectus and Registration Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report thereon appearing elsewhere herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 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 55 60 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. 56 61 AMSURG CORP. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report................................ F-2 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 1996 and 1997................................................... F-3 Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 1997................................................... F-4 Consolidated Statements of Changes in Shareholders' Equity for each of the years in the three-year period ended December 31, 1997...................................... F-5 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1997................................................... F-6 Notes to the Consolidated Financial Statements............ F-7 Pro Forma Financial Information Unaudited Pro Forma Combined Financial Information Basis of Presentation........................................ F-20 Pro Forma Combined Balance Sheet as of December 31, 1997................................................... F-21 Pro Forma Combined Statement of Operations for the year ended December 31, 1997................................ F-22 Pro Forma Combined Statement of Operations for the three months ended March 31, 1998............................ F-23 Notes to Pro Forma Consolidated Financial Information (Unaudited)............................................ F-24 South Denver Endoscopy Center, Inc. Independent Auditors' Report.............................. F-25 Balance Sheets as of December 31, 1997 and March 31, 1998................................................... F-26 Statements of Earnings and Retained Earnings for the year ended December 31, 1997 and the three months ended March 31, 1997 and 1998................................ F-27 Statements of Cash Flows for the year ended December 31, 1997 and the three months ended March 31, 1997 and 1998................................................... F-28 Notes to Financial Statements............................. F-29 Boswell Eye Center, LLC Independent Auditors' Report.............................. F-31 Combined Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998..................................... F-32 Combined Statements of Earnings for the years ended December 31, 1996 and 1997 and the three months ended March 31, 1997 and 1998................................ F-33 Combined Statements of Cash Flows for the years ended December 31, 1996 and 1997 and the three months ended March 31, 1997 and 1998................................ F-34 Notes to Combined Financial Statements.................... F-35 The Endoscopy Center, Inc. Independent Auditors' Report.............................. F-37 Statements of Earnings and Retained Earnings for the years ended December 31, 1995 and 1996 and the eight months ended August 31, 1996 and 1997......................... F-38 Statements of Cash Flows for the years ended December 31, 1995 and 1996 and the eight months ended August 31, 1996 and 1997.......................................... F-39 Notes to Financial Statements............................. F-40 Financial Statement Schedule -- AmSurg Corp. Independent Auditors' Report.............................. S-1 Schedule II -- Valuation and Qualifying Accounts.......... S-2 Financial Statement Schedule -- South Denver Endoscopy Center, Inc. Independent Auditors' Report.............................. S-3 Schedule II -- Valuation and Qualifying Accounts.......... S-4 Financial Statement Schedule -- Boswell Eye Center, LLC Independent Auditors' Report.............................. S-5 Schedule II -- Valuation and Qualifying Accounts.......... S-6 Financial Statement Schedule -- The Endoscopy Center, Inc. Independent Auditors' Report.............................. S-7 Schedule II -- Valuation and Qualifying Accounts.......... S-8
F-1 62 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders AmSurg Corp. Nashville, Tennessee We have audited the accompanying consolidated balance sheets of AmSurg Corp. and subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of AmSurg Corp. and subsidiaries as of December 31, 1996 and 1997 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Nashville, Tennessee February 17, 1998 (April 30, 1998 as to Note 15) F-2 63 AMSURG CORP. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31, ------------------------- ----------- 1996 1997 1998 ----------- ----------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents............................. $ 3,192,408 $ 3,406,787 $ 3,772,047 Accounts receivable, net of allowance of $1,272,651, $1,436,468 and $1,771,596, respectively............ 5,640,946 8,220,616 10,344,915 Supplies inventory.................................... 554,839 905,992 990,749 Deferred income taxes (note 11)....................... 303,000 390,000 390,000 Prepaid and other current assets...................... 680,761 1,020,835 940,345 ----------- ----------- ----------- Total current assets.................................. 10,371,954 13,944,230 16,438,056 Long-term receivables and deposits (note 4)............. 643,516 479,012 880,902 Property and equipment, net (notes 5, 7 and 8).......... 12,335,892 19,248,464 20,655,711 Intangible assets, net (notes 4 and 6).................. 31,302,096 41,566,684 44,783,750 ----------- ----------- ----------- Total assets.................................. $54,653,458 $75,238,390 $82,758,419 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt (note 7)............ $ 2,616,714 $ 1,330,595 $ 1,446,506 Accounts payable...................................... 1,307,069 922,188 1,293,033 Accrued salaries and benefits......................... 998,460 1,018,844 1,148,161 Other accrued liabilities............................. 635,456 1,235,626 835,400 Current income taxes payable.......................... 82,586 125,396 553,394 ----------- ----------- ----------- Total current liabilities............................. 5,640,285 4,632,649 5,276,494 Long-term debt (note 7)................................. 9,218,281 24,969,718 30,060,171 Deferred income taxes (note 11)......................... 765,000 1,185,000 1,185,000 Minority interest....................................... 5,673,960 9,191,896 10,215,884 Preferred stock, no par value, 5,000,000 shares authorized, 916,666, 916,666 and 416,666 shares outstanding, respectively (note 9).................... 4,982,057 5,267,672 3,207,767 Shareholders' equity (note 3, 10 and 12): Common stock: Class A, no par value, 20,000,000 shares authorized 9,199,525, 4,758,091 and 5,145,966 shares outstanding, respectively........................ 26,064,085 14,636,331 16,723,980 Class B, no par value, 4,800,000 shares authorized, 4,787,131 shares outstanding..................... -- 13,528,981 13,528,981 Retained earnings..................................... 2,309,790 2,099,491 2,799,315 Deferred compensation on restricted stock (note 12)... -- (273,348) (239,173) ----------- ----------- ----------- Total shareholders' equity............................ 28,373,875 29,991,455 32,813,103 ----------- ----------- ----------- Commitments and contingencies (note 5, 8, 12 and 13) Total liabilities and shareholders' equity.... $54,653,458 $75,238,390 $82,758,419 =========== =========== ===========
See accompanying notes to the consolidated financial statements. F-3 64 AMSURG CORP. CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, --------------------------------------- ------------------------- 1995 1996 1997 1997 1998 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Revenues (note 2)............... $22,388,739 $34,898,496 $57,413,812 $12,591,148 $17,828,648 Operating expenses: Salaries and benefits (note 12)........................ 6,243,134 11,613,504 17,363,440 3,971,664 5,367,341 Other operating expenses (note 12)........................ 7,557,655 11,546,562 20,352,442 4,450,793 6,383,712 Depreciation and amortization............... 2,396,796 3,000,183 4,944,483 1,087,263 1,568,407 Net loss on sale of assets (note 4)................... -- 30,811 1,424,690 2,321,168 42,914 ----------- ----------- ----------- ----------- ----------- Total operating expenses............ 16,197,585 26,191,060 44,085,055 11,830,888 13,362,374 ----------- ----------- ----------- ----------- ----------- Operating income...... 6,191,154 8,707,436 13,328,757 760,260 4,466,274 Minority interest............... 3,938,364 5,433,588 9,084,132 1,947,911 2,807,075 Other (income) and expenses: Interest expense, net of interest income of $95,640, $139,531 and $69,088, $18,776 and $50,044, respectively............... 626,750 808,332 1,553,508 308,179 492,825 Distribution cost (note 3).... -- -- 841,801 -- -- ----------- ----------- ----------- ----------- ----------- Earnings (loss) before income taxes........ 1,626,040 2,465,516 1,849,316 (1,495,830) 1,166,374 Income tax expense (note 11).... 578,000 985,000 1,774,000 329,000 466,550 ----------- ----------- ----------- ----------- ----------- Net earnings (loss)... 1,048,040 1,480,516 75,316 (1,824,830) 699,824 Accretion of preferred stock discount (note 9)............. -- 22,057 285,615 67,565 -- ----------- ----------- ----------- ----------- ----------- Net earnings (loss) available to common shareholders........ $ 1,048,040 $ 1,458,459 $ (210,299) $(1,892,395) $ 699,824 =========== =========== =========== =========== =========== Earnings (loss) per common share (note 10): Basic......................... $ 0.13 $ 0.17 $ (0.02) $ (0.20) $ 0.07 Diluted....................... $ 0.12 $ 0.16 $ (0.02) $ (0.20) $ 0.07 Weighted average number of shares and share equivalents outstanding (note 10): Basic......................... 8,173,511 8,689,480 9,453,205 9,360,240 9,673,447 Diluted....................... 8,580,974 9,082,535 9,453,205 9,360,240 10,347,306
See accompanying notes to the consolidated financial statements. F-4 65 AMSURG CORP. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1998
DEFERRED COMMON STOCK RETAINED COMPENSATION ------------------------ EARNINGS ON RESTRICTED SHARES AMOUNT (DEFICIT) STOCK TOTAL ---------- ----------- ---------- ------------- ----------- Balance December 31, 1994................. 7,744,801 $19,754,382 $ (196,709) $ -- $19,557,673 Issuance of stock....................... 356,826 1,197,279 -- -- 1,197,279 Issuance of stock in conjunction with acquisitions.......................... 200,850 676,200 -- -- 676,200 Net earnings............................ -- -- 1,048,040 -- 1,048,040 ---------- ----------- ---------- --------- ----------- Balance December 31, 1995................. 8,302,477 21,627,861 851,331 -- 22,479,192 Issuance of stock....................... 512,239 2,366,262 -- -- 2,366,262 Issuance of stock in conjunction with acquisitions.......................... 384,809 2,069,962 -- -- 2,069,962 Net earnings available to common shareholders.......................... -- -- 1,458,459 -- 1,458,459 ---------- ----------- ---------- --------- ----------- Balance December 31, 1996................. 9,199,525 26,064,085 2,309,790 -- 28,373,875 Issuance of stock....................... 146,087 934,273 -- (273,348) 660,925 Issuance of stock in conjunction with acquisitions.......................... 300,863 1,847,376 -- -- 1,847,376 Acquisition of stock.................... (101,253) (680,422) -- -- (680,422) Net loss available to common shareholders.......................... -- -- (210,299) -- (210,299) ---------- ----------- ---------- --------- ----------- Balance December 31, 1997................. 9,545,222 28,165,312 2,099,491 (273,348) 29,991,455 Issuance of stock (unaudited)........... 5,792 18,481 -- -- 18,481 Issuance of stock in conjunction with acquisitions (unaudited).............. 1,131 9,263 -- -- 9,263 Redemption of preferred stock (unaudited)........................... 380,952 2,059,905 -- -- 2,059,905 Net earnings (unaudited)................ -- -- 699,824 -- 699,824 Amortization of deferred compensation on restricted stock (unaudited).......... -- -- -- 34,175 34,175 ---------- ----------- ---------- --------- ----------- Balance March 31, 1998 (unaudited) 9,933,097 $30,252,961 $2,799,315 $(239,173) $32,813,103 ========== =========== ========== ========= ===========
See accompanying notes to the consolidated financial statements. F-5 66 AMSURG CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ----------------------------------------- ------------------------- 1995 1996 1997 1997 1998 ----------- ------------ ------------ ----------- ----------- (UNAUDITED) Cash flows from operating activities: Net earnings (loss)................... $ 1,048,040 $ 1,480,516 $ 75,316 $(1,824,830) $ 699,824 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Minority interest................... 3,938,364 5,433,588 9,084,132 1,947,911 2,807,075 Distributions to minority partners.......................... (3,840,787) (5,084,294) (8,907,875) (1,719,822) (2,825,098) Depreciation and amortization....... 2,396,796 3,000,183 4,944,483 1,087,263 1,568,407 Amortization of deferred compensation on restricted stock............................. -- -- -- -- 34,175 Deferred income taxes............... 213,000 249,000 333,000 -- -- Net loss (gain) on sale of assets... -- (30,811) 1,424,690 2,321,168 42,914 Increase (decrease) in cash, net of effects of acquisitions, due to changes in: Accounts receivable, net.......... (467,620) (1,353,365) (1,620,141) (611,293) (1,594,191) Supplies inventory................ (73,413) (128,248) (212,403) 35,045 (24,403) Prepaid and other current assets......................... (110,443) (213,838) (572,455) (183,703) 59,812 Other assets...................... (109,360) (266,801) (803,022) (101,424) (58,096) Accounts payable.................. 241,428 648,292 (384,881) 541,402 370,395 Accrued expenses and other liabilities.................... 568,525 (43,734) 322,870 66,826 47,539 Other, net........................ 106,220 156,001 273,593 12,555 (43,737) ----------- ------------ ------------ ----------- ----------- Net cash flows provided by operating activities........... 3,910,750 3,846,489 3,957,307 1,571,098 1,084,616 Cash flows from investing activities: Acquisition of interest in surgery centers............................. (3,186,512) (12,669,794) (12,643,331) (6,030,569) (4,562,773) Acquisition of property and equipment........................... (1,831,445) (3,863,052) (10,578,551) (1,943,151) (2,420,369) Proceeds from sale of assets.......... -- -- 1,978,462 -- 641,078 Decrease (increase) in long-term receivables......................... (846) 137,582 57,504 5,085 14,557 ----------- ------------ ------------ ----------- ----------- Net cash flows used in investing activities......... (5,018,803) (16,395,264) (21,185,916) (7,968,635) (6,327,507) Cash flows from financing activities: Proceeds from long-term borrowings.... 2,164,949 10,544,700 17,629,000 6,176,000 5,172,850 Repayment on long-term borrowings..... (999,929) (7,261,534) (3,524,641) (825,267) (385,640) Net proceeds from issuance of preferred stock..................... -- 4,960,000 -- -- -- Net proceeds from issuance of common stock............................... 1,197,279 2,366,262 524,216 133,776 18,481 Proceeds from capital contributions by minority partners................... 476,693 1,681,324 2,952,507 184,506 804,431 Financing cost incurred............... (11,345) (19,230) (138,094) (10,051) (1,971) ----------- ------------ ------------ ----------- ----------- Net cash flows provided by financing activities......... 2,827,647 12,271,522 17,442,988 5,658,964 5,608,151 ----------- ------------ ------------ ----------- ----------- Net increase (decrease) in cash and cash equivalents........................... 1,719,594 (277,253) 214,379 (738,573) 365,260 Cash and cash equivalents, beginning of period................................ 1,750,067 3,469,661 3,192,408 3,192,408 3,406,787 ----------- ------------ ------------ ----------- ----------- Cash and cash equivalents, end of period................................ $ 3,469,661 $ 3,192,408 $ 3,406,787 $ 2,453,835 $ 3,772,047 =========== ============ ============ =========== ===========
See accompanying notes to the consolidated financial statements. F-6 67 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 68 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 69 AMSURG CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) J. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. K. RECLASSIFICATIONS Distributions to minority partners, disclosed as a financing activity in prior years' consolidated statements of cash flows, is classified as an operating activity in order to present cash flows provided by operating activities more comparably to industry practices. Certain other prior year amounts have been reclassified to conform to the 1997 presentation. L. RECENT ACCOUNTING PRONOUNCEMENTS Statements of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" and No. 131 "Disclosures about Segments of an Enterprise and Related Information" become effective for the Company for the year ended December 31, 1998. The Company is continuing to evaluate the effects of adopting these two statements, but does not expect the adoption of either pronouncement to have a material effect on the Company's consolidated financial statements. M. UNAUDITED INTERIM INFORMATION The unaudited interim financial statements include all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation of the financial position and results of operations. The results of operations for the three-month period ended March 31, 1998 are not necessarily indicative of the results that may be expected for a full year. 2. REVENUE RECOGNITION Revenues for the years ended December 31, 1995, 1996 and 1997 are comprised of the following:
1995 1996 1997 ----------- ----------- ----------- 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 =========== =========== ===========
Surgery center revenues consist of the billing for the use of the Centers' facilities (the "usage fee") directly to the patient or third party payer. The usage fee excludes any amounts billed for physicians' services which are billed separately by the physicians to the patient or third party payer. Physician practice revenues consist of the billing for physician services of the Company's two majority owned physician practices acquired in 1996 and 1997. The billings are made by the practice directly to the patient or third party payer. Revenues from surgery centers and physician practices are recognized on the date of service, net of estimated contractual allowances from third party medical service payers including Medicare and Medicaid. During the years ended December 31, 1995, 1996 and 1997 approximately 37%, 36% and 37%, respectively, of the Company's revenues were derived from the provision of services to patients covered under Medicare and F-9 70 AMSURG CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Medicaid. Concentration of credit risk with respect to other payers is limited due to the large number of such payers. 3. PUBLIC DISTRIBUTION OF COMMON STOCK The Company operated as a majority owned subsidiary of American Healthcorp, Inc. ("AHC") from 1992 until the distribution by AHC to its stockholders of the shares of the AmSurg common stock owned by it (the "Distribution") on December 3, 1997. Prior to the Distribution, the Company effected a recapitalization pursuant to which every three shares of the Company's then outstanding common stock were converted into one share of Class A Common Stock. Immediately following the Recapitalization, AHC exchanged a portion of its shares of Class A Common Stock for shares of Class B Common Stock. The principal purpose of the Distribution was to enable the Company to have access to debt and equity capital markets as an independent, publicly traded company. Upon the Distribution, the Company became a publicly traded company. All shares and earnings per share data included herein have been adjusted to reflect the recapitalization. Expenses incurred in connection with the Distribution are reflected as distribution cost in the consolidated statement of operations for the year ended December 31, 1997. 4. ACQUISITIONS AND DISPOSITIONS A. ACQUISITIONS The Company, through wholly owned subsidiaries and in separate transactions, acquired a majority interest in two, four and five practice-based surgery centers during 1995, 1996 and 1997, respectively. In addition, the Company acquired through wholly owned subsidiaries one physician practice and related entities in each of 1996 and 1997. Consideration paid for the acquired interests consisted of cash, common stock, note payable or a combination thereof. Total consideration paid in 1995, 1996 and 1997 for all acquisitions was $4,415,000, $13,561,661 and $14,471,503, respectively, of which the Company assigned $3,976,358, $12,289,386 and $13,738,220, respectively, to excess of cost over net assets of purchased operations. The acquisitions were accounted for as purchases, and the accompanying consolidated financial statements include the results of their operations from the dates of acquisition. An acquisition which occurred in 1995 was structured such that if certain operating results were not achieved, the purchase price would be adjusted. Subsequent operations of the center did not meet the predefined levels, and the purchase price adjustment, which is reflected as a long-term receivable in the accompanying consolidated balance sheets, is being repaid to the Company over a thirty-month period. B. PRO FORMA INFORMATION The unaudited consolidated pro forma results for the years ended December 31, 1996 and 1997, assuming all 1996 and 1997 acquisitions had been consummated on January 1, 1996, are as follows:
1996 1997 ----------- ----------- 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
F-10 71 AMSURG CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) C. DISPOSITIONS In two separate transactions in 1997, the Company sold its investment in a partnership that owned two surgery centers acquired in 1994 and a surgery center building and equipment which the Company leased to a physician practice. In conjunction with the sale of the surgery center building and equipment, the Company also terminated its management agreement with the physician practice for the surgery center in which it had no ownership interest but had managed since 1994. The net loss associated with these transactions was $1,494,000. D. SUBSEQUENT ACQUISITIONS In January 1998, the Company, through a wholly owned subsidiary, acquired a majority interest in a practiced-based surgery center. Consideration paid for the acquired interest consisted of cash of $1,400,000, of which the Company assigned approximately $970,000 to excess of cost over net assets of purchased operations. 5. PROPERTY AND EQUIPMENT Property and equipment at December 31, 1996 and 1997 are as follows:
1996 1997 ----------- ----------- 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 =========== ===========
At December 31, 1997, the Company and its partnerships had unfunded construction and equipment purchase commitments for centers under development of approximately $3,100,000 in order to complete construction in progress. 6. INTANGIBLE ASSETS Intangible assets at December 31, 1996 and 1997 consist of the following:
1996 1997 ----------- ----------- 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 =========== ===========
F-11 72 AMSURG CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. LONG-TERM DEBT Long-term debt at December 31, 1996 and 1997 is comprised of the following:
1996 1997 ---------- ----------- $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 ========== ===========
On December 19, 1997, the Company amended its credit agreement. Under the terms of the newly amended agreement, all borrowings outstanding under the Company's term loan with the same lending institutions were converted to its revolving credit facility. The borrowings under the credit facility are guaranteed by the wholly owned subsidiaries of the Company, and in some instances, the underlying assets of certain developed centers. The credit agreement permits the Company to borrow up to $35,000,000 to finance the Company's acquisition and development projects at prime or 1.75% above LIBOR or a combination thereof, provides for a fee of .35% on unused commitments, prohibits the payment of dividends and contains covenants relating to the ratio of debt to net worth, operating performance and minimum net worth. The Company was in compliance with all covenants at December 31, 1997. Certain partnerships and LLCs included in the Company's consolidated financial statements have loans with local lending institutions which are collateralized by certain assets of the centers with a book value of approximately $6,300,000. The Company and the partners or members have guaranteed payment of the loans. Principal payments required on long-term debt in the five years subsequent to December 31, 1997 are $1,330,595, $1,118,876, $693,653, $22,957,821 and $199,368. 8. LEASES The Company has entered into various building and equipment operating leases and equipment capital leases for its surgery centers in operation and under development and for office space, expiring at various dates through 2014. Future minimum lease payments at December 31, 1997 are as follows:
CAPITALIZED EQUIPMENT OPERATING YEAR ENDED DECEMBER 31, LEASES LEASES - ----------------------- ----------- ----------- 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 ==========
F-12 73 AMSURG CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1997, equipment with a cost of $1,669,134 and accumulated amortization of $760,630 was held under capital lease. The Company and its limited partners have guaranteed payment of the leases. Rental expense for operating leases for the years ended December 31, 1995, 1996 and 1997 was $1,201,000, $1,775,000 and $3,093,000 (see note 12). 9. PREFERRED STOCK Preferred stock, net of issuance costs, is comprised of the following:
1996 1997 ---------- ---------- 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 ========== ==========
On November 20, 1996, the Company issued to unaffiliated institutional investors a combination of redeemable and convertible preferred stock for net proceeds of $4,960,000. The Series A Redeemable Preferred Stock, with a stated amount of $3,000,000, was to pay a cumulative dividend of 8% commencing November 21, 1998. Subsequent to December 31, 1997, the holders of the Series A Redeemable Preferred Stock converted their preferred shares into 380,952 shares of Class A Common Stock using a conversion ratio based on market price of the Class A Common Stock pursuant to the provisions of the Company's Charter. The Series B Convertible Preferred Stock, with a stated amount of $2,500,000, is convertible into that number of shares of Class A Common Stock that approximates 6% of the equity of the Company determined as of November 20, 1996, with that percentage being ratably increased to 8% of the equity of the Company if an event of liquidity has not occurred by November 20, 2000. An event of liquidity is defined as an initial public offering of common stock or sale of the Company yielding net cash proceeds to the Company of at least $25,000,000, or in the event the Company has completed a spin-off, yielding net proceeds of $20,000,000 to the Company and/or its shareholders. If such events of liquidity do not occur by November 20, 2002, the holders of the Series B Convertible Preferred Stock have the right to require the Company to redeem the stock at current market price as defined by the Company's Charter. The preferred stock was recorded at its fair value, net of issuance costs. From the time of issuance, the Series A Redeemable Preferred Convertible Stock has been accreted toward its stated amount, including potential dividends, over the redemption term. The Series B Preferred Stock is not being accreted because management expects a conversion upon an event of liquidity. 10. SHAREHOLDERS' EQUITY A. COMMON STOCK From the time of the Company's inception, the Company has sold Class A Common Stock to AHC, partners and members of certain of its partnerships and LLCs and other private investors at fair value. In addition, the Company has issued shares of Class A Common Stock in connection with acquisitions of surgery center assets. On December 3, 1997, the Company issued Class B Common Stock in connection with the Distribution (see note 3). Class B Common Stock differs from Class A Common Stock only in that it has ten votes per share in the election and removal of directors of the Company, while the Class A Common Stock has one vote per share. Other than the election and removal of directors of the Company, the Class A Common Stock and the Class B Common Stock have equal voting and other rights. The Company does not have the right to issue additional Class B Common Stock. F-13 74 AMSURG CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) B. EARNINGS PER SHARE The following is a reconciliation of the numerator and denominators of basic and diluted earnings per share:
EARNINGS (LOSS) SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT --------------- ------------- --------- 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) ========== =========
Options to purchase 1,174,849 shares of common stock at prices ranging from $0.75 to $8.70, representing common share equivalents of 335,927 under the treasury stock method, were outstanding at December 31, 1997 but were not included in the computation of diluted earnings per share for the year then ended because to do so would have been anti-dilutive to the net loss per share available to common shareholders. The options will expire at various dates through December 2007. The effect of the conversion of 500,000 shares of Series A Redeemable Preferred Stock to 380,952 shares of Class A Common Stock, which occurred subsequent to December 31, 1997 (see note 9), has also been excluded from the computation of diluted earnings per share for the year ended December 31, 1997 because to do so would have been anti-dilutive after giving consideration to the elimination of related accretion of preferred stock. C. STOCK OPTIONS The Company has two stock option plans under which it has granted non-qualified options to purchase shares of Class A Common Stock to employees and outside directors. Options are granted at market value on the date of the grant and vest over 4 years at the rate of 25% per year. Options have a term of 10 years from the date of grant. As of December 31, 1997, 491,232 shares were reserved for future options. F-14 75 AMSURG CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock option activity for the years ended December 31, 1995, 1996 and 1997 is summarized below:
WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE --------- -------- 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 =========
The following table summarizes information concerning outstanding and exercisable options at December 31, 1997:
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 --------------- ----------- --------- -------- ----------- -------- $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 ========= =======
The Company accounts for its stock options issued to employees and outside directors pursuant to APB No. 25. Accordingly, no compensation expense has been recognized in connection with the issuance of stock options. The estimated weighted average fair values of the options at the date of grant using the Black-Scholes option pricing model as promulgated by SFAS No. 123 in 1995, 1996 and 1997 were $1.80, $2.73 and $3.93 per share, respectively. In applying the Black-Scholes model, the Company assumed no dividends, an expected life for the options of seven years and a forfeiture rate of 3% in 1995, 1996 and 1997 and an average risk free interest rate of 6.6% in 1995, 6.2% in 1996 and 6.4% in 1997. The Company also assumed a volatility rate of 46% and 49% in 1995 and 1996, respectively, based upon an average of comparable companies, and 54% in 1997, based upon the volatility rate of AHC. Had the Company used the Black-Scholes estimates to determine compensation expense for the options granted in the years ended December 31, 1995, 1996 and 1997 net income and net income per share attributable to common shareholders would have been reduced to the following pro forma amounts. F-15 76 AMSURG CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995 1996 1997 ---------- ---------- --------- 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)
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:
1995 1996 1997 -------- -------- ---------- 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 ======== ======== ==========
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:
1995 1996 1997 --------- -------- ---------- 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 ========= ======== ==========
F-16 77 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:
1996 1997 -------- ---------- 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 ======== ==========
The net deferred tax liability at December 31, 1996 and 1997, is recorded as follows:
1996 1997 -------- ---------- 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 ======== ==========
The Company has provided a valuation allowance on its gross deferred tax asset primarily related to state net operating losses to the extent that management does not believe that it is more likely than not that such asset will be realized. 12. RELATED PARTY TRANSACTIONS Included in other operating expenses for the years ended December 31, 1995, 1996 and 1997 is $186,215, $213,820 and $382,467, respectively, paid to AHC for management and financial services provided by AHC to the Company. These expenses were incurred pursuant to an agreement under which AHC was paid for the services of AHC's chief executive officer and chief financial officer as well as ongoing accounting and tax services for surgery center and corporate operations. Upon the Distribution, the Company issued to AHC's chief executive officer and chief financial officer, who also serve as directors of the Company, restricted shares of Class A Common Stock valued at approximately $350,000, in accordance with an agreement in which they are to provide advisory services to the Company through December 3, 1999. Deferred compensation associated with the restricted stock is amortized over the term of the agreement. The Company also rents approximately 15,000 square feet of office space from AHC pursuant to a sublease which expires December 1999. Included in other operating expenses for the years ended December 31, 1996 and 1997 is $163,212 and $271,194, respectively, related to this sublease. The Company leases space for certain surgery centers from its physician partners affiliated with its centers at rates the Company believes approximate fair market value. Payments on these leases were $871,054, $1,205,849 and $2,198,802 for the years ended December 31, 1995, 1996 and 1997, respectively. The Company reimburses certain of its limited partners for salaries and benefits related to time spent by employees of their practices on activities of the centers. Total reimbursement of such salary and benefit costs F-17 78 AMSURG CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) totaled $3,538,925, $4,616,745 and $7,024,657 for the years ended December 31, 1995, 1996 and 1997, respectively. The Company believes that the foregoing transactions are in its best interests. It is the Company's current policy that all transactions by the Company with officers, directors, five percent shareholders and their affiliates will be entered into only if such transactions are on terms no less favorable to the Company than could be obtained from unaffiliated parties, are reasonably expected to benefit the Company and are approved by a majority of the disinterested independent members of the Company's Board of Directors. 13. COMMITMENTS AND CONTINGENCIES The Company and its partnerships are insured with respect to medical malpractice risk on a claims made basis. Management is not aware of any claims against it or its partnerships which would have a material financial impact. The Company or its wholly owned subsidiaries, as general partners in the limited partnerships, are responsible for all debts incurred but unpaid by the partnership. As manager of the operations of the partnership, the Company has the ability to limit its potential liabilities by curtailing operations or taking other operating actions. In the event of a change in current law which would prohibit the physicians' current form of ownership in the partnerships or LLCs, the Company is obligated to purchase the physicians' interests in the partnerships or LLCs. The purchase price to be paid in such event is generally the greater of the physicians' capital account or a multiple of earnings. 14. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information for the years ended December 31, 1995, 1996 and 1997 is as follows:
1995 1996 1997 ----------- ----------- ----------- 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 =========== =========== ===========
15. SUBSEQUENT EVENTS On March 31, 1998, the Company, through a wholly-owned subsidiary, acquired a majority interest in a practice-based surgery center. Consideration paid for the acquired interest was $3,125,553, consisting primarily of cash, of which the Company assigned approximately $2,900,000 to excess of cost over net assets of purchased operations. F-18 79 AMSURG CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Also on March 31, 1998, a partnership in which the Company, through a wholly-owned subsidiary, owned a 51% interest, sold certain assets comprising a surgery center developed in 1995 for approximately $640,000, and incurred a net loss of $42,914. On April 30, 1998, the Company through a wholly owned subsidiary, acquired a 60% interest in a physician practice-based surgery center for approximately $5,400,000, of which the Company assigned approximately $4,900,000 to excess of cost over net assets of purchased operations. 16. UNAUDITED SUBSEQUENT EVENTS In May 1998, the Company's Board of Directors approved a plan to dispose of the Company's interests in the two specialty physician practices in which it owns a majority interest as part of an overall strategy to exit the practice management business and focus solely on the development, acquisition and operation of ambulatory surgery centers and specialty networks. While the Company's past strategy for network development included the ownership of related physician practices, the Company's experience in specialty network development has made it clear that physician practice ownership is not necessary for the successful development of these networks. Because of this change in strategy and the fact that the ownership of physician practices is management intensive and produces lower profit margins than surgery centers, the Company believes that its capital and management resources are better allocated to the development and acquisition of surgery centers and networks. In addition, the Company believes that the ownership of only two physician practices does not allow for the economies of scale and growth opportunities needed to be successful in the physician practice management business. In conjunction with the plan of disposal of these practices, the Company will reduce the carrying value of the long-lived assets held for sale by approximately $5,400,000 in the second quarter of 1998, based on the estimated sales proceeds less estimated costs to sell. The Company will recognize a deferred income tax benefit of approximately $1,800,000 associated with the estimated loss. The remaining carrying value of the net assets of the practices is approximately $1,700,000. The Company expects to dispose of these practice interests through a sale. Although the Company is currently in negotiations regarding the possible sale of one of the two practices, there are no definitive agreements or arrangements with regard thereto. Therefore, there can be no assurance that the Company will sell these operations; however, the Company believes that the estimated disposal loss will be adequate in the sale of the practices. A summary of the information about the operations of the physician practices for the years ended December 31, 1995, 1996 and 1997 and for the three months ended March 31, 1997 and 1998 is as follows:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------- ------------------------ 1995 1996 1997 1997 1998 ---------- ---------- ---------- ---------- ---------- Revenues....................... $ -- $5,155,148 $8,814,724 $2,216,891 $2,242,916 Operating expenses............. -- 4,979,142 7,956,189 1,976,238 1,917,911 Minority interest.............. -- -- 327,287 71,074 73,444 Interest expense............... -- 90,912 101,797 29,801 14,834 ---------- ---------- ---------- ---------- ---------- Contribution margin............. $ -- $ 85,094 $ 429,451 $ 139,778 $ 236,727 ========== ========== ========== ========== ==========
Concurrent with the Company's decision to exit the physician practice management business, one of the Company's physician practices received notification from a payer with which it has a capitated contract for gastroenterology services covering approximately 120,000 lives that the contract would not be renewed beyond the June 30, 1998 anniversary date of the contract. The payer has advised the Company that it plans to negotiate a new contract. At this time, the Company cannot determine the outcome of these negotiations; however, an unfavorable outcome in these negotiations may have an adverse impact on the results of operations of the Company during the period this practice is held prior to disposal. F-19 80 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 an April 1998 acquisition, as if it had occurred on March 31, 1998. The unaudited pro forma combined statements of operations are presented to show the effects of the 1997 and 1998 acquisitions as if they had occurred on January 1, 1997. The pro forma information is based on the historical financial statements of the Company and the acquired centers, giving effect to the acquisitions under the purchase method of accounting, and the assumptions and adjustments in the accompanying notes to the pro forma consolidated financial information. The allocation of the purchase price is preliminary, but management does not believe it will change materially. The unaudited pro forma financial information does not purport to represent what the Company's financial position or results of operations would actually have been had the transactions in fact occurred on the dates indicated above, nor to project the Company's financial position or results of operations for any future date or period. In the opinion of the Company's management, all adjustments necessary for a fair presentation have been made. This unaudited pro forma financial information should be read in conjunction with the accompanying notes and the consolidated financial statements of AmSurg Corp. and the related notes included elsewhere herein. F-20 81 AMSURG CORP. PRO FORMA COMBINED BALANCE SHEET MARCH 31, 1998 (ALL AMOUNTS EXPRESSED IN THOUSANDS) (UNAUDITED)
EFFECT OF PRO BOSWELL ACQUISITIONS FORMA EYE AND RELATED COMBINED HISTORICAL CENTER, LLC FINANCING TOTALS ---------- -------------- ------------ -------- Current assets: Cash and cash equivalents......................... $ 3,772 $ 511 $(1,911)(1) $ 2,372 Accounts receivable, net.......................... 10,345 519 -- 10,864 Other current assets.............................. 2,321 92 (22)(2) 2,391 ------- ------ ------- ------- Total current assets...................... 16,438 1,122 (1,933) 15,627 Long-term receivables and deposits.................. 881 -- -- 881 Property and equipment, net......................... 20,655 244 -- 20,899 Intangible assets, net.............................. 44,784 -- 4,900(3) 49,684 ------- ------ ------- ------- Total assets.............................. $82,758 $1,366 $ 2,967 $87,091 ======= ====== ======= ======= Current liabilities: Current portion of long-term debt................. $ 1,447 $ 37 $ (37)(4) $ 1,447 Other current liabilities......................... 3,829 159 (159)(4) 3,829 ------- ------ ------- ------- Total current liabilities................. 5,276 196 (196) 5,276 Long-term debt...................................... 30,060 111 3,889(5) 34,060 Deferred income taxes............................... 1,185 -- -- 1,185 Minority interest................................... 10,216 -- 333(6) 10,549 Preferred stock..................................... 3,208 -- -- 3,208 Shareholders' equity................................ 32,813 1,059 (1,059)(7) 32,813 ------- ------ ------- ------- Total liabilities and shareholders' equity.................................. $82,758 $1,366 $ 2,967 $87,091 ======= ====== ======= =======
F-21 82 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)
THE SOUTH DENVER INDIVIDUALLY ENDOSCOPY ENDOSCOPY BOSWELL EYE INSIGNIFICANT PRO FORMA HISTORICAL CENTER, INC. CENTER, INC. CENTER, LLC ACQUISITIONS ADJUSTMENTS ---------- ------------ ------------ --------------- ------------- ----------- Revenue........................... $57,414 $2,090 $2,092 $5,032 $2,253 $ -- Operating expenses: Salaries and benefits........... 17,363 470 373 1,024 481 155(8) Other operating expenses........ 20,352 501 574 2,161 838 3(9) Depreciation and amortization... 4,944 -- 65 107 192 301(10) Net loss on sale of assets (a)........................... 1,425 -- -- -- -- -- ------- ------ ------ ------ ------ ------- Total operating expenses................ 44,084 971 1,012 3,292 1,511 459 ------- ------ ------ ------ ------ ------- Operating income.......... 13,330 1,119 1,080 1,740 742 (459) Minority interest................. 9,084 -- -- -- -- 2,236(6) Other (income) and expense: Interest expense, net of interest income............... 1,554 -- -- 21 (35) 923(11) Distribution cost (b)........... 842 -- -- -- -- -- ------- ------ ------ ------ ------ ------- Earnings before income taxes................... 1,850 1,119 1,080 1,719 777 (3,618) Income tax expense................ 1,774 -- -- -- -- 431(12) ------- ------ ------ ------ ------ ------- Net earnings.............. 76 1,119 1,080 1,719 777 (4,049) Accretion of preferred stock discount........................ 286 -- -- -- -- -- ------- ------ ------ ------ ------ ------- Net earnings (loss) attributable to common shareholders............ $ (210) $1,119 $1,080 $1,719 $ 777 $(4,049) ======= ====== ====== ====== ====== ======= Earnings (loss) per common share: Basic........................... $ (0.02)(c) Diluted......................... $ (0.02)(c) Weighted average number of shares and share equivalents outstanding: Basic........................... 9,453 135(13) Diluted......................... 9,453 471(14) PRO FORMA COMBINED TOTALS --------- Revenue........................... $68,881 Operating expenses: Salaries and benefits........... 19,866 Other operating expenses........ 24,429 Depreciation and amortization... 5,609 Net loss on sale of assets (a)........................... 1,425 ------- Total operating expenses................ 51,329 ------- Operating income.......... 17,552 Minority interest................. 11,320 Other (income) and expense: Interest expense, net of interest income............... 2,463 Distribution cost (b)........... 842 ------- Earnings before income taxes................... 2,927 Income tax expense................ 2,205 ------- Net earnings.............. 722 Accretion of preferred stock discount........................ 286 ------- Net earnings (loss) attributable to common shareholders............ $ 436 ======= Earnings (loss) per common share: Basic........................... $ 0.05(d) Diluted......................... $ 0.04(d) Weighted average number of shares and share equivalents outstanding: Basic........................... 9,588 Diluted......................... 9,924
- --------------- (a) Includes a loss attributable to the sale of a partnership interest, net of a gain on the sale of a surgery center building and equipment, which had an impact after taxes of reducing historical and pro forma basic and diluted net earnings per share by $0.16 for the year ended December 31, 1997. (b) Reflects costs incurred related to the distribution of the Company's common stock, which had an impact of reducing historical and pro forma basic and diluted net earnings per share by $0.09 for the year ended December 31, 1997. (c) Without giving effect to the items reflected in footnotes (a) and (b) above, basic and diluted earnings per common share would have been $0.24 and $0.23, respectively, for the year ended December 31, 1997. (d) Without giving effect to the items reflected in footnotes (a) and (b) above pro forma basic and diluted earnings per common share would have been $0.31 and $0.29, respectively, for the year ended December 31, 1997. F-22 83 AMSURG CORP. PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 (ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
SOUTH DENVER INDIVIDUALLY PRO FORMA ENDOSCOPY BOSWELL EYE INSIGNIFICANT PRO FORMA COMBINED HISTORICAL CENTER, INC. CENTER, LLC ACQUISITION ADJUSTMENTS TOTALS ---------- ------------ --------------- ------------- ----------- --------- Revenue.................................. $17,829 $ 598 $1,468 $ 143 $ -- $20,038 Operating expenses: Salaries and benefits.................. 5,367 141 251 29 39(8) 5,827 Other operating expenses............... 6,384 130 550 52 -- 7,116 Depreciation and amortization.......... 1,568 18 25 15 44(10) 1,670 Net loss on sale of assets............. 43 -- -- -- -- 43 ------- ------ ------ ------ ------- ------- Total operating expenses......... 13,362 289 826 96 83 14,656 ------- ------ ------ ------ ------- ------- Operating income................. 4,467 309 642 47 (83) 5,382 Minority interest........................ 2,807 -- -- -- 450(5) 3,257 Other (income) and expense: Interest expense, net of interest income............................... 493 -- 5 1 147(11) 646 ------- ------ ------ ------ ------- ------- Earnings before income taxes..... 1,167 309 637 46 (680) 1,479 Income tax expense....................... 467 -- -- -- 125(12) 592 ------- ------ ------ ------ ------- ------- Net earnings..................... $ 700 $ 309 $ 637 $ 46 $ (805) $ 887 ======= ====== ====== ====== ======= ======= Earnings per common share: Basic.................................. $ 0.07 $ 0.09 Diluted................................ $ 0.07 $ 0.09 Weighted average number of shares and share equivalents outstanding: Basic.................................. 9,673 1(13) 9,674 Diluted................................ 10,347 1(13) 10,348
F-23 84 AMSURG CORP. NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) In 1997 the Company acquired majority interests in the assets and certain liabilities comprising the business operations of five surgery centers and one physician practice. Through April 1998, the Company acquired majority interests in the assets and certain liabilities comprising the business operations of three surgery centers. The accompanying pro forma consolidated balance sheet includes the purchased assets and assumed liabilities and effects of financing, as if a surgery center acquired in April 1998 had been acquired on March 31, 1998. The accompanying pro forma consolidated statements of operations reflects the pro forma results of operations of the Company, as if the surgery centers and physician practice had been acquired on January 1, 1997. Two acquisitions were completed in early 1997, and therefore the results of their operations for the year ended December 31, 1997 are included in the historical amounts. PRO FORMA ADJUSTMENTS The adjustments reflected in the pro forma consolidated statement of operations are as follows: 1. To reflect cash used to fund acquisitions, net of cash not acquired. 2. To reflect other current assets not acquired. 3. To reflect additional excess of cost over net assets acquired resulting from acquisitions. 4. To reflect obligations of acquired entities not assumed. 5. To reflect additional long-term debt used to finance acquisitions, net of long-term debt not assumed. 6. To reflect minority owners' interest in earnings of acquired operations. 7. To eliminate equity of acquired entities. 8. To reflect $275,000 in additional corporate general and administrative salary costs as a result of an increase in the number of centers managed, net of $120,000 in salaries based on a reduction in salary expense allocated to the surgery center following the acquisition, for the year ended December 31, 1997, and $39,000 in additional corporate general and administrative salary costs as a result of an increase in the number of centers managed for the three months ended March 31, 1998. 9. To reflect $36,000 in additional miscellaneous general and administrative cost as a result of increase in number of centers managed, net of $33,000 in reduced rent expense pursuant to new lease agreements. 10. To reflect amortization of additional excess of cost over net assets of purchased operations assets and differences in depreciation of purchased equipment. 11. To reflect interest on acquisition-related borrowings. 12. To record estimated additional federal and state income taxes at a combined rate of 40%, as a result of the incremental increase in earnings before income taxes. 13. To reflect weighted average shares for stock issued in acquisition. 14. To reflect weighted average shares for stock issued in acquisition and the effect of potential common shares due to existing securities options which are dilutive upon consideration of the adjusted pro forma net earnings. F-24 85 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders South Denver Endoscopy Center, Inc. We have audited the accompanying balance sheet of South Denver Endoscopy Center, Inc. (the "Center") as of December 31, 1997, and the related statements of earnings and retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the Center's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Center as of December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Nashville, Tennessee April 24, 1998 F-25 86 SOUTH DENVER ENDOSCOPY CENTER, INC. BALANCE SHEETS
DECEMBER 31, MARCH 31, 1997 1998 ------------ ----------- (UNAUDITED) ASSETS Current assets: Cash...................................................... $ 24,105 $414,080 Accounts receivable, net of allowance for uncollectible accounts of $62,587 and $79,693, respectively.......... 333,505 272,946 Supplies inventory........................................ 15,000 13,000 Prepaid expenses.......................................... 600 3,664 -------- -------- Total current assets.............................. 373,210 703,690 Organization cost, net of accumulated amortization of $15,572 and $16,546, respectively......................... 3,895 2,921 Equipment, net of accumulated depreciation of $110,619 and $128,202, respectively.................................... 258,654 242,581 -------- -------- Total............................................. $635,759 $949,192 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $182,624 $181,733 Accrued expenses.......................................... 9,099 14,708 -------- -------- Total current liabilities......................... 191,723 196,441 Shareholders' equity: Retained earnings......................................... 444,036 752,751 -------- -------- Total............................................. $635,759 $949,192 ======== ========
See notes to financial statements. F-26 87 SOUTH DENVER ENDOSCOPY CENTER, INC. STATEMENTS OF EARNINGS AND RETAINED EARNINGS
THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, --------------------- 1997 1997 1998 ------------ --------- --------- (UNAUDITED) Revenue.................................................... $ 2,092,392 $ 485,068 $ 598,138 Expenses: Salaries and benefits.................................... 372,872 80,866 141,171 Supplies and other operating expenses.................... 442,380 99,836 93,980 Rent expense (Note 2).................................... 71,185 16,117 17,795 Bad debt expense......................................... 61,181 14,384 17,920 Depreciation and amortization............................ 65,068 17,686 18,557 ----------- --------- --------- Total expenses................................... 1,012,686 228,889 289,423 ----------- --------- --------- Net earnings............................................... 1,079,706 256,179 308,715 Retained earnings, beginning of period..................... 390,867 390,867 444,036 Distributions to shareholders.............................. (1,026,537) (226,532) -- ----------- --------- --------- Retained earnings, end of period........................... $ 444,036 $ 420,514 $ 752,751 =========== ========= =========
See notes to financial statements. F-27 88 SOUTH DENVER ENDOSCOPY CENTER, INC. STATEMENTS OF CASH FLOWS
THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, -------------------- 1997 1997 1998 ------------ --------- -------- (UNAUDITED) Cash flows from operating activities: Net earnings.............................................. $ 1,079,706 $ 256,179 $308,715 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation........................................... 61,175 16,712 17,583 Amortization of organization cost...................... 3,893 974 974 (Increase) decrease in accounts receivable............. (77,214) 7,389 60,559 Increase in supplies inventory......................... (5,500) (2,500) 2,000 Increase in prepaid assets............................. (241) (4,137) (3,064) Increase (decrease) in accounts payable................ 1,382 (10,252) (891) Increase in accrued expenses........................... 2,599 2,276 5,609 ----------- --------- -------- Net cash provided by operating activities......... 1,065,800 266,641 391,485 Cash flows from financing activities: Shareholders' distributions............................... (1,026,537) (226,532) -- ----------- --------- -------- Cash flows from investing activities: Purchase of equipment..................................... (19,254) -- (1,510) ----------- --------- -------- Net increase in cash........................................ 20,009 40,109 389,975 Cash at beginning of period................................. 4,096 4,096 24,105 ----------- --------- -------- Cash at end of period....................................... $ 24,105 $ 44,205 $414,080 =========== ========= ========
See notes to financial statements. F-28 89 SOUTH DENVER ENDOSCOPY CENTER, INC. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The South Denver Endoscopy Center, Inc. ("SDEC") began operations in 1994 in Englewood, Colorado (a suburb of Denver). SDEC is owned by a group of shareholders who perform endoscopy procedures through their related physician practice. Revenue Recognition. Revenue consists of the billing for the use of SDEC facilities (the "usage fee") directly to the patient or third party payer. The usage fee excludes amounts billed for physicians' services, which are billed separately by the physicians to the patient or third party payer. Revenues are reported at the estimated net realizable amounts from patients, third-party payers and others, including Medicare. Such revenues are recognized as the related services are performed. Contractual adjustments resulting from agreements with various organizations to provide services for amounts which differ from billed charges, are recorded as deductions from patient service revenues. During 1997, approximately 22% of the Center's revenues were provided to patients covered under Medicare. Amounts which are determined to be uncollectible are charged against the allowance for uncollectible accounts. Equipment. Equipment acquisitions are recorded at cost. Depreciation is provided over the estimated useful life and is computed using the straight-line method. The estimated useful life for the depreciation of equipment is 5-10 years. Income Taxes. SDEC has elected Subchapter S status of the Internal Revenue Code, and accordingly, income taxes are the responsibility of the individual shareholders of SDEC. Therefore, no provision for income taxes has been reflected by SDEC. Management Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. Unaudited Interim Information. The unaudited interim financial statements include all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation of the financial position and results of operations. The results of operations for the three-month period ended March 31, 1998 are not necessarily indicative of the results that may be expected for a full year. 2. RELATED PARTY TRANSACTIONS For the year ended December 31, 1997, the shareholders of SDEC owned 100% of SDEC as well as 100% of the South Denver Gastroenterology Center (SDGC). SDGC provides SDEC with billing, collection, accounts payable and other bookkeeping services. A monthly overhead charge is paid by SDEC in the amount of $2,000. Total expense incurred for these services of $24,000 has been included in the statement of earnings and retained earnings for the year ended December 31, 1997. In addition, the SDGC maintains a defined benefit pension plan as well as a profit sharing plan which is open to all employees of SDEC. Employees may participate after completing 2 years of service. SDGC is responsible for making the contributions to the plans on behalf of the SDEC. Contributions in the amounts of $5,933 and $10,563 were contributed to the pension plan and profit sharing plan, respectively during 1997. F-29 90 SOUTH DENVER ENDOSCOPY CENTER, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. COMMITMENTS AND CONTINGENCIES The SDEC leases facility space under a five year operating lease that expires on January 31, 1999. Total rental expense for 1997 was approximately $71,000. The following is a schedule by year of the future minimum lease payments under the operating lease as of December 31, 1997.
YEAR ENDING DECEMBER 31, - ------------ 1998........................................................ $68,000 1999........................................................ 5,720
4. SUBSEQUENT EVENT Effective March 31, 1998, AmSurg Holdings, Inc. ("Holdings"), a subsidiary of AmSurg Corp. ("AmSurg") acquired from SDEC a fifty-one percent ownership interest in the assets and assumed certain liabilities comprising the business operations of the endoscopy center. Pursuant to the terms of the Asset Purchase Agreement, dated as of March 18, 1998, by and among Holdings, AmSurg and SDEC, Holdings paid $3,116,290 in cash and AmSurg issued 1,131 shares of its Class A Common Stock to SDEC. Following the asset purchase, Holdings and SDEC contributed their respective ownership in the assets of the center into a newly formed limited liability company, The Englewood ASC, LLC, and received proportionate membership therein. F-30 91 INDEPENDENT AUDITORS' REPORT Board of Directors and Members Boswell Eye Center, LLC Sun City, Arizona We have audited the accompanying combined balance sheets of Boswell Eye Center, LLC as of December 31, 1996 and 1997, and the related combined statements of earnings and retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such combined financial statements present fairly, in all material respects, the financial position of Boswell Eye Center, LLC as of December 31, 1996 and 1997 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Nashville, Tennessee May 6, 1998 F-31 92 BOSWELL EYE CENTER, LLC COMBINED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, MARCH 31, 1996 1997 1998 ------------ ------------ ----------- (UNAUDITED) ASSETS Current assets: Cash.................................................... $ 80,383 $ 97,747 $ 510,524 Accounts receivable, net of allowance for uncollectible accounts of $45,393, $28,511 and $20,861, respectively......................................... 361,866 592,838 519,214 Prepaid expenses........................................ 6,691 6,924 21,642 Supplies inventory...................................... 48,714 62,632 70,076 -------- ---------- ---------- Total current assets............................ 497,654 760,141 1,121,456 Furniture and equipment, net (Note 2)..................... 353,523 246,115 244,425 Other assets.............................................. 4,600 2,300 -- -------- ---------- ---------- Total........................................... $855,777 $1,008,556 $1,365,881 ======== ========== ========== LIABILITIES AND MEMBERS' EQUITY Current liabilities: Accounts payable........................................ $153,204 $ 84,508 $ 159,130 Note payable -- current portion (Note 3)................ 106,150 36,980 36,980 -------- ---------- ---------- Total current liabilities....................... 259,354 121,488 196,110 Note payable (Note 3)..................................... 156,822 123,433 110,644 Commitments and contingencies (Note 4) Members' equity: Capital................................................. 9,000 9,000 9,000 Retained earnings....................................... 430,601 754,635 1,050,127 -------- ---------- ---------- Total members' equity........................... 439,601 763,635 1,059,127 -------- ---------- ---------- Total........................................... $855,877 $1,008,556 $1,365,881 ======== ========== ==========
See notes to financial statements. F-32 93 BOSWELL EYE CENTER, LLC COMBINED STATEMENTS OF INCOME
YEARS ENDED THREE MONTHS DECEMBER 31, ENDED MARCH 31, ------------------------- ----------------------- 1996 1997 1997 1998 ----------- ----------- ---------- ---------- (UNAUDITED) Revenues...................................... $ 4,460,677 $ 5,032,149 $1,296,892 $1,467,813 Expenses: Supplies and other operating expenses....... 1,609,488 1,785,911 455,963 472,458 Salaries and benefits....................... 1,012,588 1,024,131 242,794 250,802 Rent expense................................ 232,267 229,899 57,830 57,119 Bad debt expense............................ 220,532 145,271 37,710 20,261 Depreciation................................ 105,650 107,408 27,313 24,882 Interest expense............................ 28,852 20,752 5,763 4,799 ----------- ----------- ---------- ---------- Total expenses...................... 3,209,377 3,313,372 827,373 830,321 ----------- ----------- ---------- ---------- Net earnings.................................. 1,251,300 1,718,777 469,519 637,492 Retained earnings, beginning of period........ 446,800 430,601 430,601 754,635 Distributions to Members...................... (1,267,499) (1,394,743) (319,494) (342,000) ----------- ----------- ---------- ---------- Retained earnings, end of period.............. $ 430,601 $ 754,635 $ 580,626 $1,050,127 =========== =========== ========== ==========
See notes to financial statements. F-33 94 BOSWELL EYE CENTER, LLC COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED THREE MONTHS DECEMBER 31, ENDED MARCH 31, ------------------------- --------------------- 1996 1997 1997 1998 ----------- ----------- --------- --------- (UNAUDITED) Cash flows from operating activities: Net earnings................................. $ 1,251,300 $ 1,718,777 $ 469,519 $ 637,492 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation.............................. 105,650 107,408 27,313 24,882 Decrease (increase) in accounts receivable.............................. 35,102 (230,972) (68,990) 73,624 Increase in supplies inventory............ (5,488) (13,918) (13,918) (7,444) (Increase) decrease in prepaid expenses... 303 (233) (15,022) (14,718) Decrease in other assets.................. 2,342 2,300 2,300 2,300 (Decrease) increase in accounts payable... (13,844) (68,696) 123,372 74,622 ----------- ----------- --------- --------- Net cash provided by operating activities......................... 1,375,365 1,514,666 524,574 790,758 Cash flows from investing activities: Payments for equipment additions............. -- -- -- (23,192) ----------- ----------- --------- --------- Cash flows from financing activities: Principal payments on notes payable.......... (99,439) (102,559) (22,405) (12,789) Members' distributions....................... (1,267,499) (1,394,743) (319,494) (342,000) ----------- ----------- --------- --------- Net cash used in financing activities......................... (1,366,938) (1,497,302) (341,899) (354,789) ----------- ----------- --------- --------- Net increase in cash........................... 8,427 17,364 182,675 412,777 Cash at beginning of period.................... 71,956 80,383 80,383 97,747 ----------- ----------- --------- --------- Cash at end of period.......................... $ 80,383 $ 97,747 $ 263,058 $ 510,524 =========== =========== ========= ========= Supplemental disclosure of cash flow information: Cash paid during the year for interest......... $ 28,852 $ 20,752 $ 5,763 $ 4,799 =========== =========== ========= =========
F-34 95 BOSWELL EYE CENTER, LLC NOTES TO COMBINED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Boswell Eye Center, LLC (the "Center") owns and operates an ophthalmology surgery center in Sun City, Arizona. The Center is owned by a group of physicians who perform ophthalmic procedures at the Center through their related physician practices. The accompanying financial statements have been prepared on the accrual basis of accounting and include the accounts and transactions of the Boswell Eye Center, LLC and the Boswell Eye Institute, Inc. which are under common control. Significant intercompany balances and transactions have been eliminated. Furniture and equipment. Furniture and equipment are stated at cost less accumulated depreciation. Depreciation for furniture and equipment is recognized on the straight line method over five to seven years, and for leasehold improvements over the remaining term of the lease plus renewal options. Revenue recognition. Revenues consist of the billing of the use of the Center's facilities (the "usage fee") directly to the patient or third-party payer. The usage fee excludes amounts billed for physicians' services, which are billed separately by the physicians to the patient or third-party payer. Revenues are reported at the estimated net realizable amounts from patients, third-party payers and others, including Medicare. Such revenues are recognized as the related services are performed. Contractual adjustments resulting from agreements with various organizations to provide services for amounts which differ from billed charges, are recorded as deductions from patient service revenues. During the years ended December 31, 1996 and 1997, approximately 52% and 48%, respectively, of the Center's revenues were provided to patients covered under Medicare. Amounts that are determined to be uncollectible are charged against the allowance for uncollectible accounts. Income taxes. The Center has elected SubChapter S status of the Internal Revenue Code, and accordingly, income taxes are the responsibility of the individual members of the Center. Therefore, no provision for income taxes has been reflected in the accompanying financial statements. Management estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts liabilities and disclosure of contingent assets and liabilities at the date of the financial statements an the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. Unaudited interim information. The unaudited interim financial statements include all adjustments, consisting only of normal recurring adjustments which management considers necessary for a fair presentation of the financial position and results of operations. The results of operations for the three-month period ended March 31, 1998 are not necessarily indicative of the results that may be expected for a full year. 2. FURNITURE AND EQUIPMENT Furniture and equipment consists of:
DECEMBER 31, ------------------------- MARCH 31, 1996 1997 1998 ----------- ----------- ----------- (UNAUDITED) Medical equipment............................... $ 1,116,666 $ 1,116,666 $ 1,139,859 Leasehold improvements.......................... 486,290 486,290 486,290 Furniture and fixtures.......................... 247,498 247,498 247,498 Office equipment................................ 54,584 54,584 54,584 ----------- ----------- ----------- 1,905,038 1,905,038 1,928,231 Less accumulated depreciation................... (1,551,515) (1,658,923) (1,683,806) ----------- ----------- ----------- $ 353,523 $ 246,115 $ 244,425 =========== =========== ===========
F-35 96 BOSWELL EYE CENTER, LLC NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 3. NOTE PAYABLE The note payable bears interest at 9% and is due in monthly installments through June 2001. 4. COMMITMENTS AND CONTINGENCIES The center operates under a facilities lease expiring April 1999. The following is a schedule of future minimum lease payments under the facilities lease, which is classified as an operating lease:
YEAR ENDING DECEMBER 31, - ------------ 1998........................................................ $228,478 1999........................................................ 66,639 -------- $295,117 ========
5. SUBSEQUENT EVENT Effective May 1, 1998, AmSurg Holdings, Inc. ("Holdings"), a subsidiary of AmSurg Corp. ("AmSurg") acquired from the Center a sixty percent ownership interest in the assets comprising the business operations of the Center. Pursuant to the terms of the Asset Purchase Agreement, dated as of April 30, 1998, by and among Holdings, AmSurg, and the Center, Holdings paid $5,400,000 in cash as consideration for the sixty percent ownership interest in the Center. Following the asset purchase, Holdings and the Center contributed their respective ownership in the assets of the Center into a newly formed limited liability company, The Sun City Ophthalmology ASC, LLC, and received proportionate membership therein. F-36 97 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders The Endoscopy Center, Inc. Independence, Missouri We have audited the accompanying statements of earnings and retained earnings and cash flows of The Endoscopy Center, Inc. for the years ended December 31, 1995 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the results of operations and cash flows of The Endoscopy Center, Inc. for the years ended December 31, 1995 and 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Nashville, Tennessee October 7, 1997 F-37 98 THE ENDOSCOPY CENTER, INC. STATEMENTS OF EARNINGS AND RETAINED EARNINGS
EIGHT MONTHS ENDED YEAR ENDED DECEMBER 31, AUGUST 31, ------------------------- ------------------------ 1995 1996 1996 1997 ----------- ----------- ----------- ---------- (UNAUDITED) 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 =========== =========== =========== ==========
See accompanying notes to the financial statements. F-38 99 THE ENDOSCOPY CENTER, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED EIGHT MONTHS ENDED DECEMBER 31, AUGUST 31, ----------------------- ----------------------- 1995 1996 1996 1997 ---------- ---------- ---------- ---------- (UNAUDITED) Cash flow from operations: Net earnings................................ $1,608,237 $1,806,516 $1,117,854 $1,119,287 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of organization cost........... 71 71 47 47 Decrease (increase) in accounts receivable............................... (220,594) (38,136) 84,016 (32,213) Increase in supplies inventory.............. (5,174) (2,133) (1,290) (733) Increase (decrease) in accounts payable..... (2) 21,967 42,685 (20,956) Increase (decrease) in amount due to related party.................................... 33,559 3,801 193 (8,530) ---------- ---------- ---------- ---------- Net cash provided by operating activities............................. 1,416,097 1,792,086 1,243,505 1,056,902 ---------- ---------- ---------- ---------- Cash flows from financing activities: Stockholders' distribution.................. (1,310,528) (1,808,123) (1,128,268) (949,855) Increase (decrease) in distribution withholdings............................. 78,525 29,830 (78,525) (108,355) Decrease in outstanding checks in excess of deposits................................. (4,731) -- -- -- ---------- ---------- ---------- ---------- Net cash used by financing activities.... (1,236,734) (1,778,293) (1,206,793) (1,058,210) ---------- ---------- ---------- ---------- Net increase (decrease) in cash............... 179,363 13,793 36,712 (1,308) Cash, beginning of period..................... -- 179,363 179,363 193,156 ---------- ---------- ---------- ---------- Cash, end of period........................... $ 179,363 $ 193,156 $ 216,075 $ 191,848 ========== ========== ========== ==========
See accompanying notes to the financial statements. F-39 100 THE ENDOSCOPY CENTER, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995 AND 1996 AND EIGHT MONTHS ENDED AUGUST 31, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Endoscopy Center Inc. ("TEC") began operations in 1994 and operates two gastrointestinal surgery centers in Independence and Kansas City, Missouri. TEC is owned by a group of stockholders which perform gastroenterology procedures at the centers through their related physician practice. A. REVENUE RECOGNITION Revenue consists of the billing for the use of TEC's facilities (the "usage fee") directly to the patient or third-party payor. The usage fee excludes amounts billed for physicians' services, which are billed separately by the physicians to the patient or third-party payor. Revenues are reported at the estimated net realizable amounts from patients, third-party payors and others, including Medicare and Medicaid. Such revenues are recognized as the related services are performed. Contractual adjustments resulting from agreements with various organizations to provide services for amounts which differ from billed charges, are recorded as deductions from patient service revenues. During the 1995, 1996 and 1997 periods, approximately 29%, 39% and 28%, respectively, of the Centers' revenues were provided to patients covered under Medicare and Medicaid. Amounts, which are determined to be uncollectible, are charged against the allowance for uncollectible accounts. B. AMORTIZATION Amortization of organization cost is provided on a straight-line basis over four years. C. INCOME TAXES TEC has elected Subchapter S status of the Internal Revenue Code, and accordingly, income taxes are the responsibility of the individual stockholders of TEC. Therefore, no provision for income taxes has been reflected by TEC. D. MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. E. UNAUDITED INTERIM INFORMATION The unaudited interim financial statements include all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation of the financial position and results of operations. The results of operations for the eight month periods ended August 31, 1996 and 1997 are not necessarily indicative of the results that may be expected for a full year. 2. RELATED PARTY TRANSACTIONS Both centers rent equipment and furniture and one center occupies space provided by an entity which is owned by the same group of stockholders which own TEC. Included in the statement of earnings and retained earnings is a charge of $156,571, $200,993, $133,995 and $133,587 for the years ended December 31, 1995 and 1996 and the eight months ended August 31, 1996 and 1997, respectively, related to these lease arrangements, which management believes reflects the fair value of space and rental items provided. In addition, the F-40 101 THE ENDOSCOPY CENTER, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) employees of TEC are leased from the related physician practice. Charges associated with this arrangement are reflected as salaries and benefits in the statements of earnings and retained earnings. 3. SUBSEQUENT EVENT Effective September 1, 1997, AmSurg Holdings, Inc. ("Holdings"), a subsidiary of AmSurg Corp. ("AmSurg") acquired from TEC a sixty percent ownership interest in the assets comprising the business operations of two gastrointestinal surgery centers. Pursuant to the terms of the Asset Purchase Agreement, dated as of September 2, 1997, by and among Holdings, AmSurg and TEC, Holdings paid $5,652,205 in cash and AmSurg issued 280,367 shares of its common stock to TEC. Following the asset purchase, Holdings and TEC contributed their respective ownership in the assets of the centers in a newly formed limited liability company, The Independence ASC, LLC, and received proportionate membership therein. F-41 102 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-1 103 AMSURG CORP. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COST AND OTHER END OF OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS(2) PERIOD ---------- ---------- ------------ ------------- ----------- 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 ========== ========== ======== ========== ==========
- --------------- (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-2 104 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders South Denver Endoscopy Center, Inc. We have audited the financial statements of South Denver Endoscopy Center, Inc. (the "Center") as of and for the year ended December 31, 1997, and have issued our report thereon dated April 24, 1998; such report is included elsewhere in this Registration Statement. Our audit also included the financial statement schedule of the Center, listed in Item 16 of this Registration Statement. This financial statement schedule is the responsibility of the Center's management. Our responsibility is to express an opinion based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Nashville, Tennessee April 24, 1998 S-3 105 SCHEDULE II SOUTH DENVER ENDOSCOPY CENTER, INC. VALUATION AND QUALIFYING ACCOUNTS YEAR ENDED DECEMBER 31, 1997
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF PERIOD EXPENSES DEDUCTIONS(1) OF PERIOD ---------- ---------- ------------- ---------- ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS INCLUDED UNDER THE BALANCE SHEET CAPTION "ACCOUNTS RECEIVABLE" Year ended December 31, 1997....................... $ 54,419 $ 61,181 $53,013 $ 62,587
- --------------- (1) Charge-off against reserve. S-4 106 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Boswell Eye Center, LLC Sun City, Arizona We have audited the financial statements of Boswell Eye Center, LLC (the "Center") as of and for the years ended December 31, 1996 and 1997, and have issued our report thereon dated May 6, 1998; such report is included elsewhere in this Registration Statement. Our audit also included the financial statement schedule of the Center, listed in Item 16 of this Registration Statement. This financial statement schedule is the responsibility of the Center's management. Our responsibility is to express an opinion based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Nashville, Tennessee May 6, 1998 S-5 107 SCHEDULE II BOSWELL EYE CENTER, LLC -- SUN CITY, ARIZONA VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1996 AND 1997
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF PERIOD EXPENSES DEDUCTIONS(1) OF PERIOD ---------- ---------- ------------- ---------- ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS INCLUDED UNDER THE BALANCE SHEET CAPTION "ACCOUNTS RECEIVABLE" Year ended December 31, 1996....................... $ 22,965 $220,532 $198,104 $ 45,393 ======== ======== ======== ======== Year ended December 31, 1997....................... $ 45,393 $145,271 $162,153 $ 28,511 ======== ======== ======== ========
- --------------- (1) Charge-off against reserve. S-6 108 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders The Endoscopy Center, Inc. Independence, Missouri We have audited the financial statements of The Endoscopy Center, Inc. (the "Center") as of and for the years ended December 31, 1995 and 1996, and have issued our report thereon dated October 7, 1997; such report is included elsewhere in this Registration Statement. Our audit also included the financial statement schedule of the Center, listed in Item 16 of this Registration Statement. This financial statement schedule is the responsibility of the Center's management. Our responsibility is to express an opinion based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Nashville, Tennessee October 7, 1997 S-7 109 SCHEDULE II THE ENDOSCOPY CENTER INC -- INDEPENDENCE, MISSOURI VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1995 AND 1996
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF PERIOD EXPENSES DEDUCTIONS(1) OF PERIOD ---------- ---------- ------------- ---------- 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 ======== ======== ======= ========
- --------------- (1) Charge-off against reserve. S-8 110 ====================================================== NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING DESCRIBED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE SPECIFICALLY OFFERED HEREBY OR OF ANY SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE AN OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. --------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 1 Risk Factors.......................... 4 Price Range of Common Stock and Dividend Policy..................... 11 Use of Proceeds....................... 11 Capitalization........................ 12 Selected Financial Data............... 13 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 14 Business.............................. 23 Management............................ 36 Principal Shareholders................ 45 Certain Relationships and Related Transactions........................ 46 Description of Capital Stock.......... 47 Shares Eligible for Future Sale....... 52 Underwriting.......................... 54 Legal Matters......................... 55 Experts............................... 55 Available Information................. 55 Index to Financial Statements......... F-1
====================================================== ====================================================== 3,700,000 SHARES (AMSURG LOGO) CLASS A COMMON STOCK ------------------------- PROSPECTUS ------------------------- J.C. BRADFORD & CO. PIPER JAFFRAY INC. MORGAN KEEGAN & COMPANY, INC. , 1998 ====================================================== 111 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, NASD and Nasdaq fees. 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 ========
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-1 112 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-2 113 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:
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 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)
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EXHIBIT NUMBER DESCRIPTION - ------- ----------- 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 -- Third Amended and Restated Loan Agreement dated as of May 19, 1998 among the Company, SunTrust Bank, Nashville, N.A., and NationsBank of Tennessee, N.A. 10.5 -- [Intentionally Omitted] 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)
II-4 115
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 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) 10.16 -- Asset Purchase Agreement dated as of April 30, 1998 among AmSurg Holdings, Inc., Boswell Eye Center, L.L.C., Boswell Eye Institute, Inc. and the members and shareholders thereof (incorporated by reference to Exhibit 2 to the Current Report on Form 8-K dated April 30, 1998) 21 -- Subsidiaries of the Registrant 23.1 -- Consent of Deloitte & Touche LLP -- AmSurg Corp. 23.2 -- Consent of Deloitte & Touche LLP -- South Denver Endoscopy Center, Inc. 23.3 -- Consent of Deloitte & Touche LLP -- Boswell Eye Center, LLC 23.4 -- Consent of Deloitte & Touche LLP -- The Endoscopy Center, Inc. 23.5 -- Consent of Bass, Berry & Sims PLC (included in Exhibit 5) 24* -- Power of Attorney (included in signature page)
- --------------- * Previously filed (b) Financial Statement Schedules. Schedule II -- AmSurg Corp. -- Valuation and Qualifying Accounts Schedule II -- South Denver Endoscopy Center, Inc. -- Valuation and Qualifying Accounts Schedule II -- Boswell Eye Center, LLC -- Sun City, Arizona -- 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. II-5 116 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-6 117 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Nashville, Tennessee on May 20, 1998. AMSURG CORP. By: /s/ CLAIRE M. GULMI ------------------------------------ Claire M. Gulmi Senior Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- * President and Chief Executive May 20, 1998 - ----------------------------------------------------- Officer (Principal Executive Ken P. McDonald Officer) /s/ CLAIRE M. GULMI Senior Vice President, Chief May 20, 1998 - ----------------------------------------------------- Financial Officer and Claire M. Gulmi Secretary (Principal Financial and Accounting Officer) * Chairman of the Board May 20, 1998 - ----------------------------------------------------- Thomas G. Cigarran * Director May 20, 1998 - ----------------------------------------------------- James A. Deal * Director May 20, 1998 - ----------------------------------------------------- Steven I. Geringer Director - ----------------------------------------------------- Debora A. Guthrie * Director May 20, 1998 - ----------------------------------------------------- Henry D. Herr * Director May 20, 1998 - ----------------------------------------------------- Bergein F. Overholt, M.D. *By: /s/ CLAIRE M. GULMI ------------------------------------------------- Claire M. Gulmi attorney-in-fact
II-7 118 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 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 -- Third Amended and Restated Loan Agreement dated as of May 19, 1998 among the Company, SunTrust Bank, Nashville, N.A., and NationsBank of Tennessee, N.A. 10.5 -- [Intentionally Omitted] 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))
II-8 119
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 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) 10.16 -- Asset Purchase Agreement dated as of April 30, 1998 among AmSurg Holdings, Inc., Boswell Eye Center, L.L.C., Boswell Eye Institute, Inc. and the members and shareholders thereof (incorporated by reference to Exhibit 2 to the Current Report on Form 8-K dated April 30, 1998) 21 -- Subsidiaries of the Registrant 23.1 -- Consent of Deloitte & Touche LLP -- AmSurg Corp. 23.2 -- Consent of Deloitte & Touche LLP -- South Denver Endoscopy Center, Inc. 23.3 -- Consent of Deloitte & Touche LLP -- Boswell Eye Center, LLC 23.4 -- Consent of Deloitte & Touche LLP -- The Endoscopy Center, Inc. 23.5 -- Consent of Bass, Berry & Sims PLC (included in Exhibit 5) 24* -- Power of Attorney (included in signature page)
- --------------- * Previously filed II-9 EX-1 2 FORM OF UNDERWRITING AGREEMENT 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"), proposes to sell to the several underwriters named in Schedule I hereto (the "Underwriters"), for whom you are acting as the representatives (the "Representatives"), 3,700,000 shares (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. 333-50813), including the related preliminary prospectus relating to the Shares, and has filed one or more amendments thereto. 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 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 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 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 corporate power and corporate 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 material to the conduct of the business in which it is 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 Exhibit 21 to the Registration Statement (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 corporate 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 in the Registration Statement, are owned by the Company directly, or indirectly through one 3 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 partnership power and partnership 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 initial 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, fraudulent conveyance 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 limited liability company 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 initial capital contributions with respect to the outstanding 4 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 of 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, fraudulent conveyance 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 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 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) 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. (j) 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 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 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, other than violations and defaults which would not have a material adverse effect on the business condition (financial or otherwise) of the Company. 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. (k) The historical consolidated financial statements, together with the related schedules and notes, of the Company, included in the Registration Statement, the Effective Prospectus and the Final Prospectus, comply with 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. 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, 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. (l) 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 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 material 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. (m) 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. (n) 4,255,000 additional shares of Class A Common Stock have been approved for listing on the Nasdaq National Market (the "Nasdaq National Market"), subject to official notice of issuance. (o) 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. (p) 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. 8 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. (q) 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. (r) 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. (s) 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 (with the exception or any returns for which valid extensions for the filing have been obtained) 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. (t) 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, to the Company's knowledge, 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, to the Company's knowledge, 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, to the Company's knowledge, 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 10 (u) 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 and other employment matters 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. (v) 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 where the failure to file the same would have a material adverse effect on the Company; 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 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, except as disclosed in the Effective Prospectus and the Final Prospectus, 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, properties 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, to the Company's knowledge, is under investigation with respect to a possible violation of any provision of any law, regulation or order. (w) 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. 10 11 (x) The Company and its Subsidiaries and, to the Company's knowledge, its affiliated practice groups own or possess all licenses, patents, copyrights, trademarks, service marks and trade names currently employed by them 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, would result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company. (y) 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. (z) Neither the Company, its Subsidiaries, nor, to the Company's knowledge, 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, to the Company's knowledge, 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. (aa) 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. (bb) 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. 11 12 (cc) None of the Company nor any of its officers or directors, or, to the knowledge of the Company, any employee, member of an LLC, partner of a Partnership, 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. 12 13 2. 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 agrees to sell to the several Underwriters 3,700,000 Firm Shares, 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, plus such additional number of Firm Shares which such Underwriter may become obligated to purchase pursuant to Section 8 hereof. (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 13 14 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 14 15 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. 3. 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. 4. Covenants of the Company. 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, based on the advice of legal counsel, 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 15 16 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, in cooperation with the Underwriters and their counsel, 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. The foregoing notwithstanding, the Company shall not be required to qualify as a foreign corporation or to take any action which would subject it to general service of process in any jurisdiction where it is not presently qualified or where it would be subject to taxation as a foreign corporation. (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, and (B) for a period of not more than nine months after the Registration Statement becomes effective, 16 17 send to the Representatives as many additional copies of the Final Prospectus and any supplement thereto as the Representatives 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, 17 18 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. 18 19 5. Expenses. The Company agrees with 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 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, 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 12(b)(ii) or (iv) of this Agreement or (ii) because of any failure or refusal on the part of the Company to comply with the terms or fulfill any of the conditions of this Agreement. 6. 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 of all of its covenants and agreements hereunder and to the following additional conditions: 19 20 (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 corporate 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 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. 20 21 (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 partnership power and partnership 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 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 limited liability company power and limited liability company 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 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 date 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 21 22 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. To such counsel's knowledge, 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) No consent, approval, authorization or order of any court or governmental agency or body or, to such counsel's knowledge, 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 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 22 23 judgment, decree, order, rule or regulation of any court or governmental agency or body applicable to the Company and known to such counsel (except that such counsel need not express an opinion as to whether performance of the indemnification provisions of this Agreement would be permitted). (vi) 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. (vii) Except as described in the Final Prospectus, to such counsel's knowledge, 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, would result in any material adverse change in the business, financial position, net worth or results of operations, or would materially adversely affect the properties or assets, of the Company or any of the Subsidiaries. (viii) To such counsel's knowledge, 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. (ix) 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. (x) The Registration Statement and all post-effective amendments thereto have become effective under the Securities Act, and, to such counsel's knowledge, 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 23 24 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. (xi) 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 healthcare 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). (xii) To such counsel's knowledge, 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. (xiii) The descriptions of statutes and regulations under the captions "Risk Factors - Contingent Purchase Obligations," "Risk Factors - Risks Associated with Capitated Payment Arrangements," "Risk 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. 24 25 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). The opinion to be rendered pursuant to paragraph (c) 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. (d) 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. (e) 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 25 26 adverse change in revenues or net income of Company, in each case as compared with the corresponding period of the prior year. (f) 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) 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 (iv) 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. (g) 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 26 27 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. (h) The Shares shall be listed on the Nasdaq National Market. (i) 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 6, 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. 7. Condition of the Company's Obligations. The obligations hereunder of the Company are subject to the condition set forth in Section 6(a) hereof. 8. 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 contained herein; (ii) any failure of the Company to perform its 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, 27 28 or (B) in any Blue Sky application or other written information furnished by the Company 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, 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 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 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). 28 29 (b) Each Underwriter, will indemnify and hold harmless 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 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, 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, 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). 29 30 (c) Promptly after receipt by an indemnified party under this Section 8 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 8 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 8. 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 8 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. (d) 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 8 is for any reason held to be unavailable to the Underwriters or the Company or is insufficient to hold harmless an indemnified party, then the Company shall contribute to the damages paid by the Underwriters, and the Underwriters shall contribute to the damages paid by the Company; 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 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 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 on the one hand and 30 31 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, in the case of the Company, 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 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 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, 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. The Underwriters' 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 within the meaning of Section 15 of the Securities Act shall have the same rights to contribution as the Company, as the case may be. (e) 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. 31 32 9. 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 and the Company 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 except for (i) the provisions of Section 8 hereof, and (ii) the expenses to be paid or reimbursed by the Company pursuant to Section 5. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section 9. Nothing herein shall relieve a defaulting Underwriter from liability for its default. 10. Survival Clause. The respective representations, warranties, agreements, covenants, indemnities and other statements of the Company or its 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 32 33 controlling person, (b) any termination of this Agreement and (c) delivery of and payment for the Shares. 11. 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 5,8,10, and 11 hereof shall at all times be effective. For purposes of this Section 11, 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. 12. 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 11 hereof, or (ii) in the event that the condition set forth in Section 7 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 11 hereof; (ii) in the event that at or prior to the First Closing Date the Company shall have failed, refused or been unable to perform any agreement on the part of the Company 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. 33 34 (c) Termination of this Agreement pursuant to this Section 12 shall be without liability of any party to any other party other than as provided in Sections 5 and 8 hereof. 13. 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. 14. Miscellaneous. This Agreement shall inure to the benefit of and be binding upon the Underwriters and the Company and 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 and the Underwriters and for the benefit of no other person except that (a) the representations and warranties and indemnities of the Company 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. 34 35 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 and each of the Underwriters. Very truly yours, AMSURG CORP. By: -------------------------------------- Title: ---------------------------------- 35 36 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: ------------------------------------- 36 37 SCHEDULE I UNDERWRITERS
Underwriter Number of Firm Shares to be Purchased - ----------- ------------------------------------- J.C. Bradford & Co. Piper Jaffray Inc. Morgan Keegan & Company, Inc. ------------------------ Total ========================
37 EX-5 3 OPINION OF BASS BERRY & SIMS 1 Exhibit 5 B A S S, B E R R Y & S I M S P L C A PROFESSIONAL LIMITED LIABILITY COMPANY ATTORNEYS AT LAW 2700 FIRST AMERICAN CENTER 1700 RIVERVIEW TOWER NASHVILLE, TENNESSEE 37238-2700 POST OFFICE BOX 1509 TELEPHONE (615) 742-6200 KNOXVILLE, TENNESSEE 37901-1509 TELECOPIER (615) 742-6293 TELEPHONE (423) 521-6200 TELECOPIER (423) 521-6234 May 19, 1998 AmSurg Corp. One Burton Hills Boulevard, Suite 350 Nashville, TN 37215 Re: REGISTRATION STATEMENT ON FORM S-1 (File No. 333-50813) Dear Ladies and Gentlemen: We have acted as your counsel in connection with the preparation of a Registration Statement on Form S-1 (the "Registration Statement") filed by you with the Securities and Exchange Commission, covering 4,255,000 shares of Class A Common Stock, no par value (the "Class A Common Stock"), of AmSurg Corp., a Tennessee corporation (the "Company"), to be offered by the Company. In connection with this opinion, we have examined and relied upon such records, documents and other instruments as in our judgment are necessary or appropriate in order to express the opinions hereinafter set forth and have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity to original documents of all documents submitted to us as certified or photostatic copies. Based upon the foregoing and such other matters as we have deemed relevant, we are of the opinion that the shares of Class A Common Stock to be offered by the Company, when and as described in the Registration Statement (after the Registration Statement is declared effective), will be validly issued, fully paid and nonassessable. We hereby consent to the reference to our law firm in the Registration Statement under the caption "Legal Matters" and to the use of this opinion as an exhibit to the Registration Statement. Sincerely, /s/ Bass, Berry & Sims PLC EX-10.4 4 THIRD AMENDED AND RESTATED LOAN AGREEMENT 1 THIRD AMENDED AND RESTATED LOAN AGREEMENT dated as of May 19, 1998 by and among AMSURG CORP. and SUNTRUST BANK, NASHVILLE, N.A. as Agent and as Lender 2 TABLE OF CONTENTS
Page Article I. Definitions.......................................................................................... 1 Article II. The Loans........................................................................................... 10 Section 2.01 The Revolving Credit Notes................................................................ 10 Section 2.02 Advances Under the Revolving Credit Notes................................................. 10 Section 2.03 Borrowing Procedure....................................................................... 11 Section 2.04 Minimum Advance Amounts................................................................... 11 Section 2.05 Required Payments......................................................................... 11 Section 2.06 Applicable Interest Rate.................................................................. 11 Section 2.07 Participation............................................................................. 15 Section 2.08 Use of Proceeds........................................................................... 15 Section 2.09 Payments to Principal Office; Debit Authority............................................. 15 Section 2.10 Letters of Credit......................................................................... 15 Section 2.11 Right of Offset, Etc...................................................................... 16 Section 2.12 Usury..................................................................................... 17 Article III. Collateral......................................................................................... 17 Section 3.01 Collateral................................................................................ 17 Section 3.02 Guarantees................................................................................ 17 Article IV. Representations and Warranties...................................................................... 18 Section 4.01 Corporate Existence....................................................................... 18 Section 4.02 Corporate Power and Authorization......................................................... 18 Section 4.03 Binding Obligations....................................................................... 18 Section 4.04 No Legal Bar or Resultant Lien............................................................ 18 Section 4.05 No Consent................................................................................ 18 Section 4.06 Financial Condition....................................................................... 19 Section 4.07 Investments, Advances, and Guaranties..................................................... 19 Section 4.08 Liabilities and Litigation................................................................ 19 Section 4.09 Taxes; Governmental Charges............................................................... 19 Section 4.10 Title, Etc................................................................................ 19 Section 4.11 No Default................................................................................ 20 Section 4.12 Casualties; Taking of Properties, Etc..................................................... 20 Section 4.13 Regulation U.............................................................................. 20 Section 4.14 Compliance with Laws, Etc................................................................. 20 Section 4.15 ERISA..................................................................................... 21 Section 4.16 Subsidiaries, Etc......................................................................... 21 Section 4.17 No Material Misstatements................................................................. 21 Section 4.18 Investment Company Act.................................................................... 21 Section 4.19 Use of Proceeds; Purpose of the Credit.................................................... 21
3 Section 4.20 Personal Holding Company; Subchapter S.................................................... 21 Section 4.21 Solvency.................................................................................. 21 Section 4.22 Capital................................................................................... 22 Article V. Conditions of Lending................................................................................ 22 Section 5.01 Initial Conditions........................................................................ 22 Section 5.02 Conditions Prior to Funding............................................................... 23 Section 5.03 All Borrowings............................................................................ 23 Article VI. Affirmative Covenants............................................................................... 24 Section 6.01 Financial Statements and Reports.......................................................... 24 Section 6.02 Taxes and Other Liens..................................................................... 25 Section 6.03 Maintenance............................................................................... 25 Section 6.04 Further Assurances........................................................................ 26 Section 6.05 Performance of Obligations................................................................ 26 Section 6.06 Insurance................................................................................. 26 Section 6.07 Accounts and Records...................................................................... 26 Section 6.08 Right of Inspection....................................................................... 26 Section 6.09 Notice of Certain Events.................................................................. 27 Section 6.10 ERISA Information and Compliance.......................................................... 27 Section 6.11 Management................................................................................ 27 Section 6.12 Reports, Etc.............................................................................. 27 Section 6.13 Calculations.............................................................................. 27 Section 6.14 Partnership Notes and LLC Notes, Etc...................................................... 28 Section 6.15 Additional Guarantees..................................................................... 28 Article VII. Negative Covenants................................................................................. 28 Section 7.01 Debts, Guaranties, and Other Obligations.................................................. 28 Section 7.02 Liens..................................................................................... 29 Section 7.03 Investments, Loans, and Advances.......................................................... 29 Section 7.04 Dividends, Distributions, and Redemptions; Issuance of Stock.............................. 29 Section 7.05 Nature of Business........................................................................ 30 Section 7.06 Mergers, Etc.............................................................................. 30 Section 7.07 Proceeds of Loan.......................................................................... 30 Section 7.08 Sale or Discount of Receivables........................................................... 30 Section 7.09 Disposition of Assets..................................................................... 30 Section 7.10 Partnership Notes or LLC Notes............................................................ 30 Section 7.11 Financial Covenants....................................................................... 30 Section 7.12 Inconsistent Agreements................................................................... 31 Section 7.13 Restrictions on Physician Practice Acquisitions........................................... 31 Section 7.14 Acquisitions.............................................................................. 32 Article VIII. Events of Default................................................................................. 33 Section 8.01 Events of Default......................................................................... 33
ii 4 Section 8.02 Remedies.................................................................................. 35 Section 8.03 Right of Set-off.......................................................................... 35 Section 8.04 Default Conditions........................................................................ 35 Article IX. General Provisions.................................................................................. 36 Section 9.01 Notices................................................................................... 36 Section 9.02 Deviation from Covenants.................................................................. 37 Section 9.03 Invalidity................................................................................ 37 Section 9.04 Survival of Agreements.................................................................... 37 Section 9.05 Successors and Assigns.................................................................... 37 Section 9.06 Renewal, Extension, or Rearrangement...................................................... 38 Section 9.07 Waivers................................................................................... 38 Section 9.08 Cumulative Rights......................................................................... 38 Section 9.09 Construction.............................................................................. 38 Section 9.10 Nature of Commitment...................................................................... 38 Section 9.11 Disclosures............................................................................... 38 Section 9.12 Governance; Exhibits...................................................................... 39 Section 9.13 Titles of Articles, Sections, and Subsections............................................. 39 Section 9.14 Time of Essence........................................................................... 39 Section 9.15 Remedies.................................................................................. 39 Section 9.16 Application of Prepayments................................................................ 39 Section 9.17 Computations; Accounting Principles....................................................... 39 Section 9.18 Costs, Expenses, and Taxes................................................................ 39 Section 9.19 Distribution of Information............................................................... 40 Section 9.20 Entire Agreement; No Oral Representations Limiting Enforcement............................ 40 Section 9.21 Amendments................................................................................ 40 Section 9.22 Non-Use Fee............................................................................... 40 Section 9.23 Commitment Fee............................................................................ 40 Article X. Jury Waiver.......................................................................................... 41 Section 10.01 Jury Waiver.............................................................................. 41 Article XI. The Agent........................................................................................... 41 Section 11.01 Appointment of Agent..................................................................... 41 Section 11.02 Authorization of Agent with Respect to the Loan Documents................................ 41 Section 11.03 Agent's Duties Limited; No Fiduciary Duty................................................ 43 SECTION 11.04 NO RELIANCE ON THE AGENT................................................................. 43 Section 11.05 Certain Rights of Agent.................................................................. 44 Section 11.06 Reliance by Agent........................................................................ 44 Section 11.07 Indemnification of Agent................................................................. 44 Section 11.08 The Agent in its Individual Capacity..................................................... 45 Section 11.09 Successor Agent.......................................................................... 45 Section 11.10 Notice of Default or Event of Default.................................................... 46 Section 11.11 Sharing of Payments, etc................................................................. 46 Section 11.12 Separate Liens on Collateral............................................................. 46 Section 11.13 Payments Between Agent and Lenders....................................................... 46 Section 11.14 Independent Agreements................................................................... 46 Section 11.15 Limitation on Lenders.................................................................... 46 INDEX OF EXHIBITS............................................................................................... 48
iii 5 THIRD AMENDED AND RESTATED LOAN AGREEMENT ENTERED INTO by and among AMSURG CORP. a Tennessee corporation (the "Borrower"), SUNTRUST BANK, NASHVILLE, N.A., AGENT for the Lenders defined herein ("Agent"), SUNTRUST BANK, NASHVILLE, N.A., a national bank ("STB"), and NATIONSBANK OF TENNESSEE, N.A., a national bank ("NBT") (herein STB and NBT shall be referred to as "Lenders"), as of this 19th day of May, 1998. RECITALS: 1. Borrower and STB entered into an Amended and Restated Loan Agreement dated as of June 25, 1996, as amended and restated by a Second Amended and Restated Loan Agreement dated April 15, 1997, as amended by a First Amendment to Second Amended and Restated Loan Agreement dated May 5, 1997, a Second Amendment to Second Amended and Restated Loan Agreement dated September 2, 1997, and a Third Amendment to Second Amended and Restated Loan Agreement (herein the Second Amended and Restated Loan Agreement, as amended, shall be referred to as the "Loan Agreement"). 2. The Borrower further desires that the Lenders increase the credit available to Borrower, and the Borrower, the Agent, and the Lenders desire to amend and restate the terms of the Loan Agreement, as provided herein. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the parties hereto agree that the Loan Agreement is amended and restated as follows: Article I. Definitions As used in this Agreement, the following terms shall have the following meanings, unless the context expressly otherwise requires: The terms defined in this article have the meanings attributed to them in this article. Singular terms shall include the plural as well as the singular, and vice versa. Words of masculine, feminine or neuter gender shall mean and include the correlative words of other genders. All references herein to a separate instrument are to such separate instrument as the same may be amended or supplemented from time to time pursuant to the applicable provisions thereof. All accounting terms not otherwise defined herein have the meanings assigned to them, and all computations herein provided for shall be made, in accordance with generally accepted accounting principles applied on a consistent basis. All references herein to "generally accepted accounting principles" refer to such principles as they exist at the date of application thereof. 6 All references herein to designated "Articles", "Sections" and other subdivisions or to lettered Exhibits are to the designated Articles, Sections and other subdivisions hereof and the Exhibits annexed hereto unless the context otherwise clearly indicates. All Article, Section, other subdivision and Exhibit captions herein are used for reference only and in no way limit or describe the scope or intent of, or in any way affect, this Agreement. "Acquisition" means the acquisition by Borrower of a majority ownership interest in any existing ambulatory surgery center(s) through the formation of a Partnership or LLC with a physician or group of physicians. "Acquisition Approval Letter" means a letter executed by Borrower, Agent, and Lenders pursuant to Section 7.14(b) in the form of Exhibit H. "Acquisition Informational Package" means information delivered by Borrower to Agent and Lenders pursuant to Section 7.14 as set forth on Exhibit I hereto. "Acquisition Pro-Forma" means a pro-forma statement in the form of and containing the information shown on Exhibit J hereto. "Agent" shall mean SunTrust Bank, Nashville, N.A., Agent or any successor appointed pursuant to Article XI herein. "Advance" or "Advances" means any and all extensions of credit made pursuant to this Agreement and shall include, without limitation, any and all advances under the Revolving Credit Notes and amounts evidenced by any Letter of Credit. "Agreement" means this Loan Agreement (including all exhibits hereto) as the same may be modified, amended, or supplemented from time to time. "Applicable Interest Rate" means either the Base Rate or the LIBOR Based Rate as applicable. "Applicable Margin" means the number of basis points per annum determined on the Determination Date in accordance with the table set forth below for the purpose of calculating the Unused Fee and the LIBOR Based Rate; provided that if the Borrower has not provided to Agent its Compliance Report for the most recently ended Fiscal Quarter as required by Section 6.01(c) herein, the Applicable Margin shall be 225 basis points per annum for the LIBOR Based Rate and 40 basis points per annum for the Unused Fee. 2 7
================================================================================ RATIO OF DEBT TO EBITDA LIBOR BASED RATE UNUSED FEE ================================================================================ > 3.0 to 1.0 225 basis points 40 basis points - -------------------------------------------------------------------------------- > 2.5 to 1.0 and < 3.0 to 1.0 200 basis points 40 basis points - - - -------------------------------------------------------------------------------- > 2.0 to 1.0 and < 2.5 to 1.0 175 basis points 32 1/2 basis points - - - -------------------------------------------------------------------------------- > 1.5 to 1.0 and < 2.0 to 1.0 150 basis points 25 basis points - - - -------------------------------------------------------------------------------- > 1.0 to 1.0 and < 1.5 to 1.0 125 basis points 20 basis points - - - -------------------------------------------------------------------------------- < 1.0 to 1.0 100 basis points 15 basis points ================================================================================
"Base Rate" means the rate of interest established from time to time and announced by STB as its "base rate," such rate being an interest rate used as an index for establishing interest rates on loans. "Borrower" means AmSurg Corp., a Tennessee corporation and any successors thereto, including without limitation, any trustee or receiver in bankruptcy, in reorganization, or in similar proceedings. "Borrowing Request" means that certain written request presented by Borrower to Agent in connection with a request for an Advance, which Borrowing Request shall be in the form of Exhibit B hereto. "Business Day" means any day other than a Saturday, Sunday or day on which commercial banks are authorized to close under the laws of the State of Tennessee. "Capitalization" means Borrower's total consolidated Debt plus an amount equal to Borrower's Consolidated Net Worth. "Change of Control" means the occurrence of (i) any Person or two or more Persons acting in concert acquiring beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended), directly or indirectly, of securities of Borrower (or other securities convertible into such securities) representing 40% or more of the combined voting power of all securities of Borrower entitled to vote in the election of directors; or (ii) individuals who at the beginning of this Agreement were directors of Borrower ceasing for any reason to constitute a majority of the Board of Directors of Borrower unless the Persons replacing such individuals were nominated by the Board of Directors of Borrower; or (iii) any Person or two or more Persons acting in concert 3 8 acquiring by contract or otherwise, or entering into a contract or arrangement which upon consummation will result in its or their acquisition of, or control over, securities of Borrower (or other securities convertible into such securities) representing 40% or more of the combined voting power of all securities of Borrower entitled to vote in the election of directors. "Closing" means the time and place of the execution and/or delivery of the Loan Documents. "Closing Date" means the 19th day of May, 1998 or at such other date as the parties elect. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Collateral" means any and all collateral securing the Indebtedness, as described in Article III hereof. "Compliance Report" has the same meaning set forth in Section 6.01(c) herein. "Conditions Precedent" means those matters or events that must be completed or must occur or exist prior to Agent's and Lenders' being obligated to fund any Advance, including, but not limited to, those matters described in Article V hereof. "Consolidated Debt" means the Debt of Borrower and its Subsidiaries on a consolidated basis. "Consolidated Net Income" means, for any period, the net income on a consolidated basis of Borrower, its Subsidiaries, the Partnerships, the LLC's, and any other Persons that prepare financial statements on a consolidated basis under Borrower for such period, determined in accordance with GAAP. "Consolidated Statements" means Financial Statements of the Borrower on a consolidated basis. "Consolidated Net Worth" means (a) the aggregate amount of all assets of the Borrower (determined on a consolidated basis) as may properly be classified as such, less (b) the aggregate amount (as determined on a consolidated basis) of (i) all current liabilities of the Borrower, (ii) all deferred taxes of the Borrower, (iii) all long term debt of Borrower, and (iv) Minority Interest. "Contingent Liabilities" means all contingent liabilities required to be disclosed on the consolidated Financial Statements of the Borrower, its Subsidiaries, the Partnerships, the LLC's in accordance with GAAP as in effect from time to time, including statement #5 of the Financial Accounting Standards Board and any successor thereto. "Conversion Date" means the date that interest on the outstanding principal balance of any Advance is converted from the Base Rate to the LIBOR Based Rate. 4 9 "Debt" means, with respect to any Person, all obligations of such Person, contingent or otherwise, which in accordance with GAAP would be classified on a balance sheet of such Person as liabilities of such Person, but in any event including (a) liabilities secured by any mortgage, pledge or lien existing on Property owned by such Person and subject to such mortgage, pledge or lien, whether or not the liability secured thereby shall have been assumed by such Person, (b) all indebtedness and other similar monetary obligations of such Person, (c) all guaranties, obligations in respect of letters of credit, endorsements (other than endorsements of negotiable instruments for purposes of collection in the ordinary course of business), obligations to purchase goods or services for the purpose of supplying funds for the purchase or payment of Debt of others and other contingent obligations in respect of, or to purchase, or otherwise acquire, or advance funds for the purchase of, Debt of others, (d) all obligations of such Person to indemnify another Person to the extent of the amount of indemnity, if any, which would be payable by such Person at the time of determination of Debt and (e) all obligations of such Person under capital leases. "Default" or "Event of Default" means the occurrence of any of the events specified in Section 8.01 hereof. "Default Conditions" or "Default Condition" means the occurrence of any of the events specified in Section 8.04 hereof. "Determination Date" means that date which is five (5) Business Days subsequent to Agent's receipt of the Borrower's most recent consolidated Financial Statements and most recent quarterly calculations of Borrower's ratio of EBITDA to Consolidated Debt. "Development Costs" means the total amount of all costs and expenses (excluding soft costs and fees payable to Borrower) incurred by a Partnership or LLC in the development, construction, or renovation of Projects. "EBITDA" (Earnings Before Interest, Taxes, Depreciation, and Amortization) for any period means for Borrower and its Subsidiaries, on a consolidated basis, an amount equal to Consolidated Net Income (or the net deficit, if expenses and charges exceed revenues and proper income items) for such period, plus amounts that have been deducted for (i) depreciation, (ii) amortization, (iii) interest expense, (iv) income taxes, (v) extraordinary and non-recurring items, and (vi) the cumulative effects of changes in accounting principles, and minus (vii) amounts that have been added for (a) extraordinary and non-recurring items and (b) the cumulative effects of changes in accounting principles, in determining Consolidated Net Income for such period. In calculating EBITDA for the purposes of this Agreement, an amount equal to an after tax amount of $3,630,000, attributable to the loss incurred in the second Fiscal Quarter of 1998 in the planned divestiture of two physician practices identified as Gastroentology Group of South Florida and The Miami Urology Group, L.P., shall be excluded from the relevant calculations of EBITDA and shall be treated as an extra-ordinary and non-recurring loss. 5 10 "Environmental Law" means any federal, state or local law, statute, ordinance or regulation applicable or pertaining to health, industrial hygiene, waste materials, removal of waste materials, oil, gas, or underground storage tanks, Hazardous Substances, other environmental conditions on, under, or affecting Borrower's Property or any interest therein. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, including (unless the context otherwise requires) any rules or regulations promulgated thereunder. "Eurodollar Business Day" means a Business Day on which the relevant London international financial markets are open for transaction of business contemplated by this Agreement. "Financial Statements" means (i) the consolidated financial statement or statements of Borrower described or referenced in Section 4.06 hereof and delivered with this Agreement to Agent, and (ii) subsequent financial statements required to be provided pursuant to this Agreement. "Fiscal Quarter" means each of the quarters of the Fiscal Year ending on March 31st, June 30th, September 30th, and December 31st. "Fiscal Year" or "Annually" means any twelve-month accounting period ending December 31st. "Funded Debt" means all Debt resulting from loans made to Borrower by banks, savings and loan associations, and financial institutions, all purchase money mortgages, all conditional sales contracts, all title retention agreements, all Seller Financing, and all current maturities of Debt not otherwise specified herein. "GAAP" means generally accepted accounting principles. "Guarantors" means all Subsidiaries, both presently existing and those hereafter formed. "Guarantees" means guaranty agreements executed by the Guarantors in favor of Agent on behalf of Lenders. "Indebtedness" means any and all amounts and liabilities owing or to be owing by Borrower to Agent pursuant hereto or to either of the Lenders from time to time whether now existing or hereafter incurred, and whether in connection with this Agreement or otherwise, including any amendments hereof, or in connection with loans, participation interests, drafts, notes, banker's acceptances, letters of credit, guarantees, or overdrafts of checking or savings accounts of Borrower maintained with either of Lenders. 6 11 "Interest Expense" means any and all payments, cash or in-kind, made or accrued on account of interest obligations incurred, arising under or out of any Debt of the Borrower (on a consolidated basis), including but not limited to promissory notes issued to evidence such interest payments and including the component of amounts payable under capital leases attributable to interest, and excluding any non-cash items other than notes issued to evidence such interest payments and the component of amounts payable under capital leases attributable to interest. "LLC" means any limited liability company validly formed under the law of any State for the purpose of making an Acquisition or a Physician Practice Acquisition, or for the purpose of developing a Project and in which the Borrower retains a majority ownership interest. "LLC Note" means a promissory note issued by an LLC to the order of Borrower and evidencing a loan by Borrower to such LLC of monies initially advanced to Borrower under the Revolving Credit Notes, which loan is made for the purpose of developing a Project in which the Borrower retains a majority ownership interest. "LLC Note Collateral" means any property, collateral, or assets securing repayment of an LLC Note. "Lenders" means STB and the other banks and lending institutions listed on the signature pages set forth herein, and any permitted transferee thereof. "Letter of Credit" means any letter of credit issued by Agent on Borrower's account pursuant to and in compliance with Section 2.11 herein. "Letter of Credit Fee" shall mean an amount equal to 1% multiplied by the face amount of the Letter of Credit. "LIBOR Based Rate" means for any LIBOR Based Rate Period, the LIBOR Rate for such LIBOR Based Rate Period, plus the Applicable Margin, plus the LIBOR Premium (if applicable). "LIBOR Based Rate Period" means with respect to any Advance on which the Borrower has elected, pursuant to Section 2.06, that the LIBOR Based Rate apply, the 30, 60, or 90 day period selected by Borrower commencing on the date the Advance is made or on any subsequent Conversion Date. "LIBOR Premium" means an amount equal to twenty-five (25) basis points per annum, which shall be applicable only until the Borrower completes the Secondary Public Offering. "LIBOR Rate" means either the 30-day, 60-day, or 90-day LIBOR Rate, as applicable, as set forth in STB's Fund Management, Cost of Funds Report published for STB by Telerate, Inc. each Monday through Friday that STB is open for business. 7 12 "Lien" means any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute, or contract, and including, but not limited to, the lien or security interest arising from a mortgage, encumbrance, pledge, security agreement, conditional sale, or trust receipt or a lease, consignment, or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting the Property. For the purposes of this Agreement, Borrower shall be deemed to be the owner of any Property that it has acquired or holds subject to a conditional sale agreement, financing lease, or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. "Loan" or "Loans" means any borrowing by Borrower under this Agreement, the Revolving Credit Notes, and/or any extension of credit by Agent on behalf of Lenders or by any of the Lenders to or for Borrower pursuant to this Agreement or any other Loan Document, including any renewal, amendment, extension, or modification thereof. "Loan Documents" means, collectively, each document, paper or certificate executed, furnished or delivered in connection with this Agreement (whether before, at, or after the Closing Date), including, without limitation, this Agreement, the Revolving Credit Notes, the Guarantees, and all other documents, certificates, reports, and instruments that this Agreement requires or that were executed or delivered (or both) at Agent's request. "Majority Lenders" means Lenders in the aggregate having a Pro Rata Share equal to 66 2/3% or greater, provided that in no event shall Majority Lenders be less than two (2) Lenders. "Minority Interest" means that amount depicted from time to time on Borrower's most current consolidated balance sheet as "Minority Interest" so long as such is calculated on a consistent basis and in accordance with GAAP. "NBT" means NationsBank of Tennessee, N.A., its successors and assigns. "Notice of Interest Rate Election" means the notice required by Section 2.06(b) and Section 2.06(c) herein and which notice shall be in either the form of Exhibit A hereto or in such other form as approved by Agent. "Obligations" means all of Borrower's undertakings in the Loan Documents including, but not limited to, all agreements, representations, warranties, and covenants. The term "Obligations" includes the Indebtedness. "Partnership" means any general or limited partnership validly formed under the law of any state for the purpose of making an Acquisition or a Physician Practice Acquisition, or for the purpose of developing a Project and in which the Borrower retains a majority ownership interest. 8 13 "Partnership Agreement" means the general partnership agreement or the limited partnership agreement of any Partnership. "Partnership Note" means a promissory note issued by a Partnership to the order of Borrower and evidencing a loan by Borrower to such Partnership of monies initially advanced by the Lenders to Borrower under the Revolving Credit Notes, which loan is made in connection with the development of a Project in which the Borrower retains a majority ownership interest. "Partnership Note Collateral" means any property, collateral, or assets securing repayment of a Partnership Note. "Physician Practice Acquisition" means the acquisition of the assets of a physician's practice or the practice of more than one physician by a Partnership or LLC in circumstances where the physicians whose assets are acquired are partners or are members in an LLC or immediately thereafter will become partners in the Partnership or a member in the LLC. "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, government, or any agency or political subdivision thereof, or any other form of entity. "Plan" means any employee benefit or other plan established or maintained, or to which contributions have been made, by the Borrower or any Subsidiary and covered by Title IV of ERISA or to which Section 412 of the Code applies. "Principal Office" means the principal office of the Agent located at 201 Fourth Avenue North, Nashville, Tennessee. "Pro Rata Share" means the percentage of interest held by each of the Lenders as set forth opposite their respective signatures hereto, as such percentage may be adjusted from time to time as a result of assignments or amendments made pursuant to this Agreement. "Projects" mean construction, expansion and/or renovation of ambulatory surgery centers owned by a Partnership or LLC. "Property" or "Properties" means any interest in any kind of property or asset, whether real, personal, or mixed, or tangible or intangible. "Revolving Credit Note" and "Revolving Credit Notes" means those Revolving Credit Notes executed by the Borrower payable to the order of each of the Lenders, each Revolving Credit Note being substantially in the form of Exhibit C hereto and in the principal amount that 9 14 each Lender's Pro Rata Share bears to $50,000,000, including all amendments, renewals, and extensions thereto. "STB" means SunTrust Bank, Nashville, N.A., its successors and assigns. "Secondary Public Offering" means a public offering of common stock of the Borrower yielding net cash proceeds to the Borrower and/or its shareholders of at least $25,000,000. "Seller Financing" means either: (i) the extension of credit to Borrower that enables the Borrower to acquire a majority interest in a Partnership or LLC, (ii) the extension of credit to Borrower by any seller of a majority interest in an existing ambulatory surgery center, which sale is made to Borrower, a Partnership, or an LLC, or (iii) the extension of credit to Borrower by the seller of the assets in a Physician Practice Acquisition. "Stock Pledge Agreement" means any Stock Pledge Agreement executed by Borrower in form and substance reasonably satisfactory to Agent and pursuant to which the Borrower pledges, assigns, and grants the Agent on behalf of Lenders a first perfected security interest and lien against all securities owned by Borrower in any Person that serves as a member manager (or chief manager) of a LLC or that serves as a general partner in a Partnership, and shall include any stock power and Reg U form executed in connection with such Stock Pledge Agreement. "Subsidiary" means any corporation of which more than fifty percent (50%) of the issued and outstanding Voting Stock is owned or controlled, directly or indirectly, by Borrower or a Subsidiary of Borrower. "Voting Stock" means securities of any class of a corporation the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or persons performing similar functions). Article II. The Loans. Section 2.01 The Revolving Credit Notes. Subject to the conditions and the terms of the Loan Documents and subject to the limitations of Section 2.11 set forth below, and in reliance upon the representations, warranties, and covenants set forth in the Loan Documents, the Lenders agree to extend the Borrower credit on a revolving credit basis, in the principal amount of up to $50,000,000 pursuant to the Revolving Credit Notes. Section 2.02 Advances Under the Revolving Credit Notes. Advances under the Revolving Credit Notes shall be made only after the Borrower has complied with the provisions of this Agreement. Subject to the terms and requirements of this Agreement, Borrower may repay and reborrow amounts under the Revolving Credit Notes up to the maximum principal amount thereof, provided, however, the amount available to be advanced to Borrower under the Revolving Credit Notes shall be reduced by the face amount of any outstanding Letters of Credit issued by Agent on Borrower's behalf pursuant to Section 2.11 herein. Each Lender shall be 10 15 responsible to fund its Pro Rata Share of any Advance. The failure of any Lender to fund its Pro Rata Share of any Advance shall not relieve any other Lender of its obligations to fund such other Lender's Pro Rata Share of an Advance, but no Lender shall be responsible for the failure of any other Lender to make an Advance. Section 2.03 Borrowing Procedure. The Borrower hereby authorizes the Lenders (acting through the Agent) to deposit all Advances under the Revolving Credit Notes into the operating account maintained by the Borrower with STB. Any authorized officer of Borrower shall have the authority to request Advances. All requests for Advances shall be evidenced by a Borrowing Request delivered to Agent (except that telephonic requests by any authorized officer confirmed immediately thereafter by delivery of a Borrowing Request shall be acceptable). In the event of a telephonic request, the Agent shall be entitled to rely, without further investigation, on the fact that the person making the telephone call has identified himself as one of the authorized officers. Neither the Agent nor any of the Lenders shall have any liability to Borrower arising out of compliance with this procedure. Subject to the remaining terms of this Loan Agreement and with regard to Advances that bear interest at the Base Rate, the Agent shall endeavor to cause all requests for Advances received prior to 11:00 A.M. Nashville time to be funded on the same date received, and the Agent shall endeavor to cause all requests for Advances received subsequent to 11:00 A.M. Nashville time to be funded on the next succeeding Business Day. Subject to the remaining terms of this Loan Agreement and with regard to Advances that bear interest at the LIBOR Based Rate, the Agent shall endeavor to cause all requests for Advances to be funded within two (2) Business Days from the date the Agent receives the Borrowing Request. The giving of notice by Borrower that it is requesting an Advance shall constitute a warranty that, as of the date the notice is given and as of the date of the Advance, the officers of the Borrower do not have knowledge of any Default Conditions or Event of Default as defined herein; and that as of such date, the representations and warranties contained in Article IV are and will be true and correct, except as to changes occurring after the date of this Agreement caused by transactions not prohibited under this Agreement. Section 2.04 Minimum Advance Amounts. Advances under the Revolving Credit Notes calculated at the Base Rate shall not be made in amounts less than $100,000 without Agent's prior written consent, and Advances under the Revolving Credit Notes calculated at the LIBOR Based Rate shall not be made in amounts less than $500,000 without Agent's prior written consent. Section 2.05 Required Payments. The Revolving Credit Notes shall be payable as set forth therein. Each payment under the Revolving Credit Notes shall be made without defense, setoff, or counterclaim to Agent at its Principal Office in U.S. Dollars for the account of each of the Lenders and in immediately available funds before 12:00 Noon Nashville time on the date such payment is due. 11 16 Section 2.06 Applicable Interest Rate. (a) With regard to the Revolving Credit Notes and at the time that the Borrower requests an Advance, the Borrower shall deliver to Agent a Borrowing Request which shall be irrevocable, and which shall set forth the following: (a) whether the selected interest rate is the Base Rate or the LIBOR Based Rate, and (b) if the interest rate selected is the LIBOR Based Rate, the maturity selected for the LIBOR Based Rate Period. In the event that the Borrower shall fail to select an Applicable Interest Rate on the Borrowing Request, then it shall be conclusively presumed that the Borrower has elected the Base Rate. (b) At any time that the outstanding principal balance of an Advance bears interest at the Base Rate, the Borrower may elect upon two (2) Business Days prior written notice and delivery to Agent of a Notice of Interest Rate Election to convert the Applicable Interest Rate to a LIBOR Based Rate. (c) Once the Borrower has selected the LIBOR Based Rate, such rate shall remain applicable until the expiration of the then applicable LIBOR Based Rate Period. Two (2) Business Days prior to the expiration of any applicable LIBOR Based Rate Period, the Borrower shall deliver to Agent a Notice of Interest Rate Election. Should the Borrower fail to deliver such Notice of Interest Rate Election in a timely manner, then it shall be conclusively presumed that the Borrower has selected the Base Rate as the Applicable Interest Rate. (d) At any time, no more than six (6) different LIBOR Based Rate Periods may be applicable to all Advances. (e) The Applicable Interest Rate shall be computed on the basis of a year of 360 days for the actual number of days elapsed. (f) The following provisions shall apply at any time that the LIBOR Based Rate is applicable: (i) Increased Cost. If, as a result of any change in applicable law, regulation, treaty or directive, in the interpretation or application thereof or compliance by Agent or any of the Lenders with any request or directive (whether or not having the force of law) from any court or governmental authority, agency or instrumentality: (A) the basis of taxation of payments to any of the Lenders of the principal of or interest on any loan on which a LIBOR Based Rate is applicable (other than taxes imposed on the overall net income of either of the Lenders) is changed; 12 17 (B) any reserve, special deposit or similar requirements against assets of, deposits with or for the account of, or credit extended by, Agent or any of the Lenders are imposed, modified or deemed applicable; or (C) any other condition affecting this Agreement or the LIBOR Based Rate is imposed on Agent or any of the Lenders or the London eurodollar market; and Agent or any of the Lenders determines that, by reason thereof, the actual out-of-pocket cost to Agent or any of the Lenders of offering, making, or maintaining the LIBOR Based Rate is increased, or the amount of any sum receivable by Agent or any of the Lenders hereunder in respect of any of the LIBOR Based Rate is reduced; then, Borrower shall pay to Agent or such of the Lenders as designated by Agent upon demand (which demand shall be accompanied by a statement setting forth the basis for the calculation thereof but only to the extent not theretofore provided to Borrower) such additional amount or amounts as will compensate Agent or any of the Lenders for such additional cost or reduction. Determinations by the Agent for purpose of this section of the additional amounts required to compensate Agent or any of the Lenders in respect of the foregoing shall be conclusive, absent demonstrable error. (ii) Eurodollar Deposits Unavailable or Interest Rate Unascertainable. In the event that the Agent shall have reasonably determined (which determination shall be conclusive and binding on the parties hereto, absent demonstrable error) that deposits of the necessary amount for the relevant LIBOR Based Rate Period are not available to Agent or any of the Lenders in the London Eurodollar market or that, by reason of circumstances affecting such market, adequate and reasonable means do not exist for ascertaining the LIBOR Based Rate applicable to such period or term, as the case may be, or that the application or use of the LIBOR Based Rate would be impracticable as a result of a contingency occurring after the Closing Date that materially and adversely affects the London interbank market, then Agent shall promptly give notice of such determination to Borrower and (i) any notice of new LIBOR Based Rate selection previously given by Borrower and not yet converted shall be deemed a selection of the Base Rate and (ii) the existing LIBOR Based Rate shall be converted to the Base Rate on the last day of the then current LIBOR Based Rate Period with respect thereof. (iii) Changes in Law Rendering the LIBOR Based Rate Unlawful. If at any time due to any new law, treaty or regulation, or any interpretation thereof by any governmental or other regulatory authority charged with the administration thereof, or for any other reason arising subsequent to the date hereof, it shall become unlawful for Agent or any of the Lenders to offer, charge or collect 13 18 interest based on the LIBOR Based Rate, the obligation of Agent or such of the Lenders to provide the LIBOR Based Rate shall, upon the happening of such event, forthwith be suspended for the duration of such illegality. Upon the happening of such event, Agent or any of the Lenders shall notify Borrower thereof in writing, and Borrower, at its election, shall, on the earlier of (i) the last day of the then current LIBOR Based Rate Period or (ii) if required by such law, regulation or interpretation, on such date as shall be specified in such notice, either convert the unlawful LIBOR Based Rate to the Base Rate or repay such of the Revolving Credit Notes, without penalty, to Agent or any of the Lenders, as designated by Agent, in full, together with all interest accrued thereon. (iv) Other Changes Rendering Use of LIBOR Based Rate a Severe Hardship. In the event that on any date after the Closing Date Agent or any of the Lenders shall reasonably determine (which determination shall be conclusive and binding on the parties hereto, absent demonstrable error) that the use and/or application of the LIBOR Based Rate will cause the Agent or any of the Lenders severe hardship as a result of a contingency occurring after the date of this Agreement; then, and in any such event, the Agent and the affected Lenders shall give telephonic notice (immediately confirmed in writing) to the Borrower of such determination, and the obligation of the Agent and such of the affected Lenders to offer or permit the selection of the LIBOR Based Rate shall be terminated at the earlier of the end of the then current LIBOR Based Rate Period, and upon such date the Borrower, at its option shall either repay such Revolving Credit Note, without penalty, together with all interest accrued thereon, or convert such Revolving Credit Note to the Base Rate. (v) Adjustments to Rate to Cover Additional Cost. It is the intention of the parties that the LIBOR Based Rate shall accurately reflect the cost to the Lenders of maintaining loans at the LIBOR Based Rate during the applicable LIBOR Based Rate Period. Accordingly: (i) if by reason of any change after the date hereof in any applicable law or governmental rule, regulation or order (or any interpretation thereof and including the introduction of any new law or governmental rule, regulation or order), including any change in the LIBOR reserve requirement, the cost to either of the Lenders of maintaining loans at the LIBOR Based Rate or funding the same by means of a London interbank market time deposit, as the case may be, shall increase, the LIBOR Based Rate then charged by any of the Lenders shall be adjusted as necessary to reflect such change in cost to any of the Lenders, effective as of the date on which such change in any applicable law, governmental rule, regulation or order becomes effective. 14 19 (ii) if the Agent shall have determined that the adoption after the Closing Date of any law, rule, regulation or guideline regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any governmental authority or agency, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any of the Lenders (or any lending office of any of the Lenders) or any of the Lenders' holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any such governmental authority or agency, central bank or comparable agency, has or would have the effect of reducing the rate of return on any of the Lenders' capital or on the capital of any of the Lenders' holding company, as a consequence of the Lenders' obligations under this Agreement or the Advances made by any of the Lenders pursuant hereto to a level below that which any of the Lenders or either of the Lenders' holding company could have achieved but for such adoption, change or compliance (taking into consideration the Lenders' guidelines with respect to capital adequacy) by an amount deemed by any of the Lenders to be material, then from time to time the Borrower shall pay to the Agent for delivery to the Lenders such additional amount or amounts as will compensate such of the Lenders or such of the Lenders' holding company for any such reduction suffered. (g) Borrower may prepay the principal amount evidenced by any Advance at any time that the Applicable Interest Rate is the Base Rate. Except as provided specifically in Section 2.06(f)(i), (iii) and (iv), Borrower may not prepay any Advance so long as the Applicable Interest Rate is the LIBOR Based Rate, except at the maturity of any applicable LIBOR Based Rate Period. Section 2.07 Participation. The Lenders shall have the right to enter into one or more participation agreements with affiliates of Lenders, but not further or otherwise. Section 2.08 Use of Proceeds. Proceeds of the Revolving Credit Notes will be used to: (i) permit the issuance of Letters of Credit, (ii) enable the Borrower to make (x) loans to Partnerships or LLC's for the construction and renovation of Projects and/or (y) Acquisitions and Physician Practice Acquisitions, or (iii) for working capital. Section 2.09 Payments to Principal Office; Debit Authority. Each payment under the Revolving Credit Notes (including any permitted prepayment and payment of interest) shall be made to Agent at its Principal Office for the account of Lenders in U.S. dollars and in immediately available funds before 11:00 a.m. Nashville time on the date such payment is due. Section 2.10 Letters of Credit. (a) Provided no Event of Default or Default Condition exists and subject to the terms and conditions of the Loan Documents, the Lenders have agreed 15 20 that the Agent on behalf of the Lenders will issue to third party beneficiaries on the Borrower's account standby Letters of Credit. (b) In connection with the issuance of each Letter of Credit, the Borrower shall complete a Letter of Credit Application Agreement and such other documentation, in form and substance as required by the Agent. (c) In connection with each Letter of Credit, the Borrower shall pay to the Agent a Letter of Credit Fee to be apportioned and paid by Agent to each of the Lenders pursuant to the Pro Rata Share of each Lender. (d) In connection with each Letter of Credit, the Borrower shall pay to the Agent administrative and documentation fees in such amount as established by Agent from time to time, which administrative and documentation fees shall be retained by Agent and shall not be apportioned among the Lenders. (e) The issuance by the Agent of a Letter of Credit shall reduce the Borrower's ability to receive Advances under the Revolving Credit Notes by an amount equal to the face amount of the Letter of Credit for so long as the Letter of Credit remains outstanding. (f) In the event that the Agent is required to pay to any Person the proceeds (partially or in full) of a Letter of Credit, the Borrower agrees to pay to the Agent immediately on demand by the Agent, an amount equal to the proceeds paid by the Agent to such Person, plus interest from the date of such payment at an amount equal to the Base Rate. (g) Letters of Credit issued by the Agent shall not be issued for a time period in excess of twelve months. (h) The Agent shall have no obligation to issue Letters of Credit on or after January 10, 2000. (i) The Lenders shall participate in all Letters of Credit issued by the Agent. Each Lender, upon the issuance of a Letter of Credit by the Agent, shall be deemed to have purchased without recourse a risk participation from the Agent in such Letter of Credit and the obligations arising thereunder, in each case in an amount equal to its Pro Rata Share of all obligations under such Letter of Credit and shall absolutely, unconditionally, and irrevocably assume, as primary obligor and not as a surety, and be obligated to pay to the Agent therefor and discharge when due, its Pro Rata Share of all obligations arising under such Letter of Credit. Without limiting the scope and nature of each Lender's participation in any Letter of Credit, to the extent that the Agent has not been reimbursed as required hereunder or under any such Letter of Credit, each such Lender shall pay to the Agent its Pro Rata Share of such unreimbursed drawing in same 16 21 day funds on the day of notification by the Agent of an unreimbursed drawing. The obligation of each Lender to so reimburse the Agent shall be absolute and unconditional and shall not be affected by the occurrence of a Default Condition or an Event of Default or any other occurrence or event. Section 2.11 Right of Offset, Etc. The Borrower hereby agrees that, in addition to (and without limitation of) any right of set-off, banker's lien or counterclaim the Agent or the Lenders may otherwise have, the Agent and the Lenders shall be entitled, at their option, to offset balances held by any of Agent or Lenders at any of their offices against any principal of or interest on the Obligations hereunder which is not paid within fifteen (15) days after such payment is due, and in the event Agent or any of the Lenders does offset against such balances, it shall promptly notify the Borrower, provided that its failure to give such notice shall not affect the validity thereof. Section 2.12 Usury. The parties to this Agreement intend to conform strictly to applicable usury laws as presently in effect. Accordingly, if the transactions contemplated hereby would be usurious under applicable law (including the laws of the United States of America and the State of Tennessee), then, in that event, notwithstanding anything to the contrary in any Loan Document or agreement executed in connection with or as security for the Obligations, Borrower, Agent, and the Lenders agree as follows: (i) the aggregate of all consideration that constitutes interest under applicable law which is contracted for, charged, or received under any of the Loan Documents or agreements, or otherwise in connection with the Obligations, shall under no circumstance exceed the maximum lawful rate of interest permitted by applicable law, and any excess shall be credited on the Obligations by the holder thereof (or, if the Obligations shall have been paid in full, refunded to Borrower); and (ii) in the event that the maturity of the Obligations is accelerated by reason of an election of the holder resulting from any Event of Default under this Agreement or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest may never include more than the maximum amount of interest permitted by applicable law, and excess interest, if any, for which this Agreement provides, or otherwise, shall be cancelled automatically as of the date of such acceleration or prepayment and, if previously paid, shall be credited on the Obligations (or, if the Obligations shall have been paid in full, refunded to Borrower). Article III. Collateral and Guarantees. Section 3.01 Collateral. The Indebtedness and Obligations shall be secured by the following: (a) all Partnership Notes, Partnership Note Collateral, LLC Notes, and LLC Note Collateral; (b) all deposit accounts, monies, and items of value of Borrower now or hereafter placed in the possession of Agent or any of the Lenders; 17 22 (c) all securities pledged to Agent on behalf of Lenders pursuant to any Stock Pledge Agreement; and (d) all other Property of Borrower presently and/or subsequently pledged or delivered to Agent to secure all or a portion of the Indebtedness. Section 3.02 Guarantees. The Indebtedness and Obligations shall be guaranteed by the Guarantors. Article IV. Representations and Warranties. To induce Agent and Lenders to enter this Agreement and extend credit under this Agreement, Borrower covenants, represents, and warrants to Agent and to Lenders that as of the date hereof and as of the Closing Date: Section 4.01 Corporate Existence. Borrower and each Subsidiary are corporations duly organized, and validly existing, and in good standing under the laws of the states of their respective incorporation, and the Borrower and each Subsidiary are duly qualified as a foreign corporation in all jurisdictions in which the Property owned or the business transacted by each of them makes such qualification necessary, except where failure to do so would not have a material, adverse effect on the Borrower or any Subsidiary which acts as a general partner in a Partnership or member in an LLC. Each Partnership and LLC that has executed LLC Notes or Partnership Notes, as applicable, as of the date hereof is duly formed and validly existing under the laws of the respective State under which it was formed. Section 4.02 Corporate Power and Authorization. The Borrower is duly authorized and empowered to execute, deliver, and perform under all Loan Documents; the Borrower's board of directors has authorized the Borrower to execute and perform under the Loan Documents; and all other corporate and/or shareholder action on Borrower's part required for the due execution, delivery, and performance of the Loan Documents has been duly and effectively taken. Section 4.03 Binding Obligations. This Agreement is, and the other Loan Documents when executed and delivered in accordance with this Agreement will be, legal, valid and binding upon and against the Borrower and its Properties enforceable in accordance with their respective terms, subject to no defense, counterclaim, set-off, or objection of any kind known to or suspected by Borrower. To the best of Borrower's knowledge and belief, neither the Agent nor any of the Lenders has taken any action or failed to take any action that subjects Agent or Lenders to any liability to Borrower. Section 4.04 No Legal Bar or Resultant Lien. The Borrower's execution, delivery and performance of the Loan Documents do not constitute a default under, and will not violate any provisions of the charter or bylaws of Borrower, or any contract or agreement entered into by 18 23 Borrower and any Person. To Borrower's knowledge, the Borrower's execution, delivery and performance of the Loan Documents do not constitute a breach of any law, regulation, order, injunction, judgment, decree, or writ to which Borrower is subject, or result in the creation or imposition of any lien upon any Properties of Borrower, other than those contemplated by the Loan Documents. Section 4.05 No Consent. The execution, delivery, and performance of the Loan Documents do not require the consent or approval of any other Person, except for such consents which have been obtained by Borrower in writing. Section 4.06 Financial Condition. The Financial Statements for the period ended December 31, 1997 which have been delivered to Agent, have been prepared on a consolidated basis in accordance with GAAP, consistently applied, and the Financial Statements present fairly the consolidated financial condition of Borrower as of the date or dates and for the period or periods stated therein. No material adverse change in the consolidated financial condition of Borrower has occurred since the date of the most recent Financial Statements. The Financial Statements include all liabilities (direct and contingent) and all assets of each LLC and Partnership, and such Financial Statements accurately reflect Borrower's ownership interest therein. Section 4.07 Investments, Advances, and Guaranties. Except for the transactions described on Exhibit D, neither Borrower, nor any Subsidiary, nor any Partnership, nor any LLC has made investments in, advances to, or guaranties of the obligations of any Person (other than to Borrower or any Subsidiary, a Partnership, a LLC, or to a partnership or other entity that prepares financial statements under Borrower on a consolidated basis) in excess of $100,000 in the aggregate, or committed or agreed to undertake any of these actions or obligations, except as referred to or reflected in the Financial Statements or as permitted hereunder. Section 4.08 Liabilities and Litigation. Neither Borrower, nor any Subsidiary, nor any Partnership, nor any LLC has any material liabilities (individually or in the aggregate) direct or contingent, except as referred to or reflected in the Financial Statements. There is no litigation, legal or administrative proceeding, investigation, or other action of any nature pending or, to the knowledge of Borrower, threatened against or affecting Borrower, or any Subsidiary, or any Partnership, or any LLC that involves the possibility of any judgment or liability not fully covered by insurance or that if adversely decided could reasonably be expected to materially and adversely affect the business or the Properties of Borrower, or any Subsidiary, or any Partnership, or any LLC or the ability of Borrower, or any Subsidiary, or any Partnership, or any LLC to carry on its business as now conducted. Section 4.09 Taxes; Governmental Charges. Borrower, each Subsidiary, each Partnership, and each LLC have filed or caused to be filed all tax returns and reports required to be filed and have paid all taxes, assessments, fees, and other governmental charges levied upon each of them or upon any of their respective Properties or income, which are due and payable, including 19 24 interest and penalties unless such are contested in good faith and adequate reserves have been retained therefor. Borrower, each Subsidiary, each Partnership, and each LLC have made all required withholding deposits. Section 4.10 Title, Etc. Borrower, each Subsidiary, each Partnership, and each LLC have good title to their respective Properties, free and clear of all liens except those referenced or reflected in the Financial Statements or those securing the Obligations. Borrower, each Subsidiary which acts as a general partner in a Partnership, each Partnership, and each LLC possess all trademarks, copyrights, trade names, patents, licenses, and rights therein, adequate in all material respects for the conduct of their respective business as now conducted and presently proposed to be conducted, without conflict with the rights or claimed rights of others. Section 4.11 No Default. Neither Borrower, nor any Subsidiary, nor any Partnership, nor any LLC is in default in any material respect that affects its respective business, Properties, operations, or condition, financial or otherwise, under any indenture, mortgage, deed of trust, credit agreement, note, agreement, or other instrument to which Borrower, or any Subsidiary, or any Partnership, or any LLC is a party or by which it or its respective Properties are bound. Neither the Borrower, nor any Subsidiary, nor any Partnership, nor any LLC is in violation in any material respect of its applicable articles of incorporation or charter or bylaws or Partnership Agreements or LLC operating agreements. Neither the Borrower, nor any Subsidiary, nor any Partnership, nor any LLC has received notice from any Person that it has violated or breached any applicable articles of incorporation, charter, bylaws, Partnership Agreements, articles of organization, or operating agreements. No Default Conditions hereunder have occurred or are continuing as of the date hereof or at the Closing Date. Section 4.12 Casualties; Taking of Properties, Etc. Neither the business nor the Properties of Borrower, nor of any Subsidiary which acts as a general partner in a Partnership, nor of any Partnership, nor of any LLC have been materially affected as a result of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike or other labor disturbance, embargo, requisition or taking of property, cancellation of contracts, permits, concessions by any domestic or foreign government or any agency thereof, riot, activities of armed forces or acts of God or of any public enemy. Section 4.13 Regulation U. Neither Borrower, nor any Subsidiary which acts as a general partner in a Partnership, nor any Partnership, nor any LLC is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System. No part of the Indebtedness shall be used at any time to purchase or to carry margin stock within the meaning of Regulation U or to extend credit to others for the purpose of purchasing or carrying any margin stock if to do so would cause the Lender to violate the provisions of Regulation U. Section 4.14 Compliance with Laws, Etc. Neither Borrower, nor any Subsidiary which acts as a general partner in a Partnership, nor any Partnership, nor any LLC is in violation of any 20 25 law, judgment, decree, order, ordinance, or governmental rule or regulation to which Borrower, or any such Subsidiary, or any Partnership, or any LLC or any of their respective Properties is subject which, if enforced, would have a material adverse effect on the Borrower, or such Subsidiaries, or any Partnership, or any LLC. Neither Borrower, nor any Subsidiary, which acts as a general partner in a Partnership, nor any Partnership, nor any LLC has failed to obtain any license, permit, franchise, or other governmental authorization necessary to the ownership of any of their Properties or to the conduct of their respective business. All improvements on the real estate owned by, leased to or used by Borrower, or any Subsidiary which acts as a general partner in any Partnership, or any Partnership, or any LLC conform in all material respects to all applicable state and local laws, zoning and building ordinances and health and safety ordinances, and such real estate is zoned for the various purposes for which such real estate and improvements thereon are presently being used. Section 4.15 ERISA. Borrower, each Subsidiary, each Partnership, and each LLC are in compliance in all material respects with the applicable provisions of ERISA. Neither Borrower, nor any Subsidiary, nor any Partnership, nor any LLC has incurred any "accumulated funding deficiency" within the meaning of ERISA which is material, and Borrower has not incurred any material liability to PBGC in connection with any Plan. Section 4.16 Subsidiaries, Etc. The names, addresses of registered offices, and states of incorporation of Borrower's Subsidiaries are attached hereto as Exhibit E. Borrower owns a majority interest of all of the Voting Stock of each Subsidiary and its ownership interest is noted on Exhibit E. The Borrower uses no trade names. The names, addresses of registered offices, and states of formation of the Partnerships and LLC's are attached hereto as Exhibit F. Section 4.17 No Material Misstatements. No information, exhibit, or report furnished or to be furnished by Borrower to Agent or to Lenders in connection with this Agreement, contain as of the date thereof, or will contain as of the Closing Date, any material misstatement of fact or failed or will fail to state any material fact, the omission of which would render the statements therein materially false or misleading. Section 4.18 Investment Company Act. Neither Borrower, nor any Subsidiary, nor any Partnership, nor any LLC is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 4.19 Use of Proceeds; Purpose of the Credit. Borrower has used and will use proceeds from the Revolving Credit Notes exclusively for the purposes stated in this Agreement. Section 4.20 Personal Holding Company; Subchapter S. Neither Borrower, nor any Subsidiary, nor any Partnership, nor any LLC is a "personal holding company" as defined in Section 542 of the Code, and neither Borrower, nor any Subsidiary, nor any Partnership, nor any LLC is a "Subchapter S" corporation within the meaning of the Code. 21 26 Section 4.21 Solvency. Borrower, each Subsidiary that is a general partner in any Partnership, each Partnership, and each LLC are solvent as of the date hereof and shall remain solvent at all times hereafter. Borrower, and each Subsidiary that is a general partner in any Partnership, and each Partnership, and each LLC are generally paying their respective debts as they mature and the fair value of Borrower's, and such Subsidiary's, and such Partnership's, and such LLC's assets substantially exceeds the sum total of their respective liabilities. Section 4.22 Capital. Borrower now has capital sufficient to carry on its business and transactions and all businesses and transactions in which it is engaged. Article V. Conditions of Lending. Section 5.01 Initial Conditions. Lenders' obligation to extend credit hereunder is subject to the Conditions Precedent that Agent shall have received (or agreed in writing to waive or defer receipt of) all of the following, each duly executed, dated and delivered as of the Closing Date, in form and substance satisfactory to Agent and its counsel: (a) Revolving Credit Notes and Loan Documents. The Revolving Credit Notes and all other Loan Documents. (b) Collateral. Delivery of any collateral required by Article III herein. (c) Resolutions of Borrower. Certified copies of resolutions of the Board of Directors of Borrower authorizing or ratifying the execution, delivery, and performance, respectively, of this Agreement and all Loan Documents. (d) Borrower's Certificate of Existence. A certificate of existence of Borrower from the State of Tennessee, which certificate shall contain no facts objectionable to Agent. (e) Consents, Etc. Certified copies of all documents evidencing any necessary corporate action, consents, and governmental approvals (if any) with respect to this Agreement and the Loan Documents. (f) Officer's Certificate. A certificate of the secretary or any assistant secretary of Borrower certifying the names of the officer or officers of Borrower authorized to sign this Agreement and the Loan Documents, together with a sample of the true signature of such officer(s). (g) Borrower's Charter and By-Laws. A copy of Borrower's by-laws and charter (including all amendments thereto) certified, in the case of by-laws, by the secretary or any assistant secretary of Borrower, and in the case of the charter by the Secretary of State of Tennessee, as being true and complete copies of the current charter and by-laws of Borrower. 22 27 (h) Guaranties. Delivery of all Guaranties required by Section 3.02 herein. (i) Guarantor's Certificate of Existence. A certificate of existence for each Guarantor from the State of its incorporation. (j) Resolutions of Guarantors. Certified copies of resolutions of the Board of Directors of each Guarantor authorizing or ratifying the execution, delivery, and performance of the Guaranties. (k) Guarantor's Charters and Bylaws. A copy of the Charter and Bylaws (including all amendments thereto) for each Guarantor, certified as complete and accurate by the secretary of such Guarantor. (l) Opinions of Counsel for Borrower. The opinions of counsel addressed to Agent, substantially in the form of Exhibit G. (m) Other. Such other documents as Agent may reasonably request. Section 5.02 Conditions Prior to Funding. Lenders' obligation to fund any Advance is subject to the additional Conditions Precedent that Agent shall have received (or agreed in writing to waive or defer receipt of) all of the following, each duly executed: Borrowing Request. A Borrowing Request in the form of Exhibit B hereto. Section 5.03 All Borrowings. The Lenders' obligations to extend credit under the Loan Documents are subject to the following additional Conditions Precedent which shall be met each time an Advance is requested and an Advance is made: (a) The representations of the Borrower contained in Article IV are true and correct in all material respects as of the date of the requested Advance, with the same effect as though made on the date additional funds are advanced, except as to changes occurring after the date of this Agreement caused by transactions not prohibited under this Agreement; (b) There has been no material adverse change in the Borrower's financial condition or other condition since the date of the last borrowing hereunder; (c) No Default Conditions and no Event of Default have occurred and continue to exist; (d) No material litigation (including, without limitation, derivative actions), arbitration proceedings or governmental proceedings not disclosed in writing by the Borrower to the Agent and the Lenders prior to the date of the execution and delivery of this Agreement is pending or known to be threatened against the Borrower, or any Subsidiary, or any Partnership, or any LLC, and (e) no material development not so disclosed has occurred in any litigation, arbitration proceedings or governmental proceedings so disclosed, which could reasonably be expected to adversely affect the financial position or business of the Borrower, or any Subsidiary, or any Partnership, or any LLC, or impair the ability of the Borrower, or any Subsidiary, or any Partnership, or any LLC, to perform their respective obligations under this Agreement or any other Loan Documents. 23 28 Article VI. Affirmative Covenants. Borrower covenants that, during the term of this Agreement (including any extensions hereof) and until all Indebtedness shall have been finally paid in full and all Obligations shall have been fully discharged, unless Agent shall otherwise first consent in writing, Borrower shall: Section 6.01 Financial Statements and Reports. Promptly furnish to Agent (with sufficient copies for each of the Lenders): (a) Annual Reports. As soon as available, and in any event within ninety (90) days after the close of each Fiscal Year, the audited consolidated Financial Statements of the Borrower setting forth the audited consolidated balance sheets of Borrower as at the end of such year, and the audited consolidated statements of income, statements of cash flows, and consolidated statements of retained earnings of Borrower for such year, setting forth in each case in comparative form (beginning when comparative data are available) the corresponding figures for the preceding Fiscal Year accompanied by the report of Borrower's certified public accountants, and by an unaudited consolidating balance sheet and unaudited consolidating statements of income of Borrower, its Subsidiaries, LLC's, Partnerships, and partnerships and LLC's that are not borrowing funds from Borrower duly certified by Borrower's chief financial officer as being correct reflections of the information used for the audited consolidated Financial Statements. The audit opinion in respect of the Financial Statements of Borrower shall be the opinion of a firm of independent certified public accountants reasonably acceptable to Agent; (b) Quarterly and Year-to-Date Reports. As soon as available and in any event within forty-five (45) days after the end of each of the first three (3) Fiscal Quarters, the unaudited consolidated balance sheets of Borrower as of the end of such Fiscal Quarter, and the unaudited consolidated and consolidating statements of income of Borrower, its Subsidiaries, the LLC's, the Partnerships, and partnerships and LLC's that are not borrowing funds from Borrower for such Quarter and for a period from the beginning of the Fiscal Year to the close of such Fiscal Quarter, all certified by the chief financial officer or chief accounting officer of Borrower as being true and correct to the best of his or her knowledge; (c) Compliance Reports. As soon as available and in any event within forty-five (45) days of the end of each Fiscal Quarter, the calculations with supporting details by the Borrower of the financial covenants contained in Section 7.11 herein, all in a format reasonably satisfactory to Agent (the "Compliance Report"), along with a certificate signed by the chief financial officer of the Borrower stating that such officer has no knowledge of any Event of Default or Default Condition, or if such officer has obtained such knowledge, disclosing the nature, details, and period of existence of such event; and 24 29 (d) Other Information. Promptly upon its becoming available, such other material information about Borrower or the Indebtedness as Agent may reasonably request from time to time. All such balance sheets and other Financial Statements referred to in Sections 6.01(a) and (b) hereof shall conform to GAAP on a basis consistent with those of previous Financial Statements. Section 6.02 Taxes and Other Liens. Cause to be paid and discharged promptly all taxes, assessments, and governmental charges or levies imposed upon it, upon any Subsidiary, upon any LLC, or upon any Partnership or upon any of its or any Subsidiary's, any LLC's, or any Partnership's income or Property as well as all claims of any kind (including claims for labor, materials, supplies, and rent) which, if unpaid, might become a Lien upon any or all of its or any Subsidiary's, any LLC's, or any Partnership's Property; provided, however, that neither Borrower, nor any Subsidiary, nor any LLC, nor any Partnership shall be required to pay any such tax, assessment, charge, levy, or claim if the amount, applicability, or validity thereof shall currently be contested in good faith by appropriate proceedings diligently conducted and if Borrower shall establish reserves therefor adequate under GAAP. Section 6.03 Maintenance. (a) Maintain and cause to be maintained its corporate existence, name, rights, and franchises and the corporate existence, name, rights and franchises of each Subsidiary that acts as a general partner in a Partnership, and the existence, name, and rights of each Partnership and each LLC; (b) observe and comply (to the extent necessary so that any failure will not materially and adversely affect the business or Property of Borrower, or of any Subsidiary that is a general partner of any Partnership, or of any Partnership, or of any LLC) with all applicable laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, certificates, franchises, permits, licenses, authorizations, and requirements of all federal, state, county, municipal, and other governments; (c) cause its Property and the Property of any Subsidiary that acts as a general partner in any Partnership, any Partnership, and of any LLC (and any Property leased by or consigned to it, any Subsidiary that acts as a general partner in any Partnership, any Partnership, or any LLC or held under title retention or conditional sales contracts) to be maintained in good and workable condition at all times and make all repairs, replacements, additions, and improvements to the Property owned by Borrower, and any Subsidiary that acts as a general partner in any Partnership, and any Partnership, and any LLC reasonably necessary and proper to ensure that the business carried on in connection with such Property may be conducted properly and efficiently at all times; and (d) cause the Borrower, each LLC, and each Subsidiary that acts as a general partner in a Partnership, and each Partnership to refrain from doing business in any state 25 30 in which such business would require qualifications to do business in such state unless and until it shall have qualified to do business in such state. Section 6.04 Further Assurances. Promptly cure any defects in the creation, issuance, and delivery of the Loan Documents. Borrower at its expense promptly will execute and deliver to Agent upon request all such other and further documents, agreements, and instruments in compliance with or accomplishment of the covenants and agreements of Borrower in the Loan Documents, or to correct any omissions in the Loan Documents, or to state more fully the Obligations and agreements set out in any of the Loan Documents, to file any notices, or to obtain any consents, all as may be reasonably necessary or appropriate in connection therewith. Section 6.05 Performance of Obligations. (a) Pay the Indebtedness according to the terms of the Loan Documents; and (b) do and perform, and cause to be done and to be performed, every act and discharge all of the Obligations provided to be performed and discharged by Borrower under the Loan Documents, at the time or times and in the manner specified. Section 6.06 Insurance. Maintain and continue to maintain, with financially sound and reputable insurors, insurance satisfactory in type, coverage and amount to Agent against such liabilities, casualties, risks, and contingencies and in such types and amounts as is customary in the case of Persons engaged in the same or similar businesses and similarly situated as that of Borrower, its Subsidiaries, LLC's, and the Partnerships. Upon request of Agent, Borrower will furnish or cause to be furnished to Agent from time to time a summary of the insurance coverage of Borrower in form and substance satisfactory to Agent and if requested will furnish Agent copies of the applicable policies. In the case of any fire, accident, or other casualty causing material loss or damage to any Property of Borrower, any Subsidiary, any LLC, or any Partnership, and the loss(es) materially impair(s) the operation of the business of Borrower, any Subsidiary, any LLC, or any Partnership the proceeds of such policies shall be used, at Borrower's discretion (a) to repair or replace the damaged Property, or (b) to prepay the Indebtedness. Section 6.07 Accounts and Records. At Borrower's expense, cause books of record and account for it and its Subsidiaries, the LLC's, and the Partnerships to be kept, in which full, true, and correct entries will be made of all dealings or transactions in accordance with GAAP as applicable, except only for changes in accounting principles or practices with which Borrower's certified public accountants concur and which changes have been reported to Agent in writing and with an explanation thereof. Section 6.08 Right of Inspection. At Borrower's expense, permit any officer, employee, or agent of Agent or either of the Lenders to visit and inspect any of the Property of Borrower or any Subsidiary, to examine Borrower's and any Subsidiary's books of record and accounts, to take copies and extracts from such books of record and accounts, and to discuss the affairs, finances, and accounts of Borrower and any Subsidiary with Borrower's respective officers, 26 31 accountants, and auditors, all at such reasonable times and as often as Agent or either of the Lenders may reasonably desire. Cause at reasonable times any officer, employee, or agent of Agent or either of the Lenders to be permitted to visit and inspect at Borrower's cost any Properties owned by any Partnership or LLC and to inspect and copy any financial records and books of records and account of such Partnership or LLC. Section 6.09 Notice of Certain Events. Promptly notify Agent if Borrower learns of the occurrence of (i) any event that constitutes a Default Condition or Event of Default together with a detailed statement by a responsible officer of Borrower of the steps being taken as a result thereof; or (ii) the receipt of any notice from, or the taking of any other action by, the holder of any promissory note, debenture, or other evidence of Debt of Borrower or of any security (as defined under the Securities Act of 1933, as amended) of Borrower with respect to a claimed default, together with a detailed statement by a responsible officer of Borrower specifying the notice given or other action taken by such holder and the nature of the claimed default and what action Borrower is taking or proposes to take with respect thereto; or (iii) any legal, judicial, or regulatory proceedings affecting Borrower in which the amount involved is material and is not covered by insurance or which, if adversely determined, would have a material and adverse effect on the business or the financial condition of Borrower; or (iv) any dispute between Borrower and any governmental or regulatory authority or any other person, entity, or agency which, if adversely determined, could reasonably be expected to materially interfere with the normal business operations of Borrower; or (v) any material adverse changes, either individually or in the aggregate, in the assets, liabilities, financial condition, business, operations, affairs, or circumstances of Borrower from those reflected in the Financial Statements or from the facts warranted or represented in any Loan Document; or (vi) the occurrence of a default under a Partnership Note or an LLC Note. Section 6.10 ERISA Information and Compliance. Comply with ERISA and all other applicable laws governing any pension or profit sharing plan or arrangement to which Borrower is a party. Borrower shall provide Agent with notice of any "reportable event" or "prohibited transaction" or the imposition of a "withdrawal liability" within the meaning of ERISA. Section 6.11 Management. Give notice to Agent of any material change in the executive officers of Borrower within five (5) days after such change occurs. Section 6.12 Reports, Etc. If applicable, furnish to Agent copies of all filings and reports, of any nature or type, made with or to the Securities and Exchange Commission (or any successor thereto) within 5 days thereafter, and including all amendments, modifications, or supplements thereto, as the same are filed with the Securities and Exchange Commission. Section 6.13 Calculations. In all calculations made for purposes required by this Loan Agreement, the Borrower, each Subsidiary, each LLC, each Partnership, and each partnership and LLC not borrowing funds from the Borrower shall comply with GAAP, and the Borrower, each Subsidiary, each LLC, each Partnership, and each partnership and LLC not borrowing funds from the Borrower shall use the same procedures and methods employed by Borrower, each Subsidiary, each LLC, each Partnership, and each partnership and LLC not borrowing funds from the 27 32 Borrower in preparing the Financial Statements delivered to STB prior to the date of this Agreement. All references contained herein to calculations of or determinations affecting Borrower (on a consolidated basis) shall refer to the Borrower, each Subsidiary, each LLC, each Partnership, and each Person that prepares financial statements under Borrower. Section 6.14 Partnership Notes and LLC Notes, Etc. The Borrower shall assign to Agent and grant Agent for the benefit of Lenders a first perfected security interest in all Partnership Notes, Partnership Note Collateral, LLC Notes, and LLC Note Collateral to secure repayment of the Indebtedness and the Obligations pursuant to such documentation as reasonably required by Agent. Section 6.15 Additional Guarantees. Within thirty (30) days after the Borrower acquires or forms a Subsidiary, the Borrower shall cause such new Subsidiary to execute a Guarantee in the form of the Guarantees executed by the Guarantors, and to deliver to Agent such Guarantees and other documents, instruments and items with respect thereto that are similar to those documents, instruments and items delivered by the Guarantors with regard to their Guarantees. Additionally, in such case Agent shall be entitled to receive, at Borrower's option, either: (a) copy of duly certified corporate resolutions of each guaranty authorizing the execution of the Guaranty, together with a certificate of good standing containing no matters objectionable to Lender, or (b) a counsel's opinion letter issued by counsel acceptable to Agent regarding such matters involving the new Guarantor as may be reasonably required by Agent. Immediately upon any Person becoming a Subsidiary, Borrower shall give notice thereof to Agent. Borrower shall pay the costs and expenses, including without limitation Agent's legal fees and expenses, in connection with the preparation, negotiation, execution and review of the Guaranty of such Subsidiary and the other items described in this Section. Article VII. Negative Covenants. Borrower covenants and agrees that, during the term of this Agreement and any extensions hereof and until the Indebtedness has been paid and satisfied in full, unless Agent shall otherwise first consent in writing, neither Borrower, nor any Subsidiary, nor any LLC, nor any Partnership, nor any other partnership or LLC in which Borrower or a Subsidiary owns an interest will, either directly or indirectly: Section 7.01 Debts, Guaranties, and Other Obligations. Incur, create, assume, or in any manner become or be liable with respect to any Debt; provided that subject to all other provisions of this Article VII, the foregoing prohibitions shall not apply to: (a) Any Indebtedness to the Lenders as described herein; (b) liabilities, direct or contingent, of Borrower or any Subsidiary, or any Partnership, or any LLC existing on the date of this Agreement that are referenced or reflected in the Financial Statements; and 28 33 (c) Excluding the Indebtedness to the Lenders described herein, Funded Debt not to exceed $5,500,000 in the aggregate. Section 7.02 Liens. Create, incur, assume, or permit to exist any Lien on any of its Property (now owned or hereafter acquired) except, subject to all other provisions of this Article, the foregoing restrictions shall not apply to: (a) Liens securing the payment of any Indebtedness to Lenders; (b) Liens for taxes, assessments, or other governmental charges not yet due or which are being contested in good faith by appropriate action promptly initiated and diligently conducted, if Borrower or such Subsidiary shall have made any reserve therefor required by GAAP; (c) Liens referred to or reflected in the Financial Statements identified in Section 4.06 herein; and (d) Liens on any real or personal property that secures the Debt permitted by Section 7.01(c) above; and (e) Landlord liens in states where such liens arise by operation of law. Section 7.03 Investments, Loans, and Advances. Make or permit to remain outstanding any loans or advances to or investments in any Person, except that, subject to all other provisions of this Article, the foregoing restriction shall not apply to: (a) investments in direct obligations of the United States of America or any agency thereof; (b) investments in certificates of deposit having maturities of less than one year, or repurchase agreements issued by commercial banks in the United States of America having capital and surplus in excess of $50,000,000, or commercial paper of the highest quality; (c) investments in money market funds so long as the entire investment therein is fully insured or so long as the fund is a fund operated by a commercial bank of the type specified in (b) above; (d) those matters referenced on Exhibit D and loans to Partnerships or LLC's; and (e) other investments not to exceed $500,000. Section 7.04 Dividends, Distributions, and Redemptions; Issuance of Stock. (a) Excluding dividends paid to holders of Series A Redeemable Preferred Stock as described in a Conditional 29 34 Consent Agreement between Borrower and STB, permit Borrower to declare or pay any dividend; nor permit any Subsidiary to declare or pay any dividend to any Person other than Borrower or another Subsidiary; or (b) permit Borrower or any Subsidiary to redeem any of its stock or return capital to shareholders except through existing shareholder agreements and future shareholder agreements with (i) Persons who are members in an LLC or who are partners in a Partnership formed subsequent to the Closing Date that acquire Voting Stock of Borrower, (ii) physicians or physician groups that are affiliated with the partners in a Partnership or are affiliated with the members in an LLC formed subsequent to the Closing Date; and (iii) physicians and physician groups that enter into a business relationship with the Borrower or a Subsidiary after the Closing Date regarding the development, operation, or investment in an ambulatory surgery center. Section 7.05 Nature of Business. (a) Suffer any material change to be made in the character of its business as carried on at the Closing Date; or (b) except as set forth on Exhibit F hereto, permit the Borrower to own less than 51% of the Voting Stock of any incorporated Subsidiary; or (c) except as set forth on Exhibit F hereto, permit the Borrower or a Subsidiary of Borrower to own less than 51% of the controlling ownership interest of any Partnership or LLC. Section 7.06 Mergers, Etc. (a) Permit Borrower to merge or consolidate with any other Person, except under conditions in which the Borrower is the surviving entity and such merger or consolidation does not cause the Borrower to be in violation of this Agreement; or (b) permit any Subsidiary to merge or consolidate with any Person other than the Borrower or any other Subsidiary; or (c) permit the Borrower, any Subsidiary, LLC, or Partnership to dispose of substantially all of their respective Properties. Section 7.07 Proceeds of Loan. Permit the proceeds of the Advances to be used for any purpose other than those permitted under this Agreement. Section 7.08 Sale or Discount of Receivables. Except to minimize losses on bona fide debts previously contracted, discount or sell with recourse, or sell for less than the greater of the face or market value thereof, any of its notes receivable or Accounts. Section 7.09 Disposition of Assets. Dispose of any of its assets having a material value other than in the ordinary course of its present business upon terms standard in Borrower's industry; provided, however, that Borrower, AmSurg West Tennessee, Inc., and AmSurg Holdings, Inc. may sell, transfer, and convey their interests in the Digestive Clinic Ambulatory Surgery Center in Jackson, Tennessee without the consent of Agent or of Lenders. Section 7.10 Partnership Notes or LLC Notes. Forgive, cancel, amend, alter, or seek to transfer any Partnership Notes or LLC Notes. Section 7.11 Financial Covenants. (a) Net Worth. Permit its Consolidated Net Worth as of March 31, 1998 to be less than $31,791,000; nor permit its Consolidated Net Worth as measured at the end 30 35 of each Fiscal Quarter thereafter to be less than the sum of: (i) $31,791,000, plus (ii) the net proceeds received from the issuance, sale, or disposition of the Borrower's capital stock (common, preferred, or special), converted into, or exchanged for capital stock, and any rights, options, warrants, and similar instruments from March 31, 1998 to any date of determination, plus (iii) 75% of the net, after-tax earnings of the Borrower as determined on a consolidated basis from the immediately preceding Fiscal Quarter, as calculated on a cumulative basis. (b) Consolidated Debt to EBITDA. As calculated on the last day of each Fiscal Quarter, permit the ratio of Consolidated Debt to EBITDA to be greater than the following ratios as of the time periods set forth below: (i) 3.25 to 1.0 as of June 30, 1998; and (ii) 2.75 to 1.0 as of September 30, 1998 and each Fiscal Quarter thereafter. (c) Consolidated Debt to Capitalization. As calculated on the last day of each Fiscal Quarter, permit the ratio of Consolidated Debt , to Capitalization to be greater than the following ratios as of the time periods set forth below: (i) .60 to 1.0 as of June 30, 1998; and (ii) .5 to 1.0 as of September 30, 1998 and each Fiscal Quarter thereafter. (d) Debt Service Coverage Ratio. As calculated on the last day of each Fiscal Quarter, permit the ratio of EBITDA to an amount equal to: (i) Interest Expense, plus (ii) current payments of long term Debt to be less than 2.25 to 1.0. (e) General Provisions. For the purpose of calculating EBITDA in parts (b) and (d) above, EBITDA shall be calculated on an annualized, trailing six (6) month basis and it shall include the EBITDA of any Acquisition so long as the calculation thereof is done in a manner reasonably calculated to comply with GAAP. For the purpose of calculating Interest Expense in part (d) above, Interest Expense shall be calculated on a trailing twelve (12) month basis. For the purpose of calculating EBITDA in parts (a), (b) and (d) above, the amount attributable to EBITDA shall exclude a pre-tax amount up to $500,000 in spinoff costs. Section 7.12 Inconsistent Agreements. Enter into any agreement containing any provision which would be violated or breached by the performance by Borrower of its Obligations. Section 7.13 Restrictions on Physician Practice Acquisitions. (a) Enter into Physician Practice Acquisitions the aggregate cost of which exceeds $4,000,000 in any twelve (12) month 31 36 period without the Agent's prior written consent; or (b) enter into any single Physician Practice Acquisition the cost of which exceeds $2,000,000 without the Agent's prior written approval. Section 7.14 Acquisitions. Make any Acquisition, provided that: (a) the Borrower can make an Acquisition that satisfies all of the following: (i) the total consideration (including cash, stock, personal property, and other Property) exchanged for such Acquisition does not exceed $5,000,000; (ii) the ratio of: total consideration (including cash, stock, personal property, and other Property) exchanged for such Acquisition to annual pre-tax income after GAAP adjustments less minority interest as reflected on the Acquisition Pro-Forma does not exceed 6.5 to 1.0; (iii) the aggregate number of Acquisitions in any rolling twelve (12) month period, commencing with the month of January, 1998, does not exceed ten (10); (iv) at least five (5) Business Days before such Acquisition, the Borrower delivers to Agent and Lenders the Acquisition Informational Package; (v) simultaneously with the Acquisition, the Borrower shall deliver to Agent the documentation and agreements required by Section 6.15 herein; and (vi) simultaneously with the Acquisition, the Borrower shall execute a Stock Pledge Agreement and shall deliver the securities described therein to Agent. (b) the Borrower can make an Acquisition where the total consideration (including cash, stock, personal property, and other Property) exchanged for such Acquisition exceeds $5,000,000 only with the prior approval in writing of the Majority Lenders as evidenced by an Acquisition Approval Letter and satisfaction of the following conditions: (i) at least fifteen (15) Business Days prior to the proposed Acquisition the Borrower delivers to Agent and Lenders the Acquisition Informational Package (it being understood that the Lenders shall use reasonable efforts to notify the Borrower within ten (10) Business Days after receipt of the Acquisition Informational Package of their decision to approve or disapprove the proposed Acquisition); (ii) if the Majority Lenders approve the Acquisition, then simultaneously with the Acquisition, the Borrower shall deliver to Agent the documentation and agreements required by Section 6.15 herein; and 32 37 (iii) simultaneously with the Acquisition, the Borrower shall execute a Stock Pledge Agreement and shall deliver the securities described therein to Agent. Article VIII. Events of Default. Section 8.01 Events of Default. Any of the following events shall be considered an Event of Default as those terms are used in this Agreement: (a) Principal and Interest Payments. Borrower fails to make payment when due of any installment of principal or interest on any of the Revolving Credit Notes or the Indebtedness within fifteen (15) days of the date thereof, or Borrower fails to pay when due any payment due hereunder or under any of the Loan Documents within fifteen (15) days of the due date thereof; or (b) Representations and Warranties. Any representation or warranty made by Borrower in any Loan Document, proves to have been incorrect in any material respect as of the date thereof; or any representation, statement (including Financial Statements), certificate, or data furnished or made by Borrower in any Loan Document with respect to any Indebtedness, proves to have been untrue in any material respect, as of the date as of which the facts therein set forth were stated or certified, provided that with regard to Borrower's representation in Section 4.04 herein, the Agent shall not be entitled to declare a default hereunder unless the Borrower's representation in Section 4.04 proves to be untrue with regard to any contract requiring the payment of money or goods valued at $250,000 or more or the performance of services valued at $250,000 or more; or (c) Obligations. Borrower fails to perform its Obligations as required by and contained in any Loan Document or a breach occurs of any agreement, representation, or warranty contained herein or in any Loan Document and such continues for thirty (30) days after delivery by Agent of written notice to Borrower that it has failed to perform its Obligations or that a breach has occurred of any agreement, representation, or warranty contained herein or in any Loan Document, and following delivery of such written notice from Agent to Borrower the failure or breach has not been fully cured and/or corrected; provided and except that the 30 day notice and cure period shall not be applicable to Events of Default or breaches arising out of or under the following sections of this Loan Agreement (and in such cases no notice and cure period beyond any specifically stated therein shall be applicable): Section 8.01(a), 8.01(b), 8.01(d), 8.01(e), 8.01(f), 8.01(h), 8.01(i), 8.01(k), 8.01(l), 6.01, 6.08, 6.09, 6.11, 6.12, 7.01, 7.02, 7.03, 7.05, 7.06, 7.07, 7.08, 7.09, 7.10, 7.11, and 7.12. (d) Involuntary Bankruptcy or Receivership Proceedings. A receiver, custodian, liquidator, or trustee of Borrower, any Subsidiary, any Partnership, or of any LLC, or of any of their respective Property, is appointed by the order or decree of any court or 33 38 agency or supervisory authority having jurisdiction; or Borrower, any Subsidiary, any Partnership, or any LLC is adjudicated bankrupt or insolvent; or any of the Property of Borrower, any Subsidiary, any Partnership, or LLC is sequestered by court order or a petition is filed against Borrower, any subsidiary, Partnership, and/or any LLC under any state or federal bankruptcy, reorganization, debt arrangement, insolvency, readjustment of debt, dissolution, liquidation, or receivership law of any jurisdiction, whether now or hereafter in effect, which proceeding is not dismissed within 60 days of filing; or (e) Voluntary Petitions. Borrower, any Subsidiary, any Partnership, or any LLC takes affirmative steps to prepare to file, or Borrower, any Subsidiary, any Partnership, or any LLC files a petition in voluntary bankruptcy or to seek relief under any provision of any bankruptcy, reorganization, debt arrangement, insolvency, readjustment of debt, dissolution, or liquidation law of any jurisdiction, whether now or hereafter in effect, or consents to the filing of any petition against it under any such law; or (f) Assignments for Benefit of Creditors, Etc. Borrower, any Subsidiary, any Partnership, or any LLC makes an assignment for the benefit of its creditors, or admits in writing its inability to pay its debts generally as they become due, or consents to the appointment of a receiver, trustee, or liquidator of Borrower, any Subsidiary, any Partnership, or any LLC, or of all or any part of its Properties; or (g) Discontinuance of Business, Etc. Borrower, any Subsidiary that acts as a general partner in any Partnership, any Partnership, or any LLC discontinues its usual business and such has a material adverse impact on Borrower's financial condition; or (h) Cross-Default on Other Debt or Security. Subject to any applicable grace period or waiver prior to any due date, Borrower, any Subsidiary, any Partnership, any partnerships consolidated with Borrower on its consolidated Financial Statements, and/or any LLC fails to make any payment due on any Debt or security (as "security" is defined for purposes of the federal securities laws) in excess of an aggregate amount equal to $500,000 or any event shall occur or any condition shall exist with respect to any Debt or security of Borrower, any Subsidiary, any Partnership, and/or any LLC or under any agreement securing or relating to such indebtedness or security the effect of which is to cause or to permit any holder or holders of Debt in excess of an aggregate amount equal to $500,000 to cause such Debt or security, or a portion thereof, to become due prior to its stated maturity or prior to its regularly scheduled dates of payment; or (i) Undischarged Judgments. If a judgment for the payment of money in excess of $500,000 in the aggregate is rendered by any court or other governmental authority against Borrower, any Subsidiary, any Partnership, and/or any LLC which is not fully covered by valid collectible insurance (subject, however to a reasonable deductible); or (j) Violation of Laws, Etc. Borrower, any Subsidiary, any Partnership, or any LLC violates or otherwise fails to comply with any law, rule, regulation, decree, order, or judgment under the laws of the United States of America, or of any state or jurisdiction 34 39 thereof which violation or failure has a material, adverse effect on Borrower, any Subsidiary, any Partnership, or any LLC; or Borrower fails or refuses at any and all times to remain current in its or their financial reporting requirements pursuant to such laws, rules, and regulations or pursuant to the rules and regulations of any exchange upon which any shares of Borrower are traded. (k) Dissolution of Partnerships, Subsidiaries, or LLC's. Should any Partnership, Subsidiary, or LLC be dissolved prior to repayment of all amounts owed by such Partnership, Subsidiary, or LLC to Borrower. (l) Change of Control. Should a Change of Control occur. Section 8.02 Remedies. Upon the happening of any Event of Default set forth above, with the exception of those events set forth in Section 8.01(d) and 8.01(e): (i) Agent may declare the entire principal amount of all Indebtedness then outstanding, including interest accrued thereon, to be immediately due and payable without presentment, demand, protest, notice of protest, or dishonor or other notice of default of any kind, all of which Borrower hereby expressly waives, (ii) at Agent's sole discretion and option, all obligations of Lenders under this Agreement shall immediately cease and terminate unless and until Agent shall reinstate such obligations in writing, (iii) Agent on behalf of Lenders may exercise all rights against the Guarantors under the Guaranties and against the Collateral set forth in the Security Documents or afforded a creditor under applicable law; or (iv) Agent on behalf of Lenders may bring an action to protect or enforce its rights under the Loan Documents or seek to collect the Indebtedness and/or enforce the Obligations by any lawful means. Upon the happening of any event specified in Section 8.01(d) and Section 8.01(e) above: (i) all Indebtedness, including all principal, accrued interest, and other charges or monies due in connection therewith shall be immediately and automatically due and payable in full, without presentment, demand, protest, or dishonor or other notice of any kind, all of which Borrower hereby expressly waives, (ii) all obligations of Lenders under this Agreement shall immediately cease and terminate unless and until Agent shall reinstate such obligations in writing, (iii) Agent on behalf of Lenders may exercise all rights against the Guarantors under the Guaranties and against the Collateral set forth in the Security Documents or afforded a creditor under applicable law; or (iv) Agent on behalf of Lenders may bring an action to protect or enforce its rights under the Loan Documents or seek to collect the Indebtedness and/or enforce the Obligations by any lawful means. Section 8.03 Right of Set-off. Upon the occurrence and during the continuance of any Event of Default, each of the Lenders and Agent are authorized, at any time and from time to time, without notice to Borrower (any such notice being expressly waived by Borrower), to set-off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by the Agent or any of the Lenders to or for the credit or the account of Borrower against any and all of the Obligations, irrespective of whether or not Agent shall have accelerated the Indebtedness or made any demand under this Agreement and although such obligations may be unmatured. 35 40 Section 8.04 Default Conditions. Any of the following events shall be considered a Default Condition: (a) Borrower suffers a material adverse change in its financial condition; and (b) Any event occurs which with the passage of time or giving of notice would become an Event of Default hereunder or an Event of Default under any Guaranty. Upon the occurrence of a Default Condition or at any time thereafter until such Default Condition no longer exists, the Borrower agrees that the Agent and the Lenders, in Agent's sole discretion, and without notice to Borrower, may immediately cease making any Advances under the Loan Documents, all without liability whatsoever to Borrower or any other Person whomsoever, all of which is expressly waived hereby. Borrower releases Agent and each of the Lenders from any and all liability whatsoever, whether direct, indirect, or consequential, and whether seen or unforeseen, resulting from or arising out of or in connection with Agent's and/or Lenders' determination to cease making Advances pursuant to this Section, unless Agent and/or Lenders act with gross negligence or willful misconduct. Article IX. General Provisions. Section 9.01 Notices. All communications under or in connection with this Agreement or any of the other Loan Documents shall be in writing and shall be mailed by first class certified mail, postage prepaid, or otherwise sent by telex, telegram, telecopy, or other similar form of rapid transmission confirmed by mailing (in the manner stated above) a written confirmation at substantially the same time as such rapid transmission, or personally delivered to an officer of the receiving party. All such communications shall be mailed, sent, or delivered as follows: (a) if to Borrower, to its address shown below, or to such other address as Borrower may have furnished to Agent in writing: One Burton Hills Boulevard Suite 350 Nashville, Tennessee 37215 Attention: Claire Gulmi (b) if to Agent, to its address shown below, or to such other address or to such individual's or department's attention as it may have furnished Borrower in writing: Karen Ahern SunTrust Bank, Nashville, N.A., Agent 201 Fourth Avenue North Nashville, Tennessee 37219 (c) if to STB, to its address shown below, or to such other addresses STB may have furnished to Borrower: 36 41 Mark Mattson SunTrust Bank, Nashville, N.A. 201 Fourth Avenue North Nashville, Tennessee 37219 (d) if to NBT, to the address shown below, or to such other address as NBT may have furnished to Borrower: Kim Dupuy One NationsBank Plaza Fourth Floor Nashville, Tennessee 37239 Any communication so addressed and mailed by certified mail shall be deemed to be given when so mailed. Section 9.02 Deviation from Covenants. The procedure to be followed by Borrower to obtain the consent of Agent to any deviation from the covenants contained in this Agreement or any other Loan Document shall be as follows: (a) Borrower shall send a written notice to Agent setting forth (i) the covenant(s) relevant to the matter, (ii) the requested deviation from the covenant(s) involved, and (iii) the reason for the requested deviation from the covenant(s); and (b) Agent, within a reasonable time, will send a written notice to Borrower, signed by an authorized officer of Agent, permitting or refusing the request, but in no event will any deviation from the covenants of this Agreement or any other Loan Document be effective without the express prior written consent of Agent. Agent's failure to provide such written notice shall be deemed a refusal of such request. Section 9.03 Invalidity. In the event that any one or more of the provisions contained in any Loan Document for any reason shall be held invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of any Loan Document. Section 9.04 Survival of Agreements. All representations and warranties of Borrower in this Agreement and all covenants and agreements in this Agreement not fully performed before the Closing Date of this Agreement shall survive the Closing. Section 9.05 Successors and Assigns. Borrower may not assign its rights or delegate its duties under this Agreement or any other Loan Document. All covenants and agreements contained by or on behalf of Borrower in any Loan Document shall bind the Borrower's successors and assigns and shall inure to the benefit of Agent and Lenders and their respective successors and assigns. In the event that any of the Lenders sells participations in Indebtedness to participating lenders, each of such participating lenders shall have the rights of set-off against 37 42 such Indebtedness and similar rights or Liens to the same extent available to Lenders, except as otherwise provided in this Agreement. Section 9.06 Renewal, Extension, or Rearrangement. All provisions of this Agreement relating to Indebtedness shall apply with equal force and effect to each and all promissory notes executed hereafter which in whole or in part represent a renewal, extension for any period, increase, or rearrangement of any part of the Indebtedness originally represented by any part of such other Indebtedness. Section 9.07 Waivers. Pursuant to T.C.A. Section 47-50-112, no action or course of dealing on the part of Agent or Lenders or their officers, employees, consultants, or agents, nor any failure or delay by Agent or any of the Lenders with respect to exercising any right, power, or privilege Agent or any of the Lenders under the Note, this Agreement, or any other Loan Document shall operate as a waiver thereof, except as otherwise provided in this Agreement. Agent or Lenders may from time to time waive any requirement hereof, including any of the Conditions Precedent; however no waiver shall be effective unless in writing and signed by the Agent or the Lenders, as applicable. The execution by Agent or the Lenders of any waiver shall not obligate Lender to grant any further, similar, or other waivers. Section 9.08 Cumulative Rights. Rights and remedies of Agent and Lenders under each Loan Document shall be cumulative, and the exercise or partial exercise of any such right or remedy shall not preclude the exercise of any other right or remedy. Section 9.09 Construction. This Agreement and the other Loan Documents constitute a contract made under and shall be construed in accordance with and governed by the laws of the State of Tennessee. Section 9.10 Nature of Commitment. With respect to the Loan and the Advances, Lenders' obligation to make the Loan or any Advances shall be deemed to be pursuant to a contract to make a loan or to extend debt financing or financial accommodations to or for the benefit of Borrower within the meaning of Sections 365(c)(2) and 365(e)(2)(B) of the United States Bankruptcy Code, 11 U.S.C. ? 101 et seq. Section 9.11 Disclosures. Every reference in this Agreement to disclosures of Borrower to Agent and to Lenders (except the Financial Statements), to the extent that such references refer or are intended to refer to disclosures at or prior to the execution of this Agreement, shall be deemed strictly to refer only to written disclosures delivered to Agent and to Lenders concurrently with the execution of this Agreement and referred to specifically in the Loan Documents. The parties intend that such disclosures are to be limited to those presented in an orderly manner at the time of executing this Agreement and are not to be deemed to include expressly or impliedly any disclosures that previously may have been delivered from time to time to Agent and Lenders, except to the extent that such previous disclosures are again presented to Agent or Lenders in writing concurrently with the execution of this Agreement. 38 43 Section 9.12 Governance; Exhibits. The terms of this Agreement shall govern if determined to be in conflict with the terms or provisions in any other Loan Document. The exhibits attached to this Agreement are incorporated in this Agreement and shall be considered a part of this Agreement except that in the event of any conflict between an exhibit and this Agreement or another Loan Document, the provisions of this Agreement or the Loan Document, as the case may be, shall prevail over the exhibit. Section 9.13 Titles of Articles, Sections, and Subsections. All titles or headings to articles, sections, subsections, or other divisions of this Agreement or the exhibits to this Agreement are only for the convenience of the parties and shall not be construed to have any effect or meaning with respect to the other content of such articles, sections, subsections, or other divisions, such other content being controlling with respect to the agreement between the parties. Section 9.14 Time of Essence. Time is of the essence with regard to each and every provision of this Agreement. Section 9.15 Remedies. All remedies for which this Agreement and all other Loan Documents provide for Agent shall be in addition to all other remedies available to Agent and Lenders under the principles of law and equity, and pursuant to any other body of law, statutory or otherwise. Section 9.16 Application of Prepayments. Prepayments shall be applied at Agent's sole discretion (i) first to accrued interest under any of the Obligations as determined by Agent and (ii) second to reduce principal of any of the Obligations, all in such manner as determined by Agent. Section 9.17 Computations; Accounting Principles. Where the character or amount of any asset or liability or item of income or expense is required to be determined, or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, such determination or calculation, to the extent applicable and except as otherwise specified in this Agreement, shall be made in accordance with GAAP applied on a consolidated basis consistent with those in effect at the Closing Date. Section 9.18 Costs, Expenses, and Taxes. Borrower agrees to pay on demand all out-of-pocket costs and expenses of Agent (including the reasonable fees and out-of-pocket expenses of counsel for Agent) incurred by Agent in connection with the preparation, execution, delivery, administration, interpretation, enforcement, or protection of Agent or either of Lenders' rights under the Loan Documents (including any suit for declaratory judgment or interpretation of the provisions hereof). In addition, Borrower agrees to pay, and to hold Agent and both of the Lenders harmless from all liability for, any stamp or other taxes (including taxes under Tennessee Code Annotated Section 67-4-409 due upon the recordation of mortgages and financing statements) which may be payable in connection with the execution or delivery of this Agreement, the Advances, and the Collateral under this Agreement, or the issuance of the Loan Documents delivered or to be delivered under or in connection with this Agreement. Borrower, upon request, promptly will reimburse Agent and both of the Lenders for all amounts expended, 39 44 advanced, or incurred by Agent and both of the Lenders to satisfy any obligation of Borrower under this Agreement or any other Loan Documents, or to perfect a Lien in favor of Agent and both of the Lenders, or to protect the Properties or business of Borrower or to collect the Obligations, or to enforce the rights of Agent and both of the Lenders under this Agreement or any other Loan Document, which amounts will include all court costs, attorney's fees, fees of auditors and accountants, and investigation expenses reasonably incurred by Agent and both of the Lenders in connection with any such matters, together with interest thereon at the rate applicable to past due principal and interest as set forth in the Loan Documents but in no event in excess of the maximum lawful rate of interest permitted by applicable law on each such amount. All obligations for which this Section provides shall survive any termination of this Agreement. Section 9.19 Distribution of Information. The Borrower hereby authorizes the Agent and the Lenders, as the Agent and the Lenders may elect in their sole discretion, to discuss with and furnish to any affiliate of the Agent and the Lenders, to any government or self-regulatory agency with jurisdiction over the Agent and the Lenders, or to any participant or prospective participant, all financial statements, audit reports and other information pertaining to the Borrower and/or its Subsidiaries whether such information was provided by Borrower or prepared or obtained by the Agent and the Lenders or third parties. Neither the Agent nor the Lenders nor any of their employees, officers, directors or agents make any representation or warranty regarding any audit reports or other analyses of Borrower which the Agent or the Lenders may elect to distribute, whether such information was provided by Borrower or prepared or obtained by the Agent, the Lenders, or third parties, nor shall the Agent, the Lenders, or any of their employees, officers, directors or agents be liable to any Person receiving a copy of such reports or analyses for any inaccuracy or omission contained in such reports or analyses or relating thereto. Section 9.20 Entire Agreement; No Oral Representations Limiting Enforcement. This Agreement represents the entire agreement between the parties hereto except for such other agreements set forth in the Loan Documents, and any and all oral statements heretofore made regarding the matters set forth herein are merged herein. Section 9.21 Amendments. Excluding Section 11.1 through 11.14, the Borrower's written agreement shall be necessary to amend this Agreement. Sections 11.1 through 11.14 of this Agreement may be amended by the Lenders without the necessity of Borrower's agreement thereto pursuant to the provisions contained therein. Section 9.22 Non-Use Fee. As additional consideration for the Lenders' committing and reserving monies to fund the Revolving Credit Notes, the Borrower shall pay to Agent for the account of Lenders quarterly in arrears a fee at a rate equal to the Applicable Margin per annum of the average unused portion of the Revolving Credit Notes during the prior Fiscal Quarter. The fee shall be calculated on the basis of a year of 360 days for the actual number of days elapsed. Section 9.23 Commitment Fee. In consideration of Lenders' willingness to extend the Loans and to reserve the funds necessary to fund the Revolving Credit Notes, the Borrower shall pay to Agent for distribution to Lenders a one-time commitment fee equal to $37,500.00. 40 45 Article X. Jury Waiver. Section 10.01 Jury Waiver. IF ANY ACTION OR PROCEEDING INVOLVING THIS LOAN AGREEMENT OR ANY LOAN DOCUMENT IS COMMENCED IN ANY COURT OF COMPETENT JURISDICTION, BORROWER, AGENT, AND LENDERS HEREBY WAIVE THEIR RIGHTS TO DEMAND A JURY TRIAL. Article XI. The Agent. Section 11.01 Appointment of Agent. Each of the Lenders hereby designates the Agent to administer all matters concerning the Indebtedness and the Obligations and to act as herein specified. Each of the Lenders hereby irrevocably authorizes the Agent to take such actions on its behalf under the provisions of this Agreement, the other Loan Documents and all other instruments and agreements referred to herein or therein, and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Agent may perform any of its duties hereunder by or through its agents or employees. The Lenders agree that neither the Agent nor any of its directors, officers, employees or agents shall be liable for any action taken or omitted to be taken by it or them hereunder or in connection herewith, except for its or their own gross negligence or willful misconduct. The Lenders agree that the Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any of the Lenders, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise be imposed upon or exist against the Agent. Section 11.02 Authorization of Agent with Respect to the Loan Documents. (a) Each of the Lenders hereby authorizes the Agent to enter into each of the Loan Documents and to take all action contemplated thereby, all in its capacity as Agent for the ratable benefit of the Lenders. All rights and remedies under the Loan Documents may be exercised by the Agent for the benefit of the Agent and the Lenders upon the terms thereof. (b) The Agent shall administer the Loans described herein and the Loan Documents on behalf of and for the benefit of the Lenders in all respects as if the Agent were the sole Lender under the Loan Documents, except that: (i) The Agent shall administer the Loans and the Loan Documents with a degree of care at least equal to that customarily employed by the Agent in the administration of similar credit facilities for its own account. (ii) The Agent shall not, without the consent of the Majority Lenders, take any of the following actions: (A) agree to a waiver of any material requirements, covenants, or obligations of the Borrower or of any of the Guarantors contained herein; 41 46 (B) agree to any amendment to or modification of any of the terms of any of the Loan Documents; (C) waive any Event of Default or Default Condition as set forth in the Loan Agreement; (D) accelerate the Indebtedness described in the Loan Agreement following an Event of Default; or (E) initiate litigation or pursue other remedies to enforce the obligations contained in any Loan Document or to collect the Indebtedness described herein. (iii) The Agent shall not, without the consent of all of the Lenders, take any of the following actions: (A) extend the maturity of any payment of principal of or interest on the Indebtedness described herein; (B) reduce any fees paid to or for the benefit of Lenders under the Loan Agreement; (C) reduce the rate of interest charged on the Indebtedness described herein; (D) release any Guaranty; (E) postpone any date fixed for the payment in respect of principal of, or interest on the Indebtedness described herein, or any fees hereunder; (F) modify the definition of Majority Lenders; or (G) modify this Section 11.02(b)(iii). (c) The Agent, upon its receipt of actual notice thereof, shall notify the Lenders of: (i) each proposed action that would require the consent of the Lenders as set forth herein, or (ii) any action proposed to be taken by the Agent in the administration of the Loans and Loan Documents not in the ordinary course of business; provided that any failure of the Agent to give the Lenders any such notice shall not alone be the basis for any liability of the Agent to the Lenders except for the Agent's gross negligence or willful misconduct. (d) The Lenders agree that the Agent shall incur no liability under or in respect of this Agreement with respect to anything which it may do or refrain from doing in the 42 47 reasonable exercise of its judgment or which may seem to it to be necessary or desirable in the circumstances, except for its gross negligence or willful misconduct. Agent shall incur no liability to any of the Lenders for giving consent on behalf of the Lenders when under the terms of this Agreement consent may not be unreasonably withheld. (e) The Agent shall not be liable to the Lenders or to any Lender in acting or refraining from acting under this Agreement or any other Loan Document in accordance with the instructions of the Majority Lenders or all of the Lenders, where expressly required by this Agreement, and any action taken or failure to act pursuant to such instructions shall be binding on all Lenders. In each circumstance where any consent of or direction from the Majority Lenders or all of the Lenders is required or requested by Agent, the Agent shall send to the Lenders a notice setting forth a description in reasonable detail of the matter as to which consent or direction is requested and the Agent's proposed course of action with respect thereto. In the event the Agent shall not have received a response from any Lender within five (5) Business Days after Agent sends such notice, such Lender shall be deemed to have agreed to the course of action proposed by the Agent. Section 11.03 Agent's Duties Limited; No Fiduciary Duty. The Lenders agree that the Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and the other Loan Documents. The Lenders agree that none of the Agent nor any of its respective officers, directors, employees or agents shall be liable for any action taken or omitted by it as such hereunder or in connection herewith, unless caused by its or their gross negligence or willful misconduct. The Agent shall not have by reason of this Agreement a fiduciary relationship to or in respect of any of the Lenders, and nothing in this Agreement, express or implied, is intended to or shall be so construed as to impose upon the Agent any obligations in respect of this Agreement or the other Loan Documents except as expressly set forth herein. SECTION 11.04 NO RELIANCE ON THE AGENT. (a) EACH OF THE LENDERS REPRESENTS AND WARRANTS TO THE AGENT AND THE OTHER LENDERS THAT INDEPENDENTLY AND WITHOUT RELIANCE UPON THE AGENT, EACH OF THE LENDERS, TO THE EXTENT IT DEEMS APPROPRIATE, HAS MADE AND SHALL CONTINUE TO MAKE (I) ITS OWN INDEPENDENT INVESTIGATION OF THE FINANCIAL CONDITION AND AFFAIRS OF THE BORROWER AND THE GUARANTORS IN CONNECTION WITH THE TAKING OR NOT TAKING OF ANY ACTION IN CONNECTION HEREWITH, AND (II) ITS OWN APPRAISAL OF THE CREDIT WORTHINESS OF THE BORROWER AND THE GUARANTORS, AND EACH OF THE LENDERS FURTHER AGREES THAT, EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, THE AGENT SHALL HAVE NO DUTY OR RESPONSIBILITY, EITHER INITIALLY OR ON A CONTINUING BASIS, TO PROVIDE ANY OF THE LENDERS WITH ANY CREDIT OR OTHER INFORMATION WITH RESPECT THERETO, WHETHER COMING INTO ITS POSSESSION BEFORE THE MAKING OF THE LOANS OR AT ANY TIME OR TIMES THEREAFTER. AS LONG AS ANY OF THE LOANS ARE OUTSTANDING AND/OR ANY AMOUNT IS AVAILABLE TO BE REQUESTED OR BORROWED HEREUNDER, OR THIS AGREEMENT AND THE LOAN DOCUMENTS 43 48 HAVE NOT BEEN CANCELLED AND TERMINATED, EACH OF THE LENDERS SHALL CONTINUE TO MAKE ITS OWN INDEPENDENT EVALUATION OF THE FINANCIAL CONDITION AND AFFAIRS OF THE BORROWERS AND THE GUARANTORS. (b) The Agent shall not be responsible to any of the Lenders for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith or for the execution, effectiveness, genuineness, validity, enforceability, collectability, priority or sufficiency of this Agreement, the Revolving Credit Notes, the Guarantees, the other Loan Documents, or any other documents contemplated hereby or thereby, or the financial condition of the Borrower or the Guarantors, or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement, the Revolving Credit Notes, the Guarantees, the other Loan Documents or the other documents contemplated hereby or thereby, or the financial condition of the Borrower or the Guarantors, or the existence or possible existence of any Default Condition or Event of Default. Section 11.05 Certain Rights of Agent. The Lenders agree that if the Agent shall request instructions from the Majority Lenders (or all of the Lenders where unanimity is expressly required under the terms of this Agreement) with respect to any action or actions (including the failure to act) in connection with this Agreement, the Agent shall be entitled to refrain from such act or taking such act, unless and until the Agent shall have received instructions from the Majority Lenders (or all of the Lenders where unanimity is expressly required under the terms of this Agreement); and the Agent shall not incur liability to any Person by reason of so refraining. Without limiting the foregoing, none of the Lenders shall have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting hereunder in accordance with the instructions of the Majority Lenders (or, with regard to acts for which the consent of all of the Lenders is expressly required under the terms of this Agreement, in accordance with the instructions of all of the Lenders). Section 11.06 Reliance by Agent. The Lenders agree that the Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telex, teletype or telecopier message, cablegram, radiogram, order or other documentary, teletransmission or telephone message reasonably believed by it to be genuine and correct and to have been signed, sent or made by the proper Person. The Lenders agree that the Agent may consult with legal counsel (including counsel for any of the Lenders), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. Section 11.07 Indemnification of Agent. To the extent the Agent is not reimbursed and indemnified by the Borrower, each of the Lenders will reimburse and indemnify the Agent, ratably according to their respective Pro Rata Share, for, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including fees of experts, consultants and counsel and disbursements) or disbursements of any kind or nature 44 49 whatsoever that may be imposed on, incurred by or asserted against the Agent in performing its duties hereunder, in any way relating to or arising out of this Agreement or the other Loan Documents; provided that none of the Lenders shall be liable to the Agent for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. The obligations and indemnifications arising under this Section 11.07 shall survive termination of this Agreement, repayment of the Loans and indebtedness arising in connection with the Letters of Credit and expiration of the Letters of Credit. Section 11.08 The Agent in its Individual Capacity. With respect to its obligation to lend under this Agreement and the Loans made by it, the Agent shall have the same rights and powers hereunder as any other of the Lenders, and may exercise the same as though it were not performing the duties of Agent specified herein; and the terms "Lenders" and "Majority Lenders" or any similar terms shall, unless the context clearly otherwise indicates, include the Agent in its individual capacity. The Agent and its affiliates may accept deposits from, lend money to, and generally engage in any kind of banking, trust, financial advisory or other business with the Borrower and the Guarantors, and any affiliate of the Borrower as if it were not performing the duties specified herein as Agent, and may accept fees and other consideration from the Borrower for services in connection with this Agreement and otherwise without having to account for the same to the Lenders. Section 11.09 Successor Agent. (a) The Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower and may be removed at any time with cause by the Majority Lenders; provided, however, the Agent may not resign or be removed until (i) a successor Agent has been appointed and shall have accepted such appointment and (ii) the successor Agent has assumed all responsibility for issuance of the Letters of Credit and the successor Agent has assumed in the place and stead of the Agent all existing liability under outstanding Letters of Credit. The transactions described in the immediately preceding sentence shall be accomplished pursuant to written agreements reasonably satisfactory to the Agent and the successor Agent. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Majority Lenders, and shall have accepted such appointment, within thirty (30) days after the retiring Agent's giving of notice of resignation or the Majority Lenders' removal of the retiring Agent, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a bank that maintains an office in the United States, or a commercial bank organized under the laws of the United States of America or any State thereof, or any Affiliate of such bank, having a combined capital and surplus of at least $100,000,000. (b) Upon the acceptance of any appointment as the Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article XI shall inure to its benefit as to any actions taken or omitted to be taken by it while it was an Agent under this Agreement. 45 50 Section 11.10 Notice of Default or Event of Default. In the event that the Agent or any of the Lenders shall acquire actual knowledge, or shall have been notified, of any Default Condition or Event of Default (other than through a notice by one party hereto to all other parties), the Agent or such Lender shall promptly notify the Agent, and the Agent shall take such action and assert such rights under this Agreement as the Majority Lenders shall request in writing, and the Agent shall not be subject to any liability by reason of its acting pursuant to any such request. If, following notification by Agent to Lenders, the Majority Lenders (or all of the Lenders if required hereunder) shall fail to request the Agent to take action or to assert rights under this Agreement in respect of any Default Condition or Event of Default within five (5) Business Days after their receipt of the notice of any Default Condition or Event of Default from the Agent or any Lender, or shall request inconsistent action with respect to such Default Condition or Event of Default, the Agent may, but shall not be required to, take such action and assert such rights as it deems in its discretion to be advisable for the protection of the Lenders. Section 11.11 Sharing of Payments, etc. Each of the Lenders agrees that if it shall, through the exercise of a right of banker's lien, set-off, counterclaim or otherwise, obtain payment with respect to the Indebtedness which results in its receiving more than its Pro Rata Share of the aggregate payments with respect to all of the Indebtedness, then (a) such Lender shall be deemed to have simultaneously purchased from the other Lender a share in the Indebtedness so that the amount of the Indebtedness held by each of the Lenders shall continue to equal their respective Pro Rata Shares, and (b) such other adjustments shall be made from time to time as shall be equitable to insure that the Lenders share such payments ratably. Section 11.12 Separate Liens on Collateral. Each Lender agrees with the other Lenders that it will not take or permit to exist any Lien in its favor on any of the Collateral or other property of any of the Borrowers other than Liens securing the Indebtedness. Section 11.13 Payments Between Agent and Lenders. All payments by the Agent to any Lender, and all payments by any Lender to the Agent, under the terms of this Agreement shall be made by wire transfer in immediately available funds to the receiving party's address specified in or pursuant to Section 9.01 hereof. If the Agent or any of the Lenders shall fail to pay when due any sum payable to the Agent or any other Lender, such sum shall bear interest until paid at the interest rate per annum for overnight borrowing by the payee from the Federal Reserve Bank for the period commencing on the date such payment was due and ending on, but excluding, the date such payment is made. Section 11.14 Independent Agreements. The provisions contained in Sections 11.01 through 11.10 and Sections 11.12, 11.13, and 11.15 constitute independent obligations and agreements of the Agent and the Lenders, and the Borrower shall not be deemed a party thereto or bound thereby or entitled to any benefit thereunder. The Borrower acknowledges the rights of the Lenders and the Agent under Section 11.11. Section 11.15 Limitation on Lenders. The Borrower agrees and acknowledges that neither the Agent nor STB shall have liability to the Borrower for any damages or claim of any kind whatsoever, whether seen or unforeseen, arising out of or in connection with the failure of NBT 46 51 to fund through the Agent its Pro Rata Share of any Advance, and that Borrower's sole recourse for such conduct by NBT shall be to NBT. The Borrower agrees and acknowledges that NBT shall not have liability to the Borrower for any damages or claims of any kind whatsoever, whether seen or unforeseen, arising out of or in connection with the failure of STB to fund through the Agent its Pro Rata Share of any Advance, and that Borrower's sole recourse for such conduct by STB shall be to STB. ENTERED INTO this date first set forth above. BORROWER: AMSURG CORP., a Tennessee corporation By: -------------------------------------- Title: ----------------------------------- AGENT: SUNTRUST BANK, NASHVILLE, N.A., AGENT By: -------------------------------------- Title: ----------------------------------- PRO RATA SHARE LENDERS: 60% SUNTRUST BANK, NASHVILLE, N.A.. By: -------------------------------------- Title: ----------------------------------- 40% NATIONSBANK OF TENNESSEE, N.A. By: -------------------------------------- Title: ----------------------------------- 47 52 INDEX OF EXHIBITS Exhibit A: Notice of Interest Rate Election (ss. 2.06(b) and ss. 2.06(c)) (form) Exhibit B: Borrowing Request Exhibit C: Revolving Credit Notes Exhibit D: Exemptions from ss. 4.07 (Largo, FL and Evansville, IN) Exhibit E: List of Subsidiaries Exhibit F: List of Partnerships and LLC's Exhibit G: Opinion Letter of Borrower's Counsel Due at Closing Exhibit H: Acquisition Approval Letter Exhibit I: Acquisition Informational Package Exhibit J: Acquisition Pro-Forma
48 53 EXHIBIT A TO LOAN AGREEMENT FORM OF NOTICE OF INTEREST RATE ELECTION VIA FAX: ATTN: MARK MATTSON SunTrust Bank, Nashville, N.A., Agent Date: , --------------------------------- -------- Re: Third Amended and Restated Loan Agreement dated May , 1998 by and among AmSurg Corp., the Lenders listed therein, and SunTrust Bank, Nashville, N.A., as Agent (as may be amended from time to time, the "Loan Agreement") Capitalized terms not otherwise defined in this request have the same meaning as in the Loan Agreement. The individual signing this request certifies that (i) he or she is an individual authorized by the Borrower to submit this Notice of Interest Rate Election to the Agent pursuant to the Loan Agreement, (ii) the undersigned hereby irrevocably gives notice of and requests, pursuant to Section 2.06(b) and/or 2.06(c) of the Loan Agreement, the continuation or conversion of an Advance made under the Loan Agreement (the "Continued/Converted Advance"), and (iii) the amount of the Continued/Converted Advance is available to the Borrower pursuant to the Loan Agreement. The information below relates to the Continued/Converted Advance: 1. IDENTIFICATION THE CONTINUED/CONVERTED ADVANCE: Amount Base Rate Advance $ LIBOR Based Rate Advance ------------------- expiring $ --------- ------------------- 2. DATE OF CONTINUED/CONVERTED ADVANCE: -------------------------------------- 3. DESIGNATION OF INTEREST OPTION FOR CONTINUED/CONVERTED ADVANCE: Base Rate Advance $ (Multiples of $100,000 and minimum of $100,000) --------------------------------- LIBOR Based Rate Advance $ (Multiples of $500,000 and minimum of ------------------------------ $500,000)
54 Notices of Interest Rate Election must be given prior to 11:00 a.m. (local time for Agent) two (2) Business Days prior to the Proposed Continuation/Conversion for Libor Based Rate Advances and on the same day of the Proposed Continuation/Conversion for Base Rate Advances. All Notices of Interest Rate Election received after 11:00 a.m. shall be deemed received on the next Business Day. 4. LIBOR BASED RATE PERIOD FOR CONTINUED/CONVERTED ADVANCES CALCULATED AT THE LIBOR BASED RATE (indicate one): (a) 30 DAYS 60 DAYS 90 DAYS -------------- --------------- ----------------- (b) CALCULATION OF RATE: LIBOR ------------ Plus Applicable Margin ------------ TOTAL = ------------ (c) EXPIRATION DATE: --------------- In connection with the Continued/Converted Advance the undersigned represents on the date hereof and on the date of the Continued/Converted Advance (a) there exists no Default or Event of Default and (b) the conditions as set forth in Section 5.03 of the Loan Agreement have been met and the representations contained therein are true and correct. BORROWER: AMSURG CORP. By: ------------------------------------------------- Title: ---------------------------------------------- 55 EXHIBIT B TO LOAN AGREEMENT FORM OF BORROWING REQUEST VIA FAX: ATTN: MARK MATTSON SunTrust Bank, Nashville, N.A., Agent Date: , ------------------------------- ------------ Re: Third Amended and Restated Loan Agreement dated May , 1998 by and among AmSurg Corp., the Lenders listed therein and SunTrust Bank, Nashville, N.A., as Agent (as may be amended from time to time, the "Loan Agreement") Capitalized terms not otherwise defined in this request have the same meaning as in the Loan Agreement. The individual signing this request certifies that (i) he or she is an individual authorized by the Borrower to submit Borrowing Requests to the Agent pursuant to the Loan Agreement, (ii) the undersigned hereby irrevocably gives notice of and requests, pursuant to Section 2.03 of the Loan Agreement, an Advance under the Loan Agreement (the "Proposed Advance"), and (iii) the amount of the Proposed Advance is available to the Borrower pursuant to the Loan Agreement. The information below relates to the Proposed Advance: 1. AMOUNT OF PROPOSED ADVANCE: ------------------------------------------- 2. DATE OF PROPOSED ADVANCE: --------------------------------------------- 3. DESIGNATION OF ADVANCES: ---------------------------------------------- Base Rate Advance $ (Multiples of $100,000 and minimums of $100,000) -------------------------- LIBOR Based Rate Advance $ (Multiples of $500,000 and minimums of ------------------------------------ $500,000)
Borrowing Requests must be given prior to 11:00 a.m. (local time for Agent) two (2) Business Days prior to the Proposed Advance for Libor Based Rate Advances and on the same day of the Proposed Advances for Base Rate Advances. All Borrowing Requests received after 11:00 a.m. shall be deemed received on the next Business Day. 4. For LIBOR Based Rate Advances, the LIBOR Based Rate Period (indicate one): (a) 30 DAYS 60 DAYS 90 DAYS -------------- ----------------- ----------------- 56 (b) CALCULATION OF RATE: LIBOR ---------------- Plus Applicable Margin ---------------- TOTAL = ---------------- (c) EXPIRATION DATE: --------------- 5. DEPOSIT PROCEEDS OF BORROWING INTO AMSURG CORP. ACCOUNT NO. . ------------------------------------ AND WIRE TRANSFER $ FROM OUR ACCOUNT NO. ----------------------------- ------------- ACCORDING TO THE FOLLOWING INSTRUCTIONS: Name of Bank: ----------------------------------- ABA No. ----------------------------------------- Credit account No. ------------------------------ Beneficiary Name -------------------------------- Special Instructions ---------------------------- - ------------------------------------------------ Remitter ---------------------------------------- 6. The Borrower represents to Agent that the amount of the Proposed Advance, when combined with the outstanding principal amount of the Revolving Credit Notes plus the face amount of all outstanding Letters of Credit does not exceed $50,000,000. 7. The conditions as set forth in Section 5.03 of the Loan Agreement have been met and the representations contained therein are true and correct. BORROWER: AMSURG CORP. By: ------------------ Title: --------------- 57 SCHEDULE I TOTALS 58 EXHIBIT C TO LOAN AGREEMENT SUNTRUST FORM OF AMENDED AND RESTATED REVOLVING CREDIT NOTE FOR VALUE RECEIVED, AMSURG CORP., a Tennessee corporation (hereinafter referred to as "Borrower"), promises and agrees to pay to the order of SUNTRUST BANK, NASHVILLE, N.A., a national bank (the "Lender") at the Nashville, Tennessee offices of SunTrust Bank, Nashville, N.A., Agent (the "Agent"), in lawful money of the United States of America, the principal sum of_______________ and no/100 Dollars ($_______________ ), or so much thereof as may be advanced from time to time by the Lender, together with interest on the unpaid principal balance outstanding from time to time hereon computed from the date of each advance until maturity at the rate of interest set forth in that certain Third Amended and Restated Loan Agreement executed among Borrower, Lender, NationsBank of Tennessee, N.A., and Agent dated May___, 1998, as such may be amended from time to time (herein referred to as the "Loan Agreement"). Interest for each year shall be computed on the basis of a year of 360 days for the actual number of days elapsed. So long as no default has occurred and is continuing hereunder and so long as no Event of Default or Default Condition has occurred and is continuing under the Loan Agreement, and subject to the terms of the Loan Agreement, the Borrower may borrow hereunder, repay such borrowings, and reborrow hereunder as provided in the Loan Agreement. Lender shall keep records of all borrowings and repayments. Draws under this Note shall be evidenced by such documentation as required by Article II of the Loan Agreement. Advances under this Note shall be made pursuant to the procedure specified in the Loan Agreement. This Note shall be repaid as follows: (a) Commencing on the tenth (10th) day of ___,___, and on the tenth day of each consecutive month through and including December 10, 2000, the Borrower shall pay to Lender an amount equal to all then accrued interest; and (b) On January 10, 2001, this Note shall mature at which time the Borrower shall pay to Lender an amount equal to all outstanding principal, plus all then accrued interest. This Note is subject to the terms of the Loan Agreement. Notwithstanding any provision to the contrary, it is the intent of the Lender, the Borrower, and all parties liable on this Note, that neither the Lender nor any subsequent holder shall be entitled to receive, collect, reserve or apply, as interest, any amount in excess of the maximum 59 lawful rate of interest permitted to be charged by applicable law or regulations, as amended or enacted from time to time. In the event the Note calls for an interest payment that exceeds the maximum lawful rate of interest then applicable, such interest shall not be received, collected, charged, or reserved until such time as that interest, together with all other interest then payable, falls within the then applicable maximum lawful rate of interest. In the event the Lender, or any subsequent holder, receives any such interest in excess of the then maximum lawful rate of interest, such amount which would be excessive interest shall be deemed a partial prepayment of principal and treated hereunder as such, or, if the principal indebtedness evidenced hereby is paid in full, any remaining excess funds shall immediately be paid to the Borrower. In determining whether or not the interest paid or payable, under any specific contingency, exceeds the maximum lawful rate of interest, the Borrower and the Lender shall, to the maximum extent permitted under applicable law, (a) exclude voluntary prepayments and the effects thereof, and (b) amortize, prorate, allocate, and spread, in equal parts, the total amount of interest throughout the entire term of the indebtedness; provided that if the indebtedness is paid in full prior to the end of the full contemplated term hereof, and if the interest received for the actual period of existence hereof exceeds the maximum lawful rate of interest, the holder of the Note shall refund to the Borrower the amount of such excess or credit the amount of such excess against the principal portion of the indebtedness as of the date it was received, and, in such event, the Lender shall not be subject to any penalties provided by any laws for contracting for, charging, reserving, collecting or receiving interest in excess of the maximum lawful rate of interest. Principal and unpaid interest bear interest during the continuance of any default in payment of principal and interest as herein provided at the lesser of (i) the Base Rate (as defined in the Loan Agreement) plus 4% per annum, or the maximum lawful rate of interest permitted by law. In case of suit, or if this obligation is placed in an attorney's hands for collection, or to protect the security for its payment, the undersigned will pay all costs of collection and litigation, including a reasonable attorney's fee. In the event that there occurs any breach of any promise made in this Note and such breach continues for longer than fifteen (15) days, or upon the occurrence of an Event of Default as defined in the Loan Agreement, then, during the continuance of any of such events, at the option of the holder, the entire indebtedness hereby evidenced shall become due, payable and collectible then or thereafter, without notice, as the holder may elect regardless of the date of maturity. The holder may waive any default before or after the same has been declared and restore this Note to full force and effect without impairing any rights hereunder, such right of waiver being a continuing one. The makers, endorsers, guarantors and all parties to this Note and all who may become liable for same, jointly and severally waive presentment for payment, protest, notice of protest, notice of nonpayment of this Note, demand and all legal diligence in enforcing collection, and hereby expressly agree that the lawful owner or holder of this Note may defer or postpone collection of the whole or any part thereof, either principal and/or interest, or may extend or renew the whole or any part thereof, either principal and/or interest, or may accept additional collateral or security for the payment of this Note, or may release the whole or any part of any -2- 60 collateral security and/or liens given to secure the payment of this Note, or may release from liability on account of this Note any one or more of the makers, endorsers, guarantors and/or other parties thereto, all without notice to them or any of them; and such deferment, postponement, renewal, extension, acceptance of additional collateral or security and/or release shall not in any way affect or change the obligation of any such maker, endorser, guarantor or other party to this Note, or of any who may become liable for the payment thereof. The Borrower shall pay a "late charge" of five percent (5%) of any payments of principal and/or interest due when paid more than five days after the due date thereof (provided that in no event shall said "late charge" result in the payment of interest in excess of the maximum lawful rate of interest permitted by applicable law), to cover the extra expenses involved in handling delinquent payments; and provided that the late charge shall not be applicable to the payment due on the Maturity Date. The term "maximum lawful rate of interest" as used herein shall mean a rate of interest equal to the higher or greater of the following: (a) the "applicable formula rate" defined in Tennessee Code Annotated Section 47-14-102(2), or (b) such other rate of interest as may be charged under other applicable laws or regulations. This Note is a secured Note. This Note has been executed and delivered in, and shall be governed by and construed according to the laws of the State of Tennessee except to the extent pre-empted by applicable laws of the United States of America. This Note may not be changed or terminated without the prior written approval of the Lender and the Borrower. No waiver of any term or provision hereof shall be valid unless in writing signed by the holder. This Note is one of the Revolving Credit Notes issued by Borrower pursuant to the Loan Agreement. This Note reflects in part an amendment, restatement, and increase to the revolving credit indebtedness previously evidenced by that certain Amended and Restated Revolving Credit Note payable to the order of SunTrust Bank, Nashville, N.A. in the principal amount of $12,000,000 dated as of June 25, 1996, which Amended and Restated Revolving Credit Note was assigned by SunTrust Bank, Nashville, N.A. to Agent. Subsequent to the assignment to Agent, the revolving credit indebtedness was increased from time to time, the last such increase being an increase to $35,000,000 and separate amended and restated notes were issued to the Lenders (as defined in the Loan Agreement) to evidence the amended, restated, and increased revolving credit indebtedness. This Note is not (and is not intended to be) a novation of the revolving credit indebtedness evidenced by the previously issued amended and restated revolving credit notes, but is intended to reflect an increase in the principal amount and an amendment to the terms thereof. Executed this day of , . -------- --------- -------- -3- 61 BORROWER: AMSURG CORP., a Tennessee corporation By: ------------------------- Title: ---------------------- -4- 62 EXHIBIT C TO LOAN AGREEMENT NATIONSBANK FORM OF AMENDED AND RESTATED REVOLVING CREDIT NOTE FOR VALUE RECEIVED, AMSURG CORP., a Tennessee corporation (hereinafter referred to as "Borrower"), promises and agrees to pay to the order of NATIONSBANK OF TENNESSEE, N.A., a national bank (the "Lender") at the Nashville, Tennessee offices of SunTrust Bank, Nashville, N.A., Agent (the "Agent"), in lawful money of the United States of America, the principal sum of __________________________________________ and no/100 Dollars ($_____________________________), or so much thereof as may be advanced from time to time by the Lender, together with interest on the unpaid principal balance outstanding from time to time hereon computed from the date of each advance until maturity at the rate of interest set forth in that certain Third Amended and Restated Loan Agreement executed among Borrower, Lender, SunTrust Bank, Nashville, N.A., and Agent dated May ______, 1998, as such may be amended from time to time (herein referred to as the "Loan Agreement"). Interest for each year shall be computed on the basis of a year of 360 days for the actual number of days elapsed. So long as no default has occurred and is continuing hereunder and so long as no Event of Default or Default Condition has occurred and is continuing under the Loan Agreement, and subject to the terms of the Loan Agreement, the Borrower may borrow hereunder, repay such borrowings, and reborrow hereunder as provided in the Loan Agreement. Lender shall keep records of all borrowings and repayments. Draws under this Note shall be evidenced by such documentation as required by Article II of the Loan Agreement. Advances under this Note shall be made pursuant to the procedure specified in the Loan Agreement. This Note shall be repaid as follows: (a) Commencing on the tenth day of ___,____ and on the tenth day of each consecutive month through and including December 10, 2000, the Borrower shall pay to Lender an amount equal to all then accrued interest; and (b) On January 10, 2001 this Note shall mature at which time the Borrower shall pay to Lender an amount equal to all outstanding principal, plus all then accrued interest. This Note is subject to the terms of the Loan Agreement. Notwithstanding any provision to the contrary, it is the intent of the Lender, the Borrower, and all parties liable on this Note, that neither the Lender nor any subsequent holder shall be entitled to receive, collect, reserve or apply, as interest, any amount in excess of the maximum lawful rate of interest permitted to be charged by applicable law or regulations, as amended or enacted from time to time. In the event the Note calls for an interest payment that exceeds the 63 maximum lawful rate of interest then applicable, such interest shall not be received, collected, charged, or reserved until such time as that interest, together with all other interest then payable, falls within the then applicable maximum lawful rate of interest. In the event the Lender, or any subsequent holder, receives any such interest in excess of the then maximum lawful rate of interest, such amount which would be excessive interest shall be deemed a partial prepayment of principal and treated hereunder as such, or, if the principal indebtedness evidenced hereby is paid in full, any remaining excess funds shall immediately be paid to the Borrower. In determining whether or not the interest paid or payable, under any specific contingency, exceeds the maximum lawful rate of interest, the Borrower and the Lender shall, to the maximum extent permitted under applicable law, (a) exclude voluntary prepayments and the effects thereof, and (b) amortize, prorate, allocate, and spread, in equal parts, the total amount of interest throughout the entire term of the indebtedness; provided that if the indebtedness is paid in full prior to the end of the full contemplated term hereof, and if the interest received for the actual period of existence hereof exceeds the maximum lawful rate of interest, the holder of the Note shall refund to the Borrower the amount of such excess or credit the amount of such excess against the principal portion of the indebtedness as of the date it was received, and, in such event, the Lender shall not be subject to any penalties provided by any laws for contracting for, charging, reserving, collecting or receiving interest in excess of the maximum lawful rate of interest. Principal and unpaid interest bear interest during the continuance of any default in payment of principal and interest as herein provided at the lesser of (i) the Base Rate (as defined in the Loan Agreement) plus 4% per annum, or (ii) the maximum lawful rate of interest permitted by law. In case of suit, or if this obligation is placed in an attorney's hands for collection, or to protect the security for its payment, the undersigned will pay all costs of collection and litigation, including a reasonable attorney's fee. In the event that there occurs any breach of any promise made in this Note and such breach continues for longer than fifteen (15) days, or upon the occurrence of an Event of Default as defined in the Loan Agreement, then, during the continuance of any of such events, at the option of the holder, the entire indebtedness hereby evidenced shall become due, payable and collectible then or thereafter, without notice, as the holder may elect regardless of the date of maturity. The holder may waive any default before or after the same has been declared and restore this Note to full force and effect without impairing any rights hereunder, such right of waiver being a continuing one. The makers, endorsers, guarantors and all parties to this Note and all who may become liable for same, jointly and severally waive presentment for payment, protest, notice of protest, notice of nonpayment of this Note, demand and all legal diligence in enforcing collection, and hereby expressly agree that the lawful owner or holder of this Note may defer or postpone collection of the whole or any part thereof, either principal and/or interest, or may extend or renew the whole or any part thereof, either principal and/or interest, or may accept additional collateral or security for the payment of this Note, or may release the whole or any part of any collateral security and/or liens given to secure the payment of this Note, or may release from liability on account of this Note any one or more of the makers, endorsers, guarantors and/or 64 other parties thereto, all without notice to them or any of them; and such deferment, postponement, renewal, extension, acceptance of additional collateral or security and/or release shall not in any way affect or change the obligation of any such maker, endorser, guarantor or other party to this Note, or of any who may become liable for the payment thereof. The Borrower shall pay a "late charge" of five percent (5%) of any payments of principal and/or interest due when paid more than five days after the due date thereof (provided that in no event shall said "late charge" result in the payment of interest in excess of the maximum lawful rate of interest permitted by applicable law), to cover the extra expenses involved in handling delinquent payments; and provided that the late charge shall not be applicable to the payment due on the Maturity Date. The term "maximum lawful rate of interest" as used herein shall mean a rate of interest equal to the higher or greater of the following: (a) the "applicable formula rate" defined in Tennessee Code Annotated Section 47-14-102(2), or (b) such other rate of interest as may be charged under other applicable laws or regulations. This Note is a secured Note. This Note has been executed and delivered in, and shall be governed by and construed according to the laws of the State of Tennessee except to the extent pre-empted by applicable laws of the United States of America. This Note may not be changed or terminated without the prior written approval of the Lender and the Borrower. No waiver of any term or provision hereof shall be valid unless in writing signed by the holder. This Note is one of the Revolving Credit Notes issued by Borrower pursuant to the Loan Agreement. This Note reflects in part an amendment, restatement, and increase to the revolving credit indebtedness previously evidenced by that certain Amended and Restated Revolving Credit Note payable to the order of SunTrust Bank, Nashville, N.A. in the principal amount of $12,000,000 dated as of June 25, 1996, which Amended and Restated Revolving Credit Note was assigned by SunTrust Bank, Nashville, N.A. to Agent. Subsequent to the assignment to Agent, the revolving credit indebtedness was increased from time to time, the last such increase being an increase to $35,000,000 and separate amended and restated notes were issued to the Lenders (as defined in the Loan Agreement) to evidence the amended, restated, and increased revolving credit indebtedness. This Note is not (and is not intended to be) a novation of the revolving credit indebtedness evidenced by the previously issued amended and restated revolving credit notes, but is intended to reflect an increase in the principal amount and an amendment to the terms thereof. Executed this day of , . ---------- ------ --------- -3- 65 BORROWER: AMSURG CORP., a Tennessee corporation By: ------------------------ Title: --------------------- -4- 66 EXHIBIT D TO LOAN AGREEMENT EXEMPTIONS FROM SECTION 4.07 1. Loan to the Largo Urology ASC, Inc., Largo, Florida. AmSurg will own 40% of this Ambulatory Surgery Center with a right to buy up to 51% after 3 years of operation. 2. Loan to Evansville ASC, LLC, Evansville, Indiana. AmSurg's current ownership is 40%. On the date of opening, AmSurg will purchase an additional 15% bringing ownership to 55%. 67 EXHIBIT E & F SUBSIDIARY LIST * AS OF MAY 1, 1998 PAGE (1 OF 6)
STATE OF OWNERSHIP NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE ------------------ ------------ -------- ---------- 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%
* The registered office for all entities is: One Burton Hills Blvd., Suite 350 Nashville, TN 37215 68 SUBSIDIARY LIST * AS OF MAY 1, 1998 PAGE (2 OF 6)
STATE OF OWNERSHIP NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE ------------------ ------------ -------- ---------- 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 Lorain 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%
69 SUBSIDIARY LIST * AS OF MAY 1, 1998 PAGE (3 OF 6)
STATE OF OWNERSHIP NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE ------------------ ------------ -------- ---------- 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.
70 SUBSIDIARY LIST AS OF MAY 1, 1998 PAGE (4 OF 6)
STATE OF OWNERSHIP NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE ------------------ ------------ -------- ---------- 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
71 SUBSIDIARY LIST AS OF MAY 1, 1998 PAGE (5 OF 6)
STATE OF OWNERSHIP NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE ------------------ ------------ -------- ---------- 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%
72 SUBSIDIARY LIST AS OF MAY 1, 1998 PAGE (6 OF 6)
STATE OF OWNERSHIP NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE ------------------ ------------ -------- ---------- 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% The Sun City Ophthalmology ASC, LLC TN AmSurg Holdings, Inc. 51%
73 EXHIBIT G TO LOAN AGREEMENT FORM OF OPINION LETTER OF BORROWER'S COUNSEL May ____________, 1998 SunTrust Bank, Nashville, N.A., Agent 201 Fourth Avenue North Nashville, TN 37219 Attention: Karen Ahern Dear Ms. Ahern: We have acted as counsel to AmSurg Corp., a Tennessee corporation (the "Borrower"), in connection with the execution by the Borrower of that certain Third Amended and Restated Loan Agreement dated as of May ______, 1998 by and among Borrower, SunTrust Bank, Nashville, N.A., Agent (the "Agent"), and the Lenders, described therein (the "Loan Agreement"), the Revolving Credit Notes, and certain other loan documents executed in connection with the Loan Agreement (the Loan Agreement, the Revolving Credit Notes, and such other loan documents executed by the Borrower are collectively referred to herein as the "Transaction Documents"). This Opinion Letter is delivered to, and for the benefit of, the Agent and the Lenders, pursuant to the requirements of the Loan Agreement. All terms used, but not defined herein shall have the meanings ascribed to them in the Loan Agreement or the Accord (see below). This Opinion Letter is governed by, and shall be interpreted in accordance with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law (1991). As a consequence, it is subject to a number of qualifications, exceptions, definitions, limitations on coverage and other limitations, all as more particularly described in the Accord, and this Opinion Letter should be read in conjunction therewith. Solely as to matters of fact, but not as to the legal conclusions that are the subject of this opinion, we have relied upon representations made by Borrower in the Transaction Documents. The Law covered by the opinions expressed herein is limited to the federal Law of the United States and the Law of the State of Tennessee. Based on the foregoing, and subject to the assumptions, limitations, and qualifications set forth herein, we are of the opinion that: 74 1. Borrower is a corporation, duly organized, validly existing, and in good standing under the laws of the State of Tennessee. Borrower has the corporate power and corporate authority under such laws to enter into and perform its obligations under the Transaction Documents. 2. The Transaction Documents have been duly authorized by all necessary Corporate action on the part of Borrower and have been duly executed and delivered by the Borrower. 3. The Transaction Documents are enforceable against the Borrower. Our opinion in paragraph 3 is further subject to the qualification that certain waivers, procedures, remedies, and other provisions of the Transaction Documents may be unenforceable under or limited by applicable law; provided, however, that the inclusion of such waivers, procedures, remedies, and other provisions does not render the Transaction Documents invalid as a whole, and subject to the other qualifications and limitations set forth herein, there exist in the Transaction Documents or pursuant to applicable law, legally adequate remedies for the practical realization of the principal benefits reasonably intended to be provided by the Transaction Documents, subject to the consequences of any delay that may result from limitations imposed by applicable law. In making our examinations and in expressing our opinions, we have assumed that the Transaction Documents have been executed and delivered for adequate consideration. The General Qualifications apply to all of the opinions set forth above. We hereby confirm to you that there are no actions or proceedings against the Borrower, pending or threatened in writing, before any court, governmental agency or arbitrator that affect the enforceability of the Transaction Documents. This Opinion Letter may be relied upon by Agent and the Lenders only in connection with the Transaction Documents and may not be used or relied upon by any other person for any purpose whatsoever, except to the extent authorized in the Accord, without in each instance our prior written consent. Very truly yours, 75 EXHIBIT H TO LOAN AGREEMENT FORM OF ACQUISITION APPROVAL LETTER [DATE] To the Agent and Lenders under the Loan Agreement referred to below Ladies and Gentlemen: Reference is made to the Third Amended and Restated Loan Agreement, dated as of May ___, 1998 (as amended, supplemented or otherwise modified from time to time, the "Loan Agreement"), among AmSurg Corp. (the "Borrower"), the lender parties thereto (the "Lenders"), and SunTrust Bank, Nashville, N.A., as the agent for the Lenders (the "Agent"). Unless otherwise defined herein, the terms defined in the Loan Agreement shall be used herein as therein defined. In connection with the proposed Acquisition, the Borrower hereby requests that the Agent and the Lenders approve the Acquisition pursuant to Section 7.14(b) of the Loan Agreement. The Borrower hereby acknowledges that the Lenders' approval of the Acquisition is subject to satisfaction of all of the conditions precedent set forth in Section 7.14(b) of the Loan Agreement. The Borrower herewith submits the Acquisition Informational Package. The execution and delivery of this Acquisition Approval Letter by the Majority Lenders shall constitute approval of the Acquisition. This Acquisition Approval Letter may be executed in any number of counterparts and by any combination of the parties hereto in separate counterparts, each of which counterparts shall be an original and all of which taken together shall constitute one and the same consent. This Acquisition Approval Letter shall become effective upon the receipt by the Agent of executed counterparts of this consent duly executed by the Borrower and by the Majority Lenders. 76 The Borrower certifies to the Lender that immediately after completion of the Acquisition no Default or Event or Default shall exist, and all of the representations of the Borrower contained in Article IV are true and correct in all material respects. Very truly yours, AMSURG CORP. By: -------------------------------------------- Name: ------------------------------------------ Title: ----------------------------------------- Approved as of , , : - --------------------------- -------- ------- THE AGENT: SunTrust Bank, Nashville, N.A. as Agent By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- LENDERS: SunTrust Bank, Nashville, N.A. By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- NationsBank of Tennessee, N.A. By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- 77 EXHIBIT I TO LOAN AGREEMENT ACQUISITION INFORMATIONAL PACKAGE The Borrower shall deliver to the Agent (with enough copies for each of the Lenders) the following information in connection with any Acquisition: (1) the total consideration given in connection with any Acquisition in the following format: (a) Cash: $_______________________________ (b) Stock: $_______________________________ (c) Personal Property: $___________________ (d) Other Property: identify type and value (2) summary financial information relating to the interest or entity to be acquired, including percentage interest being acquired and operating forecasts, (3) (a) the Acquisition Pro Forma duly certified by the chief financial officer of the Borrower and (b) calculations of the chief financial officer of the Borrower demonstrating compliance on a pro-forma basis with the financial covenants contained in Section 7.11 and Section 7.14(a) and 7.14(b), as applicable, after such Acquisition is completed. 78 EXHIBIT J TO LOAN AGREEMENT ACQUISITION PRO-FORMA [Name of Entity to be Acquired]
Annual Projections ------------------ Revenue $ ----------- Salaries and benefits $ ----------- Other operating expenses $ ----------- Depreciation and amortization $ ----------- Interest $ - ----------- Total Expenses $ ----------- Pretax income $ ----------- GAAP adjustments: $ - ----------- Pretax Income after GAAP adjustments $ ----------- Center pro forma adjustments: Depreciation and amortization - old $ ----------- Depreciation and amortization - new $ ----------- Equipment lease expense $ ----------- Interest expense $ ----------- Goodwill amortization difference - AmSurg only $ ----------- Minority interest $ ----------- Total adjustments $ ----------- Pro forma center-level net income $ ----------- Overhead pro forma adjustments: Accounting fees $ ----------- Salaries $ ----------- Investment income at ______% $ ----------- Interest expense at ______% $ ----------- Total adjustments $ ----------- Pretax pro forma $ ----------- Pro forma income taxes $ ----------- Pro forma net income $ =========== Total Consideration Cash $ ------------- Borrowings $ ------------- Stock $ ------------- Purchase Price $ ------------- A.R. net $ ------------- Inventory $ ------------- PP & E $ ------------- % ------ $ ------------- Goodwill $ ------------- Purchase Price $ =============
EX-21 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARY LIST AS OF MAY 1, 1998 PAGE (1 OF 6)
STATE OF OWNERSHIP NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE ------------------ ------------ -------- ---------- 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%
2 EXHIBIT 21 SUBSIDIARY LIST AS OF MAY 1, 1998 PAGE (2 OF 6)
STATE OF OWNERSHIP NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE ------------------ ------------ -------- ---------- 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 Lorain 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%
3 EXHIBIT 21 SUBSIDIARY LIST AS OF MAY 1, 1998 PAGE (3 OF 6)
STATE OF OWNERSHIP NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE ------------------ ------------ -------- ---------- 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.
4 EXHIBIT 21 SUBSIDIARY LIST AS OF MAY 1, 1998 PAGE (4 OF 6)
STATE OF OWNERSHIP NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE ------------------ ------------ -------- ---------- 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
5 EXHIBIT 21 SUBSIDIARY LIST AS OF MAY 1, 1998 PAGE (5 OF 6)
STATE OF OWNERSHIP NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE ------------------ ------------ -------- ---------- 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%
6 EXHIBIT 21 SUBSIDIARY LIST AS OF MAY 1, 1998 PAGE (6 OF 6)
STATE OF OWNERSHIP NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE ------------------ ------------ -------- ---------- 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% The Sun City Ophthalmology ASC, LLC TN AmSurg Holdings, Inc. 51%
EX-23.1 6 CONSENT OF DELOITTE & TOUCHE-AMSURG CORP 1 Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-50813 of AmSurg Corp. on Form S-1 of our report dated February 17, 1998 (April 30, 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. /s/ DELOITTE & TOUCHE LLP Nashville, Tennessee May 19, 1998 EX-23.2 7 CONSENT OF DELOITTE & TOUCHE-SOUTH DENVER 1 Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-50813 of AmSurg Corp. on Form S-1 of our report dated April 24, 1998 (relating to the financial statements of South Denver Endoscopy Center, Inc.) appearing in the Prospectus, which is part of this Registration Statement, and of our report dated April 24, 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. /s/ DELOITTE & TOUCHE LLP Nashville, Tennessee May 19, 1998 EX-23.3 8 CONSENT OF DELOITTE & TOUCHE-BOSWELL EYE CENTER 1 Exhibit 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-50813 of AmSurg Corp. on Form S-1 of our report dated May 6, 1998 (relating to the financial statements of Boswell Eye Center, LLC) appearing in the Prospectus, which is part of this Registration Statement, and of our report dated May 6, 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. /s/ DELOITTE & TOUCHE LLP Nashville, Tennessee May 19, 1998 EX-23.4 9 CONSENT OF DELOITTE & TOUCHE-THE ENDOSCOPY CENTER 1 Exhibit 23.4 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-50813 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 Nashville, Tennessee May 19, 1998 -----END PRIVACY-ENHANCED MESSAGE-----