-----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, KaXZHhImFMFyhqoUsNEOi+GzHTzcWCuIprJs7VtnKOgtlv/b6qjXMKgPW5kKN6fl Gb1HKjnJacBPDqPnnVCCNg== 0000927016-96-001520.txt : 19961107 0000927016-96-001520.hdr.sgml : 19961107 ACCESSION NUMBER: 0000927016-96-001520 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19961106 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN MEDICAL RESPONSE INC CENTRAL INDEX KEY: 0000888675 STANDARD INDUSTRIAL CLASSIFICATION: LOCAL & SUBURBAN TRANSIT & INTERURBAN HWY PASSENGER TRAINS [4100] IRS NUMBER: 043147881 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-15607 FILM NUMBER: 96655018 BUSINESS ADDRESS: STREET 1: 2821 S PARKER RD CITY: AURORA STATE: CO ZIP: 80014 BUSINESS PHONE: 3036148500 MAIL ADDRESS: STREET 1: 2821 S PARKER RD STREET 2: 10TH FLOOR CITY: AURORA STATE: CO ZIP: 80014 S-4 1 FORM S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1996 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- AMERICAN MEDICAL RESPONSE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) --------------- DELAWARE 8099 04-3147881 (STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 2821 SOUTH PARKER ROAD, 10TH FLOOR, AURORA, COLORADO 80014, (303) 614-8500 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) PAUL T. SHIRLEY PRESIDENT AND CHIEF EXECUTIVE OFFICER 2821 SOUTH PARKER ROAD, 10TH FLOOR, AURORA, COLORADO 80014, (303) 614-8500 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) --------------- COPIES TO: KEITH F. HIGGINS, ESQ. CARMELO M. GORDIAN, ESQ. ROPES & GRAY RONALD G. SKLOSS, ESQ. ONE INTERNATIONAL PLACE BROBECK, PHLEGER & HARRISON LLP BOSTON, MASSACHUSETTS 02110 301 CONGRESS AVENUE, SUITE 1200 (617) 951-7000 AUSTIN, TEXAS 78701 (512) 477-5495 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: At the effective time of the merger of a wholly-owned subsidiary of the Registrant with and into STAT Healthcare, Inc., which shall occur as soon as practicable after the effective date of this Registration Statement and the satisfaction or waiver of all conditions to closing of such merger as described in the enclosed Proxy Statement/Prospectus. --------------- If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box: [_] --------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED(1) UNIT(2) PRICE(2) FEE(3) - --------------------------------------------------------------------------------------------------------- 3,975,003 Common Stock, $.01 par value......... shares $30.00 $119,250,097.50 $36,139.67
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Represents the maximum number of shares of Common Stock, $0.01 par value, which the Registrant would issue, (i) in exchange for 14,975,412 shares of Common Stock, $0.01 par value of STAT Healthcare, Inc. ("STAT") (ii) in respect of 138,375 currently exercisable options to purchase shares of STAT Common Stock and (iii) in respect of 786,226 warrants to purchase shares of STAT Common Stock, based upon an exchange ratio of 0.25 of a share of Registrant Common Stock per share of STAT Common Stock. (2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended (the "Securities Act"), and based upon the price of the Registrant's Common Stock on the New York Stock Exchange on October 31, 1996. (3) A fee of $23,739.67 was previously paid by the Registrant on behalf of STAT Healthcare, Inc. pursuant to Rule 14a-6 under the Securities Exchange Act of 1934, as amended, in connection with the filing of the preliminary Proxy Statement/Prospectus on October 21, 1996. Pursuant to Rule 457(b) under the Securities Act, such fee is being credited against the registration fee, and accordingly, an additional $12,400 is being paid in connection with this Registration Statement. --------------- 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- LOGO 12450 GREENSPOINT DRIVE SUITE 1200 HOUSTON, TEXAS 77060 November 6, 1996 STAT Stockholders: You are cordially invited to attend a Special Meeting of the stockholders (the "Special Meeting") of STAT Healthcare, Inc. ("STAT") to be held at 9:00 a.m. (local time) on December 10, 1996, at STAT's headquarters, 12450 Greenspoint Drive, Suite 1200, Houston, Texas. At the Special Meeting, STAT stockholders will be asked to consider and vote on a proposal to approve and adopt the Agreement and Plan of Merger dated as of October 7, 1996 (the "Merger Agreement") by and among STAT, American Medical Response, Inc. ("American") and SHI Acquisition Corp., a wholly-owned subsidiary of American ("Merger Sub"). Pursuant to the Merger Agreement, Merger Sub will be merged with and into STAT (the "Merger") and STAT will become a wholly-owned subsidiary of American. In the Merger, each outstanding share of STAT will be converted into the right to receive 0.25 of a share of American common stock. STAT stockholders will receive cash in lieu of any fractional shares which would otherwise be issued in the Merger. Your Board of Directors has carefully reviewed and considered the terms and conditions of the Merger and has received the opinion of Pacific Growth Equities, Inc., STAT's financial advisor, that the exchange ratio of 0.25 is fair from a financial point of view to holders of STAT common stock. A copy of that opinion is attached as Annex B to the accompanying Proxy Statement/Prospectus. THE BOARD OF DIRECTORS OF STAT HAS DETERMINED THAT THE MERGER IS FAIR TO AND IN THE BEST INTERESTS OF STAT STOCKHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT YOU VOTE IN FAVOR OF THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. You should read carefully the accompanying Notice of Special Meeting of Stockholders and the Proxy Statement/Prospectus for details of the Merger and additional related information. Whether or not you expect to attend the Special Meeting, it is important that your shares be represented. Please complete, sign and date the enclosed proxy card and return it promptly in the enclosed postage-paid envelope. If you attend the Special Meeting, you may vote in person if you wish, even though you previously have returned your proxy card. Thank you and I look forward to seeing you at the Special Meeting. Sincerely, Russell D. Schneider Chairman of the Board and Chief Executive Officer LOGO 12450 GREENSPOINT DRIVE SUITE 1200 HOUSTON, TEXAS 77060 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special Meeting") of STAT Healthcare, Inc., a Delaware corporation ("STAT"), will be held at 9:00 a.m., local time, on December 10, 1996, at STAT's headquarters, 12450 Greenspoint Drive, Suite 1200, Houston, Texas. The meeting is called for the purpose of considering and voting upon: 1. A proposal to approve and adopt the Agreement and Plan of Merger dated as of October 7, 1996 (the "Merger Agreement") among American Medical Response, Inc., a Delaware corporation ("American"), SHI Acquisition Corp., a wholly-owned subsidiary of American, and STAT. A copy of the Merger Agreement is attached as Annex A to the Proxy Statement/Prospectus accompanying this Notice. 2. The transaction of such other business as may properly come before the Special Meeting or any adjournments or postponements thereof. The proposed merger and other related matters are more fully described in the attached Proxy Statement/Prospectus and the Annexes thereto. The Board of Directors has fixed the close of business on November 6, 1996 as the record date for the determination of the stockholders entitled to notice of and to vote at the Special Meeting, or any adjournments or postponements thereof. Only holders of record of STAT Common Stock on the record date are entitled to vote at the Special Meeting. A list of such stockholders will be available at the time and place of the meeting and, during the ten days prior to the meeting, at the office of the Secretary of STAT at the above address. If you would like to attend the meeting and your shares are held by a broker, bank or other nominee, you must bring to the meeting a recent brokerage statement or a letter from the nominee confirming your beneficial ownership of the shares. You must also bring a form of personal identification. In order to vote your shares at the meeting, you must obtain from the nominee a proxy issued in your name. You can ensure that your shares are voted at the meeting by signing and dating the enclosed proxy and returning it in the envelope provided. Sending in a signed proxy will not affect your right to attend the meeting and vote in person. You may revoke your proxy at any time before it is voted by notifying the Secretary of STAT at the above address in writing, or by executing a subsequent proxy, which revokes your previously executed proxy. Whether or not you expect to attend, WE URGE YOU TO SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED. By Order of the Board of Directors Ned E. Chapman, Secretary Houston, Texas November 6, 1996 STAT HEALTHCARE, INC. PROXY STATEMENT ---------------- AMERICAN MEDICAL RESPONSE, INC. PROSPECTUS This Proxy Statement and Prospectus ("Proxy Statement/Prospectus") is being furnished to the holders of common stock, par value $0.01 per share ("STAT Common Stock"), of STAT Healthcare, Inc., a Delaware corporation ("STAT"), in connection with the solicitation of proxies by the Board of Directors of STAT for use at a Special Meeting of Stockholders of STAT to be held at STAT's headquarters, 12450 Greenspoint Drive, Suite 1200, Houston, Texas, on December 10, 1996 at 9:00 a.m., local time, and at any and all adjournments or postponements thereof (the "Special Meeting"). This Proxy Statement/Prospectus also constitutes the Prospectus of American Medical Response, Inc., a Delaware corporation ("American") with respect to the issuance of shares of common stock of American, par value $0.01 per share ("American Common Stock"), to be issued to stockholders of STAT, in connection with the proposed merger (the "Merger") of SHI Acquisition, Inc., a Delaware corporation and a wholly-owned subsidiary of American ("Merger Sub"), with and into STAT pursuant to the Agreement and Plan of Merger dated as of October 7, 1996 (the "Merger Agreement") by and among American, Merger Sub and STAT. American Common Stock is traded on the New York Stock Exchange, Inc. (the "NYSE") under the symbol "EMT." On November 1, 1996, the closing sale price for American Common Stock as reported in the NYSE Composite Transactions Tape was $30 1/4 per share. Based upon the exchange ratio of 0.25 shares of American Common Stock for each share of STAT Common Stock (the "Exchange Ratio") and the number of shares of STAT Common Stock and options and warrants to purchase STAT Common Stock outstanding at November 6, 1996, American would issue approximately 3,975,000 shares of American Common Stock to STAT stockholders in the Merger if options and warrants to purchase STAT Common Stock that are currently exercisable are exercised prior to the Effective Time and would assume options to purchase STAT Common Stock which would be converted into options to purchase approximately 54,000 shares of American Common Stock. This Proxy Statement/Prospectus and the accompanying form of proxy are first being mailed to stockholders of STAT on or about November 8, 1996. ---------------- SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY STAT STOCKHOLDERS. 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 PROXY STATEMENT/PROSPECTUS, ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS NOVEMBER 6, 1996. Upon consummation of the Merger, STAT will be a wholly-owned subsidiary of American. Consummation of the Merger is subject to various conditions, including the approval and adoption of the Merger Agreement by the holders of a majority of the outstanding shares of STAT Common Stock at the Special Meeting. Holders of approximately 60% of the STAT Common Stock outstanding as of the date of the Merger Agreement have agreed to vote in favor of the approval and adoption of the Merger Agreement and have granted Merger Sub an irrevocable proxy to vote their shares of STAT Common Stock in accordance therewith. See "Other Agreements--Stockholder Agreements." All information contained in this Proxy Statement/Prospectus with respect to American and Merger Sub has been provided by American. All information contained in this Proxy Statement/Prospectus with respect to STAT has been provided by STAT. A stockholder who has given a proxy may revoke it at any time prior to its exercise. See "Special Meeting--Record Date" and "--Voting Rights; Proxies." NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES OFFERED BY THIS PROXY STATEMENT/PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER, OR PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR THE ISSUANCE OR SALE OF ANY SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR INCORPORATED BY REFERENCE SINCE THE DATE HEREOF. TABLE OF CONTENTS FORWARD-LOOKING STATEMENTS................................................ 1 AVAILABLE INFORMATION..................................................... 1 INCORPORATION OF DOCUMENTS BY REFERENCE................................... 1 SUMMARY................................................................... 3 The Companies........................................................... 3 The Meeting............................................................. 3 Change of Vote.......................................................... 4 The Merger.............................................................. 4 Opinion of Financial Advisor............................................ 7 Interests of Certain Persons in the Merger.............................. 7 Certain Federal Income Tax Consequences................................. 8 Comparative Rights of Stockholders...................................... 8 Comparative Per Share Prices............................................ 8 Selected Historical and Pro Forma Financial Data........................ 9 Unaudited Selected Pro Forma Combined Financial Data.................... 12 Comparative Per Share Data.............................................. 13 RISK FACTORS.............................................................. 14 INTRODUCTION.............................................................. 17 SPECIAL MEETING........................................................... 17 Purpose of the Special Meeting.......................................... 17 Record Date............................................................. 17 Quorum.................................................................. 17 Required Vote........................................................... 17 Voting Rights; Proxies.................................................. 18 Solicitation of Proxies................................................. 18 THE MERGER................................................................ 19 General................................................................. 19 Effective Time.......................................................... 19 Conversion of Shares; Procedures for Exchange of Certificates........... 19 Background of the Merger................................................ 20 Reasons of American for Engaging in the Merger.......................... 22 Recommendation of the Board of Directors of STAT; Reasons for the Merg- er....................................................................... 22 Opinion of STAT's Financial Advisor..................................... 23 Interests of Certain Persons in the Merger.............................. 27 Certain Federal Income Tax Consequences................................. 29 Anticipated Accounting Treatment........................................ 30 Effect on Stock Options and Warrants.................................... 31 Certain Legal Matters................................................... 31 Federal Securities Law Consequences..................................... 31 Stock Exchange Listing.................................................. 32 Dividends............................................................... 32 Appraisal Rights........................................................ 32 Fees and Expenses....................................................... 32 THE MERGER AGREEMENT...................................................... 33 Terms of the Merger..................................................... 33 Exchange of Certificates................................................ 34 Representations and Warranties.......................................... 35 Conduct of Business Pending the Merger.................................. 36 Additional Agreements................................................... 39 Conditions to the Merger................................................ 41
i Termination............................................................... 44 Amendment and Waiver...................................................... 45 OTHER AGREEMENTS............................................................ 46 Stockholder Agreements.................................................... 46 THE COMPANIES............................................................... 47 American.................................................................. 47 STAT...................................................................... 47 COMPARATIVE PER SHARE PRICES AND DIVIDENDS.................................. 76 American.................................................................. 76 STAT...................................................................... 76 UNAUDITED PRO FORMA FINANCIAL STATEMENTS.................................... 77 DESCRIPTION OF CAPITAL STOCK OF AMERICAN.................................... 85 COMPARATIVE RIGHTS OF STOCKHOLDERS.......................................... 85 Special Meeting of Stockholders........................................... 85 Stockholder Action by Written Consent..................................... 85 Advance Notice of Stockholder Proposals and Board Nominations............. 86 Quorums................................................................... 86 Classification of the Board of Directors.................................. 86 Removal of Directors...................................................... 86 Vacancies on the Board of Directors....................................... 86 Indemnification of Directors, Officers and Others......................... 87 Amendments to Charter..................................................... 87 By-Laws................................................................... 87 Vote Required for Mergers................................................. 87 OTHER MATTERS............................................................... 88 VALIDITY OF THE SHARES AND TAX MATTERS...................................... 88 EXPERTS..................................................................... 88 STOCKHOLDER PROPOSALS....................................................... 89 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF STAT.......................... F-1 Annexes: A. Agreement and Plan of Merger B. Opinion of STAT's Financial Advisor, Pacific Growth Equities, Inc.
ii FORWARD-LOOKING STATEMENTS This Proxy Statement/Prospectus includes and incorporates by reference forward-looking statements based on current plans and expectations of American Medical Response, Inc. and STAT Healthcare, Inc. Such statements relate to, among other matters, analyses, including an opinion from financial advisors to STAT Healthcare, Inc.'s Board of Directors as to the fairness from a financial point of view of the exchange ratio in the Merger, based upon forecasts of future results, and estimates of amounts that are not yet determinable. Such forward-looking statements are contained in the sections entitled "Summary," "Risk Factors," "The Merger," "The Companies" and other sections of this Proxy Statement/Prospectus. Such statements involve risks and uncertainties which may cause actual future activities and results of operations to be materially different from that suggested in this Proxy Statement/Prospectus, including among others, risks associated with the integration of acquisitions by American Medical Response, Inc., fluctuations in American Medical Response, Inc. operating results because of the acquisitions and variations in stock prices, changes in reimbursement practices or rates or in applicable government regulations, as well as other factors described elsewhere in this Proxy Statement/Prospectus. AVAILABLE INFORMATION American and STAT are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith file reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and may be available at the following Regional Offices of the Commission: Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and New York Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such materials can be obtained at prescribed rates from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Each of American and STAT makes filings of reports, proxy statements and other information pursuant to the Exchange Act with the Commission electronically, and such materials may be inspected and copied at the Commission's Web site (http://www.sec.gov). In addition, material filed by American can be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005, on which the shares of American Common Stock are listed. This Proxy Statement/Prospectus does not contain all the information set forth in the Registration Statement on Form S-4 and exhibits relating thereto, including any amendments (the "Registration Statement"), of which this Proxy Statement/Prospectus is a part, and which American has filed with the Commission under the Securities Act of 1933, as amended (the "Securities Act"). Reference is made to such Registration Statement for further information with respect to American and the securities of American offered hereby. Statements contained herein concerning the provisions of documents are necessarily summaries of such documents, and each statement is qualified in its entirety by reference to the copy of the applicable document filed with the Commission or attached as an annex hereto. INCORPORATION OF DOCUMENTS BY REFERENCE American hereby incorporates by reference into this Proxy Statement/Prospectus the following documents previously filed with the Commission pursuant to the Exchange Act: 1.American's Current Report on Form 8-K filed on January 16, 1996; 2.American's Current Report on Form 8-K filed on October 11, 1996; 3.American's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996 and June 30, 1996, as amended by American's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1996; 4.American's Annual Report on Form 10-K for the fiscal year ended December 31, 1995; and 5. The description of American Common Stock in American's Registration Statement on Form 8-A (no. 1-11196), as amended. 1 In addition, all reports and other documents filed by American pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and prior to the Special Meeting shall be deemed to be incorporated by reference herein and to be a part hereof from the date of filing of such reports and documents. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Proxy Statement/Prospectus to the extent that a statement contained herein (or in the case of any statement in such an incorporated document), or in any other subsequently filed document that also is incorporated or deemed to be incorporated by reference herein, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Proxy Statement/Prospectus. THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED HEREIN. THESE DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST BY ANY PERSON TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, INCLUDING ANY BENEFICIAL OWNER, TO: AMERICAN MEDICAL RESPONSE, INC., 2821 SOUTH PARKER ROAD, 10TH FLOOR, AURORA, COLORADO 80014 ATTENTION: ANNA MARIE DUNLAP, VICE PRESIDENT, INVESTOR RELATIONS, (TELEPHONE NO.: (303) 614-8570). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BEFORE DECEMBER 3, 1996. 2 SUMMARY The following is a brief summary of certain information contained elsewhere in this Proxy Statement/Prospectus and the Annexes hereto. This summary does not contain a complete statement of all material information relating to the Merger Agreement and the Merger and is subject to, and is qualified in its entirety by, the more detailed information and financial statements contained or incorporated by reference in this Proxy Statement/Prospectus. Stockholders of STAT should read carefully this Proxy Statement/Prospectus in its entirety. Certain capitalized terms used in this summary are defined elsewhere in this Proxy Statement/Prospectus. THE COMPANIES AMERICAN MEDICAL RESPONSE, INC. American is the leading provider of emergency and non-emergency ambulance services in the United States. American provides pre-hospital emergency medical care and ambulance services to patients in response to "911" emergency medical calls. Additionally, American provides non-emergency ambulance services to patients during transfer to and from healthcare facilities and residences and non-medical transport services to the physically challenged and the elderly. American completed approximately 1,710,000 transports in response to calls for its services during 1995, expects to complete approximately 2,600,000 transports in response to calls for its services during 1996, and currently provides ambulance services in 28 states. The executive offices of American are located at 2821 South Parker Road, Aurora, Colorado 80014, and its telephone number is (303) 614-8500. STAT HEALTHCARE, INC. STAT provides a continuum of disease management services primarily to diabetic patients with complications such as end-stage renal disease ("ESRD" or "chronic kidney failure") and non-healing wounds. STAT also provides physician practice management services to affiliated physician groups which staff hospital emergency departments. As of October 1, 1996, STAT operated five kidney dialysis facilities, managed two hyperbaric oxygen ("HBO") therapy facilities and had entered into contracts to manage three additional HBO therapy facilities commencing in October 1996, and provided home healthcare management and related ancillary services primarily in the Rio Grande Valley of south Texas. As of October 1, 1996, STAT, through its affiliated physician groups, also provided physician practice management services to 24 hospital emergency departments, 17 of which are in the Houston greater metropolitan area. The executive offices of STAT are located at 12450 Greenspoint Drive, Suite 1200, Houston, Texas 77060, and its telephone number is (713) 872-6900. THE MEETING TIME, PLACE AND DATE The Special Meeting of STAT's stockholders will be held at STAT's headquarters, 12450 Greenspoint Drive, Suite 1200, Houston, Texas on December 10, 1996, at 9:00 a.m., local time (including any and all adjournments or postponements thereof, the "Special Meeting"). 3 PURPOSE OF THE MEETING At the Special Meeting, holders of STAT Common Stock will consider and vote upon a proposal (the "Merger Proposal") to approve and adopt the Merger Agreement providing for the merger of Merger Sub with and into STAT. Holders of STAT Common Stock will also transact such other business as may properly come before the Special Meeting. THE BOARD OF DIRECTORS OF STAT HAS APPROVED THE MERGER AND THE MERGER AGREEMENT AND RECOMMENDS THAT STAT STOCKHOLDERS VOTE FOR THE MERGER PROPOSAL. SEE "THE MERGER--BACKGROUND OF THE MERGER," "--RECOMMENDATION OF THE BOARD OF DIRECTORS OF STAT; REASONS FOR THE MERGER" AND "--INTERESTS OF CERTAIN PERSONS IN THE MERGER." VOTES REQUIRED; RECORD DATE The Merger Proposal will require approval and adoption of the Merger Agreement by the affirmative vote of the holders of a majority of the outstanding shares of STAT Common Stock. Holders of STAT Common Stock are entitled to one vote per share. Only holders of STAT Common Stock at the close of business on November 6, 1996 (the "Record Date") will be entitled to notice of and to vote at the Special Meeting. See "Special Meeting." Holders of approximately 60% of the STAT Common Stock outstanding as of the date of the Merger Agreement entered into stockholder agreements with American pursuant to which such holders agreed, among other things, to vote in favor of the Merger Agreement and have granted Merger Sub an irrevocable proxy to vote their shares of STAT Common Stock in accordance therewith. See "Other Agreements--Stockholder Agreements." CHANGE OF VOTE STAT stockholders who have executed a proxy may revoke the proxy at any time prior to its exercise at the Special Meeting by giving written notice to the Secretary of STAT at STAT's headquarters, 12450 Greenspoint Drive, Suite 1200, Houston, Texas 77060, by signing and returning a later dated proxy or by voting in person at the Special Meeting. ACCORDINGLY, STOCKHOLDERS OF STAT WHO HAVE EXECUTED AND RETURNED PROXY CARDS IN ADVANCE OF THE SPECIAL MEETING MAY CHANGE THEIR VOTE AT ANY TIME PRIOR TO OR AT THE SPECIAL MEETING. THE MERGER THE MERGER Pursuant to the Merger Agreement, Merger Sub will be merged with and into STAT and STAT will become a wholly-owned subsidiary of American. 4 MERGER CONSIDERATION Pursuant to the Merger, each outstanding share of STAT Common Stock (other than shares owned by STAT as treasury stock or by its subsidiaries or by American or its subsidiaries, all of which shall be canceled) will be converted into the right to receive 0.25 of a share of American Common Stock. See "The Merger Agreement-- Terms of the Merger." EXCHANGE OF CERTIFICATES As soon as practicable after the filing of a Certificate of Merger with the Secretary of State of the State of Delaware (the time of such filing being the "Effective Time"), The First National Bank of Boston, c/o Boston EquiServe, or another person designated by American in its capacity as exchange agent for the Merger (the "Exchange Agent"), will send a transmittal letter to each STAT stockholder. The transmittal letter will contain instructions with respect to the surrender of certificates representing STAT Common Stock to be exchanged for American Common Stock. See "The Merger Agreement--Exchange of Certificates." STAT STOCKHOLDERS SHOULD NOT FORWARD CERTIFICATES FOR STAT COMMON STOCK TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS. STAT STOCKHOLDERS SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY. CONDITIONS TO THE MERGER; TERMINATION; FEES The obligations of American, Merger Sub and STAT to consummate the Merger are subject to various conditions, including but not limited to: (i) the effectiveness of the Registration Statement; (ii) obtaining requisite approval of the stockholders of STAT; (iii) approval for listing on the NYSE, subject to official notice of issuance, of the American Common Stock to be issued in connection with the Merger; (iv) the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976; (v) the absence of any preliminary or permanent injunction or other order by any court preventing the consummation of the Merger; (vi) receipt of opinions of counsel to American and of KPMG Peat Marwick LLP, independent certified public accountants of STAT and American, as to the tax treatment of the Merger; and (vii) receipt of an opinion of KPMG Peat Marwick LLP to the effect that the Merger qualifies for "pooling of interests" accounting treatment. See "The Merger Agreement-- Conditions to the Merger." The Merger Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the matters presented in connection with the Merger by the stockholders of STAT: (i) by mutual written consent of the Boards of Directors of American and STAT; (ii) by American or STAT, if the Merger shall not have been consummated by March 31, 1997 (provided that such right to terminate shall not be available to any party whose obligation to fulfill any obligation under the Merger Agreement has been the cause of or resulted in the failure of the Merger to occur on or before such date); (iii) by American or STAT, if a court or other governmental authority shall have issued a nonappealable final order permanently enjoining or otherwise prohibiting the Merger (provided that such right to terminate the Merger Agreement shall not be available to any party who has not complied with its obligations under the Merger Agreement and such noncompliance materially contributed to the issuance of such order); (iv) by American, if the requisite vote of the stockholders of STAT shall not have been obtained by March 31, 1997; (v) by American or STAT, if the Board of Directors of STAT withdraws, modifies or changes its approval of the Merger Agreement or the Merger in a manner adverse to American; (vi) by American or STAT, if after receipt by STAT of an Acquisition Proposal (as defined in the Merger Agreement), American requests in writing that the Board of Directors of STAT reconfirm its recommendation of the Merger Agreement and the Board of Directors of STAT fails to do so within ten business days; (vii) by American or STAT, if the Board of Directors of STAT recommends to the stockholders of STAT an Alternative Transaction (as defined in "The Merger Agreement--Termination") or recommends that the stockholders of STAT tender their shares in a tender or exchange offer by a person other than American for 25% or more of the outstanding STAT Common Stock; (viii) by American or STAT if (1) any representation or 5 warranty of STAT or American, respectively, set forth in the Merger Agreement shall be untrue when made, or (2) upon a breach of any covenant or agreement on the part of STAT or American, respectively, set forth in the Merger Agreement and, in the case of any such breach that is curable, if such breach shall not have been cured within ten days after the nonbreaching party gives the breaching party written notice of such breach, in each case such that the corresponding conditions set forth in the Merger Agreement would not be satisfied (either (1) or (2) above being a "Terminating Breach"), provided, that, if such Terminating Breach is curable prior to March 31, 1997 by STAT or American, as the case may be, through the exercise of its reasonable best efforts and for so long as STAT or American, as the case may be, continues to exercise such reasonable best efforts, neither American nor STAT, respectively, may terminate the Merger Agreement under this section; or (ix) by American, if any representation or warranty of STAT shall have become untrue such that the corresponding condition set forth in the Merger Agreement would not be satisfied, or by STAT, if any representation or warranty of American shall have become untrue such that the corresponding condition in the Merger Agreement would not be satisfied, in either case other than by reason of a Terminating Breach. See "The Merger Agreement--Termination--Conditions to Termination." STAT will pay American a fee of $4.5 million plus reasonable, documented out- of-pocket expenses of up to $500,000, if the Merger Agreement is terminated: (i) by American, because of the failure to obtain the requisite vote for approval of the Merger Agreement by the stockholders of STAT by March 31, 1997, if a proposal for an Alternative Transaction is made prior to the date of the Special Meeting; (ii) by American or STAT, because the STAT Board of Directors withdraws, modifies or changes its approval of the Merger Agreement or the Merger in a manner adverse to American; (iii) by American or STAT, if after receipt by STAT of an Acquisition Proposal, American requests in writing that the Board of Directors of STAT reconfirm its recommendation of the Merger Agreement and the Board of Directors of STAT fails to do so within ten business days; (iv) by American or STAT, because the STAT Board of Directors recommends to the stockholders of STAT an Alternative Transaction or recommends that the stockholders of STAT tender their shares in a tender or exchange offer, as set forth above; (v) by American, because any representation or warranty of STAT set forth in the Merger Agreement shall be untrue when made or upon a breach on the part of STAT of any covenant or agreement set forth in the Merger Agreement (and, in the case of any such breach that is curable, if such breach shall not have been cured within ten days after American gives STAT written notice of such breach), in each case such that the conditions to closing the Merger set forth in the Merger Agreement as to the accuracy of STAT's representations and warranties and the performance of STAT's agreements and covenants required to be performed prior to the Effective Time would not be satisfied, unless such breach is curable prior to March 31, 1997 through the exercise of STAT's reasonable best efforts and STAT continues to exercise such reasonable best efforts. See "The Merger Agreement--Termination--Fees and Expenses." American will pay STAT a fee of $4.5 million plus reasonable, documented out- of-pocket expenses of up to $500,000, if the Merger is terminated by STAT because any representation or warranty of American shall have been untrue when made or upon a breach on the part of American of any covenant or agreement set forth in the Merger Agreement (and, in the case of any such breach that is curable, if such breach shall not have been cured within ten days after STAT gives American written notice of such breach), in each case such that the conditions to closing the Merger set forth in the Merger Agreement as to the accuracy of American's representations and warranties and the performance of American's agreement and covenants required to be performed prior to the Effective Time would not be satisfied, unless such breach is curable prior to March 31, 1997 through the exercise of American's reasonable best efforts and American continues to exercise such reasonable best efforts. LISTING It is a condition to the Merger that the shares of American Common Stock to be issued in the Merger be authorized for listing on the NYSE, subject to official notice of issuance. 6 DIVIDENDS Under the terms of the Merger Agreement, STAT is not permitted to declare, set aside, make or pay any dividend or other distribution in respect of its capital stock from the date of the Merger Agreement until the earlier of the termination of the Merger Agreement and the Effective Time, without the prior written consent of American. In addition, pursuant to the Merger Agreement, American is not permitted to declare, set aside, make or pay any dividend or other distribution in respect of its capital stock, from the date of the Merger Agreement until the earlier of the termination of the Merger Agreement and the Effective Time, without the prior written consent of STAT. APPRAISAL RIGHTS Under the General Corporation Law of the State of Delaware (the "DGCL"), the holders of STAT Common Stock are not entitled to any appraisal rights with respect to the Merger. See "The Merger--Appraisal Rights." GOVERNMENTAL APPROVALS REQUIRED Prior to consummating the Merger, American, STAT and certain STAT stockholders must file notifications under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (the "HSR Act"). See "The Merger--Certain Legal Matters." ANTICIPATED ACCOUNTING TREATMENT The Merger is expected to qualify as a "pooling of interests" for accounting and financial reporting purposes. The receipt of a letter from KPMG Peat Marwick LLP, independent certified public accountants of American and STAT, confirming that the Merger will qualify for "pooling of interests" accounting treatment, is a condition to consummation of the Merger. OPINION OF FINANCIAL ADVISOR Pacific Growth Equities, Inc. ("Pacific Growth Equities") delivered its written opinion dated October 7, 1996 to the Board of Directors of STAT that, as of such date, the Exchange Ratio was fair, from a financial point of view, to the holders of STAT Common Stock. For information on the assumptions made, matters considered and limits of the review undertaken by Pacific Growth Equities, see "The Merger--Opinion of STAT's Financial Advisor." STOCKHOLDERS ARE URGED TO READ IN ITS ENTIRETY THE OPINION OF PACIFIC GROWTH EQUITIES ATTACHED AS ANNEX B TO THIS PROXY STATEMENT/PROSPECTUS. INTERESTS OF CERTAIN PERSONS IN THE MERGER The Merger Agreement provides for certain arrangements with respect to employment agreements with certain STAT directors and officers and indemnification and insurance arrangements for STAT directors and officers. Upon consummation of the Merger, pursuant to the Merger Agreement, Russell D. Schneider, who is currently the Chairman of the Board and Chief Executive Officer of STAT, will be appointed to the Board of Directors of American by the directors of American. Upon consummation of the Merger, based on the number of outstanding shares of American Common Stock and STAT Common Stock as of November 1, 1996, directors and executive officers of STAT will own approximately 9.9% of the outstanding shares of American Common Stock. David C. Colby, who is a director of STAT, is also a director and an executive officer of American. In addition, at the Effective Time, STAT's right under its stock plan to repurchase shares of STAT Common Stock issued upon exercise of options held by David C. Colby and by Ann N. James, Ph.D., also a director of STAT, in each case, to purchase 20,000 shares of STAT Common Stock at an exercise price of $7.75 per share will terminate. See "The Merger--Interests of Certain Persons in the Merger." 7 CERTAIN FEDERAL INCOME TAX CONSEQUENCES It is expected that the Merger will constitute a reorganization for federal income tax purposes and, accordingly, that no gain or loss will be recognized for federal income tax purposes by holders of STAT Common Stock upon the conversion of STAT Common Stock into American Common Stock in the Merger (except with respect to any cash received in lieu of a fractional share interest in American Common Stock). The obligation of American and Merger Sub to consummate the Merger is conditioned on the receipt by American of an opinion of Ropes & Gray, its counsel, and the obligation of STAT to consummate the Merger is conditioned on the receipt by STAT of an opinion of KPMG Peat Marwick LLP, independent certified public accountants of STAT and American, in each case to the effect that the Merger will constitute a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended. See "The Merger--Certain Federal Income Tax Consequences." STAT stockholders are urged to consult their own tax advisors as to the specific tax consequences to them of the Merger. COMPARATIVE RIGHTS OF STOCKHOLDERS The rights of stockholders of STAT currently are governed by Delaware law, STAT's Certificate of Incorporation and STAT's By-Laws. Upon consummation of the Merger, stockholders of STAT will become stockholders of American, which is also a Delaware corporation, and their rights as stockholders of American will be governed by Delaware law, American's Certificate of Incorporation and American's By-Laws. For a discussion of various differences between the rights of stockholders of STAT and the rights of stockholders of American, see "Description of Capital Stock of American" and "Comparative Rights of Stockholders." COMPARATIVE PER SHARE PRICES The American Common Stock is traded on the NYSE under the symbol "EMT." The STAT Common Stock is traded on the Nasdaq National Market under the symbol "STHC." The high and low sales price for STAT Common Stock on October 7, 1996, the last full trading day before the execution of the Merger Agreement and the announcement of the Merger, were $8.375 and $7.625, respectively. The following table sets forth the closing price per share of the American Common Stock as reported in the NYSE Composite Transactions Tape and the closing price per share of the STAT Common Stock as reported by the Nasdaq National Market on October 7, 1996, the last full trading day before the execution of the Merger Agreement and the announcement of the Merger, and on November 1, 1996, the most recent date for which prices were available prior to printing this Proxy Statement/Prospectus, and the equivalent pro forma per share value of STAT Common Stock based on American Common Stock prices.
AMERICAN STAT STAT COMMON STOCK COMMON STOCK PRO FORMA PRICE PRICE EQUIVALENT (1) ------------ ------------ -------------- October 7, 1996........................ $37 1/2 $8 3/8 $9 3/8 November 1, 1996....................... 30 1/4 7 3/8 7 9/16
- -------- (1) Represents the equivalent pro forma value of one share of STAT Common Stock calculated by multiplying the closing price of one share of American Common Stock on the dates listed above by the Exchange Ratio. See "Comparative Per Share Prices and Dividends." 8 SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA The following selected historical financial data of American and STAT have been derived from their respective historical audited and unaudited consolidated financial statements. The selected historical data of American should be read in conjunction with American's consolidated financial statements and the notes thereto that are incorporated herein by reference. The selected historical data of STAT should be read in conjunction with STAT's Consolidated Financial Statements and Notes thereto and "The Companies--STAT--Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. The selected historical financial data of American for all periods includes the consolidated results of the four ambulance service providers acquired by American concurrent with its initial public offering in August 1992 and the three ambulance providers acquired by American in June 1993, February 1994, and February 1995 in transactions accounted for as poolings of interests. The historical data for the ambulance service providers acquired by American through June 30, 1996 and accounted for as purchases are included from their respective dates of acquisition. The selected historical financial data of STAT for all periods presented includes STAT's affiliated physician groups, South Texas Acute Trauma Physicians, P.A. ("STAT Physicians I") and STAT Physicians, P.A. ("STAT Physicians II"), and AmHealth Corporation and certain related entities which were acquired by STAT in June 1996 in a transaction accounted for as a pooling of interests. The selected historical financial data of American and STAT as of June 30, 1996 and for the six months ended June 30, 1996 and 1995 have been derived from unaudited consolidated financial statements. Such unaudited data reflects all adjustments (consisting only of normal, recurring adjustments) necessary for the fair presentation of the financial condition as of that date and the results of operations for those unaudited interim periods for each of American and STAT. The results of operations for those interim periods are not necessarily indicative of the results to be expected for any other period. The unaudited selected pro forma combined financial data give effect to the merger of American and STAT as if the transaction was accounted for as a pooling of interests and occurred, for balance sheet purposes, on June 30, 1996 and, for statements of earnings purposes, on January 1, 1993. The pro forma information is not necessarily indicative of the results that would have been reported had such events actually occurred on the date specified, nor is it indicative of American's future results. It does not include any one-time, nonrecurring Merger-related costs, nor does it incorporate any benefits from any potential cost savings or synergies following the Merger. 9 SELECTED HISTORICAL FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) AMERICAN
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------- ----------------- 1995 1994 1993 1992 1991 1996 1995 -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) HISTORICAL CONSOLIDATED STATEMENTS OF EARNINGS DATA : Total revenue...................... $483,846 $327,364 $217,883 $147,052 $131,504 $322,595 $220,567 Operating expenses: Salaries and benefits............. 245,142 168,474 110,298 76,631 65,781 161,349 112,491 Uncompensated care................ 92,345 64,217 44,656 30,477 27,723 61,573 42,585 Other operating expenses.......... 77,875 52,278 36,211 24,046 22,001 51,077 35,573 Depreciation...................... 15,671 10,594 6,805 4,610 3,943 10,707 7,023 Amortization of intangibles....... 5,288 2,741 1,664 671 1,059 4,585 1,939 Restructuring charge.............. 23,000 -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Total operating expenses.......... 459,321 298,304 199,634 136,435 120,507 289,291 199,611 -------- -------- -------- -------- -------- -------- -------- Earnings from operations.......... 24,525 29,060 18,249 10,617 10,997 33,304 20,956 Interest expense, net.............. 3,222 1,592 959 923 1,376 4,669 1,432 -------- -------- -------- -------- -------- -------- -------- Earnings before income taxes...... 21,303 27,468 17,290 9,694 9,621 28,635 19,524 Income taxes....................... 10,866 11,644 7,489 4,340 4,025 12,828 9,196 -------- -------- -------- -------- -------- -------- -------- Net earnings...................... $ 10,437 $ 15,824 $ 9,801 $ 5,354 $ 5,596 $ 15,807 $ 10,328 ======== ======== ======== ======== ======== ======== ======== Pro forma net earnings (1)........ $ 10,950 $ 16,103 $ 10,463 $ 6,103 $ 5,447 $ 15,807 $ 10,841 ======== ======== ======== ======== ======== ======== ======== Pro forma net earnings per common share: Primary........................... $ 0.60 $ 1.06 $ 0.80 $ 0.60 $ 0.58 $ 0.78 $ 0.65 ======== ======== ======== ======== ======== ======== ======== Fully diluted..................... $ 0.60 $ 1.06 $ 0.80 $ 0.60 $ 0.58 $ 0.77 $ 0.65 ======== ======== ======== ======== ======== ======== ======== Weighted average common shares outstanding: Primary........................... 18,126 15,181 13,009 10,243 9,367 20,186 16,674 ======== ======== ======== ======== ======== ======== ======== Fully Diluted..................... 18,126 15,181 13,009 10,243 9,367 22,933 16,674 ======== ======== ======== ======== ======== ======== ========
DECEMBER 31, ---------------------------------------- JUNE 30, 1995 1994 1993 1992 1991 1996 ------- -------- -------- ------- ------ ----------- (UNAUDITED) HISTORICAL CONSOLIDATED BALANCE SHEET DATA: Working capital............................ 32,181 $ 29,457 $ 53,027 $28,027 12,115 $ 64,057 Property and equipment, net................ 64,669 39,361 22,340 13,763 12,488 70,602 Total assets............................... 476,381 236,859 140,830 79,585 48,360 555,126 Current maturities of debt................. 13,919 8,166 4,190 7,091 6,527 19,841 Long-term debt............................. 101,660 42,890 3,095 9,076 9,419 151,869 Stockholders' equity....................... 249,564 130,732 106,914 40,731 16,409 274,863
- -------- (1) Certain adjustments have been made for salaries and benefits and income taxes related to companies that were S corporations for federal income tax purposes prior to their acquisition by American. 10 SELECTED HISTORICAL FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STAT
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------- ---------------- 1995 1994(1) 1993(2) 1996 1995 ------- ------- ------- ------- ------- (UNAUDITED) HISTORICAL CONSOLIDATED STATEMENTS OF EARNINGS DATA: Net service revenues.................. $23,141 $14,521 $10,043 $16,663 $10,375 ------- ------- ------- ------- ------- Operating expenses: Professional medical fees............ 9,241 7,714 6,823 6,695 4,548 Human resources...................... 4,640 1,949 1,107 3,516 1,625 Supplies............................. 1,818 1,143 375 1,136 822 Billing and collection costs......... 1,461 795 304 996 697 Other costs.......................... 2,215 1,440 784 1,437 899 ------- ------- ------- ------- ------- Total operating expenses........... 19,375 13,041 9,393 13,780 8,591 ------- ------- ------- ------- ------- Operating income...................... 3,766 1,480 650 2,883 1,784 Interest and other (income) expense, net.................................. 121 5 33 133 29 Reorganization costs.................. -- -- -- 1,269 -- ------- ------- ------- ------- ------- Income before income taxes............ 3,645 1,475 617 1,481 1,755 Income taxes.......................... 347 65 -- (44) 181 ------- ------- ------- ------- ------- Net income............................ $ 3,298 $ 1,410 $ 617 $ 1,525 $ 1,574 ======= ======= ======= ======= ======= Pro forma net income(3).............. $ 2,406 $ 974 $ 407 948 $ 1,158 ======= ======= ======= ======= ======= Pro forma net income per common share............................... $ 0.20 $ 0.11 $ 0.05 $ 0.06 $ 0.13 ======= ======= ======= ======= ======= Number of shares used in computing pro forma net income per share...... 11,897 8,545 7,458 15,320 9,078 ======= ======= ======= ======= =======
DECEMBER 31, -------------------- JUNE 30, 1995 1994 1993 1996 ------- ------ ----- ----------- (UNAUDITED) HISTORICAL CONSOLIDATED BALANCE SHEET DATA: Working capital.......................... $ 5,618 $1,215 $ 197 $4,189 Total assets............................. 10,575 4,824 1,143 13,759 Long-term debt and capital lease obligations, less current portion....... 1,640 1,194 330 2,282 Total liabilities........................ 4,203 3,045 697 7,099 Stockholders' equity..................... 6,372 1,779 446 6,660
- -------- (1) Represents consolidated financial data for STAT for the year ended December 31, 1994 combined with financial data for STAT Physicians I for the eight months ended August 31, 1994. (2) Represents consolidated financial data for STAT combined with financial data for STAT Physicians I. (3) Certain adjustments have been made for income taxes related to companies that were partnerships or S corporations for federal income tax purposes prior to their acquisition by STAT. 11 UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------- ----------------- 1995 1994 1993 1996 1995 -------- -------- -------- -------- -------- PRO FORMA COMBINED STATEMENTS OF EARNINGS DATA (1): Total revenue........................ $513,648 $344,638 $228,631 $345,858 $233,704 Operating expenses: Salaries and benefits.............. 259,189 178,275 118,181 171,431 118,738 Uncompensated care................. 99,006 66,970 45,361 68,173 45,347 Other operating expenses........... 82,815 55,295 37,640 54,517 37,805 Depreciation....................... 16,059 10,817 6,886 10,965 7,135 Amortization of intangibles........ 5,288 2,741 1,664 4,585 1,939 Restructuring charge and merger costs............................. 23,000 -- -- 1,269 -- -------- -------- -------- -------- -------- Total operating expenses......... 485,357 314,098 209,732 310,940 210,964 -------- -------- -------- -------- -------- Earnings from operations......... 28,291 30,540 18,899 34,918 22,740 Interest expense, net................ 3,343 1,597 992 4,802 1,461 -------- -------- -------- -------- -------- Earnings before income taxes....... 24,948 28,943 17,907 30,116 21,279 Income taxes......................... 11,213 11,709 7,489 12,784 9,377 -------- -------- -------- -------- -------- Net earnings....................... $ 13,735 $ 17,234 $ 10,418 $ 17,332 $ 11,902 ======== ======== ======== ======== ======== Pro forma net earnings............. $ 13,356 $ 17,077 $ 10,870 $ 16,755 $ 11,999 ======== ======== ======== ======== ======== Pro forma net earnings per common share (2): Primary............................ $ 0.61 $ 0.90 $ 0.65 $ 0.70 $ 0.59 ======== ======== ======== ======== ======== Fully Diluted...................... $ 0.61 $ 0.90 $ 0.65 $ 0.70 $ 0.59 ======== ======== ======== ======== ======== Weighted average common shares outstanding (2)..................... Primary............................ 21,870 18,925 16,753 23,930 20,418 ======== ======== ======== ======== ======== Fully Diluted...................... 21,870 18,925 16,753 26,677 20,418 ======== ======== ======== ======== ========
JUNE 30, 1996 -------- PRO FORMA COMBINED BALANCE SHEET DATA: Working capital....................................................... $ 68,246 Property and equipment, net........................................... 73,751 Total assets.......................................................... 568,885 Current maturities of debt............................................ 21,399 Long-term debt........................................................ 154,151 Stockholders' equity.................................................. 281,523
- -------- (1) The historical consolidated statements of earnings data for STAT have been reclassified to conform with American's financial statement presentation. (2) Assumes that 0.25 of a share of American Common Stock was issued in exchange for each share of STAT Common Stock outstanding. 12 COMPARATIVE PER SHARE DATA The following table sets forth certain historical per share data of American and STAT and combined per share data on an unaudited pro forma basis after giving effect to the Merger as if it had occurred on January 1, 1993 on a pooling-of-interests basis assuming that 0.25 of a share of American Common Stock was issued in exchange for each share of STAT Common Stock outstanding. This data should be read in conjunction with the selected historical audited and unaudited financial data and the historical audited and unaudited financial statements of American and STAT and the notes thereto that are included elsewhere in this Proxy Statement/Prospectus or incorporated herein by reference. The selected pro forma combined financial information of American and STAT is derived from the unaudited pro forma condensed combined financial statements and should be read in conjunction with such unaudited pro forma statements and notes thereto included elsewhere in this Proxy Statement/Prospectus. The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the combined financial position or results of operations of future periods or the results that actually would have been realized had American and STAT been a single entity during the periods presented.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------ ------------ 1995 1994 1993 1996 1995 -------- ------- ------- ------ ----- AMERICAN(1): Historical earnings per share........... $ 0.60 $ 1.06 $ 0.80 $ 0.77 $0.65 Pro forma combined earnings per share... $ 0.61 $ 0.90 $ 0.65 $ 0.70 $0.59 Historical book value per share......... $ 12.56 $13.31 Pro forma combined book value per share.................................. $ 10.84 $11.54 STAT(1): Historical earnings per share........... $ 0.20 $ 0.11 $ 0.05 $ 0.06 $0.13 Equivalent pro forma earnings per share(2)............................... $ 0.15 $ 0.23 $ 0.16 $ 0.18 $0.15 Historical book value per share......... $ 0.43 $ 0.45 Equivalent pro forma book value per share(2)............................... $ 2.71 $ 2.89
- -------- (1) Neither American nor STAT paid any cash dividends for the periods presented. (2) Computed assuming the conversion ratio of 4 shares of STAT Common Stock for each share of American Common Stock. 13 RISK FACTORS IN CONSIDERING WHETHER TO APPROVE AND ADOPT THE MERGER AGREEMENT, THE STOCKHOLDERS OF STAT SHOULD CONSIDER THE FOLLOWING FACTORS, AMONG OTHERS, WHICH COULD AFFECT THE RESULTS OF AMERICAN. GROWTH STRATEGY--ACQUISITION OF AMBULANCE PROVIDERS. American's growth strategy depends in large measure on its ability to acquire additional ambulance service providers. Competition for the acquisition of ambulance service providers is increasing as the ambulance service industry continues to undergo consolidation. Certain of American's existing and potential competitors have significantly greater capital resources than American. Although American has acquired numerous ambulance service providers, there can be no assurance that suitable additional acquisition candidates can be identified, acquired or successfully integrated into American's operations. American has used a combination of cash, American Common Stock and subordinated debt as consideration for past acquisitions and plans to continue to use these forms of consideration in the future. In the event that the American Common Stock does not maintain a sufficient valuation or if potential acquisition candidates are unwilling to accept American's securities as consideration, American will be required to use more cash resources to continue its acquisition program. In addition, if sufficient financing is not available as needed on terms acceptable to American, American's growth strategy could be adversely affected. POSSIBLE ADVERSE CHANGES IN REIMBURSEMENT RATES OR COVERAGE. A substantial majority of American's revenues are attributable to payments received from third-party payors, including Medicare, Medicaid and private insurers. The revenues, cash flows and profitability of American, like those of other companies in the healthcare industry, are affected by the continuing efforts of third-party payors to control expenditures for healthcare. Medicare and Medicaid reforms adopted by Congress in 1995 called for a seven-year freeze on rates for ambulance services. Although these reforms were vetoed by the President, there exists a potential for a freeze of Medicare reimbursement rates for ambulance services in the future. Any freeze in Medicare reimbursement or insufficient increases in rates to compensate for increases in inflation could have an adverse impact on American's business, financial condition and results of operation. In addition, Congressional hearings in December 1994 focused attention on efforts within the Health Care Financing Administration ("HCFA") to control Medicare expenditures for ambulance services. The hearings specifically addressed two areas: provision of ambulance services to and from dialysis facilities and reimbursement at advanced life support ("ALS") rates for ambulance transports where ALS services are made available to the patient but not needed at the time the service is provided. American believes that it is in substantial compliance with current regulations for reimbursement for ambulances services to and from dialysis treatment facilities which require documentation of medical necessity and does not believe that any initiatives in this area would have a material adverse effect on American. Any initiative to address the ALS reimbursement issue would affect virtually all providers of emergency ambulance service, including American. Under current rules, ALS service is reimbursed at ALS rates if, based on an assessment of the patient's condition, it is determined that ALS service is medically necessary or if ALS response is required under "911" contracts or state or local law. Under a new proposal that HCFA is considering for proposed rule-making in late 1996 or early 1997, an ambulance provider would only be reimbursed at ALS rates, if ALS services were medically necessary at the time the service is provided. The proposal HCFA is currently considering would likely receive substantial opposition from many interested groups, including public and private ambulance providers, state and local governments that mandate ALS responses and patient advocacy groups. In addition, American believes that any change in ALS reimbursement would not become final prior to the spring of 1997 and, if adopted, would be phased in or otherwise structured so as to minimize any adverse effect on ambulance service providers. American could make adjustments to mitigate the effect of any such HCFA proposal. For example, most of American's 911 contracts provide for a renegotiation of rates in the event of a change in reimbursement policy. In addition, American could potentially offset reduced Medicare revenue by negotiating for increases in local operating subsidies. American could also attempt to change the staffing of its ambulance crews or negotiate for longer response times both of which would reduce operating costs. Because of the preliminary nature of this proposal, American is unable to predict whether HCFA will adopt the current proposal and is unable to determine the impact of any proposal adopted by the HCFA. However, if a proposal like the one HCFA is currently considering were to become law without any phase-in period and if American were unable to mitigate its effect, it would at least in the short term have an adverse effect on American's profitability. Reimbursement can also be influenced by the financial 14 instability of private third-party payors and by budget pressures and cost shifting by governmental payors. A reduction in coverage or reimbursement rates by third-party payors could have a material adverse effect on American's business. In addition, some states are considering various healthcare and insurance reform proposals. No assurance can be given that any such reforms will not have a material adverse effect on American. In addition, the regional Medicare carrier in American's Mid-Atlantic Region, which includes Pennsylvania, New Jersey and Delaware, has recently changed its practice of reimbursement based on the location of the administrative offices of an ambulance service provider to the location of the facility where the transporting ambulance is garaged. This change in reimbursement rates, which became effective in October of 1996, has and will continue to reduce American's reimbursement for certain transports in its Mid-Atlantic Region. American has taken steps to mitigate the effect of this change, including requesting an increase in the allowable Medicare reimbursement rate through the inherent reasonableness process, and relocating the location of certain garage facilities. American is also considering billing services directly to patients instead of accepting Medicare assignment. If American is unable to mitigate the effect of this change, such change in reimbursement practice could have a material adverse effect on American's business, financial condition and results of operation. GOVERNMENT REGULATION. Various state and federal laws regulate ambulance providers, physicians and other clinicians and other providers of healthcare services. These laws include the fraud and abuse provisions of the Social Security Act, which prohibit the solicitation, payment, receipt or offering of any direct or indirect remuneration for the referral of Medicare or Medicaid patients, or for the ordering or providing of Medicare or Medicaid covered services, items or equipment. Violations of these 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 American or, after the Merger, to its affiliated physician groups, could result in significant loss of reimbursement to American. COMPETITION. The ambulance service industry is highly competitive. Principal participants include government entities, large regional ambulance service providers, hospitals and numerous local providers. In some areas in which American operates, American has begun to experience intense competition from fire departments, particularly for emergency services. The entry by local fire districts into markets for ambulance transport services in areas in which American operates could have a material adverse effect on American's business, financial condition and results of operation. Certain existing and potential competitors of American have significantly greater capital resources than American. There can be no assurance that municipalities or healthcare facilities that presently contract for ambulance services will not choose to provide ambulance services directly in the future. RISKS OF OPERATIONS AND GROWTH OF STAT BUSINESS. American has not previously operated an emergency department physician management service business or a disease management business. Such businesses present risks that are in some ways different from the risks of operating an ambulance service business, including the following: Growth Strategy. Following the consummation of the Merger, American's growth strategy will depend in part on its ability to develop or acquire dialysis facilities and to enter into additional hospital-based HBO therapy and physician practice management contracts, particularly through strategic relationships with hospital networks. There can be no assurance that American will be able to develop new dialysis facilities or identify, acquire or successfully integrate acquired dialysis facilities, or that American will be able to identify, enter into or successfully integrate additional HBO therapy or physician practice management contracts. In addition, the regulatory framework of certain jurisdictions in which STAT does not operate, or changes in the regulatory framework of the jurisdiction in which STAT currently operates, may limit American's ability to expand the operations of STAT into, or its ability to continue STAT's operations within, new and existing geographical markets if American is unable to modify the operational structure of STAT to conform with such regulatory framework or such changes. Corporate Exposure to Professional Liabilities. STAT's affiliated physician groups and certain physicians who provide services on their behalf may be the subject of medical malpractice claims with the attendant risk of substantial damage awards. To the extent that physicians placed by affiliated physician groups at hospitals are 15 regarded as agents of STAT in the practice of medicine, STAT could be held liable for any medical malpractice claims against such physicians. STAT also could be found in certain instances to have been negligent in performing its contract management services for the hospitals even if no agency relationship between STAT, the affiliated physician groups or such physician exists. In addition, any liability for malpractice claims incurred by an affiliated physician group that was not covered by insurance would reduce the earnings of the affiliated physician group and thereby reduce any management fee based on net profits payable to STAT. There can be no assurance that any future claim will not exceed the scope or limits of available insurance coverage maintained by STAT's affiliated physician groups or by STAT or that such coverage will continue to be available. Government Regulation. After the Merger, American's business will be subject to additional regulation at both the federal and state level applicable to STAT, including federal laws governing rates paid for reimbursement for dialysis treatment and restrictions on physician referrals and state law prohibitions on the corporate practice of medicine. STAT is reimbursed for dialysis services primarily at fixed rates established under the Medicare ESRD program. Under this ESRD program, which is administered by HCFA, once a patient becomes eligible for Medicare reimbursement, Medicare is responsible for payment of 80% of the composite rate determined by HCFA for dialysis treatments and a secondary payor (usually Medicare supplemental insurance or the state Medicaid or ESRD-type program) pays approximately 20% of the composite rate. There can be no assurance that future legislation or regulations that may significantly modify the Medicare program or substantially reduce the amount paid for STAT's services will not be adopted or that there will be sufficient increases in rates to compensate for future increases in STAT's operating costs. In addition, federal and state laws also impose restrictions on referrals by healthcare providers for designated healthcare services to entities with which they have a financial relationship. Any future governmental reform that includes additional prohibitions on ownership, directly or indirectly, of facilities to which they refer patients could adversely affect the combined businesses, financial condition and results of operations of American and STAT. After the Merger, STAT will continue to also be subject to state laws prohibiting physicians from splitting fees with non-physicians and prohibit non-physician entities from practicing medicine. Although STAT believes its operations are in material compliance with existing laws, STAT's operations have not been the subject of judicial or regulatory interpretation or review, and there can be no assurance that any such interpretation or review would not adversely affect STAT's operations. Integration of AmHealth. In June 1996, STAT acquired AmHealth Corporation and its related healthcare entities (collectively, "AmHealth") in exchange for 11,200,000 shares of STAT Common Stock. AmHealth operated kidney dialysis facilities, managed HBO therapy facilities and provided home healthcare management and related ancillary services primarily in the Rio Grande Valley of south Texas. STAT did not conduct any such operations prior to June 1996. The continuing process of integrating the operations of AmHealth into STAT will require the dedication of STAT's management resources. There can be no assurance that STAT's management will be able to integrate successfully AmHealth's operations and oversee the combined entity. Failure to integrate successfully AmHealth's operation into STAT's operations could have a material adverse effect on STAT's business, financial condition and results of operations. FIXED EXCHANGE RATIO DESPITE POTENTIAL CHANGES IN STOCK PRICES. The Exchange Ratio is expressed in the Merger Agreement as a fixed ratio. Accordingly, the Exchange Ratio will not be adjusted in the event of any increase or decrease in the price of either American Common Stock or STAT Common Stock. The price of American Common Stock at the Effective Time may vary from its price at the date of this Proxy Statement/Prospectus and at the date of the Special Meeting. Such variations may be the result of changes in the business, operations or prospects of American or STAT, market assessments of the likelihood that the Merger will be consummated and the timing thereof, likelihood of successful integration and operation of the combined entity, regulatory considerations, general market and economic conditions and other factors. Because the Effective Time may occur at a date later than the Special Meeting, there can be no assurance that the price of American Common Stock on the date of the Special Meeting will be indicative of its price at the Effective Time. The Effective Time will occur as soon as practicable following the Special Meeting and the satisfaction or waiver of the other conditions set forth in the Merger Agreement. Stockholders of STAT are urged to obtain current 16 market quotations for American Common Stock and STAT Common Stock. See "The Merger Agreement--Terms of the Merger." NONREALIZATION OF SYNERGIES. The Merger involves the integration of two companies that have previously operated independently. No assurance can be given that American will not encounter difficulties in integrating the respective operations of American and STAT or that the benefits expected from such integration will be realized. In addition, there can be no assurance that American will not experience the loss of key STAT personnel. Among the factors considered by the Boards of Directors of American and STAT in connection with their respective approval of the Merger Agreement were the opportunities for synergies that could result from the Merger. Although American expects to achieve significant annual savings in operating costs as a result of the Merger, no assurance can be given that such savings will be realized. See "The Merger--Reasons of American for Engaging in the Merger" and "--Recommendation of the Board of Directors of STAT; Reasons for the Merger." INTRODUCTION This Proxy Statement/Prospectus is being furnished to the stockholders of STAT in connection with the solicitation of proxies by the Board of Directors of STAT for use at a Special Meeting of Stockholders of STAT to be held at STAT's headquarters, 12450 Greenspoint Drive, Suite 1200, Houston, Texas on December 10, 1996, at 9:00 a.m., local time, and at any and all adjournments or postponements thereof (the "Special Meeting"). This Proxy Statement/Prospectus also constitutes the Prospectus of American with respect to the issuance of up to 3,975,003 shares of American Common Stock to be issued to stockholders of STAT in connection with the Merger, as described below. SPECIAL MEETING PURPOSE OF THE SPECIAL MEETING At the Special Meeting, holders of STAT Common Stock will consider and vote upon a proposal to approve and adopt the Merger Agreement. In the Merger, (i) STAT will become a wholly-owned subsidiary of American and (ii) each outstanding share of STAT Common Stock (other than shares owned by STAT as treasury stock or by its subsidiaries or by American or its subsidiaries, all of which shall be canceled) will be converted into the right to receive 0.25 of a share of American Common Stock. THE BOARD OF DIRECTORS OF STAT HAS APPROVED THE MERGER AND THE MERGER AGREEMENT AND RECOMMENDS THAT STAT STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. SEE "THE MERGER--BACKGROUND OF THE MERGER," "-- RECOMMENDATION OF THE BOARD OF DIRECTORS OF STAT; REASONS FOR THE MERGER"; AND "--INTERESTS OF CERTAIN PERSONS IN THE MERGER." RECORD DATE The STAT Board of Directors has fixed the close of business on November 6, 1996 as the Record Date for determining holders entitled to notice of and to vote at the Special Meeting. QUORUM The presence in person or by properly executed proxy of holders of a majority of the issued and outstanding shares of STAT Common Stock is necessary to constitute a quorum at the Special Meeting. REQUIRED VOTE The approval of the Merger Agreement requires the affirmative vote of the holders of a majority of the outstanding shares of STAT Common Stock. Abstentions and broker nonvotes will have the effect of votes against approval of the Merger Agreement. Holders of approximately 60% of the STAT Common Stock 17 outstanding as of the date of the Merger Agreement have entered into a Stockholder Agreement with American pursuant to which such holders have agreed to vote in favor of the Merger Agreement. See "Other Agreements--Stockholder Agreements." The directors and officers of STAT and their affiliates own as a group approximately 65% of the outstanding shares of STAT Common Stock. VOTING RIGHTS; PROXIES As of the Record Date, there were 14,975,412 shares of STAT Common Stock issued and outstanding, each of which entitles the holder thereof to one vote. All shares of STAT Common Stock represented by properly executed proxies will, unless such proxies have been previously revoked, be voted in accordance with the instructions indicated in such proxies. IF NO INSTRUCTIONS ARE INDICATED, SUCH SHARES OF STAT COMMON STOCK WILL BE VOTED IN FAVOR OF APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. STAT does not know of any matters other than as described in the accompanying Notice of Special Meeting that are to come before the Special Meeting. If any other matter or matters are properly presented for action at the Special Meeting, the persons named in the enclosed form of proxy and acting thereunder will have the discretion to vote on such matters in accordance with their best judgment, unless such authorization is withheld. A stockholder giving a proxy pursuant to this proxy solicitation may revoke it at any time before it is exercised by giving a subsequent proxy, delivering to the Secretary of STAT a written notice of revocation prior to the voting of the proxy at the Special Meeting, or attending the Special Meeting and informing the Secretary of STAT in writing that such stockholder wishes to vote his or her shares in person. However, mere attendance at the Special Meeting will not in and of itself have the effect of revoking the proxy. Votes cast by proxy or in person at the Special Meeting will be tabulated by the election inspectors appointed for the meeting and will determine whether or not a quorum is present. The election inspectors will treat abstentions as shares that are present and entitled to vote for purposes of determining the presence of a quorum and as voted against approval of the Merger Agreement. If a broker indicates on the proxy that it does not have discretionary authority as to certain shares to vote on a particular matter, those shares will not be considered as present and entitled to vote with respect to that matter. SOLICITATION OF PROXIES STAT will bear its own cost of solicitation of proxies. Brokerage houses, fiduciaries, nominees and others will be reimbursed for their out-of-pocket expenses in forwarding proxy materials to beneficial owners of stock held in their names. Certain directors, officers and employees of STAT may solicit proxies by telegraph, telephone or in person. THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE TO THE STOCKHOLDERS OF STAT. ACCORDINGLY, STAT STOCKHOLDERS ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. 18 THE MERGER This section of the Proxy Statement/Prospectus, as well as the next two sections of the Proxy Statement/Prospectus entitled "The Merger Agreement" and "Other Agreements," describe certain aspects of the proposed Merger. To the extent that it relates to the Merger Agreement, or the other agreements described under "Other Agreements," the following description does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is attached as Annex A to this Proxy Statement/Prospectus and is incorporated herein by reference, and such other agreements, which are filed as exhibits to the Registration Statement and are incorporated herein by reference. All stockholders are urged to read the Merger Agreement and such other agreements in their entirety. GENERAL The Merger Agreement provides that the Merger will be consummated if the approvals of the STAT stockholders required therefor is obtained and all other conditions to the Merger are satisfied or waived. Upon consummation of the Merger, Merger Sub will be merged with and into STAT, and STAT will become a wholly-owned subsidiary of American. Pursuant to the Merger, each outstanding share of STAT Common Stock (other than shares owned by STAT as treasury stock or by its subsidiaries or by American or its subsidiaries, all of which shall be canceled) will be converted into the right to receive 0.25 of a share of American Common Stock. Based upon the outstanding shares of American and STAT as of November 1, 1996 and the Exchange Ratio, the stockholders of STAT immediately prior to the consummation of the Merger would own approximately 15.1% of the outstanding American Common Stock following consummation of the Merger. Such percentage could change depending upon whether shares of American Common Stock and STAT Common Stock issuable upon exercise of outstanding American and STAT stock options, warrants and other rights are issued. EFFECTIVE TIME Consummation of the Merger will occur upon the filing (the "Effective Time") of a Certificate of Merger with the Secretary of State of the State of Delaware (the "Certificate of Merger"). The filing of the Certificate of Merger will occur as soon as practicable after the satisfaction or waiver of all conditions to the closing of the transactions contemplated by the Merger Agreement. The Merger Agreement may be terminated by either party if the Merger shall not have been consummated on or before March 31, 1997. The Merger Agreement may also be terminated under certain other circumstances. See "The Merger Agreement--Conditions to the Merger" and "--Termination." CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES The conversion of STAT Common Stock into the right to receive American Common Stock at the Exchange Ratio will occur automatically at the Effective Time. As soon as practicable after the Effective Time, a transmittal letter will be mailed by the Exchange Agent to each stockholder of STAT informing such stockholder of the procedures to follow in forwarding stock certificates representing STAT Common Stock to the Exchange Agent. Upon receipt of such STAT stock certificates, the Exchange Agent will deliver full shares of American Common Stock to such stockholder and cash in lieu of fractional shares pursuant to the terms of the Merger Agreement and in accordance with the transmittal letter, together with any dividends or other distributions to which such stockholder is entitled. If any issuance of shares of American Common Stock in exchange for shares of STAT Common Stock is to be made to a person other than the STAT stockholder in whose name the certificate is registered at the Effective Time, it will be a condition of such exchange that the certificate so surrendered be properly endorsed or otherwise in proper form for transfer and that the STAT stockholder requesting such issuance either pay any transfer or other tax required or establish to the satisfaction of American that such tax has been paid or is not payable. 19 After the Effective Time, there will be no further transfers of STAT Common Stock on the stock transfer books of STAT. If a certificate representing STAT Common Stock is presented for transfer, it will be canceled and a certificate representing the appropriate number of full shares of American Common Stock and cash in lieu of fractional shares and any dividends and distributions will be issued in exchange therefor. After the Effective Time and until surrendered, shares of STAT Common Stock will be deemed for all corporate purposes, other than the payment of dividends and distributions, to evidence ownership of the number of full shares of American Common Stock into which such shares of STAT Common Stock were converted on the Effective Time. No dividends or other distributions, if any, payable to holders of American Common Stock will be paid to the holders of any certificates for shares of STAT Common Stock until such certificates are surrendered. Upon surrender of such certificates, all such declared dividends and distributions which shall have become payable with respect to such American Common Stock in respect of a record date after the Effective Time will be paid to the holder of record of the full shares of American Common Stock represented by the certificate issued in exchange therefor, without interest. See "The Merger Agreement--Exchange of Certificates." STAT STOCKHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS. STAT STOCKHOLDERS SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY. BACKGROUND OF THE MERGER On July 8, 1996, members of senior management of American met with members of senior management of STAT at American's headquarters in Aurora, Colorado to discuss the possibility of integrating American Medical Pathways, a healthcare access service being developed by American, into an urgent care joint venture STAT was in the process of developing for use in the Houston, Texas market. On August 16, 1996, in a telephone call among Paul T. Shirley, Chief Executive Officer and President of American, Russell D. Schneider, the Chairman and Chief Executive Officer of STAT, and David C. Colby, a director and the Chief Financial Officer of American and also a director of STAT, Mr. Schneider inquired whether American would be interested in engaging in a business combination with STAT in light of the previous favorable service integration discussions between the companies and STAT's growth objectives and opportunities and need for capital. During the next few days, Mr. Schneider began contacting the other members of STAT's Board of Directors to advise them of the discussions between STAT and American regarding a possible business combination of the two companies. On August 27, 1996, Messrs. Shirley and Colby and George DeHuff, the Chief Operating Officer of American, met with Mr. Schneider and Ruben A. Perez and Dr. William H. Rice, directors and executive officers of STAT, to learn more about the respective businesses of the companies and explore the desirability of a possible business combination between them. On the same day, following the meeting with the representatives of STAT, Messrs. Shirley, Colby and DeHuff met to discuss their meeting with STAT and to plan a visit to Houston to review STAT's operations. On September 6, 1996, Messrs. Colby and DeHuff, Carol Burt, an executive officer of American, and Don Jones, a consultant to American, met in Houston with Messrs. Schneider and Perez and Dr. Victor M. Miranda, a director and executive officer of STAT, to review STAT's operations. During the week of September 9, 1996, Mr. Shirley and Mr. Schneider had numerous telephone conversations about the terms of a possible business combination. The conversations included discussion of the exchange ratio, including possible adjustments to the exchange ratio based on collars and the value of American Common Stock. Also discussed were numerous management issues including Mr. Schneider's appointment to 20 American's Board of Directors. During that same week, Mr. Shirley telephoned members of American's Board of Directors to discuss the possible opportunity for a business combination with STAT and the status of discussions between the parties. On September 13, 1996, American and STAT executed a confidentiality agreement with respect to the exchange of nonpublic information between them. The agreement provided that through September 30, 1996, STAT would not solicit, engage in negotiations or discussions concerning or provide nonpublic information to any person relating to a merger or sale, or similar transaction, other than the Merger, involving STAT or any of its subsidiaries. On October 1, 1996, American and STAT amended the agreement to extend this obligation to October 9, 1996. The agreement also provided that in the event STAT breached this obligation it would pay to American, upon written demand, all reasonable out-of-pocket expenses incurred in connection with its evaluation of the proposed business combination between STAT and American along with a fee of $500,000 which the parties agreed was reasonable under the circumstances to compensate American. During the weeks of September 16 and 23, 1996, representatives of American and STAT and their respective legal counsel conducted due diligence investigations of the business and operations of the other party. On September 18, 1996, representatives of American and representatives of STAT met in Houston to review the status of the parties' due diligence investigations and STAT's development projects. During the period from September 18, 1996, through October 7, 1996, the date the Merger Agreement was executed, representatives of American and STAT and their respective legal counsel were in frequent contact to negotiate the terms of the Merger Agreement, the Stockholder Agreements and the Employment Agreements. The principal areas of negotiation included: the representations and warranties to be made by American and STAT in the Merger Agreement; the covenants to be made by American and STAT in the Merger Agreement; the conditions required for a termination of the Merger Agreement; the triggering events for payment of a fee and expenses in the event of termination of the Merger Agreement; and the terms of the Stockholder Agreements and the Employment Agreements. By letter dated September 23, 1996, STAT engaged Pacific Growth Equities as its financial advisor to render a fairness opinion in connection with the Merger. On the morning of October 7, 1996, the Board of Directors of STAT met to consider the proposed Merger. Mr. Colby, who is a director of STAT and also a director and the Chief Financial Officer of American, was not present at the meeting. Members of STAT senior management, STAT's legal advisors and its financial advisors made presentations and reviewed among other things, the matters set forth under "--Recommendation of the Board of Directors of STAT; Reasons for the Merger." The terms of the Merger Agreement, Stockholder Agreements and Employment Agreements were reviewed with the directors of STAT. Pacific Growth Equities rendered its oral opinion, confirmed by a subsequent written opinion dated October 7, 1996 that, as of such date, the Exchange Ratio was fair from a financial point of view to the stockholders of STAT. After discussion and consideration, the members of the Board of Directors of STAT present at the meeting unanimously voted to approve the Merger, the Merger Agreement and the Stockholder Agreements. On the afternoon of October 7, 1996, the Board of Directors of American met to consider the proposed Merger. Members of American's senior management, American's legal advisors and its investment bankers made presentations and reviewed among other things, the matters set forth under "--Reasons of American for Engaging in the Merger." The terms of the Merger Agreement and the related agreements were reviewed with the directors of American. After discussion and consideration, nine of the ten directors of the Board of Directors of American voted to approve the Merger, the Merger Agreement and the related agreements, and one director, David C. Colby, who is also a director of STAT, abstained. The Merger Agreement and the Stockholder Agreements were executed and delivered in the evening of October 7, 1996 and the Merger was publicly announced at approximately 8:00 a.m. Eastern time on October 8, 1996. 21 REASONS OF AMERICAN FOR ENGAGING IN THE MERGER In reaching its decision to approve the Merger Agreement and the Merger, the Board of Directors of American considered a number of factors including: 1. American's desire to diversify its business into related healthcare services; 2. The suitability of STAT's business to American's business, including the nature of STAT's business; STAT's approach to emergency practice management and disease management; and the quality of STAT's management team; 3. STAT's business strategy, and the potential growth rates for STAT's business; 4. The complementary nature of the businesses of American and STAT and the possible integration of their businesses; and 5. The expectation that American and STAT could achieve synergistic benefits from the Merger, including reduced costs of insurance and capital, and reduced accounting and public reporting costs. RECOMMENDATION OF THE BOARD OF DIRECTORS OF STAT; REASONS FOR THE MERGER The Board of Directors of STAT believes the following are reasons STAT's stockholders should vote FOR approval and adoption of the Merger Agreement and approval of the Merger: . Access to American's established customer base. The STAT Board believes the Merger will yield cross-marketing opportunities by enabling the combined company to offer STAT's emergency physician practice management and HBO therapy management services at hospitals currently served by American's ambulance services, which should allow STAT to accelerate the growth of its business. . The opportunity to integrate STAT's emergency physician practice management services into American Medical Pathways. Through American Medical Pathways, American is seeking capitated care contracts with health maintenance organizations ("HMOs") or other payors. The inclusion of emergency physician practice management services in this product could improve the success of American Medical Pathways and speed the growth of STAT's emergency management services. . Greater access to capital. American's larger revenue base and presence in the financial markets afford American significantly greater access to the capital required to expand STAT's business. A principal part of STAT's business strategy includes acquiring existing dialysis facilities, developing new dialysis facilities, opening additional hospital-based HBO therapy facilities and financing the acquisition by its affiliated physician groups of additional emergency department management contracts, all of which activities require significant capital expenditures. The STAT Board believes that, due to the greater resources available to American, STAT will be better positioned to compete as a part of a larger, more integrated company than as a smaller independent company. . Reduced volatility in financial market performance and operating results. Through the Merger, the STAT Board believes STAT's stockholders might expect greater and improved liquidity for their securities in the financial markets. STAT's securities frequently experience the price volatility often associated with thinly traded stocks, and STAT's operating results are dependent upon a relatively small number of revenue sources. Because of the combined company's substantially larger revenue base and expected broader following in the financial markets, stockholders might expect a more stable trading market for their securities. In the course of its deliberations, the STAT Board of Directors reviewed a number of additional factors relevant to the Merger. In particular, the STAT Board considered, among other things: (i) information concerning STAT's and American's respective businesses, historical financial performance, product offerings and business development strategies; (ii) the history of consolidation in the healthcare industry; (iii) the fact that American is 22 not a highly leveraged company; (iv) the comparative stock prices and price- earnings multiples of the two companies; (v) the compatibility of the management and businesses of STAT and American; (vi) the financial presentation by Pacific Growth Equities; and (vii) reports from management and legal advisors on the results of their due diligence investigation of American. Potential negative factors to the Merger considered by the STAT Board were: (i) the fact that no pricing collar or floor had been negotiated in the Exchange Ratio; (ii) that a shift in American's core business as a result of the announcement of the Merger might result in negative reaction by the financial markets; (iii) that the Merger is expected to be dilutive to American's 1996 earnings; and (iv) that American's stock has historically traded at a price-earnings multiple less than that of STAT's stock. In view of the variety of factors, both positive and negative, considered by the STAT Board, it did not find it practical to, and did not, quantify or otherwise assign relative weights to the specific factors considered. The factors were considered in their entirety by the STAT Board in the course of its deliberations and discussions regarding the Merger. After taking into consideration all of the factors set forth above, the STAT Board concluded (with David C. Colby not in attendance and not participating in deliberations or voting) that the Merger Agreement and the Merger were in the best interests of STAT and its stockholders and that STAT should proceed with the Merger Agreement and the Merger at this time. For a discussion of the interests of certain members of STAT's management and Board of Directors in the Merger, see "The Merger--Interests of Certain Persons in the Merger." THE STAT BOARD HAS APPROVED THE MERGER AGREEMENT AND THE MERGER AND RECOMMENDS THAT STAT'S STOCKHOLDERS VOTE FOR THE APPROVAL OF THE MERGER AGREEMENT AND THE MERGER. THE STAT BOARD BELIEVES THAT THE MERGER AGREEMENT AND THE MERGER ARE FAIR AND IN THE BEST INTERESTS OF STAT'S STOCKHOLDERS. OPINION OF STAT'S FINANCIAL ADVISOR The Board of Directors of STAT retained Pacific Growth Equities to render its opinion as to whether the Exchange Ratio is fair, from a financial point of view, to the holders of STAT Common Stock. On October 7, 1996, Pacific Growth Equities rendered its opinion to the Board of Directors of STAT to the effect that, as of such date, the Exchange Ratio was fair, from a financial point of view, to the holders of STAT Common Stock. THE FULL TEXT OF PACIFIC GROWTH EQUITIES' OPINION, DATED OCTOBER 7, 1996, WHICH SETS FORTH THE ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY PACIFIC GROWTH EQUITIES IN RENDERING ITS OPINION, IS ATTACHED AS ANNEX B TO THIS PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. PACIFIC GROWTH EQUITIES' OPINION IS DIRECTED ONLY TO THE FAIRNESS, AS OF OCTOBER 7, 1996 AND FROM A FINANCIAL POINT OF VIEW, OF THE EXCHANGE RATIO TO THE HOLDERS OF STAT COMMON STOCK AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STAT STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE WITH RESPECT TO THE MERGER AGREEMENT. THE SUMMARY OF PACIFIC GROWTH EQUITIES' OPINION SET FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION ATTACHED AS ANNEX B. STAT STOCKHOLDERS ARE URGED TO READ THE OPINION CAREFULLY IN ITS ENTIRETY. In conducting its investigation and analysis in arriving at its opinion attached as Annex B, Pacific Growth Equities reviewed such information and took into account such financial and economic factors as it deemed relevant under the circumstances. In that connection, Pacific Growth Equities among other things: (i) reviewed forecasts concerning the business and operations of American furnished to Pacific Growth Equities by or on behalf of American for purposes of its analysis, as well as publicly available information, including but not limited to Annual Reports on Form 10-K, Quarterly Reports on Form 10- Q, proxy and information statements and other information filed with the Commission by American and equity analyst research reports prepared by 23 various investment banking firms; (ii) reviewed forecasts concerning the business and operations of STAT furnished to Pacific Growth Equities by or on behalf of STAT for purposes of its analysis, as well as publicly available information, including but not limited to Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, proxy and information statements and other information filed with the Commission by STAT and equity analyst research reports prepared by various investment banking firms; (iii) reviewed the draft of the Merger Agreement in the form presented to STAT's Board of Directors on the date of the opinion; (iv) compared the historical market prices and trading activity of STAT Common Stock and the American Common Stock with those of certain other publicly traded companies it deemed relevant; (v) compared the financial position and operating results of STAT and American with those of other publicly traded companies it deemed relevant; and (vi) reviewed, to the extent publicly available, the financial terms of certain other business combinations it deemed relevant. Pacific Growth Equities held discussions with certain members of STAT's and American's senior management concerning STAT's and American's respective historical and current financial condition and operating results, as well as the future prospects of STAT and American, respectively. Pacific Growth Equities also considered such other information, financial studies, analysis and investigations and financial, economic and market criteria which it deemed relevant for the preparation of its opinion. Pacific Growth Equities did not recommend the Exchange Ratio and the Exchange Ratio was determined by STAT and American in arms-length negotiations. STAT did not place any limitation upon Pacific Growth Equities with respect to the procedures followed or factors considered by Pacific Growth Equities in rendering its opinion. In arriving at its opinion, Pacific Growth Equities assumed and relied upon the accuracy and completeness of all of the financial and other information provided to it by or on behalf of STAT and American, or publicly available, and was not engaged, and did not attempt, to independently verify any such information. Pacific Growth Equities also assumed, with STAT's consent, that: (i) the Merger will be accounted for as a pooling of interests and will be treated as a tax free reorganization for federal income tax purposes; (ii) all material assets and liabilities (contingent or otherwise, known or unknown) of STAT and American are as set forth in the consolidated financial statements of STAT (including the consolidated financial statements of STAT's affiliated physician group, South Texas Acute Trauma Physicians, P.A.) and American, respectively; and (iii) the Merger will be consummated in accordance with the terms of the Merger Agreement, without any amendment thereto and without waiver by STAT or American of any of the conditions to their respective obligations thereunder. Pacific Growth Equities also assumed that the financial forecasts examined by it had been reasonably prepared on bases reflecting the best available estimates and good faith judgments of the senior managements of STAT and American, respectively, as to the future performance of their respective companies. Pacific Growth Equities relied upon assurances of management of STAT and American that such management was unaware of any fact that would make their respective information and forecasts provided to Pacific Growth Equities incomplete or misleading. In conducting its review, Pacific Growth Equities did not make nor obtain (or assume any responsibility for making or obtaining) an independent evaluation or appraisal of any of the assets or liabilities (contingent or otherwise) of STAT or American, nor did Pacific Growth Equities make a physical inspection of the properties or facilities of STAT or American. Pacific Growth Equities' opinion was based upon economic, monetary and market conditions as they existed on and to the extent that they could be evaluated as of the date of such opinion and did not predict or take into account any changes which may occur, or information which may become available, thereafter. Pacific Growth Equities' opinion expressly states that subsequent developments may affect the opinion and that Pacific Growth Equities does not have any obligation to update, revise or reaffirm its opinion. Pacific Growth Equities' opinion does not address the relative merits of the Merger and any other potential transactions or business strategies considered by STAT's Board of Directors, and does not constitute a recommendation to any stockholder of STAT as to how such stockholder should vote with respect to the Merger. Pacific Growth Equities' opinion does not imply any conclusion as to the likely trading range of the American Common Stock following the consummation of the Merger, which may vary depending upon, among other factors, changes in interest rates, dividend rates, market conditions, general economic conditions and other factors that generally influence the price of securities. 24 In connection with preparing its opinion on October 7, 1996, Pacific Growth Equities conducted a variety of financial analyses summarized below with respect to STAT and American: Historical Trading Price and Ratio Analysis. Pacific Growth Equities reviewed the history of trading prices for shares of STAT Common Stock and American Common Stock for the 20 trading day period from September 9, 1996 to October 3, 1996, and compared the relation of such trading prices to each other. The review showed average, high and low prices to be $7.18, $8.38 and $6.31, respectively, per share of STAT Common Stock and $36.08, $37.88 and $33.63, respectively, per share of American Common Stock. Based on such prices and over such period, the average, high and low trading ratios of American Common Stock to STAT Common Stock were 5.02, 5.56 and 4.01, respectively. For purposes of providing historical perspective to the analysis, Pacific Growth Equities also reviewed, but did not provide specific ratio analysis with respect to, the historical trading prices for STAT Common Stock and American Common Stock for the most recent two years. Trading data for STAT was not available for the portion of the period prior to STAT's initial public offering on April 21, 1995. Contribution Analysis. Pacific Growth Equities analyzed STAT's and American's relative contribution to the combined company resulting from the Merger with respect to revenues, operating income, income before taxes and stockholders' equity. As a result of the Merger and assuming approximately 27,565,000 shares of American Common Stock outstanding after the Merger, STAT stockholders will own approximately 14.0% of the outstanding American Common Stock, which compares to STAT's contribution (based on American's and STAT's latest twelve month ("LTM") results through, and balance sheets at, June 30, 1996) of 5.0% of pro forma revenues, 8.05% of pro forma operating income, 8.0% of pro forma income before taxes and 2.0% of pro forma stockholders' equity, respectively of the combined company. Discounted Cash Flow Analysis. Using a discounted cash flow ("DCF") methodology, Pacific Growth Equities valued each of STAT and American by estimating the present value of operating cash flows of STAT and American if each were to continue on a stand-alone basis (without giving effect to the Merger). Pacific Growth Equities valued STAT and American in accordance with forecasts provided by management of STAT and American, respectively. Operating cash flow represents net income, plus depreciation/amortization expense, less expected capital expenditures, and less any increase and plus any decrease in forecasted working capital of the respective companies. For each entity and under each case, Pacific Growth Equities aggregated (x) the present value of the operating cash flows over the period from 1997 through 1999 with (y) the present value of the range of terminal values described below. The range of terminal values was generally calculated by applying multiples (ranging from 25.0-29.0 for STAT and 18.0-22.0 for American) to each entity's net income for the last 12 months of the forecast period. This range of terminal values represented, for each of STAT and American, their respective value beyond the forecast period. As part of the DCF analysis, Pacific Growth Equities used discount rates reflecting each entity's specific financial characteristics, ranging from 20.0% to 30.0% for STAT and from 8.0% to 12.0% for American. This DCF analysis resulted in values ranging from $32.31 to $43.11 per share of American Common Stock, with a midpoint of $37.46 per share, and values ranging from $6.86 to $9.92 per share of STAT Common Stock, with a midpoint of $8.25 per share. Pacific Growth Equities also performed a DCF analysis on the combined company resulting from the Merger utilizing the forecasts provided by management of STAT and American, and assuming an expense savings equal to approximately 0.2% of sales during each fiscal year in the forecast period. In this analysis Pacific Growth Equities determined the range of terminal values by applying the same multiples utilized in the stand-alone analysis for American and determined the present value of operating cash flows and terminal values by applying the same discount rates applied in the stand-alone analysis for American. Assuming that 27,565,000 shares of American Common Stock are outstanding following the Merger, this DCF analysis resulted in values ranging from $32.21 to $42.97 per share of post-Merger American Common Stock, with a mid-point of $37.33 per share. Based on the Exchange Ratio, this results in an average implied value per share of STAT Common Stock of $9.33, compared with an average implied value of $8.25 per share of STAT Common Stock on a stand- alone basis as determined from the DCF analysis described above. 25 Analysis of Selected Publicly Traded Comparable Companies. Pacific Growth Equities reviewed certain publicly available financial information as of the most recently reported period and stock market information as of October 2, 1996 for certain selected publicly traded companies which Pacific Growth Equities deemed comparable to STAT and American. For STAT, such comparable companies consisted of: (i) Coastal Physician Group, Inc., EmCare Holdings, Inc, InPhyNet Medical Management, Inc. Pediatrix Medical Group, Inc., Sheridan Healthcare, Inc, and Sterling Healthcare Group, Inc. in the hospital management sector, and (ii) Renal Care Group, Inc., Renal Treatment Centers, Inc., Total Renal Care Holdings, Inc. and Vivra, Inc. in the dialysis services sector. For American, such comparable companies consisted of Laidlaw, Inc. and Rural Metro Corp. For each comparable company, Pacific Growth Equities calculated multiples as of October 2, 1996 of market capitalization to LTM revenues, LTM earnings before interest and taxes ("EBIT") and LTM earnings, and the ratio ("P/E Ratio") of current stock prices per share to 1996 and 1997 fiscal year estimated earnings per share ("EPS") (such estimated earnings, for each year, as reported by IBES and Zack's). Pacific Growth Equities calculated an average of the various ratios for the comparable companies in each sector, adjusted to eliminate, in the case of the STAT comparable companies, the high and low ratios in each category. Pacific Growth Equities then calculated a combined weighted average to the STAT comparable companies by assigning a 60% weight to the hospital management sector adjusted averages and a 40% weight to the dialysis services sector (including hyperbaric oxygen treatment and home health services), with respect to the revenue ratio, and by assigning a 30% weight to the hospital management sector and a 70% weight to the dialysis services sector (including hyperbaric oxygen treatment and home health services), with respect to the earnings and EBIT ratios. Pacific Growth Equities then applied these multiples to the LTM revenues, LTM EBIT, LTM earnings and forecasted 1996 and 1997 earnings for STAT and American, respectively (utilizing estimates provided by management of STAT and American, respectively), and divided the result by the number of outstanding shares of STAT Common Stock and American Common Stock, respectively, to determine the implied per share value of STAT and American. This analysis resulted in values per share of STAT Common Stock ranging from $5.76 to $10.06, with an average of $8.12 and an average excluding the high and low values of $8.26. This analysis resulted in values per share of American Common Stock ranging from $34.56 to $38.50, with an average of $36.56 and an average excluding the high and low prices of $36.57. Analysis of Selected Comparable Acquisition Transactions. Pacific Growth Equities reviewed 41 selected transactions involving the acquisition of companies in businesses which Pacific Growth Equities deemed relevant. Such transactions were chosen based on a review of acquired companies which possessed general business, operating and financial characteristics representative of companies in the industry sectors in which STAT operates. Pacific Growth Equities noted that none of the selected transactions reviewed was identical to the Merger and that, accordingly, the analysis of comparable transactions necessarily involves complex consideration and judgments concerning differences in financial and operating characteristics of STAT and other factors that would affect the acquisition value of comparable transactions. For each comparable transaction, Pacific Growth Equities calculated multiples of price to LTM revenues, stockholders' equity, LTM earnings and LTM EBIT and calculated the average ratios and the average excluding the high and low ratios. The resulting average ratio of price to LTM revenues was 2.2x and the adjusted average ratio was 1.8x; the average and adjusted average ratios of price to stockholders' equity were 7.3x and 5.8x, respectively; the average and adjusted average ratios of price to LTM earnings were 43.4x and 38.3x, respectively; and the average and adjusted average ratios of price to LTM EBIT were 25.0x and 23.8x, respectively. Pacific Growth Equities then applied the adjusted average ratios relating to LTM EBIT and LTM earnings to STAT and divided the result by the number of outstanding shares of STAT Common Stock to determine an implied value per share of STAT Common Stock. This analysis resulted in implied values of STAT Common Stock of $7.48 and $7.51 per share, with an average of $7.49. Premiums Paid Analysis. Pacific Growth Equities reviewed the relationship between the prices paid in the comparable acquisition transactions described in the preceding paragraph and the trading price of the target stock one day prior to the announcement of the respective transactions to determine the premium paid in such transactions. The review revealed that the average premium was 33.7% and the average excluding the high and low premium was 27.0%. Pacific Growth Equities then applied the adjusted average premium to the closing price of STAT Common Stock on October 3, 1996 ($8.25) to determine an implied value of $10.48. 26 The foregoing summary does not purport to be a complete description of the analyses performed by Pacific Growth Equities or of its presentations to the STAT Board. The preparation of financial analyses and a fairness opinion is a complex process and is not necessarily susceptible to partial analyses or summary description. Pacific Growth Equities believes that its analyses (and the summary set forth above) must be considered as a whole, and that selecting portions of such analyses and of the factors considered by Pacific Growth Equities, without considering all of such analyses and factors, could create an incomplete view of the processes underlying the analyses conducted by Pacific Growth Equities and its opinion. Pacific Growth Equities did not attempt to assign specific weights to particular analyses. Any estimates contained in Pacific Growth Equities' analyses are not necessarily indicative of actual values, which may be significantly more or less favorable than as set forth therein. Estimates of values of companies do not purport to be appraisals or necessarily to reflect the prices at which companies may actually be sold. Because such estimates are inherently subject to uncertainty, Pacific Growth Equities does not assume responsibility for their accuracy. Pacific Growth Equities, as part of its investment banking business, has engaged in the evaluation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, and private placements. In the ordinary course of business, Pacific Growth Equities may from time to time trade equity securities of STAT and American for its own account and for accounts of its customers and, accordingly, may at any time hold a long or short position in such securities. Compensation. Pursuant to an engagement letter agreement dated September 23, 1996 between STAT and Pacific Growth Equities, STAT agreed to pay Pacific Growth Equities a fee of $300,000, $150,000 of which was payable upon execution of the engagement letter agreement and the remaining $150,000 payable when Pacific Growth Equities notified STAT that it was prepared to render its opinion as to the fairness, from a financial point of view, of the Exchange Ratio to the holders of STAT Common Stock, regardless of the conclusions reached by Pacific Growth Equities in such opinion and regardless of whether any transaction is consummated. STAT has also agreed to reimburse Pacific Growth Equities for its reasonable out-of-pocket expenses, including reasonable fees and disbursements of counsel. STAT has also agreed to indemnify Pacific Growth Equities, its affiliates and their respective directors, officers, employees and agents and controlling persons against certain liabilities relating to or arising out of its engagement, including liabilities under the federal securities laws. In the past, Pacific Growth Equities has provided investment banking services to STAT, including acting as manager in connection with a proposed public offering of STAT Common Stock in 1996, which was suspended pending discussions with American concerning the Merger. In connection with the proposed offering, Pacific Growth Equities was to have received customary compensation for its services as managing underwriter, and did receive reimbursement for certain expenses incurred by Pacific Growth Equities in connection therewith. The September 23, 1996, engagement letter agreement between Pacific Growth Equities and STAT provides that if the Merger is not consummated and the proposed public offering proceeds, Pacific Growth Equities will reduce dollar-for-dollar the amount of underwriting discounts and commissions payable in connection with that offering to the extent of the $300,000 fee paid to Pacific Growth Equities by STAT under the September 23, 1996 engagement letter agreement. INTERESTS OF CERTAIN PERSONS IN THE MERGER In considering the recommendation of the STAT Board of Directors with respect to the Merger Agreement and the transactions contemplated thereby, STAT stockholders should be aware that certain members of STAT management and the STAT Board of Directors have certain interests in the Merger that are in addition to the interests of stockholders of STAT generally. One of the conditions of the obligation of American and Merger Sub to consummate the Merger is the execution and delivery by each of Russell D. Schneider, Chairman of the Board and Chief Executive Officer of STAT, Ruben A. Perez, President-Healthcare Management, Treasurer and Director of STAT, Daniel A. Perez, Senior Vice President of STAT, William H. Rice, M.D., Vice Chairman of the Board of STAT and Victor M. 27 Miranda, M.D., President-Emergency Physicians and Director of STAT will enter into employment agreements, effective as of the Effective Time in the forms attached to the Merger Agreement. These agreements supersede their existing employment agreements with STAT and provide, among other things, for the continuation of the existing annual base salaries for Messrs. Schneider, R. Perez and D. Perez and Drs. Rice and Miranda of $120,000, $120,000, $96,400, $200,000 and $200,000, respectively. The agreements also provide that if such person's employment with STAT is terminated other than for cause by STAT within three years following the Effective Time, he will receive (i) base compensation as in effect on the date prior to termination for an additional period of nine months (except in the case of Russell D. Schneider, who shall receive base compensation for an additional period of twelve months), and (ii) continuation of coverage and participation in current medical and dental insurance plans for the same periods of time described in clause (i) above. In addition, each agreement provides that if the employee sells or otherwise disposes of (or in the case of Drs. Miranda and Rice, if STAT Physicians I sells or otherwise disposes of) shares of American Common Stock received in the Merger (and, in the case of Drs. Miranda and Rice, shares received upon exercise of existing options) in excess of the following percentages of such shares held by him (or, in the case of Drs. Miranda and Rice by STAT Physicians I) prior to the dates specified, such person will pay to STAT an amount equal to the number of excess shares sold or disposed of multiplied by the difference between the average selling price of such shares and the closing price of American Common Stock on the first day such shares would not be subject to such provisions: after June 30, 1997, not more than 25%; after December 31, 1997, not more than 50%; after June 30, 1998, not more than 75%; and after December 31, 1998, 100%. Pursuant to the Merger Agreement, upon consummation of the Merger, Mr. Schneider will be appointed to the Board of Directors of American by the directors of American. Upon consummation of the Merger, based on the number of outstanding shares of American Common Stock and STAT Common Stock as of November 1, 1996, directors and executive officers of STAT will own approximately 9.9% of the outstanding shares of American Common Stock. David C. Colby, who is a director of STAT, is also a director and an executive officer of American. At the Effective Time, STAT's right under STAT's 1996 Stock Option Plan to repurchase shares of STAT Common Stock issuable upon exercise of options held by David C. Colby and by Ann N. James, Ph.D., also a director of STAT, in each case, to purchase 20,000 shares of STAT Common Stock, will terminate. The Merger Agreement provides that STAT shall, to the fullest extent permitted under applicable law or under STAT's Certificate of Incorporation or By-Laws and regardless of whether the Merger becomes effective, indemnify and hold harmless, each present and former director, officer or employee of STAT or any of its subsidiaries against any costs or expenses (including attorneys' fees), judgments, fines, losses, claims, damages, liabilities and amounts paid in settlement in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to the transactions contemplated by the Merger Agreement, or otherwise with respect to any acts or omissions occurring at or prior to the Effective Time, to the same extent as provided in STAT's Certificate of Incorporation or By-Laws or any applicable contract or agreement as in effect on the date of the Merger Agreement, in each case for a period of five years after the date of the Merger Agreement. The Merger Agreement provides that American and the Surviving Corporation (as defined) shall honor and fulfill in all respects the obligations of STAT pursuant to indemnification agreements with STAT's directors and officers existing at or before the Effective Time. The Merger Agreement further provides that for a period of three years after the Effective Time, American shall cause the Surviving Corporation to maintain in effect, if available, directors' and officers' liability insurance covering those persons who are currently covered by STAT's directors' and officers' liability insurance policy on terms comparable to those now applicable to directors and officers of STAT; provided, however, that in no event shall American or the Surviving Corporation be required to expend in excess of 150% of the annual premium currently paid by STAT for such coverage; and provided further, that if the annual premium would exceed such amount, American shall cause the Surviving Corporation to obtain a policy with the maximum coverage available at a cost not exceeding such amount. See "The Merger Agreement --Conditions to the Merger--Indemnification and Insurance." 28 CERTAIN FEDERAL INCOME TAX CONSEQUENCES The obligations of American and STAT to consummate the Merger are conditioned on the receipt by American of an opinion from Ropes & Gray, its counsel, and the receipt by STAT of an opinion from KPMG Peat Marwick LLP, independent certified public accountants of STAT and American, that the Merger constitutes a reorganization under Section 368 of the Internal Revenue Code of 1986 (the "Code"). No ruling has been sought from the Internal Revenue Service as to the Federal income tax consequences of the Merger, and the opinions of counsel and accountants will not be binding upon the Internal Revenue Service or any court. The opinions referred to above will be based in part upon representations, made as of the Effective Time by STAT, American and certain stockholders of STAT, which counsel and KPMG Peat Marwick LLP will assume to be true, correct and complete. The representations will include representations of Ruben A. Perez, Russell D. Schneider, Daniel A. Perez, William H. Rice, M.D., Victor M. Miranda, M.D. and STAT Physicians I pursuant to the Stockholder Agreements (see "Other Agreements--Stockholder Agreements") to the effect that as of the Effective Time they will have no present plan to transfer or otherwise reduce the risk of ownership of the American Common Stock they receive in the Merger in excess of fifty percent (50%) of the aggregate fair market value, immediately prior to the Merger, of all outstanding shares of STAT Common Stock held by them immediately prior to the Merger. If any of the representations made by STAT, American and certain stockholders of STAT is inaccurate, the opinions of such counsel and accountants could be adversely affected. The opinion to be provided by Ropes & Gray will state that no gain or loss will be recognized by STAT, American or Merger Sub as a result of the Merger. The opinion to be provided by KPMG Peat Marwick LLP will state that the material federal income tax consequences of the Merger are as follows: 1. Provided the proposed Merger qualifies as a statutory merger under the DGCL, after the Merger STAT will hold substantially all of its assets and the assets of Merger Sub (other than the value of the American Common Stock distributed in the transaction), and in the Merger the stockholders of STAT will exchange an amount of stock constituting control of STAT (within the meaning of Section 368(c) of the Code) solely for American voting stock, then the proposed Merger will constitute a reorganization within the meaning of Section 368(a)(1)(A) of the Code. The reorganization will not be disqualified by reason of the fact that the voting stock of American is used in the Merger. For purposes of the opinion, "substantially all" means at least 90% of the fair market value of the net assets and at least 70% of the fair market value of the gross assets of Merger Sub and STAT. STAT, American and Merger Sub will each be "a party to a reorganization" within the meaning of Section 368(b)(1) of the Code. 2. No gain or loss will be recognized to the stockholders of STAT upon the receipt of solely American Common Stock in exchange for their shares of STAT Common Stock (including any fractional share interest of American Common Stock to which they may be entitled). 3. The basis of the American Common Stock received by the stockholders of STAT (including any fractional share interest to which they may be entitled) will be the same as the basis of STAT Common Stock surrendered in exchange therefor. 4. The holding period of the American Common Stock received by the stockholders of STAT (including any fractional share interest to which they may be entitled) will include the period during which the STAT Common Stock surrendered therefor was held, provided the stock of STAT is a capital asset in the hands of the stockholder of STAT on the date of the exchange. 5. The payment of cash in lieu of fractional share interests in American Common Stock will be treated for federal income tax purposes as if the fractional shares were issued as part of the exchange and then were redeemed by American for cash. The cash payments will be treated as having been received as distributions in full payment in exchange for the stock redeemed as provided in Section 302(a) of the Code. 29 6. No gain or loss will be recognized to Merger Sub on the transfer of its assets to STAT in exchange for STAT Common Stock and the assumption by STAT of Merger Sub's liabilities, if any. 7. No gain or loss will be recognized to STAT upon the receipt of the assets of Merger Sub in exchange for STAT Common Stock. 8. No gain or loss will be recognized to American upon the receipt of stock of STAT solely in exchange for stock of Merger Sub. Certain noncorporate STAT stockholders may be subject to backup withholding at a rate of 31% on cash payments received in lieu of a fractional share interest in American Common Stock. Backup withholding will not apply, however, to a stockholder who furnishes a correct taxpayer identification number ("TIN") and certifies that he or she is not subject to backup withholding on the substitute Form W-9 included in the Transmittal Letter, who provides a certificate of foreign status on Form W-8, or who is otherwise exempt from backup withholding. A stockholder who fails to provide the correct TIN on Form W-9 may be subject to a $50 penalty imposed by the Internal Revenue Service. Each STAT stockholder will be required to retain records and file with such holder's federal income tax return a statement setting forth certain facts relating to the Merger. THE FOREGOING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OF ALL POTENTIAL TAX EFFECTS RELEVANT TO A DECISION WHETHER TO VOTE IN FAVOR OF APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER. THE DISCUSSION DOES NOT ADDRESS THE TAX CONSEQUENCES THAT MAY BE RELEVANT TO A PARTICULAR STAT STOCKHOLDER SUBJECT TO SPECIAL TREATMENT UNDER CERTAIN FEDERAL INCOME TAX LAWS, SUCH AS DEALERS IN SECURITIES, BANKS, INSURANCE COMPANIES, TAX-EXEMPT ORGANIZATIONS, NON-UNITED STATES PERSONS AND STOCKHOLDERS WHO ACQUIRED STAT COMMON STOCK PURSUANT TO THE EXERCISE OF STAT OPTIONS OR OTHERWISE AS COMPENSATION, AND DOES NOT ADDRESS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCALITY OR FOREIGN JURISDICTION. MOREOVER, THE TAX CONSEQUENCES TO HOLDERS OF STAT OPTIONS OR WARRANTS TO PURCHASE STAT COMMON STOCK ARE NOT DISCUSSED. THE DISCUSSION IS BASED UPON THE CODE, TREASURY REGULATIONS THEREUNDER AND ADMINISTRATIVE RULINGS AND COURT DECISIONS AS OF THE DATE HEREOF. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE, AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING VALIDITY OF THIS DISCUSSION. STAT STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER TO THEM. ANTICIPATED ACCOUNTING TREATMENT The Merger is expected to qualify as a "pooling of interests" for accounting and financial reporting purposes. Under this method of accounting, the recorded assets and liabilities of American and STAT will be carried forward to the combined corporation at their recorded amounts, subject to any adjustments required to conform the accounting policies of the two companies; income of the combined corporation will include income of American and STAT for the entire fiscal year in which the Merger occurs; and the reported income of the separate corporations for prior periods will be combined and restated as income of the combined corporation. The Merger Agreement provides that a condition to the consummation of the Merger is the receipt of a letter from KPMG Peat Marwick LLP, independent certified public accountants of American and STAT, to the effect that the Merger qualifies for "pooling of interests" accounting treatment. 30 EFFECT ON STOCK OPTIONS AND WARRANTS At the Effective Time, each then outstanding option to purchase STAT Common Stock granted under the 1996 Stock Incentive Plan of STAT (the "STAT Stock Option Plan") and the outstanding option to acquire 10,000 shares of STAT Common Stock held by Mr. Schneider, in each case whether vested or unvested, will be deemed assumed by American and will be deemed to constitute an option to acquire the number of shares rounded to the nearest whole number of American Common Stock as the holder of such option would have been entitled to receive pursuant to the Merger had such holder exercised such option in full immediately prior to the Effective Time (not taking into account whether or not such option was in fact exercisable) at a price per share equal to (x) the aggregate exercise price for STAT Common Stock otherwise purchasable pursuant to such option divided by (y) the number of shares of American Common Stock purchasable pursuant to such option. As of September 30, 1996, there were outstanding options to acquire 344,500 shares of STAT Common Stock under the STAT Stock Option Plan. At the Effective Time, each of the Class A redeemable common stock purchase warrants expiring April 19, 1998 (the "Class A Warrants") to purchase one share of STAT Common Stock and each of the 62,500 warrants expiring April 19, 2000 (the "Other Warrants") to purchase two shares of STAT Common Stock and one Class A Warrant (the Class A Warrants and the Other Warrants are hereinafter referred to collectively as the "Warrants"), shall be deemed to constitute a warrant to acquire, on the same terms and conditions as were applicable under such Warrant prior to the Effective Time (including anti- dilution provisions), the number (rounded to the nearest whole number) of shares of American Common Stock as the holder of such Warrant would have been entitled to receive pursuant to the Merger had such holder exercised such Warrant in full immediately prior to the Effective Time, at a price per share equal to (x) the aggregate exercise price for STAT Common Stock otherwise purchasable pursuant to such Warrant divided by (y) the number of shares of American Common Stock deemed purchasable pursuant to such Warrant. CERTAIN LEGAL MATTERS Pursuant to the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), American and STAT and certain stockholders of STAT have each filed a Notification and Report Form for review under the HSR Act with the Federal Trade Commission (the "FTC") and the Antitrust Division of the Department of Justice (the "Antitrust Division"). The waiting period under the HSR Act with respect to such filings expires on November 29, 1996. American and STAT do not believe that any additional governmental filings in the United States are required with respect to the Merger, other than the filing of the Certificate of Merger with the Delaware Secretary of State and notice of a change in ownership of dialysis operations with HCFA and the Texas Department of Health. The FTC or the Antitrust Division could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking divestiture of substantial assets of American or STAT if the Merger is consummated. Consummation of the Merger is conditioned upon, among other things, the absence of any temporary restraining order, preliminary or permanent injunction, or other order issued by any federal or state court in the United States which prevents the consummation of the Merger. FEDERAL SECURITIES LAW CONSEQUENCES All American Common Stock issued in connection with the Merger will be freely transferable, except that any American Common Stock received by persons who are deemed to be "affiliates" (as such term is defined under the Securities Act) of STAT or American prior to the Merger may be sold by them only in transactions permitted by the resale provisions of Rule 145 under the Securities Act with respect to affiliates of STAT, or Rule 144 under the Securities Act with respect to persons who are or become affiliates of American, or as otherwise permitted under the Securities Act. Persons who may be deemed to be affiliates of STAT or American generally include individuals or entities that control, are controlled by, or are under common control with, such corporation and may include certain officers and directors of such corporation as well as principal stockholders of such corporation. 31 Affiliates of STAT or American may not sell their shares of American Common Stock acquired in connection with the Merger, except pursuant to an effective registration under the Securities Act covering such shares or in compliance with Rule 145 (or Rule 144 under the Securities Act in the case of persons who are or become affiliates of American) or another applicable exemption from the registration requirements of the Securities Act. In general, under Rule 145, for two years following the Effective Time an affiliate (together with certain related persons) would be entitled to sell shares of American Common Stock acquired in connection with the Merger only through unsolicited "brokers' transactions" or in transactions directly with a "market maker," as such terms are defined in Rule 145. Additionally, the number of shares to be sold by an affiliate (together with certain related persons and certain persons acting in concert) within any three-month period for purposes of Rule 145 may not exceed the greater of 1% of the outstanding shares of American Common Stock or the average weekly trading volume of such stock during the four calendar weeks preceding such sale. Rule 145 would only remain available, however, to affiliates if American remained current with its informational filings with the Commission under the Exchange Act. Two years after the Effective Time, an affiliate would be able to sell such American Common Stock without such manner of sale or volume limitations provided that American was current with its Exchange Act informational filings and such affiliate was not then an affiliate of American. Three years after the Effective Time, an affiliate would be able to sell such shares of American Common Stock without any restrictions so long as such affiliate had not been an affiliate of American for at least three months prior thereto. STOCK EXCHANGE LISTING It is a condition to the Merger that the shares of American Common Stock to be issued in connection with the Merger be authorized for listing on the NYSE, subject to official notice of issuance. DIVIDENDS Under the terms of the Merger Agreement, STAT is not permitted to declare, set aside, make or pay any dividend or other distribution in respect of its capital stock from the date of the Merger Agreement until the earlier of the termination of the Merger Agreement and the Effective Time. In addition, pursuant to the Merger Agreement, American is not permitted to declare, set aside, make or pay any dividend or other distribution in respect of its capital stock from the date of the Merger Agreement until the earlier of the termination of the Merger Agreement and the Effective Time. APPRAISAL RIGHTS Under the General Corporation Law of the State of Delaware, the holders of STAT Common Stock and American Common Stock are not entitled to any appraisal rights with respect to the Merger. FEES AND EXPENSES STAT has agreed to pay American a fee of $4.5 million plus reasonable, documented out-of-pocket expenses of up to $500,000 if the Merger Agreement is terminated under certain circumstances. See "The Merger Agreement-- Termination." American has agreed to pay STAT a fee of $4.5 million plus reasonable, documented out-of-pocket expenses of up to $500,000 if the Merger Agreement is terminated under certain circumstances. See "The Merger Agreement--Termination." American has agreed to pay the fee for filing this Proxy Statement/Prospectus with the Commission. Except as aforesaid, each of American and STAT will pay its own expenses in connection with the Merger. 32 THE MERGER AGREEMENT The description of the Merger Agreement set forth below does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, a copy of which is attached to this Proxy Statement/Prospectus as Annex A and incorporated herein by reference. All stockholders are urged to read the Merger Agreement in its entirety. TERMS OF THE MERGER The Merger. At the Effective Time and subject to and upon the terms and conditions of the Merger Agreement and the Delaware General Corporation Law ("DGCL"), Merger Sub will be merged with and into STAT, the separate corporate existence of Merger Sub will cease, and STAT will continue as the surviving corporation ("Surviving Corporation") and a wholly-owned subsidiary of American. Effective Time. As promptly as practicable after the satisfaction or waiver of the conditions to the Merger set forth in the Merger Agreement, the Merger will be consummated by filing a certificate of merger, together with any required related certificates, with the Secretary of State of the State of Delaware in accordance with the provisions of the DGCL. The time of such filing is referred to as the "Effective Time." Certificate of Incorporation and By-Laws. The Merger Agreement provides that the Certificate of Incorporation and By-Laws of STAT, as in effect immediately prior to the Effective Time, will be the Certificate of Incorporation and By- Laws of the Surviving Corporation until thereafter amended in accordance with the DGCL, such Certificate of Incorporation and such By-Laws; provided that the Board of Directors of the Surviving Corporation will consist of the same number of directors as the number of directors of Merger Sub at the Effective Time. Directors and Officers. The directors of Merger Sub immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and By-Laws of the Surviving Corporation, and persons specified in the Merger Agreement shall be the initial officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed and qualified. Conversion of STAT Common Stock in the Merger. At the Effective Time, each share of STAT Common Stock (a "STAT Share") issued and outstanding immediately prior to the Effective Time (excluding shares referred to in the following paragraph) will be converted into the right to receive 0.25 of a share of validly issued, fully paid and nonassessable shares ("American Shares") of American Common Stock. Cash will be paid to the STAT stockholders in lieu of fractional shares of American Common Stock and for any dividends or other distributions to which such holders are entitled. See "The Merger Agreement-- Terms of the Merger--Fractional Shares" and "The Merger Agreement--Exchange of Certificates." Stock Options. At the Effective Time, (A) each outstanding option to purchase STAT Common Stock granted under STAT's 1996 Stock Incentive Plan (the "STAT Stock Option Plan"), and (B) the option to purchase 10,000 shares of STAT Common Stock issued to Russell D. Schneider (together with the options described in clause (A), "Stock Options") whether vested or unvested, shall be deemed assumed by American and deemed to constitute an option to acquire, on the same terms and conditions as were applicable under such Stock Option prior to the Effective Time, the number (rounded to the nearest whole number) of American Shares as the holder of such Stock Option would have been entitled to receive pursuant to the Merger had such holder exercised such option in full immediately prior to the Effective Time (not taking into account whether or not such option was in fact exercisable), at a price per share equal to (x) the aggregate exercise price for STAT Common Stock otherwise purchasable pursuant to such Stock Option divided by (y) the number of American Shares deemed purchasable pursuant to such Stock Option. It is intended that the foregoing provisions shall be undertaken in a manner that will not constitute a "modification" as defined in Section 425 of the Code, as to any Stock Option which is an "incentive stock option." 33 Warrants. At the Effective Time, each of the 598,726 Class A redeemable common stock purchase warrants expiring April 19, 1998 (the "Class A Warrants") to purchase one share of STAT Common Stock at a purchase price of $4.50 and each of the 62,500 warrants expiring April 19, 2000 (the "Other Warrants") to purchase two shares of STAT Common Stock and one Class A Warrant at a purchase price of $10.875 (the Class A Warrants and the Other Warrants are hereinafter known collectively as, the "Warrants"), shall be deemed to constitute a warrant to acquire, on the same terms and conditions as were applicable under such Warrant prior to the Effective Time (including anti- dilution provisions), the number (rounded to the nearest whole number) of shares of American Common Stock as the holder of such Warrant would have been entitled to receive pursuant to the Merger had such holder exercised such Warrant in full immediately prior to the Effective Time, at a price per share equal to (x) the aggregate exercise price for STAT Common Stock otherwise purchasable pursuant to such Warrant divided by (y) the number of shares of American Common Stock deemed purchasable pursuant to such Warrant. Conversion of Capital Stock of Merger Sub in the Merger. Each share of common stock, $.01 par value, of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into and exchanged for one validly issued, fully paid and nonassessable share of common stock, $.01 par value, of the Surviving Corporation. Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted to reflect fully the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into American Common Stock), reorganization, recapitalization or other like change with respect to American Common Stock or STAT Common Stock occurring after the date of the Merger Agreement and prior to the Effective Time. Fractional Shares. No certificates or scrip representing less than one American Share shall be issued in connection with the Merger. In lieu of any such fractional share, each holder of a certificate or certificates for STAT Shares who would otherwise have been entitled to a fraction of an American Share upon surrender of Certificates for exchange shall be paid upon such surrender cash equal to the product of (i) such fraction, multiplied by (ii) the average closing price per share on the New York Stock Exchange ("NYSE") of American Common Stock as reported in The Wall Street Journal for the twenty trading days ending on the fifth trading date prior to the date on which the Effective Time occurs. EXCHANGE OF CERTIFICATES Exchange Agent. American shall supply, or shall cause to be supplied, to or for the account of The First National Bank of Boston (the "Exchange Agent"), in trust for the benefit of the holders of STAT Common Stock, for exchange in accordance with the Merger Agreement, through the Exchange Agent, certificates evidencing the American Shares issuable in exchange for outstanding STAT Shares. Exchange Procedures. As soon as reasonably practicable after the Effective Time, American will instruct the Exchange Agent to mail to each holder of record of STAT Common Stock a letter of transmittal and instructions to effect the surrender of the certificates representing STAT Common Stock in exchange for certificates evidencing American Common Stock. Upon surrender of a certificate representing STAT Common Stock for cancellation to the Exchange Agent together with such letter of transmittal, duly executed, and such other customary documents as may be required pursuant to such instructions, the holder of such certificate will be entitled to receive in exchange therefor (i) certificates evidencing that number of whole American Shares which such holder has the right to receive in the Merger, (ii) any dividends or other distributions on the shares of American Common Stock which such holder is entitled to receive, and (iii) cash in respect of fractional shares of American Common Stock (the American Shares, and cash described in clauses (ii) and (iii) being, collectively, the "Merger Consideration"), and the certificate representing STAT Common Stock so surrendered shall forthwith be canceled. In the event of a transfer of ownership of STAT Shares which is not registered in the transfer records of STAT as of the Effective Time, American Shares, dividends and distributions may be issued and paid to a transferee if the certificate evidencing such STAT Shares is presented to the Exchange Agent, 34 accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. Until so surrendered, each outstanding certificate that, prior to the Effective Time, represented shares of STAT Common Stock will be deemed from and after the Effective Time, for all corporate purposes (other than payment of dividends or as described below under "No Liability and Withholding"), to evidence the ownership of the number of full American Shares into which such STAT Shares shall have been so converted. Distributions With Respect to Unexchanged STAT Common Stock. No dividends or other distributions declared or made after the Effective Time with respect to American Common Stock with a record date after the Effective Time will be paid to the holder of an unsurrendered certificate representing shares of STAT Common Stock with respect to the American Shares they are entitled to receive until the holder of such certificate surrenders such certificate. Subject to applicable law, following surrender of any certificate representing shares of STAT Common Stock, there shall be paid to the record holder of the certificates representing whole shares of American Common Stock issued in exchange therefor, without interest, at the time of surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of American Common Stock. Transfers of Ownership. If any certificate for shares of American Common Stock is to be issued in a name other than that in which the Certificate representing shares of STAT Common Stock surrendered in exchange is registered, it will be a condition of the issuance that the certificate surrendered will be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange will have paid to American or any designated agent any transfer or other taxes required by reason of the issuance of a certificate for shares of American Common Stock in any name other than that of the registered holder of the certificate surrendered, or established to the satisfaction of American or any designated agent that such tax has been paid or is not payable. No Liability and Withholding. None of American, Merger Sub or STAT will be liable to any holder of STAT Common Stock for any Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. American or the Exchange Agent will be entitled to deduct and withhold from the Merger Consideration otherwise payable pursuant to the Merger Agreement to any STAT stockholder such amounts as American or the Exchange Agent is required to deduct and withhold with respect to the making of such payment under any provision of federal, state, local or foreign tax law. To the extent that amounts are so withheld by American or the Exchange Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares in respect of which such deduction and withholding was made by American or the Exchange Agent. Lost, Stolen or Destroyed Certificates. In the event any certificates representing shares of STAT Common Stock have been lost, stolen or destroyed, the Exchange Agent will issue shares of American Common Stock in exchange for such lost, stolen or destroyed certificates upon the making of an affidavit of that fact by the owner of such certificates and, at the request of American, upon delivery of a bond in such a sum as American may reasonably direct as indemnity against any claim that may be made against American or the Exchange Agent with respect to the certificates alleged to have been lost, stolen or destroyed. DETAILED INSTRUCTIONS, INCLUDING A TRANSMITTAL LETTER, WILL BE MAILED TO STAT STOCKHOLDERS PROMPTLY FOLLOWING THE EFFECTIVE TIME AS TO THE METHOD OF EXCHANGING CERTIFICATES FORMERLY REPRESENTING SHARES OF STAT COMMON STOCK. STAT STOCKHOLDERS SHOULD NOT SEND CERTIFICATES REPRESENTING THEIR SHARES TO THE EXCHANGE AGENT PRIOR TO RECEIPT OF THE TRANSMITTAL LETTER. REPRESENTATIONS AND WARRANTIES The Merger Agreement contains various representations and warranties made by STAT, in respect of itself and its subsidiaries, in favor of American and Merger Sub, and made by American and Merger Sub, in respect 35 of American and its subsidiaries, in favor of STAT, relating, among other things, to the following matters (which representations and warranties are subject, in certain cases, to specified exceptions): (i) corporate organization, standing, qualification, approvals and similar matters, except where failure to be so qualified or in good standing or to have such approvals do not constitute a Material Adverse Effect (as defined below); (ii) the absence of violation of provisions of charter documents; (iii) capitalization; (iv) the authorization, execution, delivery and enforceability of the Merger Agreement; (v) no breach or default of certain material agreements or absence of required consents except as would not constitute a Material Adverse Effect; (vi) the absence of conflict of the Merger Agreement with charter documents, laws or agreements and required consents for the execution and delivery of the Merger Agreement except as do not constitute a Material Adverse Effect; (vii) the absence of conflict with, default under or violation of agreements and laws, and the holding of permits necessary for the conduct of business, except as do not constitute a Material Adverse Effect; (viii) reports and other documents filed with the Commission, the absence of material misstatements or omissions in the information contained therein, and the fair presentation of the financial statements contained therein in accordance with generally accepted accounting principles; (ix) conduct of business in the ordinary course and the absence of certain changes or events since the close of the most recent fiscal year of STAT or American, respectively, including the absence of a Material Adverse Effect; (x) the absence of undisclosed liabilities that constitute a Material Adverse Effect; (xi) the absence of pending litigation or known threatened litigation that constitutes a Material Adverse Effect; (xii) the absence of any material untrue statements or omissions in the Registration Statement and this Proxy Statement/Prospectus; (xiii) the following representations and warranties made only by STAT: (a) employee benefit matters; (b) labor matters and claims known or threatened which constitute a Material Adverse Effect; (c) the absence of restrictions on business, except as do not constitute a Material Adverse Effect; (d) clear title to property and valid leases, except the existence of a defect which does not constitute a Material Adverse Effect; (e) payment of taxes and certain other tax matters, except where non-payment does not constitute a Material Adverse Effect; (f) compliance with environmental laws, except where noncompliance, in the aggregate, does not constitute a Material Adverse Effect; (g) ownership, rights to use and absence of violations or claims or restrictions with respect to intellectual property, except as to restrictions which do not constitute a Material Adverse Effect; (h) relationships or transactions with affiliates; (i) maintenance of insurance; (j) collectibility of accounts receivable and adequacy of reserves for accounts receivable not collectible, except as would not have a Material Adverse Effect; (k) the absence of actions that could affect the ability of American to account for the business combination to be effected by the Merger as a pooling of interests; (l) the opinion of STAT's financial advisor as to fairness; (m) absence of brokers', finders' and investment bankers' fees; (n) action taken by the STAT Board of Directors as to Section 203 of the DGCL; (o) absence of change in control payments; (p) expenses; (q) compliance with laws and rules of ethical conduct of applicable medical societies and accrediting bodies, except where the failure to be in compliance would not have a Material Adverse Effect and absence of knowing and willful violations of federal Medicare and Medicaid statutes and related state statutes and regulations; and (xiv) the following representation of American and Merger Sub: (a) the formation of Merger Sub and the absence of obligations or liabilities on the part of Merger Sub other than under the Merger Agreement. "Material Adverse Effect" means any change, effect or circumstance that, individually or when taken together with all other such changes, effects or circumstances that have occurred prior to the date of determination of the occurrence of the Material Adverse Effect, (a) is or would be materially adverse to the business, assets (including intangible assets), prospects, financial condition or results of operations of STAT and its subsidiaries or American and its subsidiaries, as the case may be, in each case taken as a whole, or (b) is or would materially delay or prevent the consummation of the transactions contemplated by the Merger Agreement. CONDUCT OF BUSINESS PENDING THE MERGER Conduct of Business by STAT. The Merger Agreement provides that, prior to the Effective Time, unless American otherwise agrees in writing, STAT will conduct its business and cause the businesses of its subsidiaries to be conducted only in the ordinary course of business and in a manner consistent with past practice; and STAT will use all reasonable efforts to preserve substantially intact the business organization of STAT and its 36 subsidiaries, to keep available the services of the present officers, employees and consultants of STAT and its subsidiaries and to preserve the present relationships of STAT and its subsidiaries with customers, suppliers and other persons with which STAT or any of its subsidiaries has significant business relations. Except as contemplated by the Merger Agreement, neither STAT nor any of its subsidiaries, without the prior written consent of American, will: (i) amend or otherwise change STAT's Certificate of Incorporation or By- Laws or similar organizational documents of any of its subsidiaries; (ii) issue, sell, pledge, dispose of or encumber, or authorize the issuance, sale, pledge, disposition or encumbrance of, any shares of capital stock of any class, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of capital stock, or any other ownership interest (including, without limitation, any phantom interest) in STAT, any of its subsidiaries or affiliates (except for the issuance of shares of STAT Common Stock issuable (A) pursuant to Stock Options which were granted under the STAT Stock Option Plan and are outstanding on the date hereof, (B) pursuant to the options to purchase 10,000 shares of STAT common stock issued to Russell D. Schneider and (C) pursuant to the Warrants). (iii) sell, pledge, dispose of or encumber any assets of STAT or any of its subsidiaries (except for (A) sales of assets in the ordinary course of business and in a manner consistent with past practice, (B) dispositions of obsolete or worthless assets, and (C) sales of immaterial assets not in excess of $50,000 in the aggregate); (iv) (A) declare, set aside, make or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of any of its capital stock, except that a wholly owned subsidiary of STAT may declare and pay a dividend to its parent, (B) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or (C) amend the terms or change the period of exercisability of, accelerate the vesting of, purchase, repurchase, redeem or otherwise acquire, or permit any subsidiary to purchase, repurchase, redeem or otherwise acquire, any of its securities or any securities of its subsidiaries, including, without limitation, shares of STAT Common Stock or any option, warrant or right, directly or indirectly, to acquire shares of STAT Common Stock, or propose to do any of the foregoing; (v) (A) acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof, except that STAT may (1) acquire complementary businesses or finance the acquisition by its affiliated physician groups of hospital medical service contracts in an amount not to exceed $1,000,000 in any single case and $2,750,000 in the aggregate, (2) with the prior written consent of American (which consent will not be unreasonably withheld or delayed) acquire certain businesses described in the Merger Agreement and (3) finance the acquisition by its affiliated physician groups of the hospital medical service contracts and not to exceed in the aggregate an amount previously specified in writing by STAT to American; (B) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse or otherwise as an accommodation become responsible for, the obligations of any person or, except in the ordinary course of business consistent with past practice, make any loans or advances; (C) enter into or amend any material contract or agreement, except that STAT may amend its existing $6,500,000 bank credit agreement to increase the amount of credit available thereunder to up to $25,000,000; (D) authorize any capital expenditures or purchase of fixed assets which are, in the aggregate, in excess of $100,000 for STAT and its subsidiaries taken as a whole (except for purchases and leases of equipment not to exceed $1,000,000 in aggregate payments required for the development of new HBO therapy and dialysis treatment facilities); or (E) enter into or amend any contract, agreement, commitment or arrangement to effect any of the matters prohibited by the foregoing. (vi) increase the compensation payable or to become payable to its officers or employees (except for increases in compensation of employees without employment agreements in accordance with past practices), grant severance or termination pay to any director, officer or other employee of STAT or any of its subsidiaries, or establish, adopt, enter into or amend any collective bargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, 37 termination, severance or other plan, agreement, trust, fund, policy or arrangement for any current or former directors, officers or employees, except, in each case, as may be required by law; (vii) take any action to change accounting policies or procedures (including, without limitation, procedures with respect to revenue recognition, payments of accounts payable and collection of accounts receivable); (viii) make any material tax election inconsistent with past practice or settle or compromise any material federal, state, local or foreign tax liability or agree to an extension of a statute of limitations; (ix) pay, discharge or satisfy any claims, liabilities or obligations, other than the payment, discharge or satisfaction in the ordinary course of business and consistent with past practice of liabilities reflected or reserved against in STAT's financial statements contained in reports previously filed with the Commission or incurred in the ordinary course of business and consistent with past practice; or (x) take, or agree to take, any of the foregoing actions, any action which would make any of the representations or warranties of STAT contained in the Merger Agreement untrue or incorrect or prevent STAT from performing its covenants under the Merger Agreement. No Solicitation by STAT. The Merger Agreement provides that STAT will not, directly or indirectly, through any officer, director, employee, representative or agent of STAT or any of its subsidiaries, (i) solicit or encourage the initiation of any inquiries or proposals regarding any merger, sale of substantial assets, sale of shares of capital stock (including without limitation by way of a tender offer) or similar transactions involving STAT or any subsidiaries of STAT (the foregoing being referred to as "Acquisition Proposals"), (ii) engage in negotiations or discussions concerning, or provide any nonpublic information to any person relating to, any Acquisition Proposal or (iii) agree to, approve or recommend any Acquisition Proposal. However, the Board of Directors of STAT is not prevented from considering, negotiating, approving and recommending to the stockholders of STAT a bona fide Acquisition Proposal not solicited in violation of the Merger Agreement, provided the Board of Directors of STAT determines in good faith (upon advice of independent counsel) that it is required to do so in order to discharge properly its fiduciary duties. Under the Merger Agreement, STAT is required immediately to notify American after receipt of any Acquisition Proposal, or any modification of or amendment to any Acquisition Proposal, or any request for nonpublic information relating to STAT or any of its subsidiaries in connection with an Acquisition Proposal or for access to the properties, books or records of STAT or any subsidiary by any person or entity that informs the Board of Directors of STAT or such subsidiary that it is considering making, or has made, an Acquisition Proposal. If the Board of Directors of STAT receives a request for material nonpublic information by a person who makes a bona fide Acquisition Proposal, and the Board of Directors determines in good faith and upon the advice of independent counsel that it is required to cause STAT to provide such information in order to discharge properly the directors' fiduciary duties, then, provided the person making the Acquisition Proposal has executed a confidentiality agreement substantially similar to the one then in effect between STAT and American, STAT may provide such person with access to information regarding STAT. The Merger Agreement also provides that STAT will immediately cease and cause to be terminated any existing discussions or negotiations with any other persons with respect to any of the foregoing, and STAT agrees not to release any third party from the confidentiality provisions of any confidentiality agreement to which STAT is a party. STAT is required to ensure that the officers, directors and employees of STAT and its subsidiaries and any investment banker or other advisor or representative retained by STAT are aware of the foregoing restrictions. Conduct of Business. The Merger Agreement provides that, prior to the Effective Time, unless STAT otherwise agrees in writing, American will conduct its business, and cause the businesses of its subsidiaries to be conducted, in the ordinary course of business and consistent with past practice, other than actions taken by 38 American or its subsidiaries in contemplation of the Merger, and American shall not directly or indirectly do, or propose to do, any of the following without the prior written consent of STAT: (a) amend or otherwise change the Certificate of Incorporation or By-Laws of American; (b) declare, set aside, make or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of any of its capital stock, except that a wholly owned subsidiary of American may declare and pay a dividend to its parent; or (c) take or agree in writing or otherwise to take any action which would make any of the representations or warranties of American contained in the Merger Agreement untrue or incorrect or prevent American from performing or cause American not to perform its covenants under the Merger Agreement. ADDITIONAL AGREEMENTS HSR Act; Etc. The Merger Agreement provides that STAT and American shall file notifications under and in accordance with the HSR Act in connection with the Merger and the transactions contemplated thereby. STAT and American shall respond as promptly as practicable to any inquiries received from the Federal Trade Commission (the "FTC") and the Antitrust Division of the Department of Justice (the "Antitrust Division") for additional information or documentation and shall respond as promptly as practicable to all inquiries and requests received from any State Attorney General or other governmental authority in connection with antitrust matters. Proxy Statement/Prospectus; Registration Statement. As promptly as practicable after the execution of the Merger Agreement, STAT and American shall prepare and file with the Commission preliminary proxy materials which shall constitute the Proxy Statement/Prospectus and the Registration Statement of American with respect to the American Stock to be issued in connection with the Merger. As promptly as practicable after comments are received from the Commission thereon and after the furnishing by STAT and American of all information required to be contained therein, STAT and American shall file with the Commission a combined proxy and Registration Statement on Form S-4 (or on such other form as shall be appropriate) relating to the adoption of the Merger Agreement and approval of the transactions contemplated hereby by the stockholders of STAT, and shall use all reasonable efforts to cause the Registration Statement to become effective, and to mail the Proxy Statement/Prospectus to the stockholders of STAT as soon thereafter as practicable. Stockholders Meeting. STAT shall call and hold a stockholders meeting as promptly as practicable and in accordance with applicable laws for the purpose of voting upon the approval of the Merger and STAT shall use its reasonable best efforts to hold the stockholders meeting as soon as practicable after the date on which the Registration Statement becomes effective. Unless otherwise required under the applicable fiduciary duties of the directors of STAT, as determined by such directors in good faith after consultation with and based upon the advice of independent counsel, STAT shall use all reasonable efforts to solicit from its stockholders proxies in favor of adoption of the Merger Agreement and approval of the transactions contemplated thereby and shall take all other action necessary or advisable to secure the vote or consent of stockholders to obtain such approvals. Access to Information; Confidentiality. Upon reasonable notice and subject to restrictions contained in confidentiality agreements to which such party is subject (from which such party shall use reasonable efforts to be released), STAT and American shall each (and shall cause each of their subsidiaries to) afford to the officers, employees, accountants, counsel and other representatives of the other, reasonable access, during the period prior to the Effective Time, to all its properties, books, contracts, commitments and records and, during such period, STAT and American each shall (and shall cause each of their subsidiaries to) furnish promptly to the other all information concerning its business, properties and personnel as such other party may reasonably request, and each shall make available to the other the appropriate individuals (including attorneys, accountants and other professionals) for discussion of the other's business, properties and personnel as either STAT or American may reasonably request. Each party shall keep such information confidential in accordance with the terms of the 39 confidentiality letter, dated September 13, 1996 as amended as of October 1, 1996 (the "Confidentiality Letter"), between American and STAT. Consents; Approvals. STAT and American will each use their best efforts to obtain all consents, waivers, approvals, authorizations or orders, and STAT and American shall make all filings required in connection with the authorization, execution and delivery of the Merger Agreement and the consummation by them of the transactions contemplated thereby. Agreements with Respect to Affiliates. Each of American and STAT shall deliver to the other, prior to the date the Registration Statement becomes effective under the Securities Act, a letter (the "Affiliate Letters") identifying all persons who are "affiliates" of American or STAT, respectively, for purposes of Rule 145 under the Securities Act ("Rule 145"). Each of American and STAT shall use its reasonable best efforts to cause each person who is identified as an "affiliate" in its Affiliate Letter to deliver, prior to the Effective Time, a written agreement (an "Affiliate Agreement") in connection with restrictions on affiliates under Rule 145 and pooling of interests accounting treatment in a form previously agreed to by American and STAT. Indemnification and Insurance. The Merger Agreement provides that the Certificate and By-Laws of the Surviving Corporation will contain the provisions with respect to indemnification set forth in the Certificate and By-Laws of STAT, which will not be amended, repealed or otherwise modified for a period of five years from the Effective Time in any manner that would adversely affect the rights thereunder of individuals who at the Effective Time were directors, officers, employees or agents of STAT, unless such modification is required by law. STAT shall, to the fullest extent permitted under applicable law or under STAT's Certificate of Incorporation or By-Laws and regardless of whether the merger becomes effective, indemnify and hold harmless, each present and former director, officer or employee of STAT or any of its subsidiaries (collectively, the "Indemnified Parties") against any costs or expenses (including attorneys' fees), judgments, fines, losses, claims, damages, liabilities and amounts paid in settlement in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to the transactions contemplated by the Merger Agreement, or otherwise with respect to any acts or omissions occurring at or prior to the Effective Time, to the same extent as provided in STAT's Certificate of Incorporation or By-Laws or any applicable contract or agreement as in effect on the date of the Merger Agreement, in each case for a period of five years after the date of the Merger Agreement. In the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Effective Time), (i) any counsel retained by the Indemnified Parties for any period after the Effective Time shall be reasonably satisfactory to the Surviving Corporation, (ii) after the Effective Time, American or the Surviving Corporation shall pay the reasonable fees and expenses of such counsel, promptly after statements therefor are received, and (iii) American or the Surviving Corporation will cooperate in the defense of any such matter; provided, however, that neither American nor the Surviving Corporation shall be liable for any settlement effected without its written consent (which consent shall not be unreasonably withheld); and provided, further, that, in the event that any claim or claims for indemnification are asserted or made within such five-year period, all rights to indemnification in respect of any such claim or claims shall continue until the disposition of any and all such claims. The Indemnified Parties as a group may retain only one law firm to represent them with respect to any single action unless there is, under applicable standards of professional conduct, a conflict on any significant issue between the positions of any two or more Indemnified Parties. American and the Surviving Corporation shall honor and fulfill in all respects the obligations of STAT pursuant to indemnification agreements with STAT's directors and officers existing at or before the Effective Time. For a period of three years after the Effective Time, American shall cause the Surviving Corporation to maintain in effect, if available, directors' and officers' liability insurance covering those persons who are currently covered by STAT's directors' and officers' liability insurance policy (a copy of which has been made 40 available to American) on terms comparable to those now applicable to directors and officers of STAT; provided, however, that in no event shall American or the Surviving Corporation be required to expend in excess of 150% of the annual premium currently paid by STAT for such coverage; and provided further, that if the annual premium would exceed such amount, American shall cause the Surviving Corporation to obtain a policy with the maximum coverage available at a cost not exceeding such amount. Notification of Certain Matters. STAT and American will each give the other prompt notice of the occurrence of any event which would be likely to cause any representation or warranty of the notifying party contained in the Merger Agreement to be materially untrue or inaccurate, or any failure of the notifying party materially to comply with any covenant, condition or agreement in the Merger Agreement. Further Action; Tax Treatment. Each of the parties to the Merger Agreement agrees to use all reasonable efforts to take all actions and do other things necessary, proper or advisable to consummate as promptly as practicable the transactions contemplated by the Merger Agreement, to obtain in a timely manner all necessary waivers, consents and approvals and to effect all necessary registrations and filings, and otherwise to satisfy or cause to be satisfied all conditions precedent to its obligations under this Agreement. Each of American, Merger Sub and STAT shall use its best efforts to cause the Merger to qualify, and will not (both before and after consummation of the Merger) take any actions which to its knowledge could reasonably be expected to prevent the Merger from qualifying, as a reorganization under the provisions of Section 368 of the Code. Public Announcements. American and STAT have agreed to consult with each other before issuing any press release with respect to the Merger or the Merger Agreement and will not issue any such press release or make any such public statement without the prior consent of the other party, which consent will not be unreasonably withheld, except as required by law or the regulations of the NYSE. Conveyance Taxes. American and STAT shall cooperate in the preparation, execution and filing of all returns, questionnaires, applications, or other documents regarding any real property transfer or gains, sales, use, transfer, value added, stock transfer and stamp taxes, any transfer, recording, registration and other fees, and any similar taxes which become payable in connection with the transactions contemplated hereby that are required or permitted to be filed at or before the Effective Time. Accountant's Letters. Upon reasonable notice from the other, STAT and American will use their respective best efforts to cause KPMG Peat Marwick LLP to deliver to American and STAT, a letter dated within 2 business days of the Effective Date of the Registration Statement covering such matters as are requested by American or STAT, as the case may be, and as are customarily addressed in accountant's "comfort" letters. Pooling Accounting Treatment. Each of American and STAT agrees not to take any action that to its knowledge could reasonably be expected to adversely affect the ability of American to treat the Merger as a pooling of interests, and each of American and STAT agrees to take such action as may be reasonably required to negate the impact of any past actions which to its knowledge could reasonably be expected to adversely impact the ability of American to treat the Merger as a pooling of interests. Nasdaq Listing; Listing of American Shares. STAT shall use its best efforts to continue the quotation of the STAT Common Stock on the Nasdaq National Market during the term of the Merger Agreement. American shall use its best efforts to cause the American Shares to be issued in the Merger to be approved for listing, upon official notice of issuance, on the NYSE. CONDITIONS TO THE MERGER Conditions to Obligation of Each Party to Effect the Merger. The respective obligations of each party to effect the Merger are subject to the satisfaction at or prior to the Effective Time of the following conditions: (i) Effectiveness of the Registration Statement. The Registration Statement shall have been declared effective by the Commission under the Securities Act. No stop order suspending the effectiveness of the 41 Registration Statement shall have been issued by the Commission and no proceedings for that purpose and no similar proceeding in respect of this Proxy Statement/Prospectus shall have been initiated by the Commission; (ii) Stockholder Approval. The Merger Agreement and the Merger shall have been approved and adopted by the requisite vote of the stockholders of STAT; (iii) HSR Act, Etc. The waiting period applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated; and (iv) No Injunctions or Restraints; Illegality. No statute, rule, regulation, executive order, decree, ruling, temporary restraining order, preliminary or permanent injunction or other order shall have been enacted, entered, promulgated, enforced or issued by any court or governmental authority of competent jurisdiction or shall otherwise be in effect which prohibits, restrains, enjoins or restricts the consummation of the Merger. Governmental Actions. There shall not have been instituted, pending or overtly threatened any action or proceeding having a reasonable possibility of success by any governmental authority or administrative agency before any governmental authority, administrative agency or court of competent jurisdiction, nor shall there be in effect any judgment, decree or order of any governmental authority, administrative agency or court of competent jurisdiction, in either case, seeking to prohibit or limit American from exercising all material rights and privileges pertaining to its ownership of the Surviving Corporation or the ownership or operation by American or any of its subsidiaries of all or a material portion of the business or assets of American or any of its subsidiaries, or seeking to compel American or any of its subsidiaries to dispose of or hold separate all or any material portion of the business or assets of American or any of its subsidiaries (including the Surviving Corporation and its subsidiaries), as a result of the Merger or the transactions contemplated by the Merger Agreement. Additional Conditions to Obligations of American and Merger Sub. The obligations of American and Merger Sub to effect the Merger are also subject to the following conditions: (i) Representations and Warranties. The representations and warranties of STAT contained in the Merger Agreement shall be true and correct in all respects on and as of the Effective Time, except for (1) changes contemplated by the Merger Agreement, (2) those representations and warranties which address matters only as of a particular date (which shall have been true and correct as of such date, subject to clause 3 of this paragraph), and (3) where the failure to be true and correct could not reasonably be expected to have a Material Adverse Effect, with the same force and effect as if made on and as of the Effective Time, and American and Merger Sub shall have received a certificate to such effect signed by the President and the Chief Financial Officer of STAT; (ii) Agreements and Covenants. STAT shall have performed or complied in all material respects with all agreements and covenants required by the Merger Agreement to be performed or complied with by it on or prior to the Effective Time, and American and Merger Sub shall have received a certificate to such effect signed by the President and the Chief Financial Officer of STAT; (iii) Consents Obtained. All consents, waivers, approvals, permits, licenses, authorizations or orders required to be obtained, and all filings required to be made, by STAT for the due authorization, execution and delivery of the Merger Agreement and the consummation by it of the transactions contemplated hereby shall have been obtained and made by STAT, except where the failure to receive such consents, etc. would not (i) have a Material Adverse Effect on STAT or American, or (ii) materially delay or prevent the consummation of the Merger; (iv) Opinion of Counsel. American shall have received a written opinion from Ropes & Gray, in form and substance reasonably satisfactory to American, to the effect that the Merger will constitute a reorganization within the meaning of Section 368 of the Code; 42 (v) Opinion of Accountant. American shall have received an opinion of KPMG Peat Marwick LLP, independent certified public accountants, to the effect that the Merger qualifies for pooling of interests accounting treatment if consummated in accordance with the Merger Agreement; and (vi) Affiliate Agreements. American shall have received from each person who is identified in the Affiliate Letters as an "affiliate" of STAT, an Affiliate Agreement, and such Affiliate Agreement shall be in full force and effect. (vii) Stockholder Agreements. The Stockholder Agreements shall be in full force and effective at and as of the Effective Time; and (viii) Employment Agreements. Each of Russell D. Schneider, Ruben A. Perez, Daniel A. Perez and David A. Perez shall have executed and delivered to STAT and American an employment agreement in the form attached as Exhibit A to the Merger Agreement and each of William H. Rice and Victor M. Miranda shall have executed and delivered to STAT and American an employment agreement in the form attached as Exhibit B to the Merger Agreement and all such employment agreements shall be in full force and effect. Additional Conditions to Obligation of STAT. The obligation of STAT to effect the Merger is also subject to the following conditions: (i) Representations and Warranties. The representations and warranties of American and Merger Sub contained in the Merger Agreement shall be true and correct in all respects on and as of the Effective Time, except for (1) changes contemplated by the Merger Agreement, (2) those representations and warranties which address matters only as of a particular date (which shall have been true and correct as of such date, subject to clause 3 of this paragraph), and (3) where the failure to be true and correct could not reasonably be expected to have a Material Adverse Effect, with the same force and effect as if made on and as of the Effective Time, and STAT shall have received a certificate to such effect signed by the President and Chief Financial Officer of American; (ii) Agreements and Covenants. American and Merger Sub shall have performed or complied in all material respects with all agreements and covenants required by the Merger Agreement to be performed or complied with by them on or prior to the Effective Time, and STAT shall have received a certificate to such effect signed by the President and the Chief Financial Officer of American; (iii) Consents Obtained. All consents, waivers, approvals, permits, licenses, authorizations or orders required to be obtained, and all filings required to be made, by American and Merger Sub for the authorization, execution and delivery of the Merger Agreement and the consummation by them of the transactions contemplated hereby shall have been obtained and made by American and Merger Sub, except where the failure to receive such consents, etc. would not have a Material Adverse Effect on STAT or American; (iv) Tax Opinions. STAT shall have received a written opinion of KPMG Peat Marwick LLP, in form reasonably satisfactory to STAT, to the effect that the Merger will constitute a reorganization within the meaning of Section 368 of the Code; (v) Opinion of Accountant. STAT shall have received a copy of the opinion of KPMG Peat Marwick LLP, independent certified public accountants, regarding pooling of interests accounting treatment referred to above; (vi) NYSE. The American Shares to be issued in the Merger shall have been approved, upon official notice of issuance, for listing on the NYSE; (vii) Affiliate Agreements. American shall have received from each person who is identified in the Affiliate Letter as an "affiliate" of American, an Affiliate Agreement, and such Affiliate Agreement shall be in full force and effect; and (viii) American Board Seat. American shall have taken all actions necessary to nominate and elect Russell D. Schneider as a member of its Board of Directors. 43 TERMINATION Conditions to Termination. The Merger Agreement may be terminated at any time prior to the Effective Time, notwithstanding approval thereof by the stockholders of STAT or American: (i) by mutual written consent duly authorized by the Boards of Directors of American and STAT; or (ii) by American or STAT if the Merger shall not have been consummated by March 31, 1997 (provided that such right to terminate shall not be available to any party whose failure to fulfill any obligation under the Merger Agreement has been the cause of or resulted in the failure of the Merger to occur on or before such date); or (iii) by American or STAT if a court of competent jurisdiction or governmental, regulatory or administrative agency or commission shall have issued a nonappealable final order, decree or ruling or taken any other action having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger (provided that the right to terminate the Merger Agreement shall not be available to any party who has not complied with its obligations under the Merger Agreement and such noncompliance materially contributed to the issuance of any such order, decree or ruling or the taking of such action); or (iv) by American, if the requisite vote of the stockholders of STAT shall not have been obtained at a duly held meeting of such stockholders or any adjournment thereof by March 31, 1997; or (v) by American or STAT, if: (1) the Board of Directors of STAT withdraws, modifies or changes its approval or recommendation of the Merger Agreement or the Merger in a manner adverse to American or shall have resolved to do so in accordance with the Merger Agreement; (2) after the receipt by STAT of an Acquisition Proposal, American requests in writing that the Board of Directors of STAT reconfirm its recommendation of the Merger Agreement and the Board of Directors of STAT fails to do so within 10 business days; (3) the Board of Directors of STAT recommends to the stockholders of STAT an Alternative Transaction (as defined below); or (4) a tender offer or exchange offer for 25% or more of the outstanding shares of STAT Common Stock is commenced (other than by American or an affiliate of American) and the Board of Directors of STAT recommends that the stockholders of STAT tender their shares in such tender or exchange offer; provided, that, STAT shall not be entitled to exercise any termination rights under this section unless (x) any action of the Board of Directors of STAT referred to in either such clause is required to be taken by the Board of Directors in order to properly discharge its fiduciary duties and (y) STAT has complied with its obligations in the Merger Agreement; or (vi) by American or STAT if (1) any representation or warranty of STAT or American, respectively, set forth in the Merger Agreement shall be untrue when made, or (2) upon a breach of any covenant or agreement on the part of STAT or American, respectively, set forth in the Merger Agreement and, in the case of any such breach that is curable, if such breach shall not have been cured within 10 days after the nonbreaching party gives the breaching party written notice of such breach, in each case such that the corresponding conditions set forth in the Merger Agreement would not be satisfied (either (1) or (2) above being a "Terminating Breach"), provided, that, if such Terminating Breach is curable prior to March 31, 1997 by STAT or American, as the case may be, through the exercise of its reasonable best efforts and for so long as STAT or American, as the case may be, continues to exercise such reasonable best efforts, neither American nor STAT, respectively, may terminate the Merger Agreement under this section; or (vii) by American, if any representation or warranty of STAT shall have become untrue such that the corresponding condition set forth in the Merger Agreement would not be satisfied, or by STAT, if any representation or warranty of American shall have become untrue such that the corresponding condition in the Merger Agreement would not be satisfied, in either case other than by reason of a Terminating Breach. As used herein, "Alternative Transaction" means any of (i) a transaction pursuant to which any person (or group of persons) other than American or its affiliates (a "Third Party") acquires or would acquire more than 25% of the outstanding Shares, whether from STAT or pursuant to a tender offer or exchange offer or otherwise, (ii) a merger or other business combination involving STAT pursuant to which any Third Party acquires more than 25% of the outstanding equity securities of STAT or the entity surviving such merger or business 44 combination, or (iii) any other transaction pursuant to which any Third Party acquires or would acquire control of assets (including for this purpose the outstanding equity securities of subsidiaries of STAT, and the entity surviving any merger or business combination including any of them) of STAT or any of its subsidiaries having a fair market value (as determined by the Board of Directors of STAT in good faith) equal to more than 25% of the fair market value of all the assets of STAT and its subsidiaries, taken as a whole, immediately prior to such transaction. Effect of Termination. In the event of the termination of the Merger Agreement, the Merger Agreement shall forthwith become void and there shall be no liability on the part of any party thereto or any of its affiliates, directors, officers or stockholders except (1) as otherwise set forth in the Merger Agreement, and (2) nothing in the Merger Agreement shall relieve any party from liability for any breach thereof. Fees and Expenses. (i) Except as set forth below, all fees and expenses incurred in connection with the Merger Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses, whether or not the Merger is consummated. (ii) STAT shall pay American a fee of $4,500,000 (the "STAT Fee"), plus actual, documented and reasonable out-of-pocket expenses of American relating to the transactions contemplated by the Merger Agreement not in excess of $500,000 in the aggregate (including, but not limited to, reasonable fees and expenses of American's counsel, accountants and financial advisers) ("Expenses"), upon the termination of the Merger Agreement by American on the basis described in clause (iv) of "-- Termination--Conditions to Termination" above if a proposal for an Alternative Transaction shall have been made before the Special Meeting, by American or STAT, on the basis described in clause (v) of "--Termination-- Conditions to Termination" above, or by American on the basis described in clause (vi) of "--Termination--Conditions to Termination" above. (iii) American shall pay STAT a fee of $4,500,000 (the "American Fee"), plus actual, documented and reasonable out-of-pocket expenses of STAT (not to exceed $500,000 in the aggregate) relating to the transactions contemplated by the Merger Agreement (including, but not limited to, fees and expenses of STAT's counsel, accountants and financial advisers) if STAT terminates the Merger Agreement on the basis described in clause (vi) of "--Termination--Conditions to Termination" above. (iv) The STAT Fee and related expenses payable pursuant to (ii) above and the American Fee and related expenses payable pursuant to (iii) above, as the case may be, shall be paid within one business day after the first to occur of any of the events described in (ii) or (iii) above; provided, that, in no event shall STAT or American be required to pay such fee and expenses to the other if, immediately prior to the termination of the Merger Agreement, the party that was otherwise entitled to such fee was in material breach of its obligations under the Merger Agreement. AMENDMENT AND WAIVER The Merger Agreement may be amended in writing by the parties by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time, provided that after approval of the Merger by the stockholders of STAT, no amendment may be made which by law requires further approval by such stockholders without such further approval. The Merger Agreement may not be amended except by an instrument in writing signed by the parties thereto. At any time prior to the Effective Time, any party to the Merger Agreement may, with respect to any other party, extend the time for the performance of any of the obligations or other acts, waive any inaccuracies in the representations and warranties contained in the Merger Agreement or in any document delivered pursuant to the Merger Agreement, or waive compliance with any of the agreements or conditions contained in the Merger Agreement. Any such extension or waiver will be valid if set forth in an instrument in writing signed by the party or parties to be bound thereby. 45 OTHER AGREEMENTS The description of the Stockholder Agreements set forth below does not purport to be complete and is qualified in its entirety by reference to such agreements, a form of which is filed as an exhibit to the Proxy Statement/Prospectus. STOCKHOLDER AGREEMENTS Concurrently with the execution of the Merger Agreement, American entered into a Stockholder Agreement (collectively, the "Stockholder Agreements") with each of Ruben A. Perez, Russell D. Schneider, Daniel A. Perez, William H. Rice, M.D., Victor M. Miranda, M.D., and South Texas Acute Trauma Physicians, P.A. (the "Holders"). Pursuant to the Stockholder Agreements, each of the Holders has agreed to vote all of the shares of STAT it owns of record or beneficially or subsequently acquires ("Subject Securities") in favor of the Merger and against other business combinations and actions which could interfere with the Merger and has granted an irrevocable limited proxy with respect to the Subject Securities (the "Proxy"). The Proxy appoints each of Merger Sub, certain officers and their successors and any other designee of Merger Sub as proxies with respect to such Holder's Subject Shares to vote in accordance with the provisions described in above. Holders collectively owned approximately 9,750,000 shares of STAT Common Stock outstanding as of the date of the Merger Agreement. Each Holder has agreed not, directly or indirectly, to solicit or respond to any inquiries or the making of any proposal by any person or entity (other than American or any affiliate of American) with respect to STAT that constitutes or could reasonably be expected to lead to an Alternative Transaction. Each Holder has also agreed that it will not, directly or indirectly except pursuant to the terms of the Merger Agreement offer for sale, sell, or otherwise dispose of any or all of such Holder's shares of STAT. The Stockholder Agreements shall terminate upon the earlier of the termination of the Merger Agreement pursuant to its terms and March 31, 1997. American and each Holder have agreed that none of the provisions of the Stockholder Agreements shall restrict or limit any fiduciary duty the Holder may have as a director or officer of STAT provided that no such duty shall excuse the Holder from his obligation to vote the Subject Securities as provided in the Stockholder Agreements and to otherwise comply with the Stockholder Agreements. 46 THE COMPANIES AMERICAN American is the leading provider of emergency and non-emergency ambulance services in the United States. American provides pre-hospital emergency medical care and ambulance services to patients in response to "911" emergency medical calls. Additionally, American provides non-emergency ambulance services to patients during transfer to and from healthcare facilities and residences and non-medical transport services to the physically challenged and the elderly. American completed approximately 1,710,000 transports in response to calls for its services during 1995, expects to complete approximately 2,600,000 transports in response to calls for its services during 1996, and currently provides ambulance services in 28 states. STAT STAT provides a continuum of disease management services primarily to diabetic patients with complications such as end-stage renal disease ("ESRD" or "chronic kidney failure") and non-healing wounds. STAT also provides physician practice management services to affiliated physician groups which staff hospital emergency departments. As of October 1, 1996 STAT operated five kidney dialysis facilities, managed two hyperbaric oxygen ("HBO") therapy facilities and had entered into contracts to manage three additional HBO therapy facilities commencing in October 1996 and provided home healthcare management and related ancillary services primarily in the Rio Grande Valley of south Texas. As of October 1, 1996, through its affiliates physician groups, STAT also provided physician practice management services to 24 hospital emergency departments, 17 of which are in the Houston greater metropolitan area. STAT's disease management services consist of a system of care for persons with chronic kidney failure, including kidney dialysis treatment, HBO therapy and related ancillary services. Chronic kidney failure is the state of advanced renal impairment that generally is irreversible and requires routine dialysis treatments an average of three times per week or kidney transplantation in order to sustain life. In addition to the need for dialysis treatment, chronic kidney failure patients frequently suffer from one or more associated medical conditions, including non-healing wounds, hypertension, coronary artery disease, anemia and nutritional problems. Qualified patients with chronic kidney failure have been entitled since 1972 to Medicare benefits regardless of age or financial circumstances under the federal ESRD program. Through its affiliated physician groups, STAT also provides physician practice management services for emergency departments at hospitals. Hospitals frequently outsource key departmental functions to third-party management companies in an effort to control and reduce operating costs and focus on their core competencies. There are approximately 5,200 hospital emergency departments in the U.S., many of which face numerous problems in managing their emergency departments, including difficulties in recruiting, evaluating, scheduling and retaining qualified emergency physicians, and the inefficient use of emergency departments for routine primary care. STAT intends to continue to focus on strategic relationships and outsourcing opportunities with hospital networks rather than management contracts with individual hospitals. In addition, STAT believes that in the future it can provide physician practice management services to other hospital-based physician practices, such as radiology, pathology and anesthesiology. STAT's objective is to be the preferred provider of integrated kidney disease management services and physician practice management services in its current and future market areas. The principal elements of STAT's strategy are to (i) expand its integrated disease management services, (ii) leverage its existing relationships with hospital networks, (iii) expand into new geographic markets and (iv) attract managed care contracts. STAT's predecessor was incorporated in Delaware in July 1994 and completed its initial public offering in April 1995. STAT was incorporated in Delaware in March 1996 to facilitate the reorganization of STAT in connection with the acquisition by STAT of AmHealth Corporation and its related healthcare entities in exchange 47 (the "Exchange") for 11,200,000 shares of STAT Common Stock, representing approximately 75% of STAT's Common Stock outstanding immediately after the Exchange. In June 1996, pursuant to the consummation of the Exchange, (i) STAT's predecessor merged with a wholly-owned subsidiary of STAT, (ii) each outstanding share of common stock of STAT's predecessor was converted into one share of STAT Common Stock and (iii) each option and warrant to purchase common stock of STAT's predecessor was converted into a similar option or warrant, respectively, to purchase shares of STAT Common Stock. RECENT DEVELOPMENTS EXCHANGE WITH AMHEALTH CORPORATION AND RELATED ENTITIES In June 1996, pursuant to the Exchange (i) AmHealth Corporation, AmHealth Enterprises of the Valley, Inc. and AmHealth Ambulatory Services, Inc., each a Texas corporation (collectively, the "AmHealth Corporations"), were merged into STAT, with STAT as the surviving corporation and (ii) all the general partners and limited partners (excluding limited partners representing a 25% interest in Brownsville Kidney Center, Ltd.) of AmHealth Kidney Centers of the Valley, Ltd., Weslaco Kidney Center, Ltd., Starr Dialysis Center, Ltd., Mission Kidney Center, Ltd., Brownsville Kidney Center, Ltd., AmHealth Medical Management, Ltd., Brownsville Hyperbaric Healthcare, Ltd., Southwestern Infusion Healthcare, Ltd. and AmHealth Ambulatory Healthcare, Ltd., each a Texas limited partnership (collectively, the "AmHealth Partnerships" and, together with the AmHealth Corporations, "AmHealth"), received shares of STAT Common Stock in exchange for their partnership interests in the AmHealth Partnerships. The former owners of AmHealth received a total of 11,200,000 shares of STAT Common Stock (representing approximately 75% of the STAT Common Stock outstanding immediately after the Exchange). In connection with the Exchange, Mr. Schneider was elected Chairman of the Board of Directors and Chief Executive Officer of STAT, Mr. R. Perez was elected President--Healthcare Management, Treasurer and a director of STAT, and Daniel A. Perez was elected Senior Vice President of STAT. Messrs. Schneider, R. Perez and D. Perez, each of whom was an affiliate of AmHealth prior to the Exchange, also entered into employment agreements with STAT. Following the Exchange, Ned E. Chapman, STAT's Chief Financial Officer, resigned from STAT's Board of Directors and Mr. R. Perez was elected to fill the vacancy created by Mr. Chapman's resignation. The number of directors constituting the Board was increased to six persons, and Ann N. James, Ph.D. and David C. Colby, both of whom were designated by former affiliates of AmHealth, were elected to fill the two newly created positions. At the time of the Exchange, AmHealth operated kidney dialysis facilities, managed HBO therapy facilities and provided home healthcare management and related ancillary services primarily in the Rio Grande Valley of south Texas. The Exchange was accounted for as a pooling of interests, and STAT's consolidated financial statements as of and for the years ended December 31, 1993, 1994 and 1995 have been restated to give retroactive effect to the consummation of the Exchange. See STAT's Consolidated Financial Statements and Notes thereto appearing elsewhere in this Proxy Statement/Prospectus. COLUMBIA AGREEMENT Effective February 1996, one of STAT's affiliated physician groups entered into an agreement (the "Columbia Agreement") to provide emergency medical services to 15 of Columbia's hospitals in the Houston greater metropolitan area, six of which hospitals were then being served by STAT under individual contracts with hospitals. The Columbia Agreement has an initial term ending in January 1998 with provisions for automatic renewal, and may be terminated by Columbia in certain circumstances, including the loss of Columbia's certification as a Medicare provider or unsatisfactory service by STAT or its affiliated physician groups. During the term of the Columbia Agreement and for two years thereafter, STAT has agreed not to organize, or provide administrative or advisory services to, independent physician or similar associations whose practices relate to areas other than emergency medicine and who are located in proximity to specified Columbia medical centers. There can be no assurance that the Columbia Agreement will be renewed at the conclusion of 48 its initial term, that it will be renewed on substantially the same terms and conditions, or that it will not be terminated prior to the conclusion of its term. ACQUISITION OF ASSETS OF AMEDICA, LTD. In February 1996, STAT acquired certain intangible assets of Amedica, Ltd. for a total purchase price of $270,000, consisting of $200,000 in cash and 15,730 shares of STAT Common Stock. These assets consisted of certain contract rights and the right to use the name "Amedica." ACQUISITION OF HEMA CONTRACT In January 1996, in contemplation of the Columbia Agreement, STAT acquired the rights to a contract (the "HEMA Contract") for the provision of physician practice management services at one of Columbia's Houston-area hospitals for a total purchase price of $1.2 million, consisting of $960,000 in cash and 52,174 shares of STAT Common Stock. STAT also agreed to pay to the assignor of the HEMA Contract up to $100,000 in each of the three 12-month periods following the acquisition of the contract subject to certain conditions. The rights to provide services under the HEMA Contract have been incorporated into the Columbia Agreement. OTHER MATTERS STAT is in varying stages of discussions with healthcare providers to provide physician practice management services to emergency departments in different geographic areas and to acquire dialysis facilities. In particular, STAT is discussing contracts with a hospital network to provide physician practice management services in at least two major metropolitan areas outside of Houston. STAT is also in discussions with the owners of at least two dialysis facilities which, if acquired, would be expected to significantly increase STAT's revenues from disease management services during 1997. There can be no assurance, however, that STAT will be successful in obtaining all or any of these or other similar contracts or facilities, or that, if such contracts or facilities are obtained the profit margins would be consistent with STAT's existing business. DIVIDEND POLICY To date, STAT has not paid or declared any cash dividends and does not anticipate paying or declaring any dividends on the Common Stock in the foreseeable future. In addition, STAT's credit agreement with two commercial banks and the Merger Agreement prohibit the payment of dividends. Certain of the AmHealth entities made and have declared distributions to their shareholders and partners for periods prior to the Exchange. Any future change in STAT's dividend policy rests solely within the discretion of the Board of Directors of STAT and will depend upon, among other things, STAT's earnings, capital requirements, financial condition and any restrictions under credit agreements, as well as other factors deemed relevant by the Board of Directors of STAT. 49 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. STAT's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those included elsewhere in this Proxy Statement/Prospectus. GENERAL The following discussion and analysis reviews consolidated financial data for companies which previously reported separately. The consolidation has been made because of the June 1996 merger of STAT's predecessor ("Old STAT") and AmHealth into STAT in connection with the Exchange. AmHealth is comprised of a group of corporations and partnerships with related ownership which were formed at various dates commencing in October 1992 and which commenced operating activities in April 1993. The Exchange was accounted for as a pooling of interests. Old STAT was incorporated on July 29, 1994, and commenced active operations effective September 1, 1994, pursuant to a Management Agreement with STAT Physicians I which had been in effect since January 1, 1986. To provide comprehensive historical operating data, the operating results of STAT Physicians I for the year ended December 31, 1993 and the eight months ended August 31, 1994, which are reported separately, have been combined in the comparative statements of income data discussed herein. Subsequent to August 1994, STAT Physicians' operating results were reported on a consolidated basis with the results of Old STAT. Historically, Old STAT's operations were limited to a single business segment: emergency medical management services. AmHealth's operations were focused on integrated disease management services comprised of two identifiable segments: kidney dialysis services and medical management services encompassing HBO therapy and home healthcare management services. The following discussion should be read in conjunction with STAT's Consolidated Financial Statements and Notes thereto appearing elsewhere in this Proxy Statement/Prospectus. RESULTS OF OPERATIONS For purposes of this discussion, the term "same store" refers to facilities which were open for the duration of each comparable period. Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995 Net Service Revenues. Net service revenues increased by $6.3 million, or 61%, to $16.7 million in the six months ended June 30, 1996 from $10.4 million in the comparable period of 1995. This increase is comprised of a $3.2 million (93%) increase in disease management revenues and a $3.1 million (45%) increase in emergency medical management revenues. The increase in disease management revenues, to $6.7 million in the six months ended June 30, 1996 from $3.5 million in the comparable period of 1995, was primarily attributable to the introduction of new services and facilities. Kidney dialysis services accounted for approximately $3.8 million of 1996 revenues and approximately $2.6 million of 1995 revenues, while medical management services accounted for $2.9 million of 1996 revenues compared to $0.9 million of 1995 revenues. At June 30, 1996, STAT operated five kidney dialysis facilities compared with three facilities at June 30, 1995. Revenues during 1996 attributable to the new facilities approximated $0.6 million while revenues attributable to facilities open during both periods increased to $3.2 million from $2.6 million or a same store growth rate of approximately 19%. Per patient revenue rates remained relatively constant between the periods. 50 At June 30, 1996, STAT had approximately 270 dialysis patients compared with approximately 185 patients at June 30, 1995. At June 30, 1996, STAT provided management services to one home healthcare agency, which services commenced in June 1995, and managed two HBO therapy facilities, one of which opened in May 1995 and one of which opened in April 1996. The increase in comparative medical management revenues of $2.0 million is attributable to a combination of the short operating history as of June 30, 1995 and the opening of the second HBO therapy facility in April 1996. In July 1996, STAT announced contracts for three additional HBO therapy facilities which are expected to be opened during the fourth quarter of 1996. The increase in emergency medical management revenues, to $10.0 million in the six months ended June 30, 1996 from $6.9 million in the comparable period of 1995, was primarily attributable to an increase in the number of patients treated in 1996 (approximately 124,000) compared with 1995 (approximately 90,000). The increase in patients relates to an increase in the number of emergency departments being served, 18 as of June 30, 1996 compared with 13 as of June 30, 1995. During the 1996 period, STAT began providing services at nine additional emergency departments. In July 1996, STAT announced contracts for services to five additional emergency departments, two of which commenced July 1 with the remaining three to commence during the fourth quarter of 1996. Services were terminated by STAT at four emergency departments (two in April 1996 and two during the second half of 1995) which were served at June 30, 1995. Also contributing to the increase in revenues is a 5% increase in average revenue per patient to $80.31 in 1996 from $76.27 in 1995. The increase in per patient revenue was due to a pricing increase implemented in February 1996. Operating Expenses. Operating expenses increased by $5.2 million, or 60%, to $13.8 million in the six months ended June 30, 1996 from $8.6 million in the comparable period of 1995. This percentage increase approximated the comparative increase in net service revenues. Significant elements comprising operating expenses included: (i) professional medical fees which increased $2.1 million or 47%; (ii) human resource costs which increased $1.9 million or 116%; (iii) billing and collection costs which increased $0.3 million or 43%; (iv) supplies costs which increased $0.3 million or 38%; and (v) liability insurance which increased $0.2 million or 54%. Other combined costs accounted for the remaining increase of $0.4 million. Comments relating to the five identified costs are as follows: Professional medical fees, liability insurance, and billing and collection costs, which increased by 47%, 54% and 43%, respectively, were all directly related to emergency medical management services, which revenues increased by 45%. The percentage increase in professional medical fees exceeded the percentage increase in related revenues because of rate increases in fees paid to independent contract physicians. The percentage increase in liability insurance exceeded the percentage increase in patients treated (38%) because of an increase in premiums which are paid on a per patient basis. The average cost for 1996 was approximately $4.00 per patient compared to approximately $3.60 per patient in the 1995 period. The increase in billing and collection costs was slightly less than the increase in revenues because of a May 1996 negotiated reduction in the cost of this contracted service which is based on a percentage of collections. The rate of increase in human resource costs exceeded the rate of increase in revenues. Such costs increased by 75% (compared to a revenue increase of 45%) or $0.5 million in emergency medical management services and by 146% (compared to a revenue increase of 93%) or $1.4 million relating to disease management services. The disproportionate percentage increases were attributable to the hiring of administrative and support personnel to accommodate the expanded operations and contracted future business. Additionally, the home healthcare and HBO services businesses which were started late in the 1995 period are highly labor intensive and contributed to an increase in these costs as a percentage of revenues. The 38% increase in supply costs was most directly related to a 46% increase in dialysis net service revenues. These costs did not increase at as great a rate as revenues because of economies of scale in purchasing supplies for expanded operations. 51 Reorganization Costs. The reorganization costs incurred during the six months ended June 30, 1996 relate entirely to the Exchange and consist of legal, accounting and other transactional costs. Taxes and Proforma Income Taxes. Combined income taxes and proforma income taxes have been calculated using estimated effective tax rates of 36% for the six months ended June 30, 1996 and 34% for the comparable period of 1995. Because the AmHealth entities were S corporations or partnerships for federal income tax purposes, no income taxes were provided on their pre-Exchange incomes. Pro forma income taxes represent the additional taxes which would have been provided had they been subject to income taxes at the established rates. Shares Used in Computing Net Income Per Share. Shares used in computing net income per share is based on the weighted average common shares and common share equivalents outstanding during the periods presented. For the six months ended June 30, 1996, this includes 14,902,472 shares outstanding plus approximately 418,000 common share equivalents relating to warrants and options. For the comparable period of 1995, there were no common share equivalents because the warrants and options were anti-dilutive. Additionally, shares allocable to AmHealth entities included in the Exchange which were not yet operational as of June 30, 1995 were excluded from the 1995 average. Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 Net Service Revenues. Net service revenues increased by $8.6 million, or 59%, to $23.1 million in 1995 from $14.5 million in 1994. This increase was comprised of a $5.0 million (127%) increase in disease management revenues and a $3.6 million (34%) increase in emergency medical management revenues. The increase in disease management revenues, to $9.0 million in 1995 from $5.0 in 1994, was primarily attributable to the introduction of new services and facilities from year to year. Kidney dialysis services accounted for approximately $6.3 million of 1995 revenues and approximately $3.8 million of 1994 revenues, while medical management services accounted for $2.7 million of 1995 revenues compared to $0.2 million of 1994 revenues. At December 31, 1995, STAT operated four kidney dialysis facilities compared with three facilities at December 31, 1994. Two facilities were open throughout 1994 and 1995, one facility was open for seven months of 1994 and throughout 1995 and the fourth facility was opened in August 1995. Of the $2.5 million increase in dialysis revenues, approximately $1.4 million was attributable to new facilities and $1.1 million was attributable to a same store growth rate of approximately 28%. Medical management services consisting of one HBO therapy facility and management and personnel services to a home healthcare agency commenced in May 1995 and June 1995, respectively, and generated approximately $2.6 million of revenues in 1995 with no comparable revenues for 1994. The increase in emergency medical management revenues, to $14.1 million in 1995 from $10.5 million in 1994, was attributable to an 18% increase in patients treated (approximately 180,000 in 1995 compared with approximately 153,000 in 1994) and a 14% increase in average revenue per patient ($78.47 in 1995 compared with $68.94 in 1994). The comparative increase in patients is attributable to new emergency department contracts which commenced in mid- December 1994 and in March 1995. Patient volumes under contracts serviced throughout both periods were mostly unchanged. The increase in average revenue per patient is attributable to the conversion between 1994 and 1995 of additional contracts to fee-for-service arrangements and to increases in levels of service which were required by patients treated. Standard billing rates for medical procedures were identical between the two years. Operating Expenses. Operating expenses increased by $6.3 million, or 49%, to $19.4 million in 1995 from $13.1 million in 1994. Significant elements comprising this increase included: (i) human resource costs which increased $2.7 million or 138%; (ii) professional medical fees which increased $1.5 million or 20%; (iii) supply 52 costs which increased $0.7 million or 59%; and (iv) billing and collection costs which increased $0.7 million or 84%. Other combined costs accounted for the remaining increase of $0.7 million. Comments relating to the four identified costs follow: Approximately $1.2 million of the increase in human resource costs was attributable to additional personnel associated with the medical management services contracts which commenced operations in May and June 1995. Approximately $0.4 million is attributable to personnel associated with expanded dialysis operations and approximately $0.3 million was associated with a recharacterization of compensation paid to the principal physician stockholders of Old STAT who received higher compensation as contract physicians. The remaining $0.8 million increase in attributable to increases in general administrative personnel required by the expanding operations and general salary increases awarded to employees. The percentage increase in professional medical fees approximates the percentage increase in patients treated between 1995 and 1994. The increase in supply costs was largely attributable to the expansion of the dialysis business which increased at a rate of 66% over 1994. The 84% increase in billing and collection costs, an outsourced service, exceeded the rate of increase in emergency medical management revenues (34%) because of a shift in reimbursement methods from direct hospital payments in 1994 to fee-for-service in 1995. Billing and collection costs were borne by the hospitals under the direct payment arrangements. Interest Income. Interest income of $1.1 million in 1995 was attributable to the investment of net proceeds received in Old STAT's April 1995 initial public offering. Interest Expense. Interest expense of $0.2 million in 1995 was attributable to borrowings associated with equipment for dialysis and HBO therapy facilities and the interest component of capitalized leases. Year Ended December 31, 1994 Compared to Year Ended December 31, 1993 Net Service Revenues. Net service revenues increased by $4.5 million, or 45%, to $14.5 million in 1994 from $10.0 million in 1993. This increase was comprised of a $2.8 million (240%) increase in disease management revenues and a $1.7 million (19%) increase in emergency medical management revenues. Disease management revenues for both years were comprised almost entirely of dialysis service revenues which increased to $4.0 million in 1994 from $1.2 million in 1993. This increase is attributable to an expansion of operations and length of time that dialysis services were provided. The three dialysis centers which were operational at December 31, 1994 commenced operations at the following dates: April 1993, November 1993 and June 1994. The increase in emergency medical management revenues, to $10.5 million in 1994 from $8.8 million in 1993, was attributable to an 18% increase in patients treated (approximately 153,000 in 1994 compared with approximately 130,000 in 1993). This increase was attributable to additional emergency department contracts added in 1994. Operating Expenses. Operating expenses increased by $3.7 million, or 39%, to $13.1 million in 1994 from $9.4 million in 1993. Significant elements comprising this increase included: (i) professional medical fees which increased $0.9 million or 13%; (ii) human resources which increased $0.8 million or 76%; (iii) supply costs which increased $0.8 million or 205%; and (iv) billing and collection costs which increased $0.5 million or 162%. Other combined costs accounted for the remaining increase of $0.7 million. Comments relating to the identified costs are as follows. Professional medical fees increased at a slightly lower rate than the increase in patients treated. This was attributable to increased physician productivity (more patients treated per physician) from 1993 to 1994. Human resources costs increased at a greater rate than revenues because of the need for additional contracts, the staffing of new dialysis centers which had not yet achieved optimum productivity and annual salary increases for personnel working throughout both periods. The increase in supply costs was attributable to the commencement 53 of services at the dialysis centers which are supply cost intensive operations. Billing and collection costs increased at a disproportionate rate compared to emergency medical management revenues because of a shift in 1994 to fee-for-service business from direct reimbursement contracts in 1993 which had no related billing and collection costs. Quarterly Financial Results The following tables set forth unaudited consolidated income statement data for the eleven quarters ended September 30, 1996, as well as such data expressed as a percentage of STAT's total net service revenues for the periods indicated. This data has been derived from unaudited interim consolidated financial statements that, in the opinion of management, have been prepared on a basis consistent with STAT's Consolidated Financial Statements appearing elsewhere herein and include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information when read in conjunction with STAT's Consolidated Financial Statements and Notes thereto appearing elsewhere in this Proxy Statement/Prospectus. The operating results for any quarter are not necessarily indicative of results for any future period. 54
QUARTER ENDED ----------------------------------------------------------------------------------------------- 1994 1995 1996 ------------------------------------ ------------------------------ ------------------------- MAR 31(1) JUN 30(1) SEP 30(1) DEC 31 MAR 31 JUN 30 SEP 30 DEC 31 MAR 31 JUNE 30 SEP 30 --------- --------- --------- ------ ------ ------ ------ ------ ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENTS OF INCOME DATA: Net service revenues.... $3,342 $3,368 $3,718 $4,093 $4,873 $5,502 $6,148 $6,618 $ 7,549 $9,114 $10,643 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------- Operating expenses: Professional medical fees.................. 1,862 1,918 1,950 1,984 2,200 2,348 2,367 2,326 2,824 3,871 4,746 Human resources........ 398 424 530 597 696 929 1,352 1,663 1,747 1,769 2,000 Supplies............... 168 228 334 413 382 440 473 523 566 570 589 Billing and collection costs................. 170 176 199 250 316 381 395 369 445 551 617 Other costs............ 314 324 389 413 400 499 648 668 704 733 937 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------- Total operating expenses............ 2,912 3,070 3,402 3,657 3,994 4,597 5,235 5,549 6,286 7,494 8,889 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------- Operating income........ 430 298 316 436 879 905 913 1,069 1,263 1,620 1,754 Interest and other (income) expense, net.. 30 26 32 (83) 30 (1) 56 36 52 81 105 Reorganization costs.... -- -- -- -- -- -- -- -- -- 1,269 -- ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------- Income before income taxes.................. 400 272 284 519 849 906 857 1,033 1,211 270 1,649 Income taxes............ 58 27 29 55 77 104 111 55 77 (121) 594 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------- Net income.............. $ 342 $ 245 $ 255 $ 464 $ 772 $ 802 $ 746 $ 978 $ 1,134 $ 391 $ 1,055 ====== ====== ====== ====== ====== ====== ====== ====== ======= ====== ======= Pro forma data (2): Pro forma income taxes................. 78 66 67 121 212 204 180 296 359 218 -- ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------- Pro forma net income... $ 264 $ 179 $ 188 $ 343 $ 560 $ 598 $ 566 $ 682 $ 775 $ 173 $ 1,055 ====== ====== ====== ====== ====== ====== ====== ====== ======= ====== ======= Pro forma net income per common share...... $ 0.04 $ 0.03 $ 0.02 $ 0.05 $ 0.07 $ 0.06 $ 0.04 $ 0.05 $ 0.05 $ 0.01 $ 0.07 ====== ====== ====== ====== ====== ====== ====== ====== ======= ====== ======= Number of shares used in computing pro forma net income per share................. 6,365 6,766 7,583 7,583 7,583 10,556 14,465 14,823 15,180 15,424 15,444 ====== ====== ====== ====== ====== ====== ====== ====== ======= ====== ======= AS A PERCENTAGE OF NET SERVICE REVENUES: Net service revenues.... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------- Operating expenses: Professional medical fees.................. 55.7 56.9 52.4 48.5 45.1 42.7 38.5 35.1 37.4 42.5 44.6 Human resources........ 11.9 12.6 14.3 14.6 14.3 16.9 22.0 25.1 23.1 19.4 18.8 Supplies............... 5.0 6.8 9.0 10.1 7.8 8.0 7.7 7.9 7.5 6.3 5.5 Billing and collection costs................. 5.1 5.2 5.4 6.1 6.5 6.9 6.4 5.6 5.9 6.0 5.8 Other costs............ 9.4 9.6 10.5 10.1 8.2 9.1 10.5 10.1 9.3 8.0 8.8 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------- Total operating expenses............ 87.1 91.2 91.5 89.4 82.0 83.6 85.1 83.8 83.2 82.2 83.5 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------- Operating Income........ 12.9 8.8 8.5 10.6 18.0 16.4 14.9 16.2 16.8 17.8 16.5 ====== ====== ====== ====== ====== ====== ====== ====== ======= ====== =======
- -------- (1) Represents consolidated financial data for STAT for the year ended December 31, 1994 combined with financial data for STAT Physicians I for the eight months ended August 31, 1994. (2) Reflects the effects of income taxes not otherwise payable by entities which were partnerships or S corporations prior to the Exchange. 55 LIQUIDITY AND CAPITAL RESOURCES Capital requirements of STAT relate principally to three areas: (i) funds required to purchase capital assets for dialysis facilities and equipment for the expansion of existing and opening of new HBO therapy facilities; (ii) working capital needs associated with financing the acquisition and start-up of new emergency department contracts; and (iii) availability of funds for acquisitions which complement STAT's growth strategy. Management is actively evaluating new markets for the expansion of STAT's disease management services and considers either dialysis facilities or HBO therapy facilities to be the optimum vehicles for market entry. These ventures are the most capital intensive of STAT's businesses and require funds to purchase dialysis and HBO therapy equipment. At June 30, 1996, STAT had commitments for approximately $0.5 million of HBO therapy equipment for new facilities expected to open during the fourth quarter of 1996. In evaluating individual business segments of STAT, working capital needs are most extensive as they relate to increases in emergency department contracts. Experience indicates that upon commencement of new contracts, periods ranging from 90 to 150 days are required to achieve normal cash flows. Accordingly, the more rapidly STAT is able to add new contracts, the greater the working capital needs. In evaluating growth opportunities, management expects to consider acquisitions as well as growth through internal development. Some acquisitions may be accomplished through the issuance of additional stock; however, it is expected that cash will be a significant medium in STAT's acquisition strategy. Historically, capital requirements have been met through a combination of sources including: (i) cash flows from operations; (ii) proceeds from Old STAT's April 1995 initial public offering; and (iii) lease and bank financing. STAT currently has a $6.5 million Revolving and Term Credit Facility with two commercial banks (the "Revolving and Term Credit Facility"). The revolving portion of the facility has a borrowing limit of up to $3.0 million, based upon qualified accounts receivable, bears interest, at STAT's option, at either (i) the prime rate or (ii) the London Interbank Offered Rate plus 1.50% to 2.25% per annum, depending on STAT's debt to cash flow ratio, and matures in August 1997. The term portion of the facility has a borrowing limit equal to the lesser of $3.5 million or 75% of new equipment purchases, bears interest at the prime rate, and matures in August 1999. Accrued interest is payable monthly. All borrowings under the term facility must be made prior to August 1997. Until August 1997, outstanding principal under the term facility is payable monthly in installments equal to 1/36 of the principal then outstanding. After August 1997, principal outstanding under the term facility will be payable in 24 equal monthly installments. In addition, STAT is required to pay to the banks a quarterly commitment fee of up to 0.25% of the unused revolving credit commitment. The Revolving and Term Credit Facility also contains customary restrictive covenants, prohibits the payment of dividends, requires STAT to maintain certain financial ratios and guaranteed by all of STAT's subsidiaries and affiliated physician groups. At September 30, 1996, there was $2.3 million outstanding under the revolving facility and approximately $425,000 outstanding under the term facility. Discussions recently commenced to increase the borrowing limits of the proposed Revolving and Term Credit Facility. However, no assurances can be made that STAT will be able to achieve this objective. Management believes that cash flows from operations and its borrowing capacity should be sufficient to meet its anticipated capital expenditures and other operating requirements and to substantially fund its growth strategy for the next 12 months. However, because future cash flows and the availability of financing are subject to a number of variables, such as the timing and size of dialysis and HBO therapy developments and acquisitions and new emergency medical management contracts, there can be no assurance that STAT's capital resources will be sufficient to maintain currently planned levels of growth. Accordingly, STAT may be required to seek additional equity or debt financing from other sources to fund its growth strategy. If financing is not available or is not available on terms acceptable to STAT, STAT may not be able to maintain currently planned levels of growth. INFLATION Inflation has not had a material impact on the operations or financial condition of STAT during the last three years. 56 NEW ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. The financial accounting standards of SFAS No. 123 permit companies to either continue accounting for stock-based compensation under existing rules or adopt SFAS No.123 and begin reflecting the fair value of stock options and other forms of stock-based compensation in the results of operations as additional expense. The disclosure requirements of SFAS No. 123 require companies which elect not to record the fair value in the statement of operations to provide pro forma disclosures of net income and earnings per share in the notes to the financial statements as if the fair value of stock-based compensation had been recorded. The disclosure requirements of SFAS No. 123 are effective for financial statements for fiscal years beginning after December 15, 1995. STAT will provide the pro forma disclosures beginning with its 1996 Annual Report and will continue accounting for such plans under the existing accounting rules. In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). SFAS No. 121 requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The requirements are effective for financial statements for fiscal years beginning after December 15, 1995. STAT does not anticipate that adoption of SFAS No. 121 will have a significant effect on its financial condition or results of operations. HEALTHCARE INDUSTRY OVERVIEW General. Healthcare in the U.S. traditionally has been delivered through a fragmented system of healthcare providers. Diverse treatment protocols among providers of chronic disease care have contributed to increased costs. The role of healthcare providers is changing dramatically. Third-party payors, including HMOs, increasingly are turning to specialized disease management companies that offer integrated care solutions to improve quality and reduce costs. In addition, hospital networks are outsourcing departmental functions to specialized management companies to reduce the administrative burdens of providing healthcare and permit hospitals to focus on their core competencies. Disease Management Services. Certain chronic diseases, including chronic kidney failure, require frequent and specialized healthcare services to maximize the benefits of advanced treatment protocols. Chronic kidney failure is the state of advanced renal impairment that generally is irreversible and requires routine dialysis treatments an average of three times per week or kidney transplantation in order to sustain life. In addition to the need for dialysis treatment, chronic kidney failure patients frequently suffer from one or more associated medical conditions, including diabetes, non-healing wounds, hypertension, coronary artery disease, anemia and nutritional problems. Qualified patients with chronic kidney failure have been entitled since 1972 to Medicare benefits regardless of age or financial circumstances under the federal ESRD program. Industry sources estimate that diabetes accounts for approximately 36% of all new cases of chronic kidney failure, and that in 1995 there were approximately 16 million diagnosed and undiagnosed cases of diabetes in the U.S. According to HCFA, the number of patients requiring chronic dialysis services in the U.S. has grown at a 9% compounded annual growth rate to 187,000 patients in 1994 from 66,000 in 1982. Advanced-stage diabetics typically have decreased sensation and oxygenation in their lower extremities and, as a result, are predisposed to non-healing, ulcerating lower extremity wounds which can become gangrenous and lead to amputation. Historically, nearly one-third of all diabetics have required lower extremity amputation after chronic kidney failure. HBO therapy is considered an important adjunctive treatment for infected, non-healing wounds and other chronic conditions caused by diminished tissue oxygenation. During HBO therapy, a 57 patient breathes 100% oxygen in a pressurized chamber at two to three times the atmospheric pressure at sea level. There are currently only approximately 260 HBO therapy facilities in the U.S. HBO therapy can help avoid amputation and its costs and complications and is also considered a vital and primary treatment for resolution of certain emergency situations such as air embolism, decompression sickness, carbon monoxide poisoning and burns. Medicare reimbursement is generally available for all these conditions other than treatment for burns. The healthcare needs of patients with chronic kidney failure are complex and costly and require frequent, specialized care. When specifically tailored to care for patients with chronic kidney failure, home healthcare helps identify problems early, often reducing the need for more expensive in-patient care. Home healthcare organizations also assist in administering special medical services to persons with ESRD, including the administration of erythropoietin ("EPO") and general nutrition analysis. Management believes that the healthcare needs of patients with chronic kidney failure are better served by an integrated approach including kidney dialysis, HBO therapy and home healthcare and related ancillary services. Emergency Physician Practice Management Services. Hospitals frequently outsource key departmental functions, including emergency medicine, radiology, anesthesiology and pathology, to third-party management companies in an effort to control and reduce operating costs and focus on their core competencies. There are approximately 5,200 hospitals in the U.S., many of which face numerous problems in managing their emergency departments, including difficulties in recruiting, evaluating, scheduling and retaining qualified emergency physicians, increased patient volumes, and the inefficient use of emergency departments for routine primary care. Competitive pressures have focused the attention of many hospital administrators on the need for better management of their emergency departments. Hospitals frequently turn to physician practice management firms with specialized skills to help solve physician contract and scheduling problems, to strengthen the management of their professional medical staff and specific clinical departments, to better control costs, and to assist in meeting their healthcare coverage needs and obligations to patients who are indigent, uninsured or unassigned to a referring private physician. OPERATIONS Disease Management Services General. As of October 1, 1996, STAT operated five dialysis facilities, managed two HBO therapy facilities and had entered into contracts to manage three additional HBO therapy facilities commencing in October 1996, and provided home healthcare management and related ancillary services primarily in the Rio Grande Valley of south Texas. Treatment Options for End-Stage Renal Disease. Treatment options for chronic kidney failure include hemodialysis, peritoneal dialysis and kidney transplantation. HCFA estimates that as of December 31, 1994, 82% of the ESRD patients in the United States were receiving hemodialysis treatment in outpatient facilities, with the remaining patients being treated in the home either through peritoneal dialysis (17%) or home hemodialysis (1%). Hemodialysis is generally performed on an outpatient basis in a freestanding facility. Hemodialysis uses an artificial kidney, called a dialyzer, to remove certain toxins, fluids and salt from a patient's blood combined with a machine to control external blood flow and to monitor certain vital signs of the patient. A hemodialysis treatment usually lasts approximately three hours and is performed three times per week per patient. Peritoneal dialysis is generally performed by the patient at home. There are several variations of peritoneal dialysis. The most common are continuous ambulatory peritoneal dialysis ("CAPD") and continuous cycling peritoneal dialysis ("CCPD") or automated peritoneal dialysis ("APD"). All forms of peritoneal dialysis use the patient's peritoneal (abdominal) cavity to eliminate fluid and toxins from the patient. Toxins in the blood continuously cross the peritoneal membrane into the dialysis solution. After several hours, the patient drains the used dialysis solution and replaces it with fresh solution. CCPD and APD are performed in a manner similar to CAPD, but use a mechanical device to cycle dialysis solution while the patient is sleeping or at rest. 58 An alternative treatment not provided by STAT is kidney transplantation. While transplantation, when successful, is generally the most desirable form of therapeutic intervention, the shortage of suitable donors limits the availability of this treatment option. STAT currently has transplantation agreements with the University of Texas Medical Branch-Galveston and the University of Texas Health Science Center, San Antonio, to provide assessment and evaluation of STAT's patients for possible kidney transplant services and to facilitate patient transfers. No fees are involved or paid in connection with such relationship. Dialysis Facilities. STAT currently operates 83 dialysis stations at five facilities. STAT expects to open one additional facility with ten dialysis stations in the fourth quarter of 1996. The following table sets forth certain information as of October 1, 1996 regarding STAT's dialysis facilities:
NO. OF SERVICE INSTALLED STATION COMMENCEMENT FACILITY LOCATION STATIONS CAPACITY(1) DATE ----------------- --------- ----------- ------------- McAllen, Texas.......................... 27 30 April 1993 Rio Grande City, Texas.................. 10 16 November 1993 Weslaco, Texas.......................... 20 20 June 1994 Mission, Texas.......................... 15 24 August 1995 Brownsville, Texas (2).................. 11 24 May 1996 El Paso, Texas (2)...................... 10 24 (3) --- --- Total............................... 93 138 === ===
- -------- (1) Number of dialysis stations for which plumbed, certified space is currently available. (2) Owned by a limited partnership in which physicians hold a non-controlling interest. (3) Operations expected to commence in the fourth quarter of 1996. STAT's dialysis facilities are designed specifically for outpatient hemodialysis and generally contain, in addition to space for dialysis treatments, a nurses' station, a patient weigh-in area, a supply room, a water treatment space used to purify the water used in hemodialysis treatments, a dialyzer reprocessing room (where dialyzers are sterilized for reuse), staff work areas, offices and a staff lounge and kitchen. Many of STAT's facilities also have a designated area for training patients in home dialysis. Each currently installed dialysis unit is generally operated at or near capacity ten to 13 hours per day, six days per week. As demand for dialysis increases, STAT intends to increase capacity by purchasing and installing additional dialysis units in vacant stations and/or expanding operating hours. In accordance with conditions for participation in the Medicare ESRD program, each facility has a qualified physician who serves as medical director and an Administrator who supervises the day-to-day operations of the facility and the staff. Generally, the medical director must be board eligible or board certified in internal medicine and have had at least 12 months of experience or training in the care of patients at ESRD facilities. The staff of each facility typically consists of registered nurses, licensed practical or vocational nurses, patient care technicians, a social worker, a registered dietician, a unit clerk and bio-medical technicians. All of STAT's dialysis facilities offer both high-efficiency and conventional hemodialysis, which physicians practicing at STAT's facilities deem suitable for their patients. STAT considers the equipment installed and supplies utilized at its facilities to be among the most technologically advanced presently available. STAT also offers CAPD and various other forms of home dialysis. Home dialysis services consist of providing equipment and supplies, training, patient monitoring and follow-up assistance to patients who prefer and are able to receive dialysis treatments in their homes. Patients and their families are trained by a registered nurse to perform either CAPD or CCPD at home. HBO Therapy Services. Approximately 85% of the patients with chronic kidney failure served by STAT during 1995 also suffer from diabetes or vascular disease. These diseases generally cause decreased sensation 59 and oxygenation in the lower extremities. As a result, these individuals are predisposed to problem wounds which fail to respond to established medical/surgical management, including diabetic feet, compromised amputation sites, non-healing traumatic wounds, and vascular insufficiency ulcers. HBO therapy provides a significant increase in tissue oxygenation in the poorly perfused, infected wound. This elevation in oxygen induces significant positive changes in the wound repair process. HBO therapy is prescribed, either as a primary or adjunctive treatment, and only for those physical conditions approved by the Undersea and Hyperbaric Medical Society. In the case of problem wounds, the average treatment consists of approximately 20 treatments, each with a duration of approximately two hours. Specially-trained personnel observe and monitor the entire treatment. Governmental regulations require that HBO therapy be hospital-based. STAT currently manages the operations of six monoplace chambers at two HBO therapy facilities, and expects to open six monoplace chambers at three additional facilities in the fourth quarter of 1996. The following table sets forth certain information as of October 1, 1996 regarding the HBO therapy facilities managed by STAT:
NO. OF INSTALLED CHAMBER EXPIRATION OF INITIAL FACILITY CHAMBERS (1) CAPACITY (2) CONTRACT TERM -------- ------------ ------------ --------------------- Brownsville, Texas.............. 3 3 May 2000 Corpus Christi, Texas........... 3 3 April 1999(3) Kingsville, Texas............... 2 2 Fall 1999(4) Mission, Texas.................. 2 4 Fall 2001(4) Eagle Pass, Texas............... 2 4 Fall 2001(4) --- --- Total....................... 12 16 === ===
- -------- (1) Number of monoplace chambers currently installed or expected to be installed upon commencement of facility operations. (2) Number of monoplace chambers for which plumbed, certified space is currently available. (3) Upon commencement of operations at the Kingsville facility, the contract term of the Corpus Christi facility will restart for a new three-year period. (4) Assumes operations commence as expected in the fourth quarter of 1996. STAT administers HBO therapy to patients in monoplace chambers pursuant to contracts with hospitals, which, except with respect to the Kingsville facility, may be automatically renewed for additional, one-year periods after the initial term. Under the terms of each contract, STAT provides and maintains HBO and related medical equipment at each hospital and furnishes qualified supervising physicians, nurses and medical technicians specially trained in HBO therapy to administer the HBO therapy to patients. STAT receives from the hospitals a fixed fee for each outpatient HBO therapy, with fees for inpatient treatments determined on a case-by-case basis. Each currently installed chamber is generally operated at or near capacity 12 to 14 hours per day, six days per week. As demand for HBO therapy increases, STAT intends to increase capacity by purchasing and installing additional chambers in available space and/or expanding operating hours. Home Healthcare and Other Ancillary Services. Approximately 45% of the patients served by STAT's home health services during 1995 had chronic kidney failure or diabetes. In addition, a number of STAT's patients are elderly, are often immobile and have medical conditions requiring frequent at-home healthcare. To serve the special needs of these patients, STAT has entered into a management services agreement with a local provider of home healthcare services. Under the terms of the agreement, STAT furnishes nursing staff to perform basic nursing services as well as a nursing staff specially trained for the care of renal, diabetic, transplant, cancer and cardiac patients. In addition, STAT provides continuing education and training for its employees on an on-going basis and provides a number of administrative, financial and management services to the home health agency such as quality assurance, risk management, employee safety and physician relations services. For its services, STAT receives a fixed fee for each visit made to a patient's home and a fixed hourly management 60 support services fee for other enumerated services. Fees are subject to amendment based on changes in Medicare or Medicaid laws. The agreement expires in December 2002 and contains non-competition provisions throughout its term and for a one-year period thereafter. STAT's dialysis facilities also provide a comprehensive range of related ancillary services to ESRD patients, the most significant of which is the administration of EPO upon a physician's prescription. EPO is a bio-engineered protein which stimulates the production of red blood cells and is used in connection with all forms of dialysis to treat anemia, a medical complication frequently experienced by ESRD patients. Other ancillary services include: (i) certain laboratory tests required by Medicare to determine the effectiveness of dialysis treatments; (ii) general nutrition analysis; (iii) studies to test the degree of bone deterioration; (iv) electrocardiograms; (v) nerve conduction studies to test for deterioration of a patient's nerves; (vi) doppler flow testing to test the effectiveness of a patient's vascular access for dialysis; and (vii) blood transfusions. Physician Relationships. A key factor in the success of any of STAT's dialysis facilities is its relationship with local nephrologists. ESRD patients generally seek treatment at a facility near home and where the attending nephrologist has practice privileges. Consequently, STAT's dialysis business relies upon its ability to meet the needs of the referring physicians and the ESRD patients in the communities STAT serves. During 1995, two nephrologists who are also principal stockholders of STAT collectively accounted for approximately 80% of STAT's net service revenues from dialysis services (approximately 27% of STAT's total net service revenues). The medical directors of STAT's dialysis facilities, each of whom is a nephrologist, enter into written contracts with STAT which specify their duties and establish their compensation (which is fixed for periods of three years or more). The compensation of the medical directors and other physicians for services under contract is separately negotiated for each facility and generally depends upon competitive factors in the local market, the physician's professional qualifications and responsibilities and the size and utilization of the facility or relevant program. Sources of Reimbursement. Under the Medicare ESRD program, Medicare reimburses dialysis providers for the treatment of individuals who are diagnosed to have chronic kidney failure and are eligible for participation in the Medicare program, regardless of age or financial circumstances. For each treatment, Medicare pays 80% of the amount set by the Medicare prospective reimbursement system, and a secondary payor (usually Medicare supplemental insurance or the state Medicaid program) pays approximately 20% of the amount set by the Medicare prospective reimbursement system. Texas (currently the only state where STAT provides dialysis services) provides Medicaid benefits to qualified recipients to supplement their Medicare entitlement. The Medicare and Medicaid programs are subject to statutory and regulatory changes, administrative rulings, interpretations of policy and governmental funding restrictions, some of which may have the effect of decreasing program payments, increasing costs or modifying the way STAT operates its dialysis business. See "--Medicare Reimbursement," below. Assuming a patient is eligible for participation in the Medicare program, the commencement date of Medicare benefits for ESRD patients electing hemodialysis is dependent on several factors. ESRD patients under 65 years of age who are not covered by an employer group health plan (for example, the uninsured, those covered by Medicaid and those covered by an individual health insurance policy) must wait 90 days after commencing dialysis treatment to be eligible for Medicare benefits. During the first 90 days of treatment, the patient, Medicaid or the private insurer is responsible for payment (and, in the case of the individual covered by private insurance, such responsibility is limited to the terms of the policy, with the patient being responsible for the balance). ESRD patients under 65 years of age who are covered by an employer group health plan must wait 21 months after commencing dialysis treatment before Medicare becomes the primary payor. Medicare generally covers those who are ages 65 and over, except that Medicare coverage is secondary for some patients who have qualifying employer group health insurance. During the first 21 months of treatment, the employer group health plan is responsible for payment at its negotiated rate or, in the absence of such a rate, at STAT's usual and customary rates and the patient is responsible for deductibles and co-payments, if applicable, under the terms of the employer group health plan. 61 If an ESRD patient with an employer group health plan elects home dialysis training during the first 90 days of dialysis, Medicare becomes the primary payor after 18 months. If an ESRD patient without an employer group health plan begins home dialysis training during the first three months of dialysis, Medicare immediately becomes the primary payor. Medicare Reimbursement. STAT is reimbursed by Medicare under a prospective reimbursement system for chronic dialysis services provided to ESRD patients. Under this system, the reimbursement rates are fixed in advance and have been adjusted from time to time by Congress. Although this form of reimbursement limits the allowable charge per treatment, it provides STAT with predictable and recurring per treatment revenues and allows STAT to retain any profit earned. Medicare has established a composite rate set by HCFA that governs the Medicare reimbursement available for a designated group of dialysis services, including the dialysis treatment, supplies used for such treatment, certain laboratory tests and certain medications. The Medicare composite rate is subject to regional differences based upon certain factors, including regional differences in wage earnings. Certain other services and items are eligible for separate reimbursement under Medicare and are not part of the composite rate, including certain drugs (including EPO), blood (for amounts in excess of three units per patient per year), and certain physician-ordered tests provided to dialysis patients. Claims for Medicare reimbursement must generally be presented within 15 to 27 months of treatment depending on the month in which the service was rendered and for Medicaid secondary reimbursement, if applicable, within 60 to 90 days after payment of the Medicare claim. STAT generally submits claims monthly and is usually paid by Medicare within 30 days of the submission. If in the future Medicare were to include in its composite reimbursement rate any of the ancillary services presently reimbursed separately, STAT would not be able to seek separate reimbursement for these services and this would adversely affect STAT's results of operations to the extent a corresponding increase were not provided in the Medicare composite rate. STAT receives reimbursement for outpatient dialysis services provided to Medicare-eligible patients at rates that are currently $117 per treatment. The Medicare ESRD composite reimbursement rate is subject to change by legislation and recommendations by the Prospective Payment Assessment Commission ("PROPAC"). The Medicare ESRD composite reimbursement rate currently ranges from $117 to $138 per treatment, depending on regional wage variations. STAT is unable to predict what, if any, future changes may occur in the rate of reimbursement, or, if made, whether any such changes will have a material effect on STAT's revenues and net earnings. On June 1, 1989, the FDA approved the production and sale of EPO, and HCFA- approved Medicare reimbursement for EPO's use by dialysis patients. EPO stimulates the production of red blood cells and is beneficial in the treatment of anemia, with the effect of reducing or eliminating the need for blood transfusions for dialysis patients. Physicians began prescribing EPO for their patients in STAT's dialysis facilities in April 1993. The Medicare ESRD reimbursement rate for EPO is currently $10 per 1,000 units. Legislation has been enacted in recent years to reduce the Medicare reimbursement rate for EPO, and the reimbursement rate may be further reduced in the future. There can be no assurance that STAT can maintain current operating margins in the future for EPO administrations due to potential reimbursement decreases, or to potential increases in product costs from its sole manufacturer. Medicaid Reimbursement. Medicaid programs are state administered programs partially funded by the federal government. These programs are intended to provide coverage for patients whose income and assets fall below state defined levels and who are otherwise uninsured. The programs also serve as supplemental insurance programs for the Medicare co-insurance portion and provide certain coverages (e.g., oral medications) that are not covered by Medicare. State regulations generally follow Medicare reimbursement levels and coverages without any co-insurance amounts. STAT is a licensed ESRD Medicaid provider in Texas. Private Reimbursement/Certain Payor Arrangements. STAT receives reimbursement from private payors for ESRD treatments prior to Medicare becoming a patient's primary payor at rates significantly higher than the 62 per treatment rate set by Medicare. After Medicare becomes a patient's primary payor, private secondary payors generally reimburse STAT for 20% of the Medicare per treatment rate. In addition, STAT has entered into non-exclusive contracts with third-party payors, including many leading HMOs in STAT's service areas, to provide dialysis services to their beneficiaries. Emergency Physician Practice Management Services General. STAT also provides physician practice management services to its affiliated physician groups, which in turn provide emergency medical and related services to hospitals. Through the affiliated physician groups, STAT currently provides emergency medical services at 24 hospitals primarily in the Houston greater metropolitan area. Management Agreements with Affiliated Physician Groups. Under Management Services Agreements between STAT and its affiliated physician groups (the "Management Agreements"), which are generally perpetual and without provision for cancellation or termination, STAT identifies, recruits and screens potential candidates to serve as emergency room physicians in hospitals which have contracted with STAT's affiliated physician groups to provide physician contract management services. The affiliated physician groups then enter into contracts with physicians meeting the groups' qualifications and present those physicians as candidates for admission to the hospital's medical staff. STAT also coordinates, on behalf of and with the assistance of the affiliated physician groups, the scheduling of staff physicians to provide coverage on a 24-hour, 365-day-a-year basis for the hospital's emergency departments. In addition, STAT assists the hospital's administration and medical staff in such areas as quality assurance, risk management, departmental accreditation and marketing. STAT also manages and administers the affiliated physician groups' day-to- day business functions, which include but are not limited to, assuring responsibility for the administrative, accounting, payroll and personnel functions related to the practice of medicine. Under the Management Agreements, STAT is also required to bill and collect the professional fees for the medical services provided on behalf of the affiliated physician groups, maintains all files and records, negotiates and administers all hospital contracts, and provides consulting services to the affiliated physician groups in connection with the procurement and administration of professional liability insurance and the employment of personnel. All final decisions relating to medical care are solely that of the affiliated physician groups. In consideration of the services provided by STAT under the Management Agreements, each affiliated physician group pays a management fee and provides reimbursement of all related expenses to STAT. Each affiliated physician group has also appointed STAT its attorney-in-fact to act on its behalf for the purposes of collecting and receiving all fees and revenues payable to the affiliated physician groups as a result of professional services rendered and for the purpose of carrying out its management functions under its hospital contracts. 63 Hospital Contracts. STAT's affiliated physician groups currently provide emergency medical services through their independent contracting physicians with the following hospitals:
SERVICE COMMENCEMENT FACILITY (1) LOCATION DATE - ------------ -------------------- ------------- San Jacinto Methodist Hospital (2)......... Baytown, Texas July 1987 Twelve Oaks Hospital (3)................... Houston, Texas May 1989 Columbia Fort Bend Medical Center.......... Missouri City, Texas April 1990 Columbia Alvin Medical Center.............. Alvin, Texas February 1991 Columbia North Houston Medical Center...... Houston, Texas August 1991 Columbia Katy Medical Center............... Katy, Texas December 1992 Columbia Kingwood Medical Center........... Kingwood, Texas January 1993 Columbia Alice Physicians & Surgeons Hospital.................................. Alice, Texas January 1994 Columbia Mainland Regional Health Hospital.................................. Texas City, Texas December 1994 Columbia Conroe Regional Medical Center.... Conroe, Texas February 1996 Columbia Spring Branch Medical Center...... Houston, Texas February 1996 Columbia Bellaire Hospital................. Houston, Texas March 1996 Columbia North Houston Medical Center - Airline Campus............................ Houston, Texas March 1996 Columbia West Houston Medical Center....... Houston, Texas March 1996 Columbia Doctors Hospital East Loop........ Houston, Texas April 1996 Columbia Rosewood Medical Center........... Houston, Texas April 1996 Columbia East Houston Medical Center....... Houston, Texas April 1996 Brownsville Medical Center (3)............. Brownsville, Texas June 1996 Columbia Gulf Coast Medical Center......... Wharton, Texas July 1996 Columbia Bayshore Medical Center........... Pasadena, Texas July 1996 Columbia Doctors Hospital of Laredo........ Laredo, Texas October 1996 Columbia Valley Regional Medical Center.... Brownsville, Texas October 1996 Columbia Rio Grande Regional Hospital...... McAllen, Texas October 1996 Medical Center of Southeastern Oklahoma (4)....................................... Durant, Oklahoma October 1996
- -------- (1)Except as otherwise noted, all hospitals are owned by Columbia. (2)Facility owned by The Methodist Healthcare Network. (3)Facility owned by Tenet Health System. (4)Facility owned by Health Management Associates. Through its affiliated physician groups, STAT provides contract management services to hospitals under fee-for-service contracts. Hospitals entering into fee-for-service contracts agree to authorize the affiliated physician group to bill and collect the professional component of the charges for medical services rendered by the group's contracted physicians. Under fee-for-service arrangements, the affiliated physician groups receive directed disbursements of the amounts collected and, depending on the hospital's patient volume and payor mix, may also receive a stand-by or on-call fee from the hospital. Pursuant to such contracts, the affiliated physician groups assume responsibility for billing and collection and assume the risks of non-payment, changes in patient volume or payor mix and delays attendant to reimbursement through government programs or third-party payors. All of these factors are taken into consideration by the affiliated physician groups, in consultation with STAT, in arriving at appropriate contractual arrangements with healthcare institutions and professionals. The affiliated physician groups' service contracts with hospitals generally have a term of two years, and contain provisions permitting renewal for additional periods. Pursuant to the Columbia Agreement, one of STAT's affiliated physician groups has agreed to be the exclusive provider of emergency medical services to 15 of Columbia's hospitals in the Houston greater metropolitan area. The Columbia Agreement has an initial term ending in January 1998 with provisions for automatic renewal, and may be terminated by Columbia in certain circumstances, including unsatisfactory service 64 by STAT or its affiliated physician group. During the term of the Columbia Agreement and for two years thereafter, STAT has agreed not to organize or provide administrative or advisory services to independent physician or similar associations whose practices relate to areas other than emergency medicine and who are located in proximity to specified Columbia medical centers. There can be no assurance that the Columbia Agreement will be renewed at the conclusion of its initial term, that it will be renewed on substantially the same terms and conditions, or that it will not be terminated prior to the conclusion of its term. Physician Contracts. STAT's affiliated physician groups contract with physicians as independent contractors to fulfill their contractual obligations to provide qualified doctors to hospital clients. While each hospital with which each affiliated physician group contracts ultimately determines whether a physician must be board certified in emergency medicine to provide medical services in its emergency room, hospitals generally do not require physicians to be so certified. Each affiliated physician group requires all physicians to be currently licensed to practice medicine and to be Advanced Cardiac Life Support ("ACLS") certified before entering into a contract for the physician's service. Professional fees payable to the physician are disbursed by STAT pursuant to the Management Agreements. As independent contractors, the physicians are responsible for their own income and social security taxes, as well as workers compensation insurance. The contracts with independent contractor physicians can be terminated by the affiliated physician group or the independent contractor physicians with 30 days' notice, or immediately by the affiliated physician group for cause. QUALITY ASSURANCE As part of STAT's continuing efforts to increase the quality of its services and reduce its professional liability exposure with respect to potential negligent acts of its employees and contractors, STAT manages and monitors the quality and performance of its physicians and services. Disease Management Services. In order to optimize therapy and improve outcomes, STAT monitors patient outcomes in all of its dialysis facilities. Regular monitoring of the prescribed dialysis treatments and the key physiological parameters of patients (including periodic measurements to assess anemia, nutritional status and adequacy of dialysis) constitutes part of the continuous quality improvement conducted by STAT. Pursuant to Medicare requirements, each dialysis facility has a quality assurance committee that typically includes the facility's medical director, administrator and nurses, as well as other technical personnel. This committee meets regularly to monitor the quality of care in the facility and to assure compliance with applicable regulations. At the patient level, STAT attempts to ensure quality care through the provision of instruction to all ESRD patients before and after the initiation of dialysis treatment. Patients are encouraged to participate in their own care to the fullest extent possible. A comprehensive wound monitoring, measurement and documentation process provides consistency and quality of the wound management systems associated with HBO therapy. Clinical records are monitored to assure compliance with treatment standards, clinical improvements and outcomes. Side effect and infection profiling are also a routine part of the quality monitoring process. The complete quality measurement program of HBO therapy is incorporated into each hospital-wide continuous quality improvement process and is regularly reported. Emergency Physician Practice Management Services. STAT employs an ongoing quality management system for its emergency physician practice management services which measures both clinical and non-clinical outcomes. For clinical outcomes, the system is focused on high frequency or high criticality diagnoses with diagnosis-specific standards reported in a physician- and hospital-specific format providing feedback to physicians and support staff. For non-clinical outcomes, the system tracks and studies waiting times, interpersonal interactions, and patient perceptions in order to measure overall patient satisfaction and identify areas for improvement. The non- clinical system includes a patient questionnaire program, a patient complaint program, and a patient call-back program and complies with Joint Commission on Accreditation of Healthcare Organizations (JCAHO) standards. Both the clinical and non-clinical portions of the quality management system are incorporated into each individual hospital's continuous quality improvement program and are reported on a monthly basis. 65 MANAGEMENT INFORMATION SYSTEMS STAT has implemented information systems designed to enhance the quality of its disease management and emergency physician practice management services. STAT's management information systems collect and report data regarding patient flow, utilization, physician efficiency, patient demographics, managed care participation and other important data used by STAT, hospital clients and medical directors. In addition to assisting STAT in developing staffing patterns and marketing strategies, STAT believes these systems improve efficiency of service, cost effectiveness and patient outcomes. GOVERNMENT REGULATION General. STAT's operations are subject to extensive governmental regulations at the federal, state and local levels. These regulations require STAT to meet various standards relating to, among other things, the management of facilities, personnel, maintenance of proper records, equipment and quality assurance programs. STAT's facilities are subject to periodic inspection by state agencies and other governmental authorities to determine if the premises, equipment, personnel and patient care meet applicable standards. Any loss by STAT of its various federal certifications, its authorization to participate in the Medicare or Medicaid programs or its license under the laws of any state or other governmental authority from which a substantial portion of its revenues is derived, or a change resulting from reforms that reduce reimbursement or reduce or eliminate coverage for services would have a material adverse effect on STAT's business. To date, STAT has not had any difficulty in maintaining the required licenses or its Medicare and Medicaid certifications. The healthcare services industry will continue to be subject to intense regulation at the federal and state levels, the scope and effect of which cannot be predicted. No assurance can be given that the activities of STAT will not be reviewed and challenged or that healthcare reform will not result in a material adverse change to STAT's business. Fee-Splitting; Corporate Practice of Medicine. The laws of many states prohibit physicians from splitting professional fees with non-physicians and prohibit non-physician entities, such as STAT, from practicing medicine and from employing physicians to practice medicine. In the states in which STAT conducts or may conduct business, including Texas, general business corporations are not permitted to practice medicine, exercise control over physicians who practice medicine or engage in certain practices such as fee- splitting with physicians. The corporate practice of medicine refers to the rendering directly, or through employment, of medical services by a business corporation. The laws in most states regarding the corporate practice of medicine have been subject to limited judicial and regulatory interpretation. Management believes STAT's current and planned activities do not constitute fee-splitting or the corporate practice of medicine as contemplated by these statutes or case law interpretations. STAT believes that it is not engaged in the corporate practice of medicine because the physicians who provide patient care services do so as independent professionals. Physicians who are paid directly by STAT are paid for specific administrative and management services under medical director agreements. These agreements also reserve to the physicians exclusive authority to make all decisions regarding medical care. Under STAT's Management Agreements with its affiliated physician groups, STAT is paid for administrative and other services provided at rates which STAT believes reflect the fair market value of such services. In addition, these agreements specifically acknowledge that the affiliated physician groups have the exclusive authority and responsibility for making all decisions regarding medical care. Based on current interpretations of state law in Texas where STAT now operates, STAT believes its arrangements with physicians and affiliated physician groups do not violate the prohibition against the corporate practice of medicine. However, all such laws are subject to interpretation by the courts as well as administrative agencies, and any restructuring required by such change could be detrimental to STAT's business, financial condition and results of operations. There can be no assurance that future interpretations of such laws will not require structural and organizational modifications of STAT's existing relationships with physicians and its affiliated physician groups. Self-Referral. Certain provisions contained in the Omnibus Budget Reconciliation Act of 1989 ("Stark I") and the Omnibus Budget Reconciliation Act of 1993 ("Stark II"), and subsequent amendments, prohibit physician referrals for clinical laboratory services and certain other "designated health services," including without limitation outpatient prescription drugs, parenteral and enteral nutrients, equipment and supplies, durable 66 medical equipment and supplies, home health services, and inpatient and outpatient hospital services, to entities with which a physician or an immediate family member has a financial relationship (the "Stark Law"). The Stark Law also prohibits entities from presenting or causing to be presented a claim or bill to any individual, third-party payor or other entity for designated health services furnished under a prohibited referral. A violation of the Stark Law may result in significant civil penalties, which may include exclusion or suspension of the physician and entity from future participation in the Medicare and Medicaid programs and substantial fines. In August 1995, HCFA published regulations interpreting Stark I. These regulations only address the original scope of Stark I (clinical laboratories) but representatives of HCFA assert in the preamble to the regulations that these regulations will be used by HCFA as the basis for interpretation of matters involving the other designated health services. The regulations specifically provide that clinical laboratory services that are reimbursed as part of the Medicare composite billing rate for renal dialysis services are excluded from the coverage of Stark I. However, laboratory services not included in the Medicare composite rate could be included within the coverage of Stark I. Although STAT provides a limited number of such laboratory services, STAT believes that it is not a provider of clinical laboratory services subject to the Stark Law. In addition, STAT believes it is not a provider of any designated health services which would subject it to application of Stark II. Based upon the preamble to the regulations, as described above, STAT believes that the provision of other services that are paid for under the composite billing rate is outside of the scope of the Stark Law. STAT believes that EPO and other pharmaceuticals that STAT uses in connection with its dialysis services and bills HCFA for separately from the composite billing rate do not constitute outpatient prescription drugs for purposes of the Stark Law and that, therefore, STAT is not a provider of outpatient prescription drugs as a designated health service. However, if it is determined that STAT is providing a designated health service, then each financial relationship between STAT and any physician who refers Medicare or Medicaid covered patients to STAT for the provision of a designated health service must qualify under an exception to the Stark Law or STAT will be unable to submit a bill for payment for such service. A financial relationship consists of either a compensation arrangement between a physician, a member of the physician's immediate family and STAT or an ownership interest in STAT held by a physician or a member of the physician's immediate family. STAT has entered into medical director agreements with certain physicians who are in a position to refer patients to STAT's dialysis facilities. STAT has structured these medical director agreements to comply with the Stark Law exception for personal service arrangements. Four of STAT's dialysis facilities lease space from joint ventures in which physicians who refer patients to the facilities hold interests. STAT has structured the leases to comply with the Stark Law exception for the rental of office space. Two nephrologists who are in a position to refer patients to STAT are significant equity owners of STAT as well as medical directors of STAT. In addition, physicians who refer patients to two of STAT's dialysis facilities own minority interests as limited partners in such facilities. A determination that STAT provides designated health services could have a material adverse effect on STAT's business, financial condition and results of operations because certain relationships between STAT and referring physicians do not fall squarely within a safe- harbor exception of the Stark Law. Although HBO therapy services constitute outpatient and inpatient hospital services and are therefore a designated health service, STAT does not own or control such services, but merely administers HBO therapy services, and performs certain non-professional functions related thereto, pursuant to management contracts with hospitals. The hospitals, as the licensed entities, provide and bill for the HBO therapy services. STAT is not a licensed provider of inpatient and outpatient hospital services and has no control over or financial interest in any of these hospitals. The only relationship between the hospital and STAT is through STAT's HBO management agreements. Accordingly, STAT believes its HBO administrative operations fall outside the purview of the Stark Law. Nevertheless, a determination that the Stark Law is applicable to STAT's HBO activities would require that STAT's financial relationships with referring physicians comply with a specified exception set forth in the Stark Law, or that STAT take steps to ensure that the physician does not refer patients covered under the 67 Medicare or Medicaid programs to any hospital with which STAT has an agreement to administer HBO therapy services. STAT also provides nursing staff and certain administrative, financial and management services to a local home healthcare agency that provides home health services to patients, including many of the patients of STAT's dialysis facilities. The home healthcare agency, as the licensed entity, provides and bills for the home health services. Since STAT is not a licensed home healthcare agency and has no control over nor financial interest in this agency other than through STAT's management agreement, STAT believes that it is not a provider of home health services as designated health services under the Stark Law. However, if a court or regulatory or enforcement agent determines that the Stark Law applies to STAT's home health management activities, STAT would have to ensure that each of its financial relationships with referring physicians complies with an exception to the Stark Law. In such event, a determination that any financial relationship between STAT and affiliated physicians described in the second preceding paragraph fails to comply with an exception to the Stark Law could have a material adverse effect on STAT's business, financial condition and results of operations. The list of designated health services under the Stark Law does not include the management of a physician healthcare practice such as STAT performs for its affiliated physician groups. STAT does not consider these operations to include the provision of a designated health service. In addition, STAT believes that the Stark Law does not apply to its affiliated physician groups' contracts with hospitals. The affiliated physician groups have entered into agreements with hospitals whereby the hospitals authorize the physician groups to bill and collect the professional component of the charges for medical services rendered by the groups' independent contractor physicians. Depending upon a hospital's patient volume and payor mix, a hospital may pay an affiliated physician group a stand-by or on-call fee. In such an event, the agreement could constitute a financial relationship between the affiliated physician group and the hospital that would prohibit the physicians from referring covered patients to the hospital for designated health services. STAT believes that each of the hospital contracts either does not constitute a financial relationship between the affiliated physician group and the hospital because no remuneration is paid to the group by the hospital, or if the relationship qualifies as a financial relationship, it complies with the Stark Law exception for remuneration paid to a physician by a hospital that does not relate to the provision of designated health services. Because the STAT Common Stock is publicly held, a determination of the ownership of such shares by a referring physician, or any member of his or her immediate family, may be extraordinarily difficult. It is STAT's belief that it does not provide, directly or indirectly, any designated health service and that the Stark Law does not apply to STAT's activities. Because there have been no cases or other interpretations of the Stark Law or regulations applicable to organizations like STAT, STAT cannot ascertain how its activities might be assessed if reviewed. Furthermore, STAT has no ability to obtain advisory opinions from the regulatory and enforcement agencies that govern the Stark Law. If it is determined that STAT is a provider of designated health services, then no physician who owns, or who has an immediate family member who owns, shares of the capital stock of STAT, may refer a Medicare or Medicaid covered patient to STAT for designated health services. Violations of the Stark Law are punishable by civil penalties, which may include exclusion or suspension of the provider from future participation in Medicare and Medicaid programs and substantial fines. A determination that any of STAT's activities constitutes a violation of the Stark Law could have a material adverse effect upon STAT's business, financial condition and results of operations. Medicare and State Fraud and Abuse Provisions. Federal law prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for the referral of Medicare or Medicaid program patients or patient care opportunities, or in return for the purchase, lease or order of any item or service that is covered by Medicare or certain other federal and state healthcare programs (the "Anti-Kickback Laws"). For an entity to violate the Anti-Kickback Laws, the entity must provide services that are reimbursable under the Medicare or other federal or state healthcare programs, must offer or receive remuneration, and must have an intent to induce referrals. 68 Pursuant to the Anti-Kickback Laws, the federal government released a special alert which announced a policy of increased scrutiny of joint ventures and other transactions among healthcare providers in an effort to reduce potential fraud and abuse relating to Medicare and Medicaid costs. The applicability of these provisions to many business transactions in the healthcare industry has not yet been subject to judicial and regulatory interpretation. In 1991, the Inspector General of the U.S. Department of Health and Human Services published "Safe Harbor Regulations" defining safe harbors for certain arrangements that, if complied with, would not violate the Anti-Kickback Laws. A failure to comply with the safe harbors does not, however, mean that a person or entity has violated the Anti-Kickback Laws. Among the safe harbors specifically provided for are safe harbors for ownership interests, personal service contracts, management contracts and space rentals. The Anti-Kickback Laws provide civil and criminal penalties for individuals or entities participating in the Medicare and Medicaid programs who knowingly and willfully offer, pay, solicit or receive remuneration in order to induce referrals for items or services reimbursed under such programs. In addition to federal criminal penalties, the Social Security Act also establishes the intermediate sanctions of excluding violators from participation in the Medicare or Medicaid programs. STAT believes that its medical director agreements for its dialysis centers, HBO therapy operations and affiliated physician groups described above comply with the safe harbor provisions for personal service arrangements. Four of STAT's dialysis facilities are leased from entities in which physicians who refer patients to the facility hold ownership interests. STAT believes that the leases comply with the space rental safe harbor and are in compliance with the Anti-Kickback Laws. Although certain other of STAT's financial relationships with affiliated physicians relating to ownership interests in STAT (as described in the fourth paragraph under "--Self-Referral" above) do not fully comply with the safe harbor for investment interests, STAT believes these relationships are in compliance with the Anti-Kickback Laws, and STAT has no intent to compensate any party for the referral of any patients. STAT is compensated under its various management agreements for providing management services to affiliated physician groups, home health agencies and hospital-based HBO therapy operations. The fees payable under these agreements are intended by STAT to be consistent with fair market value in arms' length transactions for the nature and amount of management services rendered, and therefore, would not constitute unlawful remuneration under the Anti-Kickback Laws. Furthermore, STAT does not believe it is in a position to make or influence referrals of patients or services reimbursed under Medicare or Medicaid programs to any provider of covered services. Consequently, STAT does not believe that the management fees payable to it should be viewed as remuneration for referring or influencing referrals of patient or services covered by such programs as prohibited by the Anti-Kickback Laws. Except for its dialysis services, STAT is not a provider or supplier of services or items reimbursed by Medicare or state healthcare programs. No assurance can be made, however, that a court or regulatory or enforcement agency would view these above-described arrangements in a similar manner. Should any of STAT's business arrangements be deemed to constitute an arrangement designed to induce the referral of Medicare, Medicaid or other covered patients, then such arrangement could be viewed as violating the Anti- Kickback Laws. Noncompliance with the Anti-Kickback Laws can result in exclusion from all such governmental programs as well as civil and criminal penalties. A determination of liability under any such law could have a material adverse effect on STAT's business, financial condition and results of operations. In 1991, Texas enacted a law similar to the federal Anti-Kickback Laws which is referred to as the "Illegal Remuneration Statute" and which covers patients sponsored by private payors as well as governmental programs. The Illegal Remuneration Statute prohibits, among other things, a person from intentionally offering 69 to pay or accepting any remuneration directly or indirectly to or from any person or corporation in exchange for a healthcare referral if the person, at the time of initial contact and at the time of the referral, does not disclose to the patient the person's affiliation with the person for whom the patient is secured and that the person will receive remuneration for securing the patient. STAT believes it is in compliance with the Illegal Remuneration Statute and that none of its business arrangements constitute a payment in exchange for a referral. However, a determination that STAT has violated the Illegal Remuneration Statute could subject STAT to injunctive relief, civil penalties or both, which could have a material adverse effect on STAT's business, financial condition and results of operations. The False Claims Act. An increasing number of healthcare providers and other entities are being faced with lawsuits alleging fraudulent billing practices under the federal Civil False Claims Act. The Civil False Claims Act permits a person (generally employees or former employees of the healthcare provider or other entity) to assert the rights of the government by initiating a qui tam action against a healthcare provider or other entity if such person has or purports to have information that the healthcare provider or other entity submitted a claim to the government for payment that could be false or fraudulent. Upon filing, the government has the opportunity to intervene and assume control of the case. Penalties of up to $10,000 for each false or fraudulent claim presented to the government for payment may be awarded as well as treble damages. Defendants also may be excluded permanently or for a period of time from participation in the Medicare and Medicaid programs. Because of penalties and treble damages, many of these lawsuits involve large monetary claims and substantial defense costs. In the event that STAT as a dialysis provider is named as a defendant in a qui tam action and is successfully prosecuted, no assurance can be made that such event would not have a material adverse effect on STAT and its operations. Medicare. The Medicare program represents a substantial portion of the federal budget, and Congress takes action in almost every legislative session to modify the Medicare program for the purpose of reducing the amounts otherwise payable from the program to healthcare providers. Legislation or regulations may be enacted in the future that may significantly modify the ESRD program or substantially reduce the amount paid for STAT's services. Further, statutes or regulations may be adopted which impose additional requirements for STAT to be eligible to participate in the federal and state healthcare payment programs. Such new legislation or regulations may adversely affect STAT's business operations. Recently, HCFA has promulgated regulations to implement the Omnibus Budget Reconciliation Act of 1993 ("OBRA 93") with respect to the coordination-of- benefits period for Medicare beneficiaries. HCFA has established rules for Medicare beneficiaries who are eligible for, or entitled to, Medicare on the basis of ESRD and are also entitled on the basis of age or disability. There are essentially four rules currently in effect for primary payor determination during the coordination-of-benefits period. . The first rule provides that if the 18-month period ended before August 1993, Medicare is primary payor from the first month of dual eligibility entitlement. . The second rule provides that if the first month of ESRD-based eligibility or entitlement and the first month of dual eligibility/entitlement both fall after February 1992 and before August 10, 1993, Medicare is (i) primary payor from the first month of dual eligibility/entitlement through August 9, 1993; (ii) secondary payor from August 10, 1993 through the 18th month of ESRD-based eligibility or entitlement; and (iii) primary payor again after the 18th month of ESRD-based eligibility or entitlement. . The third rule provides that if the first month of dual eligibility or entitlement is after February 1992, and the first month of dual eligibility or entitlement is after August 9, 1993, Medicare is secondary payor during the first 18 months of ESRD-based eligibility or entitlement, and primary payor after the 18th month of ESRD-based eligibility or entitlement. . The fourth rule, and the most controversial, provides in part that Medicare remains the primary payor if a group health plan was already secondary payor for an individual entitled on the basis of age or disability when the individual becomes eligible on the basis of ESRD. 70 Initially, HCFA had interpreted OBRA 93 to require a private plan to become primary payor under these circumstances. HCFA later corrected its interpretation of the statute and issued guidance on April 24, 1995 that Medicare remains the primary payor. On June 6, 1995, a federal court issued a preliminary injunction precluding HCFA from retroactively implementing its corrected program instruction for items and services furnished between August 10, 1993 (the enactment of OBRA 93) and April 24, 1995, pending the courts decision on the merits. HCFA has stated that it will modify the rules if required by the final ruling of the court. If the court determines that Medicare is the primary payor during the period between August 10, 1993 and April 24, 1995, then this decision could have a material adverse effect on STAT in that it would require STAT to refund certain payments to private insurers for services during that time period, and then re-bill the Medicare Program for such payments. This retroactive application of HCFA's April 1995 program instruction could cause STAT to incur a significant amount of cost in terms of work hours and office expenses. If the court maintains its current position that these rules cannot be retroactively applied, then STAT does not anticipate any impact on its earnings from such finding. However, STAT cannot estimate with any certainty, at the present time, the potential impact that any final ruling or interpretation or the timing of same may have upon its earnings. Other Regulations. STAT's operations are also subject to various state hazardous waste disposal laws. Those laws as currently in effect do not classify most of the waste produced during the provision of dialysis services to be hazardous, although disposal of non-hazardous medical waste is also subject to regulation. Occupational Safety and Health Administration regulations require employers of workers who are occupationally subject to blood or other potentially infectious materials to provide those workers with certain prescribed protections against blood borne pathogens. The regulatory requirements apply to all healthcare facilities, including dialysis facilities, and require employers to make a determination as to which employees may be exposed to blood or other potentially infectious materials and to have in effect a written exposure control plan. In addition, employers are required to provide or employ hepatitis B vaccinations, personal protective equipment, infection control training, post-exposure evaluation and follow-up, waste disposal techniques and procedures, and engineering and work practice controls. Employers are also required to comply with certain record- keeping requirements. STAT believes it is in material compliance with the foregoing laws and regulations. Although STAT believes it complies in all material respects with current applicable laws and regulations, the healthcare service industry will continue to be subject to substantial regulation at the federal and state levels, the scope and effect of which cannot be predicted by STAT. No assurance can be given that STAT's activities will not be reviewed or challenged by regulatory authorities. Regulatory Compliance and Possible Negative Effects of Prospective Healthcare Reform. Various plans have been proposed and are being considered on federal, state and local levels to reduce costs in healthcare spending. Although STAT believes it responds to the concerns addressed by such plans, it is not possible to assess the likelihood of whether any of these proposals will be enacted or to assess the impact any of these proposals may have on reimbursement to healthcare providers. Lower rates of reimbursement may reduce the amounts paid by any government payor and, accordingly, may have a material adverse effect on STAT's businesses and the results of its operations. Healthcare reforms may expand the existing Anti-Kickback Law and the Stark Law to apply to all healthcare payors, not just Medicare and Medicaid. It is unclear how any reform legislation would affect healthcare provider networks or other types of managed care arrangements. There can be no assurance that STAT will be able to comply with any new laws. STAT believes it is in material compliance with current applicable laws and regulations. No assurance can be made that in the future STAT's business arrangements, past or present, will not be the subject of an investigation or prosecution by a federal or state governmental authority. Such an investigation or prosecution could result in any, or a combination, of the penalties discussed above depending upon the agency involved in such investigation and prosecution. None of STAT's business arrangements with physicians, vendors, patients or others have been the subject of investigation by any governmental authority. No assurance can be given that 71 STAT's activities will not be reviewed or challenged by regulatory authorities. STAT monitors legislative developments and would seek to restructure a business arrangement if STAT determined that one or more of its business relationships placed it in material noncompliance with such a statute. STAT believes that healthcare regulations will continue to change and, as a result, regularly monitors developments in healthcare law. STAT expects to modify its agreements and operations from time to time as the business and regulatory environment changes. While STAT believes it will be able to structure all its agreements and operations in accordance with applicable law, there can be no assurance that its arrangements will not be successfully challenged. CORPORATE LIABILITY AND INSURANCE STAT's business entails an inherent risk of claims of physician professional and other liability. STAT currently maintains professional liability insurance underwritten by an insurance company unaffiliated with STAT for itself, its affiliated physician groups and its contracted physicians, in amounts it deems to be appropriate, based upon historical claims and the nature and risks of its business. The professional liability insurance coverage is on a claims- made basis (the coverage includes claims reported during the period that the insured was covered by the policy) and includes certain self-insurance retention. There can be no assurance that a future claim for professional liability will not exceed the scope or limits of STAT's available insurance coverage or that such coverage will continue to be available at acceptable costs or at all. Such insurance provides coverage, subject to policy limits, in the event that STAT is held liable as a co-defendant in a lawsuit against an independent contractor physician or hospital or other client. STAT does not control the practice of medicine by physicians or the compliance with certain other regulatory and other requirements directly applicable to physicians or hospitals or other clients. The likelihood that STAT could be held liable for the negligence of a physician would be increased if such physician were determined to be an employee or other agent of STAT. In addition to any potential tort liability of STAT, the affiliated physician groups' contracts with hospitals generally contain provisions under which STAT agrees to indemnify the hospital for losses resulting from the contracted physician's malpractice and the hospital agrees to indemnify STAT for losses resulting from the negligence of the hospital or hospital personnel. COMPETITION The markets for dialysis, HBO therapy, home healthcare and physician practice management services are highly competitive. STAT competes not only with other national and regional management companies and treatment facilities but also with local physician groups and with hospitals themselves, many of which are also trying to combine their own services with those of physicians into integrated delivery networks. STAT is also, in effect, competing against the traditional structure of practicing physician management and hospital management operations. Competition in the industry is based on the scope, quality, and cost of services provided. Certain of STAT's competitors are significantly larger and have substantially greater financial and other resources available to them than STAT. LEGAL PROCEEDINGS STAT and its affiliated physician groups are involved in various legal proceedings incidental to their business, substantially all of which involve claims related to the alleged medical malpractice of contracted physicians. In the opinion of STAT's management, no individual item of litigation or group of similar items of litigation, taking into account the insurance coverage available to STAT, is likely to have a material adverse effect on STAT's financial position. EMPLOYEES AND INDEPENDENT CONTRACTOR PHYSICIANS At September 30, 1996, STAT had 268 full-time employees, of whom 13 were in general executive positions, 50 were in administration and 205 were registered nurses or technicians. In addition, as of such 72 date approximately 215 physicians were under contract with STAT's affiliated physician groups or were engaged as medical directors of STAT's dialysis operations. None of STAT's employees is represented by a collective bargaining agreement, and STAT considers its employee relations to be satisfactory. PROPERTIES STAT's principal executive offices are located in approximately 10,000 square feet of leased space in Houston, Texas 77060 under an agreement terminating in June 1998. All of STAT's operations are conducted from leased facilities. STAT leases four facilities from entities in which referring physicians hold an interest. The leases for STAT's operating facilities generally cover periods from three to ten years and typically contain renewal options of one to five years at the fair rental value at the time of renewal or at rates subject to consumer price index increases since the inception of the lease. STAT's facilities range in size from approximately 900 to approximately 7,200 square feet. STAT considers its physical properties to be in good operating condition and suitable for the purposes for which they are being used. CERTAIN INFORMATION REGARDING A DIRECTOR AND AN EXECUTIVE OFFICER OF STAT WHO WILL BECOME A DIRECTOR OF AMERICAN The Merger Agreement provides that the obligation of STAT to effect the merger is subject to the condition that American shall have taken all actions necessary to nominate and elect Mr. Schneider as a member of the Board of Directors of American. No other director or executive officer of STAT will serve as a director or executive officer of American immediately following the Merger. Mr. Schneider, age 41, has been Chairman of the Board and Chief Executive Officer of STAT since June 1996 and a director since July 1995. STAT's certificate of incorporation and by-laws provide for a classified board of directors. Mr. Schneider is a Class I director of STAT and his term as a director expires at STAT's 1998 annual stockholders meeting. Mr. Schneider had not served as an executive officer of STAT prior to June 1996. Schneider co- founded AmHealth Corporation with Messrs. Ruben and Daniel Perez in October 1992. Mr. Schneider was a co-founder of Columbia/HCA Healthcare Corporation in 1988 and served on its Board of Directors from 1988 to 1993 and as Senior Vice President of Market Development from 1993 to 1994, overseeing Columbia's involvement in physician ventures, mergers, acquisitions and business development. In 1995, STAT granted to Mr. Schneider options to purchase 10,000 shares of STAT Common Stock at an exercise price of $2.75 per share, which was the fair market value of the shares on the date of grant. In June 1996, upon consummation of the Exchange, Mr. Schneider received 2,811,922 shares of STAT Common Stock in exchange for his interests in the AmHealth Corporations and related entities, was elected Chairman of the Board and Chief Executive Officer of the STAT, and entered into an employment agreement with STAT. Mr. Schneider's employment agreement with STAT provides that he will receive an annual salary of $120,000. Additionally, Mr. Schneider is entitled to an incentive compensation award in the form of a bonus, the amount of which is at the discretion of the Compensation Committee of the Board of Directors. In addition, subject to the approval of the Board of Directors, Mr. Schneider has been granted the right to participate in the 1996 Stock Option Plan. The employment agreement provides for an initial term of employment of three years ending in June 1999, provided that the Company may terminate the agreement for cause at any time. In addition, under the terms of the employment agreement, Mr. Schneider has agreed not to compete with, nor to disclose confidential information of, STAT for a period of two years after the termination of the employment agreement. The Merger Agreement provides that the obligations of American and Merger Sub to effect the Merger are subject to the condition that Mr. Schneider enter into an employment agreement with American and STAT in the form attached to the Merger Agreement, which will supersede his existing employment agreement with STAT. The terms of the employment agreement among Mr. Schneider, STAT, and American are the same as his existing 73 employment agreement with STAT, except that: (i) American is a party to the new employment agreement; (ii) the new employment agreement has a term of three years following the Effective Time; (iii) the new employment agreement provides that if Mr. Schneider's employment with STAT is terminated by STAT other than for cause, Mr. Schneider will receive one year's salary plus the continuation of certain benefits for one year; (iv) the new employment agreement provides that if Mr. Schneider sells or otherwise disposes of shares of American Common Stock received by him in the Merger prior to certain dates specified therein, he shall pay a portion of the proceeds of such disposition to American; and (v) the new employment agreement provides that Mr. Schneider will not compete with STAT or any of its subsidiaries or affiliates in certain specified types of businesses within 100 miles of any location in which STAT or any of its subsidiaries or affiliates conduct non-transportation business. STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS OF STAT The following table sets forth certain information regarding the beneficial ownership of STAT Healthcare Common Stock as of September 30, 1996, assuming the exercise of all options exercisable on, or within 60 days of, such date by (i) each director, (ii) the Chief Executive Officer and each of the other four most highly compensated executive officers of STAT, (iii) all executive officers and directors as a group and (iv) STAT's principal stockholders. Other than as set forth in the table below, there are no persons known to STAT to beneficially own more than 5% of STAT Common Stock.
NAME NUMBER(1) PERCENTAGE ---- --------- ---------- Ruben A. Perez(2).................................... 3,868,917 25.8% Russell D. Schneider(3).............................. 2,824,922(4) 18.9 Daniel A. Perez(5)................................... 1,509,231 10.1 William Restrepo, M.D.(6)............................ 1,043,018 7.0 M.K. Razdan, M.D.(7)................................. 1,026,038 6.9 William H. Rice, M.D.(3)............................. 783,756(8) 5.2 Victor M. Miranda, M.D.(3)........................... 805,677(9) 5.4 Ned E. Chapman(3).................................... 90,136(10) * David C. Colby....................................... 20,000(11) * Ann N. James, Ph.D................................... 20,000(11) * All officers and directors as a group (eight per- sons)............................................... 9,922,639(12) 65.9%
- -------- * Indicates less than 1%. (1) Beneficial ownership is calculated in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Common Stock subject to options held by that person that are currently exercisable or become exercisable within 60 days are deemed outstanding. However, such shares are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated in the footnotes to this table, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. (2) The address for Mr. R. Perez is 8200 I.H. 10 West, Suite 710, San Antonio, Texas 78230. (3) The address for Mr. Schneider, Dr. Rice, Dr. Miranda and Mr. Chapman is 12450 Greenspoint Drive, Suite 1200, Houston, Texas 77060. (4) Includes 10,000 shares purchasable upon the exercise of options. (5) The address for Mr. D. Perez is 1300 North 10th, Suite 220, McAllen, Texas 78501. (6) The address for Dr. Restrepo is 1801 South 5th Street, Suite 209, McAllen, Texas 78503. (7) The address for Dr. Razdan is 222 East Ridge Road, Suite 116, McAllen, Texas 78503. (8) Includes 5,414 shares purchasable upon the exercise of options and 778,342 shares owned of record by STAT Physicians I. Drs. Rice and Miranda each own 50% of the outstanding equity interest in STAT Physicians I and share the power to vote and dispose of the shares owned by STAT Physicians I. Excludes 74 778,342 shares attributable to Dr. Rice's equity interest in STAT Physicians I, of which Dr. Miranda disclaims beneficial ownership. (9) Includes 27,335 shares purchasable upon the exercise of options and 778,342 shares owned of record by STAT Physicians I. Drs. Rice and Miranda each own 50% of the outstanding equity interest in STAT Physicians I and share the power to vote and dispose of the shares owned by STAT Physicians I. Excludes 778,342 shares attributable to Dr. Miranda's equity interest in STAT Physicians I, of which Dr. Rice disclaims beneficial ownership. (10) Includes 11,250 shares purchasable upon the exercise of options. (11) Represents shares purchasable upon the exercise of options. The shares underlying such options are subject to repurchase by STAT. (12) Includes 93,999 shares purchasable upon the exercise of options. 75 COMPARATIVE PER SHARE PRICES AND DIVIDENDS AMERICAN American Common Stock is listed and traded on the NYSE. The following table sets forth the high and low sales prices per share of American Common Stock as reported in the NYSE Composite Transactions Tape, for the quarterly periods presented below:
AMERICAN COMMON ---------------- HIGH LOW ---------------- Calendar 1994: First quarter............................................ 28 1/8 $ 23 1/8 Second quarter........................................... 26 1/4 21 5/8 Third quarter............................................ 26 1/4 21 1/2 Fourth quarter........................................... 28 7/8 24 5/8 Calendar 1995: First quarter............................................ 28 3/4 24 5/8 Second quarter........................................... 28 22 3/4 Third quarter............................................ 31 5/8 27 Fourth quarter........................................... 32 1/2 26 1/4 Calendar 1996: First quarter............................................ 35 3/4 28 7/8 Second quarter........................................... 38 1/2 33 3/4 Third quarter............................................ 38 1/4 32 5/8 Fourth quarter (through November 1, 1996)................ 37 5/8 29
On October 7, 1996, the last trading day prior to announcement of the execution of the Merger Agreement, the closing price per share of American Common Stock as reported in the NYSE Composite Transactions Tape was $37 1/2. On November 1, 1996, the most recent date for which prices were available prior to printing this Proxy Statement/Prospectus, the closing price per share of American Common Stock as reported in the NYSE Composite Transactions Tape was $30 1/4. Stockholders are urged to obtain current market quotations. STAT STAT Common Stock has traded on the Nasdaq National Market since August 23, 1996 and was quoted on the Nasdaq SmallCap Market from April 21, 1995 to August 22, 1996. The following table sets forth the high and low closing sales prices per share of STAT Common Stock as reported by the Nasdaq National Market and the Nasdaq SmallCap Market, for the calendar quarters presented below:
STAT COMMON STOCK ------------------ HIGH LOW --------- -------- Calendar 1995: Second quarter (beginning April 21)..................... 3 3/16 2 Third quarter........................................... 3 7/8 2 Fourth quarter.......................................... 5 2 3/4 Calendar 1996: First quarter........................................... 6 3/4 3 Second quarter.......................................... 9 5/8 5 1/2 Third quarter........................................... 8 3/8 5 3/4 Fourth quarter (through November 1, 1996)............... 9 7
On October 7, 1996, the last trading day prior to announcement of the execution of the Merger Agreement, the closing price per share of STAT Common Stock as reported on the Nasdaq National Market was $8.375. On November 1, 1996, the most recent date for which prices were available prior to printing this Proxy Statement/Prospectus, the closing price per share of STAT Common Stock as reported on the Nasdaq National Market was $7 3/8. Stockholders are urged to obtain current market quotations. 76 PRO FORMA COMBINED FINANCIAL STATEMENTS The following unaudited pro forma combined financial statements give effect to the merger of American and STAT as if the transaction was accounted for as a pooling of interests and occurred, for balance sheet purposes, on June 30, 1996 and, for statements of earnings purposes, on January 1, 1993. These unaudited pro forma combined financial statements should be read in conjunction with American's and STAT's consolidated financial statements and notes thereto that are either incorporated herein by reference or included elsewhere herein. The pro forma information is not necessarily indicative of the results that would have been reported had such events actually occurred on the dates specified, nor is it indicative of American's future results. The pro forma combined financial statements do not include any one-time, nonrecurring Merger-related costs, nor do they incorporate any benefits from any potential cost savings or synergies following the Merger. 77 AMERICAN MEDICAL RESPONSE, INC. PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF JUNE 30, 1996 (IN THOUSANDS) (UNAUDITED)
AMERICAN STAT COMBINED -------- ------- -------- ASSETS Cash................................................. $ 11,668 $ 1,324 $ 12,992 Accounts receivable.................................. 130,085 7,109 137,194 Other current assets................................. 42,449 573 43,022 -------- ------- -------- Total current assets............................... 184,202 9,006 193,208 -------- ------- -------- Property & equipment................................. 70,602 3,149 73,751 -------- ------- -------- Goodwill............................................. 291,140 1,408 292,548 Other assets......................................... 9,182 196 9,378 -------- ------- -------- Total assets....................................... $555,126 $13,759 $568,885 ======== ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses................ $100,304 $ 3,259 $103,563 Current maturities of debt........................... 19,841 1,558 21,399 -------- ------- -------- Total current liabilities.......................... 120,145 4,817 124,962 -------- ------- -------- Long-term debt....................................... 26,869 2,282 29,151 Convertible subordinated notes....................... 125,000 -- 125,000 Other liabilities.................................... 8,249 -- 8,249 -------- ------- -------- Total liabilities.................................. 280,263 7,099 287,362 -------- ------- -------- Stockholders' equity................................. 274,863 6,660 281,523 -------- ------- -------- Total liabilities and stockholders' equity......... $555,126 $13,759 $568,885 ======== ======= ========
See notes to pro forma combined financial statements. 78 AMERICAN MEDICAL RESPONSE, INC. PRO FORMA COMBINED STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
AMERICAN STAT(1) COMBINED -------- ------- -------- Total revenue.................................... $483,846 $29,802 $513,648 -------- ------- -------- Operating expenses: Salaries and benefits.......................... 245,142 14,047 259,189 Uncompensated care............................. 92,345 6,661 99,006 Other operating expenses....................... 77,875 4,940 82,815 Depreciation................................... 15,671 388 16,059 Amortization of intangibles.................... 5,288 -- 5,288 Restructuring.................................. 23,000 -- 23,000 -------- ------- -------- Total operating expenses..................... 459,321 26,036 485,357 -------- ------- -------- Earnings from operations......................... 24,525 3,766 28,291 Interest expense, net.......................... 3,222 121 3,343 -------- ------- -------- Earnings before income taxes..................... 21,303 3,645 24,948 Income taxes................................... 10,866 347 11,213 -------- ------- -------- Net earnings................................. $ 10,437 $ 3,298 $ 13,735 ======== ======= ======== PRO FORMA DATA Historical net earnings.......................... $ 10,437 $ 3,298 $ 13,735 Salaries and benefits............................ (96) -- (96) Income taxes..................................... (417) 892 475 -------- ------- -------- Net earnings................................... $ 10,950 $ 2,406 $ 13,356 ======== ======= ======== Earnings per common share: Primary........................................ $ 0.60 $ 0.01 $ 0.61 ======== ======= ======== Fully diluted.................................. $ 0.60 $ 0.01 $ 0.61 ======== ======= ======== Weighted average common shares outstanding: Primary........................................ 18,126 3,744(4) 21,870 ======== ======= ======== Fully diluted.................................. 18,126 3,744(4) 21,870 ======== ======= ========
See notes to pro forma combined financial statements. 79 AMERICAN MEDICAL RESPONSE, INC. PRO FORMA COMBINED STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1994 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
AMERICAN STAT(1)(2) COMBINED -------- ---------- -------- Total revenue.................................. $327,364 $17,274 $344,638 -------- ------- -------- Operating expenses: Salaries and benefits........................ 168,474 9,801 178,275 Uncompensated care........................... 64,217 2,753 66,970 Other operating expenses..................... 52,278 3,017 55,295 Depreciation................................. 10,594 223 10,817 Amortization of intangibles.................. 2,741 -- 2,741 -------- ------- -------- Total operating expenses................... 298,304 15,794 314,098 -------- ------- -------- Earnings from operations....................... 29,060 1,480 30,540 Interest expense, net........................ 1,592 5 1,597 -------- ------- -------- Earnings before income taxes................... 27,468 1,475 28,943 Income taxes................................. 11,644 65 11,709 -------- ------- -------- Net earnings............................... $ 15,824 $ 1,410 $ 17,234 ======== ======= ======== PRO FORMA DATA Historical net earnings........................ $ 15,824 $ 1,410 $ 17,234 Salaries and benefits.......................... (1,461) -- (1,461) Income taxes................................... 1,182 436 1,618 -------- ------- -------- Net earnings............................... $ 16,103 $ 974 $ 17,077 ======== ======= ======== Earnings per common share: Primary...................................... $ 1.06 $ (0.16) $ 0.90 ======== ======= ======== Fully diluted................................ $ 1.06 $ (0.16) $ 0.90 ======== ======= ======== Weighted average common shares outstanding: Primary...................................... 15,181 3,744(4) 18,925 ======== ======= ======== Fully diluted................................ 15,181 3,744(4) 18,925 ======== ======= ========
See notes to pro forma combined financial statements. 80 AMERICAN MEDICAL RESPONSE, INC. PRO FORMA COMBINED STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1993 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
AMERICAN STAT(1)(3) COMBINED ---------- ---------- --------- Total revenue............................... $ 217,883 $ 10,748 $ 228,631 ---------- --------- --------- Operating expenses: Salaries and benefits..................... 110,298 7,883 118,181 Uncompensated care........................ 44,656 705 45,361 Other operating expenses.................. 36,211 1,429 37,640 Depreciation.............................. 6,805 81 6,886 Amortization of intangibles............... 1,664 -- 1,664 ---------- --------- --------- Total operating expenses................ 199,634 10,098 209,732 ---------- --------- --------- Earnings from operations.................... 18,249 650 18,899 Interest expense, net..................... 959 33 992 ---------- --------- --------- Earnings before income taxes................ 17,290 617 17,907 Income taxes.............................. 7,489 -- 7,489 ---------- --------- --------- Net earnings............................ $ 9,801 $ 617 $ 10,418 ========== ========= ========= PRO FORMA DATA Historical net earnings..................... $ 9,801 $ 617 $ 10,418 Salaries and benefits....................... (1,380) -- (1,380) Income taxes................................ 718 210 928 ---------- --------- --------- Net earnings............................ $ 10,463 $ 407 $ 10,870 ========== ========= ========= Earnings per common share: Primary................................... $ 0.80 $ (0.15) $ 0.65 ========== ========= ========= Fully diluted............................. $ 0.80 $ (0.15) $ 0.65 ========== ========= ========= Weighted average common shares outstanding: Primary................................... 13,009 3,744(4) 16,753 ========== ========= ========= Fully diluted............................. 13,009 3,744(4) 16,753 ========== ========= =========
See notes to pro forma combined financial statements. 81 AMERICAN MEDICAL RESPONSE, INC. PRO FORMA COMBINED STATEMENT OF EARNINGS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
AMERICAN STAT(1) COMBINED -------- -------- -------- Total revenue...................................... $322,595 $ 23,263 $345,858 -------- -------- -------- Operating expenses: Salaries and benefits............................ 161,349 10,082 171,431 Uncompensated care............................... 61,573 6,600 68,173 Other operating expenses......................... 51,077 3,440 54,517 Depreciation..................................... 10,707 258 10,965 Amortization of intangibles...................... 4,585 -- 4,585 Merger costs..................................... -- 1,269 1,269 -------- -------- -------- Total operating expenses....................... 289,291 21,649 310,940 -------- -------- -------- Earnings from operations........................... 33,304 1,614 34,918 Interest expense, net............................ 4,669 133 4,802 -------- -------- -------- Earnings before income taxes....................... 28,635 1,481 30,116 Income taxes..................................... 12,828 (44) 12,784 -------- -------- -------- Net earnings................................... $ 15,807 $ 1,525 $ 17,332 ======== ======== ======== PRO FORMA DATA Historical net earnings............................ $ 15,807 $ 1,525 $ 17,332 Salaries and benefits.............................. -- -- -- Income taxes....................................... -- 577 577 -------- -------- -------- Net earnings................................... $ 15,807 $ 948 $ 16,755 ======== ======== ======== Earnings per common share: Primary.......................................... $ 0.78 $ (0.08) $ 0.70 ======== ======== ======== Fully diluted.................................... $ 0.77 $ (0.07) $ 0.70 ======== ======== ======== Weighted average common shares outstanding: Primary.......................................... 20,186 3,744(4) 23,930 ======== ======== ======== Fully diluted.................................... 22,933 3,744(4) 26,677 ======== ======== ========
See notes to pro forma combined financial statements. 82 AMERICAN MEDICAL RESPONSE, INC. PRO FORMA COMBINED STATEMENT OF EARNINGS FOR THE SIX MONTHS ENDED JUNE 30, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
AMERICAN STAT (1) COMBINED -------- -------- -------- Total revenue................................... $220,567 $13,137 $233,704 -------- ------- -------- Operating expenses: Salaries and benefits......................... 112,491 6,247 118,738 Uncompensated care............................ 42,585 2,762 45,347 Other operating expenses...................... 35,573 2,232 37,805 Depreciation.................................. 7,023 112 7,135 Amortization of intangibles................... 1,939 -- 1,939 -------- ------- -------- Total operating expenses.................... 199,611 11,353 210,964 -------- ------- -------- Earnings from operations........................ 20,956 1,784 22,740 Interest expense, net......................... 1,432 29 1,461 -------- ------- -------- Earnings before income taxes.................... 19,524 1,755 21,279 Income taxes.................................. 9,196 181 9,377 -------- ------- -------- Net earnings................................ $ 10,328 $ 1,574 $ 11,902 ======== ======= ======== PRO FORMA DATA Historical net earnings......................... $ 10,328 $ 1,574 $ 11,902 Salaries and benefits........................... (96) -- (96) Income taxes.................................... (417) 416 (1) -------- ------- -------- Net earnings................................ $ 10,841 $ 1,158 $ 11,999 ======== ======= ======== Earnings per common share: Primary....................................... $ 0.65 $ (0.06) $ 0.59 ======== ======= ======== Fully diluted................................. $ 0.65 $ (0.06) $ 0.59 ======== ======= ======== Weighted average common shares outstanding: Primary....................................... 16,674 3,744(4) 20,418 ======== ======= ======== Fully diluted................................. 16,674 3,744(4) 20,418 ======== ======= ========
See notes to pro forma combined financial statements. 83 NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (1) Certain amounts of STAT have been reclassified to conform with American's financial statement presentation. (2) Represents consolidated financial data of STAT for the year ended December 31, 1994 combined with financial data for STAT Physicians I for the eight months ended August 31, 1994. (3) Represents consolidated financial data of STAT combined with financial data of STAT Physicians I. (4) Assumes that 0.25 of a share of American Common Stock was issued in exchange for each share of STAT Common Stock outstanding. 84 DESCRIPTION OF CAPITAL STOCK OF AMERICAN The following description does not purport to be complete and is subject in all respects to the applicable provisions of American's Certificate of Incorporation, as amended, and By-Laws, copies of which are filed as exhibits to the Proxy Statement/Prospectus. The authorized capital stock of American consists of 75,000,000 shares of Common Stock, $.01 par value, and 500,000 shares of preferred stock, $.01 par value. COMMON STOCK Subject to the preferences of any outstanding preferred stock, the holders of American Common Stock are entitled to receive dividends when and as declared by the Board of Directors and paid by American. The holders of American Common Stock are entitled to one vote per share and to share ratably, after provision for payment of creditors and for any payments to which the holders of any outstanding preferred stock may be entitled, in the assets of American in the event of any liquidation, dissolution or winding-up of American. There is no cumulative voting. Holders of American Common Stock have no preemptive or other subscription rights, and there are no conversion, redemption or sinking fund provisions applicable thereto. The Board of Directors of American is authorized to issue from time to time all of the authorized and unissued shares of American Common Stock. The First National Bank of Boston is the registrar and transfer agent of the shares of American Common Stock. PREFERRED STOCK The American Board of Directors is authorized to fix the terms of one or more series of the class of preferred stock and to issue from time to time any or all of the authorized and unissued shares of preferred stock. Issues of preferred stock may limit or qualify the rights of holders of the American Common Stock. COMPARATIVE RIGHTS OF STOCKHOLDERS The following is a summary of the material differences between the rights of holders of STAT Common Stock and holders of American Common Stock. Since both STAT and American are organized under the laws of the State of Delaware, such differences arise from differences between various provisions of the Certificate of Incorporation (the "STAT Certificate"), and By-Laws of STAT and the Certificate of Incorporation, as amended (the "American Certificate") and By-Laws of American. This summary does not purport to be complete and is qualified in its entirety by reference to the STAT Certificate and By-Laws, the American Certificate and By-Laws and the relevant provisions of Delaware law. SPECIAL MEETING OF STOCKHOLDERS Delaware law provides that special meetings of stockholders may be called only by the directors or by any other person as may be authorized by the corporation's certificate of incorporation or by-laws. STAT's By-Laws provide that special meetings may be called by the Chairman of the Board of Directors, by the President, by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors or by the holders of shares entitled to cast not less than the majority of the votes at the meeting. American's By-Laws provide that special meetings may be called at any time by the Chairman of the Board of Directors, if any, the President or the Board of Directors. STOCKHOLDER ACTION BY WRITTEN CONSENT Under Delaware law, unless the charter provides otherwise, any action required to be taken or which may be taken at a meeting of stockholders may be taken without a vote, without a meeting and without prior notice, 85 with the written consent of not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. The American Certificate and the STAT Certificate prohibit stockholder action by written consent and any stockholder action must be elected at a duly called annual or special meeting of such stockholders. ADVANCE NOTICE OF STOCKHOLDER PROPOSALS AND BOARD NOMINATIONS The respective By-Laws of STAT and American provide that a stockholder must give advance written notice to the respective company if the stockholder intends to bring any business before a meeting of stockholders or to make nominations for the board of directors. STAT's advance notice provisions require stockholders to give such notice not less than 120 days prior to the meeting at which the business would be acted upon. The advance notice provisions for American require that the notice be received not less than 60 days nor more than 90 days prior to the meeting. QUORUMS Delaware law provides that the number of shares necessary to constitute a quorum for voting purposes may be fixed by the certificate of incorporation or the By-Laws of a corporation, but in no event shall such number consist of less than one third of the shares entitled to vote at the meeting. The STAT By-Laws provide that a quorum of stockholders requires the presence, in person or by proxy, of a majority of the outstanding shares of stock entitled to vote and that a majority of the total number of directors is a quorum for the transaction of all business. The American By-Laws provide that a majority of votes entitled to vote on any matter shall constitute a quorum for a stockholders' meeting, while a majority of the total number of directors is a quorum for the transaction of all business. In no event shall a quorum be less than one-third of the total number of directors constituting the whole board. CLASSIFICATION OF THE BOARD OF DIRECTORS Delaware law permits (but does not require) classification of a corporation's board of directors into one, two or three classes. The STAT Certificate and By-Laws provide for three classes, designated Class I, Class II and Class III. Each class consists, as nearly as is possible, of one-third of the total number of directors on the board. Each director serves a three year term except for the initial Class I and Class II directors who serve approximately one and two years, respectively. The American Certificate and By-Laws do not provide for a classified board. REMOVAL OF DIRECTORS Under Delaware law, although stockholders may generally remove directors with or without cause by a majority vote, stockholders may remove members of classified boards only for cause unless the certificate of incorporation provides otherwise. The STAT Certificate provides that a director may only be removed for cause, by the holders of a majority of shares then entitled to vote at an election of directors. The By-Laws of American, which does not have a classified board of directors, provide that a director may be removed, with or without cause, by the majority of the shares issued and outstanding and entitled to vote in the election of directors. VACANCIES ON THE BOARD OF DIRECTORS Under Delaware law, unless otherwise provided in the charter or by-laws, vacancies on the board of directors and newly created directorships resulting from any increase in the authorized number of directors may be filled by the remaining directors. The STAT Certificate provides that any vacancy on the Board of Directors, however created, may be filled by a majority of the remaining directors, even if less than a quorum, at any meeting of the Board of Directors. The American By-Laws provide that vacancies arising from any increase in the number of directors may be filled by the vote of stockholders at a meeting called for that purpose, or by a majority of the directors then in office, or by a sole remaining director. Vacancies arising from the resignation of 86 one or more directors shall be filled by a majority of the directors then in office, including those who have resigned. INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS Delaware law generally permits indemnification of directors and officers for expenses incurred by them by reason of their position with the corporation, if the director or officer has acted in good faith and with the reasonable belief that his conduct was in the best interest of the corporation. However, Delaware law does not permit a corporation to indemnify persons against judgments in actions brought by or in the right of the corporation (although it does permit indemnification in such situations if approved by the Delaware Court of Chancery and for expenses of such actions). STAT's By-Laws provide that STAT shall indemnify directors to the fullest extent permitted by Delaware law. American's By-Laws provide for indemnification of current or former directors or officers of the corporation to the full extent authorized by Delaware law. AMENDMENTS TO CHARTER Under Delaware law, charter amendments require the approval of the directors and the vote of the holders of a majority of the outstanding stock and a majority of each class of stock outstanding and entitled to vote thereon as a class, unless the certificate of incorporation requires a greater proportion. In addition, Delaware law requires a class vote when, among other things, an amendment will adversely affect the powers, preferences or special rights of a class of stock. The provisions of the STAT Certificate may be amended by either the majority of all stockholders entitled to vote in the annual election of directors or the majority of the entire board of directors, except that the provisions regarding the board of directors and amendments to the certificate may only be amended by the vote of a majority of stockholders. The American Certificate requires a two-thirds vote of the then-outstanding shares of capital stock entitled to vote generally in the election of directors to amend the provisions of the certificate regarding (a) the requirement of a vote of two-thirds of the then-outstanding shares of capital stock entitled to vote generally in the election of directors whenever a stockholder vote is required under the DGCL regarding a merger or, consolidation or sale or lease of all or substantially all of American's assets, and (b) amendment of the Certificate. BY-LAWS Under Delaware law, the authority to adopt, amend or repeal the by-laws of a Delaware corporation is held exclusively by the stockholders entitled to vote unless such authority is conferred upon the board of directors in the corporation's certificate of incorporation. The STAT Certificate grants to its board of directors the powers to adopt, amend, supplement or repeal the STAT By-Laws. The STAT By-Laws also provide that the By-Laws may be changed or repealed by the affirmative vote of the majority of the voting stock of the corporation, and that no amendment or supplement to the By-Laws adopted by the board of directors shall vary or conflict with any amendment or supplement thus adopted by the stockholders. The American Certificate provides that the board of directors shall have power to make, adopt, alter, amend and repeal the By-Laws, subject to the right of stockholders entitled to vote to alter and repeal By-Laws made by the board of directors. VOTE REQUIRED FOR MERGERS Delaware law generally requires the affirmative vote of a majority of a corporation's outstanding shares entitled to vote, unless the certificate of incorporation requires a greater proportion, to authorize a merger, consolidation, share exchange, dissolution or disposition of all or substantially all of its assets, except that, (a) unless required by its charter, no authorizing stockholder vote is required of a corporation surviving a merger if (i) such corporation's charter is not amended by the merger; (ii) each share of stock of such corporation will be an identical share of the surviving corporation after the merger; and (iii) the number of shares to be issued in the merger does not exceed twenty percent (20%) of such corporation's outstanding common stock immediately prior to the effective date of the merger and (b) unless a dissolution is adopted by a majority of the board of directors, a dissolution must be approved by all stockholders entitled to vote thereon. The STAT Certificate does 87 not provide otherwise. The American Certificate provides that the affirmative vote of two-thirds of the outstanding shares of capital stock entitled to vote generally in the election of directors is required to approve mergers, consolidations and sales and leases of all or substantially all of American's assets that require shareholder approval. OTHER MATTERS It is not expected that any matters other than those described in this Proxy Statement/Prospectus will be brought before the STAT Special Meeting. If any other matters are presented, however, it is the intention of the persons named in the STAT proxy to vote the proxy in accordance with the discretion of the persons named in such proxy. VALIDITY OF THE SHARES AND TAX MATTERS Certain legal matters with respect to the validity of the securities offered hereby and the Merger will be passed upon for American by Ropes & Gray, Boston, Massachusetts. Certain tax matters in connection with the Merger will be passed upon for STAT by KPMG Peat Marwick LLP. EXPERTS The consolidated financial statements of American as of December 31, 1995 and 1994 and for each of the years in the three year period ended December 31, 1995 have been incorporated by reference herein and in the Registration Statement, in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements and schedule of STAT Healthcare, Inc. and subsidiaries as of December 31, 1994 and 1995 and for the years then ended have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and in reliance upon the report of Long, Chilton, Payte & Hardin, LLP, independent certified public accountants, with respect to the combined financial statements of AmHealth Corporation and its related healthcare entities as of December 31, 1994 and for the year then ended, and upon the authority of said firms as experts in accounting and auditing. The consolidated financial statements and schedule of STAT Healthcare, Inc. and subsidiaries as of December 31, 1993 and for the year then ended have been included herein and in the Registration Statement in reliance upon the report of Long, Chilton, Payte & Hardin, LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The financial statements of South Texas Acute Trauma Physicians, P.A. as of December 31, 1993 and August 31, 1994 and for the year ended December 31, 1993 and the eight months ended August 31, 1994 have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. Representatives of KPMG Peat Marwick LLP expect to be present at the STAT Special Meeting, and, while such representatives do not plan to make a statement at such meetings, they will be available to respond to questions from stockholders in attendance. 88 STOCKHOLDER PROPOSALS Any STAT stockholder who wishes to submit a proposal for presentation to STAT's 1997 Annual Meeting of Stockholders (if the Merger has not been consummated prior to the date the meeting is to be held) must submit the proposal to STAT, 12450 Greenspoint Drive, Suite 1200, Houston, Texas 77060, Attention: Secretary. Such proposal must be received not later than January 22, 1997 for inclusion, if appropriate, in STAT's proxy statement and form of proxy relating to its 1997 Annual Meeting. 89 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- STAT HEALTHCARE, INC. AND SUBSIDIARIES Independent Auditors' Report............................................ F-2 Independent Auditors' Report............................................ F-3 Independent Auditors' Report............................................ F-4 Consolidated Balance Sheets at December 31, 1993, 1994 and 1995......... F-5 Consolidated Statements of Income for the years ended December 31, 1993, 1994 and 1995.......................................................... F-6 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995................................. F-7 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995.................................................... F-8 Notes to Consolidated Financial Statements.............................. F-9 STAT HEALTHCARE, INC. AND SUBSIDIARIES (UNAUDITED) Consolidated Balance Sheet at June 30, 1996 (unaudited)................. F-22 Consolidated Statements of Income for the six months ended June 30, 1995 and 1996 (unaudited)................................................... F-23 Consolidated Statement of Changes in Stockholders' Equity for the six months ended June 30, 1996 (unaudited)................................. F-24 Consolidated Statement of Cash Flows for the six months ended June 30, 1996 (unaudited)....................................................... F-25 Notes to Unaudited Consolidated Financial Statements.................... F-26 SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A. Independent Auditors' Report............................................ F-27 Balance Sheets at December 31, 1993 and August 31, 1994................. F-28 Statements of Income for the year ended December 31, 1993 and the eight months ended August 31, 1994........................................................ F-29 Statements of Changes in Shareholders' Equity for the year ended December 31, 1993 and the eight months ended August 31, 1994..................................... F-30 Statements of Cash Flows for the year ended December 31, 1993 and the eight months ended August 31, 1994..................................... F-31 Notes to Financial Statements........................................... F-32
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors STAT Healthcare, Inc.: We have audited the accompanying consolidated balance sheets of STAT Healthcare, Inc. and subsidiaries (the Company) as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the 1994 financial statements of AmHealth Corporation and its related health care entities, a wholly-owned subsidiary, which statements reflect total assets constituting 57% and total net service revenues constituting 52% of the related consolidated totals in 1994. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for AmHealth Corporation and its related health care entities, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors for 1994 provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors for 1994, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of STAT Healthcare, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Houston, Texas August 9, 1996 F-2 INDEPENDENT AUDITORS' REPORT The Boards of Directors/Partners AmHealth Corporation and its Related Health Care Entities: We have audited the combined balance sheets of AmHealth Corporation and its related health care entities (collectively referred to as the Company) as of December 31, 1994, and the related combined statements of income, changes in shareholders' equity and partners' capital, and cash flows for the year then ended. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of AmHealth Corporation and its related health care entities as of December 31, 1994, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Long, Chilton, Payte & Hardin, LLP Certified Public Accountants McAllen, Texas February 22, 1995 F-3 INDEPENDENT AUDITORS' REPORT The Board of Directors STAT Healthcare, Inc.: We have audited the accompanying consolidated balance sheet of STAT Healthcare, Inc. and subsidiaries (the Company) as of December 31, 1993, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of STAT Healthcare, Inc. and subsidiaries as of December 31, 1993, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. Long, Chilton, Payte & Hardin, LLP Certified Public Accountants McAllen, Texas August 9, 1996 F-4 STAT HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1993, 1994 AND 1995
1993 1994 1995 ---------- ---------- ----------- ASSETS Cash and cash equivalents.................... $ 114,000 $ 470,000 $ 2,538,000 Accounts receivable, net (notes 5 and 8)..... 339,000 2,382,000 4,565,000 Notes receivable (note 6).................... 8,000 8,000 266,000 Inventories (note 8)......................... 32,000 63,000 103,000 Prepaid and other current assets............. 71,000 143,000 709,000 ---------- ---------- ----------- Total current assets..................... 564,000 3,066,000 8,181,000 Property and equipment, net (notes 7 and 8).. 526,000 1,446,000 2,261,000 Other non-current assets..................... 53,000 312,000 133,000 ---------- ---------- ----------- Total assets............................. $1,143,000 $4,824,000 $10,575,000 ========== ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current portion of long-term debt (note 8)... $ 122,000 $ 470,000 $ 88,000 Current portion of capital lease obligations (note 9).................................... 80,000 37,000 48,000 Accrued physicians' fees..................... -- 724,000 706,000 Accounts payable............................. 116,000 352,000 925,000 Accrued liabilities.......................... 49,000 268,000 513,000 Distributions payable........................ -- -- 283,000 ---------- ---------- ----------- Total current liabilities................ 367,000 1,851,000 2,563,000 Long-term debt (note 8)...................... 87,000 95,000 156,000 Long-term capital lease obligations (note 9).......................................... 243,000 1,099,000 1,484,000 ---------- ---------- ----------- Total liabilities........................ 697,000 3,045,000 4,203,000 ---------- ---------- ----------- Stockholders' equity (notes 8, 11 and 12): Preferred stock, $.01 par value. Authorized 5,000,000 shares; series A convertible, issued and outstanding 74,000 shares at December 31, 1994....... -- 370,000 -- Common stock, $.01 par value. Authorized 40,000,000 shares; issued and outstanding 4,165,166, 6,183,552 and 14,823,332 shares, respectively.......... 42,000 62,000 148,000 Capital in excess of par value............. 269,000 589,000 4,204,000 Retained earnings.......................... 135,000 758,000 2,020,000 ---------- ---------- ----------- Total stockholders' equity............... 446,000 1,779,000 6,372,000 ---------- ---------- ----------- Commitments and contingencies (notes 9, 13 and 15) Total liabilities and stockholders' equity.................................. $1,143,000 $4,824,000 $10,575,000 ========== ========== ===========
See accompanying notes to consolidated financial statements. F-5 STAT HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1993 1994 1995 ---------- ---------- ----------- Net service revenues (note 4)............ $1,170,000 $7,645,000 $23,141,000 ---------- ---------- ----------- Operating expenses: Professional medical fees.............. -- 2,601,000 9,241,000 Human resources........................ 394,000 1,424,000 4,640,000 Supplies............................... 336,000 1,127,000 1,818,000 Billing and collection costs........... -- 322,000 1,461,000 Outside services and other............. 226,000 624,000 970,000 Liability insurance.................... -- 167,000 706,000 Furniture and equipment................ 59,000 204,000 400,000 Occupancy.............................. -- 17,000 139,000 ---------- ---------- ----------- Total operating expenses............. 1,015,000 6,486,000 19,375,000 ---------- ---------- ----------- Operating income..................... 155,000 1,159,000 3,766,000 Interest income.......................... -- -- 75,000 Interest expense......................... (21,000) (143,000) (225,000) Other income............................. 1,000 153,000 29,000 ---------- ---------- ----------- Income before income taxes........... 135,000 1,169,000 3,645,000 Income taxes (note 10)................... -- 65,000 347,000 ---------- ---------- ----------- Net income........................... 135,000 1,104,000 3,298,000 Proforma income taxes (note 2)........... 46,000 332,000 892,000 ---------- ---------- ----------- Proforma net income.................. $ 89,000 $ 772,000 $ 2,406,000 ========== ========== =========== Proforma net income per common share (note 2)............................ $ 0.02 $ 0.11 $ 0.20 ========== ========== =========== Number of shares used in computing proforma net income per common share.... 5,257,954 7,079,131 11,897,371 ========== ========== ===========
See accompanying notes to consolidated financial statements. F-6 STAT HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
PREFERRED STOCK COMMON STOCK ------------------ ------------------- SHARES AMOUNT SHARES AMOUNT PAR VALUE EARNINGS EQUITY ------- --------- ---------- -------- ---------- ----------- ----------- Balances at January 1, 1993................... -- $ -- 339,604 $ 4,000 $ 18,000 $ -- $ 22,000 Capital contributions... -- -- 3,825,562 38,000 251,000 -- 289,000 Net income.............. -- -- -- -- -- 135,000 135,000 ------- --------- ---------- -------- ---------- ----------- ----------- Balances at December 31, 1993................... -- -- 4,165,166 42,000 269,000 135,000 446,000 Sale of common stock at par.................... -- -- 450,000 5,000 -- -- 5,000 Sale of Series A, Convertible Preferred stock.................. 74,000 370,000 -- -- -- -- 370,000 Sale of common stock at $.10 per share......... -- -- 100,000 1,000 9,000 -- 10,000 Sale of common stock at $1.00 per share, net of issuance cost.......... -- -- 250,000 2,000 233,000 -- 235,000 Capital contributions... -- -- 1,218,386 12,000 78,000 -- 90,000 Distributions to shareholders........... -- -- -- -- -- (481,000) (481,000) Net income.............. -- -- -- -- -- 1,104,000 1,104,000 ------- --------- ---------- -------- ---------- ----------- ----------- Balances at December 31, 1994................... 74,000 370,000 6,183,552 62,000 589,000 758,000 1,779,000 Initial public offering of common stock, net of issuance cost.......... -- -- 1,250,000 12,000 3,243,000 -- 3,255,000 Conversion of 10% secured notes to common stock.................. -- -- 93,332 1,000 17,000 -- 18,000 Conversion of Series A, Convertible Preferred stock to common stock.. (74,000) (370,000) 1,480,000 15,000 355,000 -- -- Capital contributions... -- -- 5,816,448 58,000 -- (31,000) 27,000 Distributions to shareholders........... -- -- -- -- -- (2,005,000) (2,005,000) Net income.............. -- -- -- -- -- 3,298,000 3,298,000 ------- --------- ---------- -------- ---------- ----------- ----------- Balances at December 31, 1995................... -- $ -- 14,823,332 $148,000 $4,204,000 $ 2,020,000 $ 6,372,000 ======= ========= ========== ======== ========== =========== ===========
See accompanying notes to consolidated financial statements. F-7 STAT HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1993 1994 1995 --------- ---------- ----------- Cash flows from operating activities: Net income................................ $ 135,000 $1,104,000 $ 3,298,000 --------- ---------- ----------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization............ 59,000 196,000 360,000 Changes in assets and liabilities: (Increase) in net accounts receivable... (337,000) (2,043,000) (2,183,000) (Increase) in inventories............... (32,000) (31,000) (40,000) (Increase) in prepaid and other current assets................................. (71,000) (72,000) (566,000) (Increase) in organization and start-up costs.................................. (59,000) (43,000) (68,000) (Increase) in other non-current assets.. -- -- (9,000) Increase (decrease) in accrued physicians' fees....................... -- 724,000 (18,000) Increase in accounts payable............ 116,000 236,000 573,000 Increase in accrued liabilities......... 49,000 219,000 245,000 Increase in distributions payable....... -- -- 283,000 --------- ---------- ----------- Total adjustments....................... (275,000) (814,000) (1,423,000) --------- ---------- ----------- Net cash provided by (used in) operating activities................. (140,000) 290,000 1,875,000 --------- ---------- ----------- Cash flows from investing activities: Increase in notes receivable.............. (8,000) -- (258,000) Purchase of property and equipment........ (219,000) (186,000) (548,000) --------- ---------- ----------- Net cash used in investing activities........................... (227,000) (186,000) (806,000) --------- ---------- ----------- Cash flows from financing activities: Capital contributions..................... 289,000 90,000 27,000 Proceeds from sale of common stock........ -- 250,000 3,255,000 Proceeds from sale of preferred stock..... -- 370,000 -- Proceeds from issuance of convertible secured notes............................ -- 350,000 -- Distributions to shareholders............. -- (481,000) (2,005,000) Issuance of long-term debt................ 220,000 360,000 278,000 Repayment of long-term debt............... (11,000) (354,000) (249,000) Repayment of convertible secured notes.... -- -- (332,000) Repayments of capital lease obligations... (34,000) (99,000) (209,000) Decrease (increase) in deferred offering costs.................................... -- (234,000) 234,000 --------- ---------- ----------- Net cash provided by financing activities........................... 464,000 252,000 999,000 --------- ---------- ----------- Net increase in cash and cash equivalents.. 97,000 356,000 2,068,000 Cash and cash equivalents at beginning of year...................................... 17,000 114,000 470,000 --------- ---------- ----------- Cash and cash equivalents at end of year... $ 114,000 $ 470,000 $ 2,538,000 ========= ========== ===========
See accompanying notes to consolidated financial statements. F-8 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993, 1994 AND 1995 (1) BUSINESS OF THE COMPANY AND ORGANIZATION Business of the Company STAT Healthcare, Inc. (STAT) was incorporated in the state of Delaware on July 29, 1994. STAT provides emergency medical management services. On June 24, 1996, STAT, through a successor entity formed for the purpose of effecting a business combination, acquired all the common stock and partnership interests of AmHealth Corporation and its related health care entities (AmHealth) (see note 3). AmHealth provides disease management services focused primarily on ailments associated with diabetes. STAT and AmHealth merged into the successor entity which became the parent and registrant and which then changed its name to STAT Healthcare, Inc. Consolidated Financial Statements The merger of STAT and AmHealth has been accounted for as a pooling of interests. Accordingly, the consolidated financial statements of STAT Healthcare, Inc. and subsidiaries (the Company) have been restated to include the accounts and results of operations of both STAT and AmHealth for all periods presented. Following the merger, the Company is an integrated disease management and medical services company which provides a continuum of disease management services primarily to patients with end-stage renal disease and also provides physician practice management services to hospital-based emergency departments. Operations and Organization of STAT Upon incorporation in July 1994, STAT negotiated a Management Agreement with South Texas Acute Trauma Physicians, P.A. (STAT Physicians). The Management Agreement became effective September 1, 1994 and is perpetual. The Management Agreement has no termination or cancellation provisions. In addition, the Company has the ability to control the designation of physician owner(s) of STAT Physicians. Prior to the merger with AmHealth, the Company's income was derived exclusively from revenues associated with the Management Agreement, less direct expenses paid by the Company on behalf of STAT Physicians, as provided in the Management Agreement and less the operating expenses of the Company. Additionally, on September 1, 1994, the Company assumed the employment of all personnel previously employed at STAT Physicians and the operating costs associated therewith from that date forward. Prior to the merger with AmHealth, the Company operated in a single business segment, emergency medical management services. The Company's principal business related to management and administrative services provided to those engaged in physician staffing of hospital emergency departments. At December 31, 1994 and 1995, the Company managed contracts for physician services with 12 and 11 hospitals, respectively, primarily located in the Houston greater metropolitan area. Under these contracts, 24-hour physician coverage of the emergency departments is provided. Physicians providing services are independent contractors to STAT Physicians and are paid monthly on a basis of fixed hourly rates. As independent contractors, these physicians are responsible for their own income and Social Security taxes as well as workers compensation insurance. The contracts between STAT Physicians and hospitals are generally written for an initial term of two years and automatically renew for extended periods after the initial term. STAT Physicians' contractual arrangements with hospitals are principally fee-for-service contracts under which the Company bills and collects the professional component of medical services on behalf of STAT Physicians. At December 31, 1994, 9 of 12 F-9 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1993, 1994 AND 1995 contracts were fee-for-service contracts, while at December 31, 1995, all contracts were fee-for-service contracts. Services performed under contracts not subject to fee-for-service arrangements at December 31, 1994 were compensated by the hospitals on a fixed fee basis. Operations and Organization of AmHealth AmHealth operates in two business segments, kidney dialysis services and healthcare management services. It operates outpatient kidney dialysis facilities, provides management services for hospital-based hyperbaric oxygen therapy facilities, and provides management and personnel services to outpatient home health providers in the Rio Grande Valley of south Texas. The AmHealth entities, their pre-merger structure and their dates of inception are as follows:
ENTITY STRUCTURE DATE OF INCEPTION ------ --------- ----------------- Management operations: AmHealth Corporation..................... S Corporation Oct 1992 Kidney dialysis center operations: AmHealth Enterprises of the Valley, Inc. ................................... S Corporation Oct 1992 AmHealth Kidney Center of the Valley, Ltd. ................................... Partnership Apr 1993 Starr Dialysis Center, Ltd. ............. Partnership Nov 1993 Weslaco Kidney Center, Ltd. ............. Partnership Jun 1994 Mission Kidney Center, Ltd. ............. Partnership Aug 1995 Brownsville Kidney Center, Ltd. ......... Partnership Apr 1996 Healthcare management operations: Southwestern Infusion Healthcare, Ltd. .. Partnership Jun 1994 AmHealth Ambulatory Services, Inc. ...... C Corporation Apr 1995 AmHealth Ambulatory Healthcare, Ltd. .... Partnership Apr 1995 Brownsville Hyperbaric Healthcare, Ltd. ................................... Partnership May 1995 AmHealth Medical Management, Ltd. ....... Partnership Jun 1995
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of STAT Healthcare, Inc., AmHealth Corporation and its related health care entities (all wholly-owned), and the results of operations of STAT Physicians since September 1, 1994, the effective date of the Company's Management Agreement with STAT Physicians. Because of the existence of a parent-subsidiary relationship by means other than record ownership of STAT Physicians' voting stock and because of the unilateral control, notwithstanding the lack of technical majority ownership, which the Company has over the assets and operation of STAT Physicians, consolidation of its results of operations is necessary to present fairly the results of operations of the Company. All significant intercompany balances and transactions have been eliminated in consolidation. F-10 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1993, 1994 AND 1995 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 amounts reported in the financial statements and accompanying notes. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent. Actual results could differ from these estimates. Cash Equivalents Investments in highly liquid, short-term instruments purchased with original maturities of three months or less are deemed to be cash equivalents. Service Revenues and Accounts Receivable Patient service revenues are recorded at established billing rates, net of an allowance for contractual adjustments and a provision for uncollectible accounts. Management services revenue for hospital and home health agency accounts are recorded net of an allowance for doubtful accounts. Patient accounts receivable are reduced to an estimated realizable value taking into consideration contractual adjustments mandated by payors (Medicare, Medicaid and private insurers) and expected write-offs of uncollectible accounts. These estimates are based upon management judgements and historical experience. Inventories Inventories, consisting primarily of dialysis and pharmacy supplies, are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Property and Equipment Property and equipment are stated at cost and are depreciated using the straight-line depreciation method over the estimated useful lives of the assets by class: minor equipment, 3 years; major equipment, 5 years; improvements, 5 years. Equipment under capital lease is stated at the lesser of the present value of the minimum lease payments or the fair value of the leased property at the inception of the lease. Equipment under capital lease is amortized using the straight-line method over the term of the leases which is 4 to 7 years. Buildings and land under capital lease are stated at the fair value of the properties and are amortized using the straight-line method over the term of the leases which is 10 years. Organization and Start-Up Costs Organization and start-up costs have been capitalized and are being amortized using the straight-line method over five years. Deferred Offering Costs Deferred offering costs totaling $234,000 at December 31, 1994 were included in other non-current assets. Such assets were combined with additional offering costs incurred during 1995 and were recorded as a reduction of the proceeds from the initial public offering of common stock during 1995. F-11 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1993, 1994 AND 1995 Deferred Acquisition Costs Costs incurred to effect an expected pooling of interests business combination are deferred and charged to expense in the period that the business combination is consummated. If a plan of combination is abandoned, costs that have been deferred are expensed. At December 31, 1995, deferred acquisition costs of $134,000 were included in prepaid and other current assets. These costs were combined with additional acquisition costs incurred in 1996 and were expensed in the second quarter of 1996 when the AmHealth merger was consummated. Income Taxes The Company utilizes the asset and liability method of accounting for income taxes. 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. Prior to consummation of the merger, each of the AmHealth entities (except AmHealth Ambulatory Services, Inc.) was a partnership or had elected to be treated as an S Corporation. Accordingly, each entity's income or loss was allocated to that entity's shareholders or partners for inclusion in their personal federal income tax returns. No federal income taxes were assessed to any of the entities (except AmHealth Ambulatory Services, Inc.), and accordingly, no provision for federal income taxes for these entities has been reflected in the accompanying consolidated statements of income prior to consummation of the merger. AmHealth Ambulatory Services, Inc. began operations in April 1995. Taxable income of this corporation from its date of inception through December 31, 1995 was not material. Net Income Per Common Share Net income per common share is computed based on the sum of STAT and AmHealth common and common equivalent shares calculated as follows: . STAT. From inception through the date of STAT's initial public offering, the number of common and common equivalent shares is computed as if all shares were outstanding for the entire period, less the number of treasury shares assumed to have been purchased (at the initial offering price of STAT's common stock) from the proceeds of actual sales of stock. Following the initial public offering, the number of common and common equivalent shares is computed based on the weighted average number of common shares outstanding adjusted for the incremental shares attributed to outstanding options and warrants to purchase common stock. . AmHealth. The number of common and common equivalent shares is computed based on the number of shares of the Company's common stock issued to the shareholders or partners of each AmHealth entity upon consummation of the merger, as if such shares were outstanding since the date of inception for each entity. Pro Forma Net Income and Pro Forma Net Income Per Share Pro forma income taxes are calculated to reflect the effect of income taxes not otherwise payable by the AmHealth entities which were partnerships or S Corporations prior to consummation of the merger. The pro F-12 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1993, 1994 AND 1995 forma income taxes are based on an effective rate of 34%. Pro forma net income per share is computed based on the pro forma net income amount. Fair Value of Financial Instruments Methods and assumptions used to estimate the fair value of each class of financial instruments are as follows: . Cash equivalents, trade accounts receivable, notes receivable and payables--The carrying amounts approximate fair value because of the short maturity of these instruments. . Long-term debt--The carrying amount approximates fair value because the notes generally have an adjustable interest rate based on the prime rate. (3) MERGER On June 24, 1996, the Company acquired all the common stock and partnership interests of AmHealth Corporation and its related health care entities (AmHealth) for 11,200,000 shares of the Company's common stock. AmHealth operates outpatient kidney dialysis facilities, provides management services for hospital-based hyperbaric oxygen therapy facilities, and provides management and personnel services to outpatient home health providers in the Rio Grande Valley of south Texas. The transaction has been accounted for as a pooling of interests and, accordingly, the consolidated financial statements for all periods presented have been restated to include the accounts of AmHealth. Separate and combined results of STAT and AmHealth during the years ended December 31, 1993, 1994 and 1995 (periods preceding the merger) were as follows:
1993 1994 1995 ---------- ---------- ----------- Net service revenues: STAT.................................. $ -- $3,672,000 $14,124,000 AmHealth.............................. 1,170,000 3,973,000 9,017,000 ---------- ---------- ----------- Combined............................ $1,170,000 $7,645,000 $23,141,000 ========== ========== =========== Net income: STAT.................................. $ -- $ 128,000 $ 674,000 AmHealth.............................. 135,000 976,000 2,624,000 ---------- ---------- ----------- Combined............................ 135,000 1,104,000 3,298,000 Proforma income taxes................. (46,000) (332,000) (892,000) ---------- ---------- ----------- Proforma net income................. $ 89,000 $ 772,000 $ 2,406,000 ========== ========== ===========
(4) NET SERVICES REVENUES Under the contracts between STAT Physicians and the hospitals and under the Company's Management Agreement with STAT Physicians, the Company has the ability, subject to hospital concurrence, to establish the rates to be billed to patients for services provided. Gross service revenues represent the billed value of physician services provided at hospital locations, and patient service and management services revenue recorded at established billing rates. Billings discounts represent the difference between gross service revenues and the amount which is ultimately expected to be received. These discounts relate principally to contractual adjustments F-13 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1993, 1994 AND 1995 mandated by payors such as Medicare and Medicaid and also to contracted arrangements with private insurers. Discounts also include provisions for indigent patients without the means of paying for services provided. Gross service revenues and billings discounts for the years ended December 31, 1993, 1994 and 1995 are as follows:
1993 1994 1995 ---------- ----------- ------------ Gross service revenues.............. $1,418,000 $12,180,000 $ 40,143,000 Billings discounts.................. (248,000) (4,535,000) (17,002,000) ---------- ----------- ------------ Net service revenues................ $1,170,000 $ 7,645,000 $ 23,141,000 ========== =========== ============
Service revenues have been primarily generated in south Texas and the Houston greater metropolitan area. Although subject to individual contracts, net service revenues derived from hospitals which, at December 31, 1995, were owned by Columbia/HCA Healthcare Corporation accounted for 46% and 41% of 1994 and 1995 net service revenues, respectively. (5) ACCOUNTS RECEIVABLE Accounts receivable at December 31, 1993, 1994 and 1995 are as follows:
1993 1994 1995 -------- ----------- ----------- Gross patient accounts receivable....... $436,000 $ 4,617,000 $ 8,892,000 Allowance for contractual adjustments... (81,000) (1,943,000) (2,938,000) -------- ----------- ----------- Estimated accounts receivable......... 355,000 2,674,000 5,954,000 Allowance for doubtful accounts......... (17,000) (539,000) (1,882,000) -------- ----------- ----------- Net patient accounts receivable....... 338,000 2,135,000 4,072,000 Other accounts receivable............... 1,000 188,000 371,000 Due from STAT Physicians................ -- 59,000 122,000 -------- ----------- ----------- Accounts receivable, net.............. $339,000 $ 2,382,000 $ 4,565,000 ======== =========== ===========
(6) NOTES RECEIVABLE Notes receivable at December 1993, 1994 and 1995 are as follows:
1993 1994 1995 ------ ------ -------- Non interest-bearing note receivable from Mission Medical Properties................................. $ -- $ -- $ 50,000 Note receivable from officer/shareholders, interest at 6%, due October 31, 1996........................ -- -- 200,000 Other............................................... 8,000 8,000 16,000 ------ ------ -------- Notes receivable.................................. $8,000 $8,000 $266,000 ====== ====== ========
Mission Medical Properties leases buildings and land under capital leases to the Company and is owned by certain stockholders of the Company. F-14 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1993, 1994 AND 1995 (7) PROPERTY AND EQUIPMENT Property and equipment at December 31, 1993, 1994 and 1995 are as follows:
1993 1994 1995 -------- ---------- ---------- Land and buildings....................... $ -- $ 619,000 $ 969,000 Equipment and furnishings................ 515,000 915,000 1,705,000 Improvements............................. 63,000 142,000 155,000 -------- ---------- ---------- 578,000 1,676,000 2,829,000 Less accumulated depreciation and amor- tization.............................. (52,000) (230,000) (568,000) -------- ---------- ---------- Property and equipment, net.......... $526,000 $1,446,000 $2,261,000 ======== ========== ==========
Depreciation and amortization of property and equipment charged to operations was $52,000, $178,000 and $338,000 during the years ended December 31, 1993, 1994 and 1995, respectively. (8) LONG-TERM DEBT Long-term debt at December 31, 1993, 1994 and 1995 is as follows:
1993 1994 1995 --------- --------- -------- Convertible secured notes; interest at 10%.. $ -- $ 350,000 $ -- Revolving credit payable to bank, due in quarterly installments of $9,375 plus interest through March 1999; interest at prime plus .5%............................. -- -- 122,000 Revolving credit payable to bank; interest at prime plus 1%........................... 79,000 75,000 -- Note payable to TransAmerican Insurance Finance, due January 1, 1996; interest at 11.64%..................................... -- -- 4,000 Note payable to bank, due April 2, 1996; interest at prime plus 1%.................. 54,000 27,000 10,000 Noninterest-bearing note payable to Palmco, Inc., for construction allowance on leased building, due April 1, 1996................ 26,000 15,000 4,000 Note payable to bank, due October 30, 1997; interest at prime plus 1%.................. 50,000 38,000 6,000 Note payable to bank, due June 15, 1998; interest at prime plus 1%.................. -- 60,000 48,000 Note payable to bank, due November 6, 1999; interest at prime plus 1%.................. -- -- 50,000 --------- --------- -------- Total debt................................ 209,000 565,000 244,000 Less current portion...................... (122,000) (470,000) (88,000) ========= ========= ======== Long-term debt............................ $ 87,000 $ 95,000 $156,000 ========= ========= ========
The convertible secured notes were issued in October and November 1994 in connection with a bridge financing. A total of $332,000 was repaid and the balance of $18,000 was converted to common stock in connection with STAT's initial public offering during 1995. The conversion of convertible secured notes to common stock is a non cash investing and financing transaction and is excluded from the 1995 consolidated statement of cash flows. F-15 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1993, 1994 AND 1995 The revolving credit payables to bank and notes payable to bank are secured by the Company's accounts receivable, inventories and equipment. Long-term debt totaling $240,000 at December 31, 1995 was guaranteed by a stockholder of the Company. Future payments of long-term debt at December 31, 1995 are as follows: 1996.............................................................. $ 88,000 1997.............................................................. 66,000 1998.............................................................. 68,000 1999.............................................................. 22,000 -------- $244,000 ========
Cash paid for interest was $21,000, $126,000 and $214,000 during the years ended December 31, 1993, 1994 and 1995, respectively. (9) LEASE OBLIGATIONS Future minimum lease payments under capital leases, together with the present value of the net minimum lease payments, at December 31, 1995 are as follows: 1996........................................................... $ 476,000 1997........................................................... 426,000 1998........................................................... 341,000 1999........................................................... 261,000 2000........................................................... 203,000 Later years.................................................... 781,000 ---------- Total minimum lease payments................................... 2,488,000 Less amount representing interest.............................. (956,000) ---------- Present value of net minimum lease payments.................... 1,532,000 Less current portion......................................... (48,000) ---------- Long-term capital lease obligations.......................... $1,484,000 ==========
At December 31, 1995, the Company's capital lease obligations include amounts payable to entities owned or controlled by stockholders of the Company. Total payments to these entities under the capital leases were $87,000 and $147,000 for the years ended December 31, 1994 and 1995, respectively. On September 10, 1995, the Company entered into an agreement to lease a facility located in Brownsville, Texas, to be constructed and owned by an entity owned by stockholders of the Company. Lease payments begin 45 days after completion and are $7,600 per month for a term of 120 months. Based on an estimated fair market value of $490,000 and the terms of the lease, the lease will be a capital lease. Future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 1995 are as follows: 1996............................................................. $265,000 1997............................................................. 268,000 1998............................................................. 121,000 1999............................................................. 16,000 -------- Total minimum lease payments..................................... $670,000 ========
F-16 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1993, 1994 AND 1995 Rental expense under operating leases was $16,000, $31,000 and $60,000 for the years ended December 31, 1993, 1994 and 1995, respectively. Obligations under capital lease incurred for property and equipment were $358,000, $912,000 and $605,000 during the years ended December 31, 1993, 1994 and 1995, respectively. These non cash investing and financing transactions have been excluded from the consolidated statements of cash flows. (10) INCOME TAXES Income taxes for the years ended December 31, 1993, 1994 and 1995 are as follows:
1993 1994 1995 ---- ------- -------- Federal................................................ $-- $58,000 $330,000 State.................................................. -- 7,000 17,000 ---- ------- -------- Total................................................ $-- $65,000 $347,000 ==== ======= ========
The actual income tax expense for the years ended December 31, 1993, 1994 and 1995 differs from the expected federal income tax computed by applying the U.S. corporate rate of 34% to income before income taxes as follows:
1993 1994 1995 -------- --------- ---------- Computed "expected" tax expense............ $ 46,000 $ 398,000 $1,239,000 Taxes on income earned and reported by shareholders of S corporations and partners of partnerships.................. (46,000) (332,000) (892,000) Increase in tax resulting from nondeductible expenses.................... -- 1,000 2,000 State tax provision, net of federal benefit................................... -- 4,000 11,000 Other...................................... -- (6,000) (13,000) -------- --------- ---------- Actual income tax expense................ $ -- $ 65,000 $ 347,000 ======== ========= ==========
For the years ended December 31, 1993, 1994 and 1995, there were no significant temporary differences which created deferred tax assets or liabilities. Income taxes payable of $65,000 are included in accrued liabilities at December 31, 1994. Refundable income taxes of $31,000 are included in other current assets at December 31, 1995. No income taxes were paid during the years ended December 31, 1993 and 1994. Income taxes of $440,000 were paid during the year ended December 31, 1995. (11) CAPITAL STOCK Authorized capital stock of the Company consists of 5,000,000 shares of $.01 par value preferred stock and 40,000,000 shares of $.01 par value common stock. In September 1994, STAT sold 74,000 shares of Series A convertible preferred stock (Preferred Stock) to STAT Physicians for $370,000. The Preferred Stock was converted into common stock at a rate of 20 shares of common stock for each share of Preferred Stock (1,480,000 common shares) upon the completion of STAT's initial public offering of common stock in 1995. The conversion of Preferred Stock into common stock is a non cash investing and financing transaction and is excluded from the 1995 consolidated statement of cash flows. F-17 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1993, 1994 AND 1995 At December 31, 1995, shares of common stock are reserved for issuance in connection with the future exercise of Class A warrants to purchase common stock at the price of $4.50 per share (734,166 shares) and underwriter warrants for 125,000 shares of common stock at $5.44 per share. These warrants were issued in connection with STAT's initial public offering of common stock and the related conversion of 10% convertible secured notes. Additionally, at December 31, 1995, 300,000 shares of common stock are reserved for issuance in connection with the Company's stock option plan. (12) STOCK OPTION PLAN The Company has a stock option plan, providing for the granting of incentive stock options or nonqualified stock options, for the benefit of its employees and directors. Under this plan, options may be granted to purchase an aggregate of 300,000 shares of common stock at no less than 100% (90% in the event of a nonqualified stock option) of the fair market value of the common stock at the time of the grant. At December 31, 1995, 10,000 unoptioned shares were available for granting. All options which have been granted expire five years from the date of grant. Information relating to stock options is as follows:
NUMBER OF OPTIONS OPTION PRICE PER SHARE --------- ---------------------- Outstanding at December 31, 1994........... -- -- Granted.................................... 290,000 $2.88-3.17 ------- Outstanding at December 31, 1995........... 290,000 $2.88-3.17 ======= Shares exercisable at December 31, 1995.... 2,500 $3.00 ======= ==========
(13) COMMITMENTS AND CONTINGENT LIABILITIES The Company has certain pending and threatened litigation and claims incurred in the ordinary course of business; however, management believes that the probable resolution of such contingencies will not materially affect the liquidity, the financial position, or the results of the Company's operations. The Company procures professional liability insurance on behalf of STAT Physicians which provides coverage on a claims-made basis during the policy period. The coverage is purchased on a "slot" basis and extends to the Company, to STAT Physicians and to contract physicians who perform services. Individual policies are not provided to physicians; however, they must be prequalified for coverage as a routine credentialing process. If a claims-made policy is not renewed or replaced by a new policy which provides coverage retroactively, it becomes necessary to purchase an extended reporting period endorsement. Management intends to renew the existing claims-made policy and in the past has either renewed or successfully purchased retroactive coverage. Although the Company does not directly contract with hospitals or physicians for the provision or procurement of medical services, its contractual relationship with STAT Physicians exposes it to potential claims from litigants. Accordingly, the Company is named as an additional insured under the professional liability coverage of STAT Physicians. Effective October 1, 1995, the Company established a 401(k) plan (the Plan) for its employees. The Plan allows participants with at least one year of prior service to make elective deferrals of up to 15% of their F-18 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1993, 1994 AND 1995 compensation. The Plan also allows discretionary matching employer contributions as well as additional discretionary contributions which shall be allocated to each eligible employee in proportion to his or her compensation as a percentage of the compensation of all eligible employees. Employer contributions vest at the rate of 20% per year of service. No discretionary contributions were made to the Plan by the Company during the year ended December 31, 1995. (14) BUSINESS SEGMENTS The Company operates in three business segments; emergency services, kidney dialysis services and health care management services. Information by business segment as of and for the years ended December 31, 1993, 1994 and 1995 is as follows:
1993 1994 1995 ---------- ---------- ----------- Net service revenues: Emergency services....................... $ -- $3,672,000 $14,124,000 Kidney dialysis.......................... 1,170,000 3,766,000 6,262,000 Healthcare management.................... -- 207,000 2,755,000 ---------- ---------- ----------- Total.................................. $1,170,000 $7,645,000 $23,141,000 ========== ========== =========== Operating income: Emergency services....................... $ -- $ 202,000 $ 977,000 Kidney dialysis.......................... 210,000 998,000 1,715,000 Healthcare management.................... -- 123,000 1,120,000 General corporate........................ (55,000) (164,000) (46,000) ---------- ---------- ----------- Total.................................. $ 155,000 $1,159,000 $ 3,766,000 ========== ========== =========== Identifiable assets: Emergency services....................... $ -- $2,094,000 $ 5,860,000 Kidney dialysis.......................... 1,117,000 2,557,000 3,642,000 Healthcare management.................... -- 103,000 970,000 General corporate........................ 26,000 70,000 103,000 ---------- ---------- ----------- Total.................................. $1,143,000 $4,824,000 $10,575,000 ========== ========== =========== Depreciation and amortization: Emergency services....................... $ -- $ -- $ 16,000 Kidney dialysis.......................... 57,000 192,000 301,000 Healthcare management.................... -- 2,000 40,000 General corporate........................ 2,000 2,000 3,000 ---------- ---------- ----------- Total.................................. $ 59,000 $ 196,000 $ 360,000 ========== ========== =========== Capital expenditures: Emergency services....................... $ -- $ -- $ 112,000 Kidney dialysis.......................... 572,000 1,094,000 742,000 Healthcare management.................... -- 4,000 282,000 General corporate........................ 5,000 -- 17,000 ---------- ---------- ----------- Total.................................. $ 577,000 $1,098,000 $ 1,153,000 ========== ========== ===========
F-19 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1993, 1994 AND 1995 (15) SUBSEQUENT EVENTS In January 1996 the Company reached an agreement with the Greater Houston Division of Columbia/HCA Healthcare Corporation (Columbia) to provide emergency medicine services to all but one of Columbia's emergency departments in the Greater Houston Division. This agreement will result in the addition of nine hospitals to the Company's service base between February 1 and July 1, 1996 resulting in a total of 18 hospitals served (16 of which are owned by Columbia). The contract for services relating to this agreement was finalized in April 1996. The Houston Division hospitals (15) are covered by this contract which has an initial term of two years and which renews automatically. This contract will account for a significant portion of the Company's net service revenues and operating expenses. On January 31, 1996, and in conjunction with the Columbia agreement noted above, the Company acquired the rights to a one-hospital contract for the provision of emergency department medical services. Consideration paid for the contract and certain non-competition covenants consisted of $960,000 in cash and 52,174 shares of the Company's common stock. Up to an additional $100,000 may be paid in each of the three twelve-month periods following the acquisition of the contract based on profits realized at that hospital. On February 1, 1996, the Company acquired intangible assets of Amedica, Ltd. (Amedica) in a transaction that will be accounted for by the purchase method of accounting. Amedica provides healthcare services relating to the management of independent physician associations. Consideration paid consisted of $200,000 in cash and 15,730 shares of the Company's common stock. Unaudited financial information of Amedica as of December 31, 1995 and for the year then ended is as follows: Balance sheet information: Current assets................................................ $ 128,000 Total assets.................................................. 135,000 Current liabilities........................................... 25,000 Total liabilities............................................. 150,000 Partners' capital............................................. (15,000) =========== Operations information: Revenue....................................................... $ 439,000 Expenses...................................................... 518,000 Net loss...................................................... (79,000) =========== Unaudited proforma results of operations for the year ended December 31, 1995, giving effect to the Amedica acquisition as though it had occurred on January 1, 1995, are as follows: Net service revenues............................................ $23,580,000 Net income...................................................... 3,222,000 =========== Net income per common share..................................... $ 0.20 ===========
STAT was advised in May 1996 that the common stock (67,904 shares, with an ascribed value of $310,000) issued in connection with the acquisitions described in this note, may have been issued in violation of Section 5 of the Securities Act. Such a violation would entitle the recipients to recission rights. In July 1996, the Company offered the right of recission, which right included the payment of the ascribed value plus accrued interest from F-20 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) DECEMBER 31, 1993, 1994 AND 1995 the acquisition dates, to the recipients. The recipients declined such offer and asserted their right to exchange their STAT common stock for common stock of the Company pursuant to the merger and exchange agreement between STAT and AmHealth. Accordingly, the $310,000 will be reported as permanent equity. In June 1996, stockholders of STAT and stockholders and partners of AmHealth approved the New STAT Healthcare, Inc. 1996 Stock Incentive Plan under which 1,500,000 shares of common stock of the Company became reserved for future issuance to officers, employees, consultants and non-employee directors of the Company. The 290,000 options outstanding at December 31, 1995 (see note 12) are considered to be options outstanding under this 1996 plan. On July 22, 1996, the Company signed a commitment letter for a $6,500,000 bank credit facility comprised of a $3,000,000 revolving line of credit and a $3,500,000 three year, non-revolving line of credit. The formal agreement is expected to be finalized during August 1996 and pursuant to the commitment agreement will provide for interest at prime. Borrowings under the lines will be collateralized by security interests in the Company's accounts receivable and in capital assets. F-21 STAT HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET JUNE 30, 1996 (UNAUDITED)
JUNE 30, 1996 ----------- ASSETS Cash and cash equivalents.......................................... $ 1,324,000 Accounts receivable, net........................................... 7,109,000 Notes receivable................................................... 200,000 Inventories........................................................ 78,000 Prepaid and other current assets................................... 295,000 ----------- Total current assets........................................... 9,006,000 Property and equipment, net........................................ 3,149,000 Intangible assets, net............................................. 1,408,000 Other non-current assets........................................... 196,000 ----------- Total assets................................................... $13,759,000 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current portion of long-term debt.................................. $ 1,486,000 Current portion of capital lease obligations....................... 72,000 Accrued physicians' fees........................................... 1,095,000 Accounts payable................................................... 1,194,000 Accrued liabilities................................................ 505,000 Distributions payable.............................................. 465,000 ----------- Total current liabilities...................................... 4,817,000 Long-term debt..................................................... 289,000 Long-term capital lease obligations................................ 1,993,000 ----------- Total liabilities.............................................. 7,099,000 ----------- Stockholders' equity: Preferred stock, $.01 par value. Authorized 5,000,000 shares; no shares outstanding.............................................. -- Common stock, $.01 par value. Authorized 40,000,000 shares; issued and outstanding, 14,902,472 shares....................... 149,000 Capital in excess of par value................................... 4,563,000 Retained earnings................................................ 1,948,000 ----------- Total stockholders' equity..................................... 6,660,000 ----------- Commitments and contingencies Total liabilities and stockholders' equity..................... $13,759,000 ===========
See accompanying notes to unaudited consolidated financial statements. F-22 STAT HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, 1995 JUNE 30, 1996 ------------- ------------- Net service revenues.............................. $10,375,000 $16,663,000 ----------- ----------- Operating expenses: Professional medical fees....................... 4,548,000 6,695,000 Human resources................................. 1,625,000 3,516,000 Supplies........................................ 822,000 1,136,000 Billing and collection costs.................... 697,000 996,000 Liability insurance............................. 324,000 499,000 Other costs..................................... 575,000 938,000 ----------- ----------- Total operating expenses...................... 8,591,000 13,780,000 ----------- ----------- Operating income.............................. 1,784,000 2,883,000 Interest income................................... 31,000 17,000 Interest expense.................................. (60,000) (150,000) Reorganization costs.............................. -- (1,269,000) ----------- ----------- Income before income taxes.................... 1,755,000 1,481,000 Income taxes...................................... 181,000 (44,000) ----------- ----------- Net income.................................... 1,574,000 1,525,000 Proforma income taxes............................. 416,000 577,000 ----------- ----------- Proforma net income............................. $ 1,158,000 $ 948,000 =========== =========== Proforma net income per common share............ $ 0.13 $ 0.06 =========== =========== Number of shares used in computing proforma net income per common share.......................... 9,077,613 15,320,433 =========== ===========
See accompanying notes to unaudited consolidated financial statements. F-23 STAT HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
COMMON STOCK ------------------- CAPITAL IN TOTAL EXCESS OF RETAINED STOCKHOLDERS' SHARES AMOUNT PAR VALUE EARNINGS EQUITY ---------- -------- ---------- ----------- ------------- Balances at December 31, 1995................... 14,823,332 $148,000 $4,204,000 $ 2,020,000 $ 6,372,000 Common stock issued for: Acquisitions.......... 67,904 1,000 309,000 -- 310,000 Compensation.......... 11,236 -- 50,000 -- 50,000 Distributions to shareholders........... -- -- -- (1,597,000) (1,597,000) Net income.............. -- -- -- 1,525,000 1,525,000 ---------- -------- ---------- ----------- ----------- Balances at June 30, 1996................... 14,902,472 $149,000 $4,563,000 $ 1,948,000 $ 6,660,000 ========== ======== ========== =========== ===========
See accompanying notes to unaudited consolidated financial statements. F-24 STAT HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996 ------------- Cash flows from operating activities: Net income...................................................... $ 1,525,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................................. 238,000 Increase in deferred tax liability............................. 50,000 Changes in assets and liabilities: Increase in net accounts receivable.......................... (2,544,000) Decrease in inventories...................................... 25,000 Decrease in prepaid and other current assets................. 464,000 Increase in other non-current assets......................... (68,000) Increase in accrued physicians' fees......................... 389,000 Increase in accounts payable................................. 269,000 Decrease in accrued liabilities.............................. (58,000) ----------- Total adjustments.......................................... (1,235,000) ----------- Net cash provided by operating activities.................. 290,000 ----------- Cash flows from investing activities: Repayment of notes receivable................................... 66,000 Purchase of HEMA assets......................................... (960,000) Purchase of Amedica assets...................................... (200,000) Purchase of property and equipment.............................. (243,000) ----------- Net cash used in investing activities...................... (1,337,000) ----------- Cash flows from financing activities: Distributions to stockholders................................... (1,415,000) Net borrowings under line of credit agreement................... 1,250,000 Issuance of long-term debt...................................... 285,000 Repayment of long-term debt..................................... (203,000) Repayments of capital lease obligations......................... (84,000) ----------- Net cash used in financing activities...................... (167,000) ----------- Net decrease in cash and cash equivalents....................... (1,214,000) Cash and cash equivalents at beginning of period................ 2,538,000 ----------- Cash and cash equivalents at end of period...................... $ 1,324,000 ===========
See accompanying notes to unaudited consolidated financial statements. F-25 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 (1) FINANCIAL STATEMENT PRESENTATION The accompanying consolidated financial statements of STAT Healthcare, Inc. and subsidiaries (the Company) present financial information as of June 30, 1996, and for the six month periods ended June 30, 1995 and 1996. Because these financial statements are unaudited and do not include all disclosures required by generally accepted accounting principles, they should be read in conjunction with the Company's audited consolidated financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial information for the periods reported have been made. Results of operations for the six month period ended June 30, 1996 are not necessarily indicative of the results that may be achieved for the year ending December 31, 1996. (2) NET INCOME PER COMMON SHARE Net income per common share is computed based on the number of common and common equivalent shares of the Company. Equivalent shares are attributable to outstanding warrants and options to purchase common shares. (3) REORGANIZATION COSTS Reorganization costs relate to the Company's merger with AmHealth Corporation and its related healthcare entities and consist of legal, accounting and other transactional costs. F-26 INDEPENDENT AUDITORS' REPORT The Board of Directors South Texas Acute Trauma Physicians, P.A.: We have audited the accompanying balance sheets of South Texas Acute Trauma Physicians, P.A. (the Company) as of August 31, 1994 and December 31, 1993, and the related statements of income, changes in shareholders' equity and cash flows for the eight months ended August 31, 1994 and the year ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of South Texas Acute Trauma Physicians, P.A. as of August 31, 1994 and December 31, 1993, and the results of its operations and its cash flows for the eight months ended August 31, 1994 and the year ended December 31, 1993, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Houston, Texas March 10, 1995, except as tothe last paragraph of note 6,which is as of April 11, 1995 F-27 SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A. BALANCE SHEETS
DECEMBER 31, AUGUST 31, 1993 1994 ------------ ---------- ASSETS Cash and cash equivalents.............................. $ 10,000 $ 63,000 Accounts receivable (notes 5 and 6): Patient accounts, net................................ 840,000 1,312,000 Hospital accounts.................................... 439,000 316,000 ---------- ---------- Net accounts receivable............................ 1,279,000 1,628,000 Prepaid assets......................................... 55,000 186,000 ---------- ---------- Total current assets............................... 1,344,000 1,877,000 Other assets........................................... 8,000 15,000 ---------- ---------- Total assets....................................... $1,352,000 $1,892,000 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current installments of long-term debt (note 6)........ $ 176,000 $ 210,000 Notes payable to hospitals (note 7).................... 70,000 203,000 Accrued physicians' fees............................... 605,000 681,000 Accrued liabilities.................................... 37,000 71,000 Accounts payable....................................... 62,000 126,000 Bank overdraft......................................... 22,000 -- ---------- ---------- Total current liabilities.......................... 972,000 1,291,000 Long-term debt, excluding current liabilities (note 6).................................................... 3,000 -- ---------- ---------- Total liabilities.................................. 975,000 1,291,000 ---------- ---------- Shareholders' equity: Common Stock, $1 par value. Authorized 100,000 shares; issued and outstanding 1,000 shares......... 1,000 1,000 Retained earnings.................................... 376,000 600,000 ---------- ---------- Total shareholders' equity......................... 377,000 601,000 Commitments and contingencies (notes 3, 8 and 9)....... ---------- ---------- Total liabilities and shareholders' equity......... $1,352,000 $1,892,000 ========== ==========
See accompanying notes to financial statements. F-28 SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A. STATEMENTS OF INCOME
EIGHT MONTHS YEAR ENDED ENDED DECEMBER 31, AUGUST 31, 1993 1994 ------------ ------------ Net service revenue (note 4).......................... $8,873,000 $6,876,000 Direct expenses: Physicians' fees.................................... 6,823,000 5,113,000 Liability insurance................................. 368,000 314,000 Billing and collection.............................. 304,000 473,000 ---------- ---------- Total direct expenses............................. 7,495,000 5,900,000 ---------- ---------- Gross profit...................................... 1,378,000 976,000 ---------- ---------- Operating expenses: Human resources..................................... 713,000 525,000 Occupancy........................................... 38,000 27,000 Furniture and equipment............................. 30,000 19,000 Supplies............................................ 39,000 16,000 Outside services and other.......................... 62,000 68,000 ---------- ---------- Total operating expenses.......................... 882,000 655,000 ---------- ---------- Operating income.................................. 496,000 321,000 Interest expense...................................... 14,000 15,000 ---------- ---------- Net income........................................ 482,000 306,000 Proforma income taxes (note 3)........................ 164,000 104,000 ---------- ---------- Proforma net income............................... $ 318,000 $ 202,000 ========== ==========
See accompanying notes to financial statements. F-29 SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
TOTAL COMMON RETAINED SHAREHOLDERS' STOCK EARNINGS EQUITY ------ --------- ------------- Balances at December 31, 1992................... $1,000 $ 58,000 $ 59,000 Net income.................................... -- 482,000 482,000 Shareholder distributions..................... -- (164,000) (164,000) ------ --------- --------- Balances at December 31, 1993................... 1,000 376,000 377,000 Net income.................................... -- 306,000 306,000 Shareholder distributions..................... -- (82,000) (82,000) ------ --------- --------- Balances at August 31, 1994..................... $1,000 $ 600,000 $ 601,000 ====== ========= =========
See accompanying notes to financial statements. F-30 SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A. STATEMENTS OF CASH FLOWS
EIGHT MONTHS YEAR ENDED ENDED DECEMBER 31, AUGUST 31, 1993 1994 ------------ ------------ Cash flows from operating activities: Net income......................................... $ 482,000 $ 306,000 Adjustments to reconcile net income to net cash used in operating activities: Changes in assets and liabilities: Increase in net accounts receivable.............. (669,000) (349,000) Increase in prepaids and other assets............ (42,000) (138,000) Increase in accrued physicians' fees............. 79,000 76,000 Increase in accrued liabilities.................. 34,000 34,000 Increase in accounts payable..................... 62,000 64,000 --------- --------- Total adjustments............................... (536,000) (313,000) --------- --------- Net cash used in operating activities........... (54,000) (7,000) --------- --------- Cash flows from financing activities: Proceeds from issuance of long-term debt........... 150,000 51,000 Proceeds from issuance of hospital notes........... 70,000 200,000 Principal payments on long-term debt............... (37,000) (20,000) Principal payments on hospital notes............... -- (67,000) Shareholder distributions.......................... (164,000) (82,000) Increase (decrease) in bank overdraft.............. 22,000 (22,000) --------- --------- Net cash provided by financing activities....... 41,000 60,000 --------- --------- Net increase (decrease) in cash and cash equivalents........................................ (13,000) 53,000 Cash and cash equivalents at beginning of period.... 23,000 10,000 --------- --------- Cash and cash equivalents at end of period.......... $ 10,000 $ 63,000 ========= ========= Supplemental disclosure of cash flow information-- cash payments during the period for interest....... $ 8,000 $ 9,000 ========= =========
See accompanying notes to financial statements. F-31 SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1993 AND AUGUST 31, 1994 (1) THE COMPANY South Texas Acute Trauma Physicians, P.A., dba STAT Physicians (the Company) was incorporated as a professional association in the state of Texas on November 22, 1985. The Company's principal business is the physician staffing of hospital emergency departments. At December 31, 1993 and August 31, 1994, the Company had contracts for physician services with eleven hospitals located in south Texas. Under these contracts the Company provides 24-hour physician coverage of the emergency departments, and one of the Company's physicians acts as the designated Director of Emergency Medicine for each hospital. At December 31, 1993, the Company also provided weekend physician coverage under another contract. The Company terminated this weekend contract effective June 30, 1994 for economic reasons. Physicians providing services on behalf of the Company are independent contractors and are paid monthly on the basis of either a fixed hourly rate or on the basis of a minimum hourly rate which is adjustable upward based on monthly volume. As independent contractors, these physicians are responsible for their own income and Social Security taxes as well as workers compensation insurance. Hospital contracts are generally written for an initial term of two years and automatically renew each year after the initial term. These contracts have cancellation clauses which provide for 90-day cancellation by either party without significant penalty. Certain terms and conditions are routinely modified. The Company's management believes that relations with all hospitals are good and does not anticipate the cancellation of any contracts. Contractual agreements with hospitals are primarily (a) contracts where the Company bills and collects the professional component for the charges for medical services, and (b) contracts where the Company receives fees from the hospital based on a fixed fee, hourly rate or percentage of gross billings. Effective September 1, 1994, the Company entered into a management agreement with STAT Healthcare, Inc. (STAT Healthcare). Under this agreement, the Company assigned all revenues and related accounts receivable from September 1, 1994 forward to STAT Healthcare. In consideration thereof, STAT Healthcare assumed responsibility for collection of receivables and agreed to pay for all direct and operating costs associated with the hospital contracts from September 1, 1994 forward. Additionally, on September 1, 1994 STAT Healthcare employed all administrative personnel previously employed by the Company and assumed responsibility for all administrative matters relating to these contracts, pursuant to a management agreement. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents Cash invested in short-term investments purchased with original maturities of three months or less is deemed to be cash equivalents for financial statement purposes. At December 31, 1993 and August 31, 1994, cash equivalents of $3,000 and $3,000, respectively, consisted of money market funds. Service Revenues and Accounts Receivable Service revenues under contracts where fees are received from hospitals are recorded at established billing rates, net of amounts to be retained by the hospital. Service revenues under contracts where the Company bills and collects for services provided are recorded at established billing rates, net of contractual adjustments and the provision for uncollectible accounts. F-32 SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1993 AND AUGUST 31, 1994 Patient accounts receivable are reduced to an estimated realizable value taking into consideration contractual adjustments mandated by payors (Medicare, Medicaid and private insurers) and expected write-offs of uncollectible accounts. These estimates are based upon historical experience at individual hospitals. (3) INCOME TAXES For federal income tax purposes, the Company has elected to be treated as an "S corporation." Accordingly, the Company's income is allocated to the Company's shareholders, included in their personal income tax returns and taxed at their respective individual rates. No federal income taxes will be assessed the corporation. The proforma income taxes reflected in the accompanying statements of income are based on an effective corporate rate of 34%. The federal income tax return of the Company for the tax year ended January 31, 1992, is currently under examination by the Internal Revenue Service. Management believes that the examination is routine in nature and does not anticipate any significant adjustments from the examination. (4) NET SERVICE REVENUES Gross service revenues represent the billed value of physician services provided at hospital locations. Under the contracts between the Company and the hospitals, the Company has the ability, subject to hospital concurrence, to establish the rates to be billed to patients for services provided. Billings discounts represent the difference between gross service revenues and the amount which the Company ultimately expects to receive. Net service revenues consist of contractual payments from hospitals and estimated collectible fees from patients and third-party payors where the Company is responsible for billing and collection functions. Net service revenues for the year ended December 31, 1993 and for the eight months ended August 31, 1994 are as follows:
1993 1994 ---------- ---------- Net service revenues: From hospitals....................................... $6,250,000 $2,695,000 From patients........................................ 2,623,000 4,181,000 ---------- ---------- $8,873,000 $6,876,000 ========== ==========
Hospital account payments are usually received by the 15th day of the month following service. Some hospitals make partial payments during the service month. Patient accounts are collected over normal collection cycles from a variety of payors including Medicare, Medicaid, private insurers and patients. Gross and net service revenues for the year ended December 31, 1993 and for the eight months ended August 31, 1994 are as follows:
1993 1994 ----------- ----------- Gross service revenues........................... $14,900,000 $14,369,000 Billings discounts............................... (6,027,000) (7,493,000) ----------- ----------- Net service revenues............................. $ 8,873,000 $ 6,876,000 =========== ===========
For the eight months ended August 31, 1994, four hospitals accounted for between 10% and 14% each of net service revenues. F-33 SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1993 AND AUGUST 31, 1994 (5) NET PATIENT ACCOUNTS RECEIVABLE Net patient accounts receivable at December 31, 1993 and at August 31, 1994 are as follows:
1993 1994 ---------- ----------- Gross patient accounts receivable................... $1,867,000 $ 3,486,000 Allowance for contractual adjustments............... (615,000) (1,427,000) ---------- ----------- Estimated accounts receivable....................... 1,252,000 2,059,000 Allowance for doubtful accounts..................... (412,000) (747,000) ---------- ----------- Net patient accounts receivable..................... $ 840,000 $ 1,312,000 ========== ===========
(6) LONG-TERM DEBT Long-term debt at December 31, 1993 and at August 31, 1994 is as follows:
1993 1994 --------- --------- 13% note payable, due in monthly installments of $1,878 including interest through April 1994. Paid in full in April 1994............................... $ 8,000 $ -- 10% note payable, due in monthly installments of $1,616 including interest through February 1995. Paid in full in February 1995....................... 21,000 10,000 Revolving credit note (up to $200,000), interest due quarterly at the bank's prime rate (7.75% at August 31, 1994) plus 2%, principal due August 1995........ 150,000 200,000 --------- --------- Total debt........................................... 179,000 210,000 Less current installments............................ (176,000) (210,000) --------- --------- Long-term debt..................................... $ 3,000 $ -- ========= =========
The notes payable are secured by the Company's accounts receivable. The revolving credit note is secured by the Company's accounts receivable and the corporate guarantee and accounts receivable of STAT Healthcare. Subsequent to August 31, 1994, the bank increased the revolving line of credit to $400,000. On April 11, 1995, the line of credit was repaid by STAT Healthcare and was canceled. (7) NOTES PAYABLE TO HOSPITALS Notes payable to hospitals December 31, 1993 and at August 31, 1994 are as follows:
1993 1994 ------- -------- 8% unsecured note, due in 16 monthly installments of $4,690, including interest, commencing in January 1995... $70,000 $ 70,000 Noninterest-bearing unsecured note, due in monthly installments of $33,333 through December 1994. Paid in full in December 1994.................................... -- 133,000 ------- -------- $70,000 $203,000 ======= ========
Notes payable to hospitals arose as unsecured advances designed to provide cash flow assistance during the inception of fee-for-service activities. F-34 SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A. NOTES TO FINANCIAL STATEMENTS--(CONCLUDED) DECEMBER 31, 1993 AND AUGUST 31, 1994 (8) LEASES The Company leases its office space under a month-to-month lease. The Company also leases certain equipment and vehicles under operating leases. Future minimum lease payments under noncancelable operating leases at August 31, 1994 are as follows: 1994.............................................................. $ 8,000 1995.............................................................. 6,000 1996.............................................................. 4,000 1997.............................................................. 4,000 ------- $22,000 =======
Rental expense for the year ended December 31, 1993 and for the eight months ended August 31, 1994 was $27,000 and $17,000 respectively. (9) CONTINGENCIES The Company procures professional liability insurance which provides coverage on a claims-made basis during the policy period. The coverage is purchased on a "slot" basis and extends to the Company and to contract physicians who perform services. Individual policies are not provided to physicians; however, they must be prequalified for coverage as a routine credentialing process. If a claims-made policy is not renewed or replaced by a new policy which provides coverage retroactively, it becomes necessary to purchase an extended reporting period endorsement. Management intends to renew its existing claims-made policy and in the past has either renewed or successfully purchased retroactive coverage. The Company has certain pending and threatened litigation and claims incurred in the ordinary course of business; however, management believes that the probable resolution of such contingencies will not materially affect the liquidity, the financial position, or the results of the Company's operations. F-35 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ANNEX A AGREEMENT AND PLAN OF MERGER BY AND AMONG AMERICAN MEDICAL RESPONSE, INC. SHI ACQUISITION CORP. AND STAT HEALTHCARE, INC. DATED AS OF OCTOBER 7, 1996 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS ARTICLE I -- THE MERGER.................................................... 1 SECTION 1.1 The Merger................................................ 1 SECTION 1.2 Effective Time............................................ 2 SECTION 1.3 Effect of the Merger...................................... 2 SECTION 1.4 Certificate of Incorporation, By-Laws..................... 2 SECTION 1.5 Directors and Officers.................................... 2 SECTION 1.6 Effect on Capital Stock................................... 2 SECTION 1.7 Exchange of Certificates.................................. 4 SECTION 1.8 Stock Transfer Books...................................... 5 SECTION 1.9 No Further Ownership Rights in Company Common Stock....... 5 SECTION 1.10 Lost, Stolen or Destroyed Certificates.................... 5 SECTION 1.11 Tax and Accounting Consequences........................... 5 SECTION 1.12 Taking of Necessary Action; Further Action................ 5 SECTION 1.13 Material Adverse Effect................................... 5 ARTICLE II -- REPRESENTATIONS AND WARRANTIES OF THE COMPANY................ 6 SECTION 2.1 Organization and Qualification; Subsidiaries.............. 6 SECTION 2.2 Certificate of Incorporation and By-Laws.................. 6 SECTION 2.3 Capitalization............................................ 6 SECTION 2.4 Authority Relative to this Agreement...................... 7 SECTION 2.5 No Conflict; Required Filings and Consents................ 7 SECTION 2.6 Compliance, Permits....................................... 8 SECTION 2.7 SEC Filings; Financial Statements......................... 8 SECTION 2.8 Absence of Certain Changes or Events...................... 9 SECTION 2.9 No Undisclosed Liabilities................................ 9 SECTION 2.10 Absence of Litigation..................................... 9 SECTION 2.11 Employee Benefit Plans, Employment Agreements............. 9 SECTION 2.12 Labor Matters............................................. 10 SECTION 2.13 Registration Statement, Proxy Statement/Prospectus........ 11 SECTION 2.14 Restrictions on Business Activitie........................ 11 SECTION 2.15 Title to Property......................................... 11 SECTION 2.16 Taxes..................................................... 11 SECTION 2.17 Environmental Matters..................................... 12 SECTION 2.18 Intellectual Property..................................... 13 SECTION 2.19 Interested Party Transactions............................. 13 SECTION 2.20 Insurance................................................. 13 SECTION 2.21 Accounts Receivable....................................... 13 SECTION 2.22 Pooling Matters........................................... 13 SECTION 2.23 Opinion of Financial Advisor.............................. 13 SECTION 2.24 Brokers................................................... 13 SECTION 2.25 Section 203 of the DGCL Not Applicable.................... 14 SECTION 2.26 Change in Control Payments................................ 14 SECTION 2.27 Expenses.................................................. 14 SECTION 2.28 Healthcare Regulatory Compliance.......................... 14 ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB..... 14 SECTION 3.1 Organization and Qualification; Subsidiaries.............. 14 SECTION 3.2 Charter and By-Laws....................................... 15 SECTION 3.3 Capitalization............................................ 15 SECTION 3.4 Authority Relative to this Agreement...................... 15 SECTION 3.5 No Conflict, Required Filings and Consents................ 16
i SECTION 3.6 Compliance; Permits.......................................................... 16 SECTION 3.7 SEC Filings; Financial Statements............................................ 17 SECTION 3.8 Absence of Certain Changes or Events......................................... 17 SECTION 3.9 Registration Statement; Proxy Statement/Prospectus........................... 17 SECTION 3.10 Pooling Matters.............................................................. 18 SECTION 3.11 No Undisclosed Liabilities................................................... 18 SECTION 3.12 Absence of Litigation........................................................ 18 SECTION 3.13 Ownership of Merger Sub; No Prior Activities................................. 18 ARTICLE IV -- CONDUCT OF BUSINESS PENDING THE MERGER........................................ 18 SECTION 4.1 Conduct of Business by the Company Pending the Merger........................ 18 SECTION 4.2 No Solicitation.............................................................. 20 SECTION 4.3 Conduct of Business by Parent Pending the Merger............................. 21 ARTICLE V -- ADDITIONAL AGREEMENTS.......................................................... 21 SECTION 5.1 HSR Act...................................................................... 21 SECTION 5.2 Proxy Statement Prospectus; Registration Statement........................... 21 SECTION 5.3 Stockholders Meeting......................................................... 22 SECTION 5.4 Access to Information; Confidentiality....................................... 22 SECTION 5.5 Consents; Approvals.......................................................... 22 SECTION 5.6 Agreements with Respect to Affiliates........................................ 22 SECTION 5.7 Indemnification and Insurance................................................ 22 SECTION 5.8 Notification of Certain Matters.............................................. 23 SECTION 5.9 Further Action/Tax Treatment................................................. 23 SECTION 5.10 Public Announcements......................................................... 24 SECTION 5.11 Conveyance Taxes............................................................. 24 SECTION 5.12 Accountants' Letters......................................................... 24 SECTION 5.13 Pooling Accounting Treatment................................................. 24 SECTION 5.14 Nasdaq Listing............................................................... 24 SECTION 5.15 Listing of Parent Shares..................................................... 24 ARTICLE VI -- CONDITIONS TO THE MERGER...................................................... 24 SECTION 6.1 Conditions to Obligation of Each Party to Effect the Merger.................. 24 SECTION 6.2 Additional Conditions to Obligations of Parent and Merger Sub................ 25 SECTION 6.3 Additional Conditions to Obligation of the Company........................... 26 ARTICLE VII -- TERMINATION.................................................................. 27 SECTION 7.1 Termination.................................................................. 27 SECTION 7.2 Effect of Termination........................................................ 28 SECTION 7.3 Fees and Expenses............................................................ 28 ARTICLE VIII -- GENERAL PROVISIONS.......................................................... 28 SECTION 8.1 Effectiveness of Representations, Warranties and Agreements; Knowledge, Etc.. 28 SECTION 8.2 Notices...................................................................... 29 SECTION 8.3 Certain Definitions.......................................................... 29 SECTION 8.4 Amendment.................................................................... 30 SECTION 8.5 Waiver....................................................................... 30 SECTION 8.6 Headings..................................................................... 30 SECTION 8.7 Severability................................................................. 30 SECTION 8.8 Entire Agreement............................................................. 31 SECTION 8.9 Assignment; Guarantee of Merger Sub.......................................... 31 SECTION 8.10 Parties in Interest.......................................................... 31 SECTION 8.11 Failure or Indulgence Not Waiver; Remedies Cumulative........................ 31 SECTION 8.12 Governing Law................................................................ 31 SECTION 8.13 Counterparts................................................................. 31
ii AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of October 7, 1996 (this "Agreement"), among American Medical Response, Inc., a Delaware corporation ("Parent"), SHI Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Parent ("Merger Sub"), and STAT Healthcare, Inc., a Delaware corporation (the "Company"). WITNESSETH: WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company have each determined that it is advisable and in the best interests of their respective stockholders for Parent to enter into a business combination with the Company upon the terms and subject to the conditions set forth herein; WHEREAS, in furtherance of such combination, the Boards of Directors of Parent, Merger Sub and the Company have each approved the merger (the "Merger") of Merger Sub with and into the Company in accordance with the applicable provisions of the Delaware General Corporation Law (the "DGCL"), and upon the terms and subject to the conditions set forth herein; WHEREAS, Parent, Merger Sub and the Company intend, by approving resolutions authorizing this Agreement, to adopt this Agreement as a plan of reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations promulgated thereunder; WHEREAS, for accounting purposes, it is intended that the Merger shall be accounted for as a pooling of interests under both generally accepted accounting principles and regulations of the Securities and Exchange Commission (the "SEC"); WHEREAS, pursuant to the Merger, each outstanding share (a "Share") of the Company's common stock, $.01 par value (the "Company Common Stock"), shall be converted into the right to receive the Merger Consideration (as defined in Section 1.7(b)), upon the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Parent, Merger Sub and the Company hereby agree as follows: ARTICLE I The Merger Section 1.1 The Merger. (a) Effective Time. At the Effective Time (as defined in Section 1.2), and subject to and upon the terms and conditions of this Agreement and the DGCL, Merger Sub shall be merged with and into the Company, the separate corporate existence of Merger Sub shall cease, and the Company shall continue as the surviving corporation. The Company as the surviving corporation after the Merger is hereinafter sometimes referred to as the "Surviving Corporation." (b) Closing. Unless this Agreement shall have been terminated and the transactions herein contemplated shall have been abandoned pursuant to Section 7.1 and subject to the satisfaction or waiver of the conditions set forth in Article VI, the consummation of the Merger will take place as promptly as practicable (and in any event within two business days) after satisfaction or waiver of the conditions set forth in Article VI, at the offices of Ropes & Gray, One International Place, Boston, Massachusetts, unless another date, time or place is agreed to in writing by the parties hereto. 1 Section 1.2 Effective Time. As promptly as practicable after the satisfaction or waiver of the conditions set forth in Article VI, the parties hereto shall cause the Merger to be consummated by filing a certificate of merger as contemplated by the DGCL (the "Certificate of Merger"), together with any required related certificates, with the Secretary of State of the State of Delaware, in such form as required by, and executed in accordance with the relevant provisions of, the DGCL (the time of such filing being the "Effective Time"). Section 1.3 Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the property, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation. Section 1.4 Certificate of Incorporation, By-Laws. (a) Certificate of Incorporation. Unless otherwise determined by Parent prior to the Effective Time, but in all cases subject to Section 5.7(a), at the Effective Time the Certificate of Incorporation of the Company, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation until thereafter amended in accordance with the DGCL and such Certificate of Incorporation. (b) By-Laws. Unless otherwise determined by Parent prior to the Effective Time, but in all cases subject to Section 5.7(a), the By-Laws of the Company, as in effect immediately prior to the Effective Time, shall be the By-Laws of the Surviving Corporation until thereafter amended in accordance with the DGCL, the Certificate of Incorporation of the Surviving Corporation and such By-Laws; provided, however, that the Company shall take such actions as may be necessary to ensure that, at the Effective Time, the authorized number of directors of the Surviving Corporation shall consist of the same number of directors as the number of directors of Merger Sub at the Effective Time. Section 1.5 Directors and Officers. The directors of Merger Sub immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and By-Laws of the Surviving Corporation, and the persons listed on Schedule 1.5 shall serve as the initial officers of the Surviving Corporation in the capacity or capacities specified on Schedule 1.5, in each case until their respective successors are duly elected or appointed and qualified. Section 1.6 Effect on Capital Stock. At the Effective Time, by virtue of the Merger and without any action on the part of the Parent, Merger Sub, the Company or the holders of any of the following securities: (a) Conversion of Securities. Each Share issued and outstanding immediately prior to the Effective Time (excluding any Shares to be canceled pursuant to Section 1.6(b)) shall be converted, subject to Section 1.6(f), into the right to receive 0.25 of a share (the "Exchange Ratio") of validly issued, fully paid and nonassessable shares ("Parent Shares") of the Common Stock, $.01 par value, of Parent ("Parent Common Stock"). (b) Cancellation. Each Share held in the treasury of the Company and each Share owned by Parent, Merger Sub or any direct or indirect wholly owned subsidiary of the Company or Parent immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holder thereof, cease to be outstanding, be canceled and retired without payment of any consideration therefor and cease to exist. (c) Stock Options and Warrants. (i) At the Effective Time, (A) each outstanding option to purchase Company Common Stock granted under the Company's 1996 Stock Incentive Plan, (the "Company Stock Option Plan") and (B) each outstanding option to purchase Company Common Stock described in Section 1.6(c) of the Company Disclosure Schedule (collectively with the options described in clause (A) ("Stock 2 Options")), whether vested or unvested, shall be deemed assumed by Parent and deemed to constitute an option to acquire, on the same terms and conditions as were applicable under such Stock Option prior to the Effective Time, the number (rounded to the nearest whole number) of Parent Shares as the holder of such Stock Option would have been entitled to receive pursuant to the Merger had such holder exercised such option in full immediately prior to the Effective Time (not taking into account whether or not such option was in fact exercisable), at a price per share equal to (x) the aggregate exercise price for Company Common Stock otherwise purchasable pursuant to such Stock Option divided by (y) the number of Parent Shares deemed purchasable pursuant to such Stock Option. It is intended that the foregoing provisions shall be undertaken in a manner that will not constitute a "modification" as defined in Section 425 of the Code, as to any Stock Option which is an "incentive stock option." (ii) As soon as practicable after the Effective Time, Parent shall deliver to each holder of an outstanding Stock Option an appropriate notice setting forth such holder's rights pursuant thereto, and such Stock Option shall continue in effect on the same terms and conditions (including antidilution provisions). (iii) Parent shall take all corporate action necessary to reserve for issuance a sufficient number of Parent Shares for delivery pursuant to the terms set forth in this Section 1.6(c). (iv) Subject to any applicable limitations under the Securities Act of 1933, as amended, and the rules and regulations thereunder (the "Securities Act"), Parent shall either (in consultation with the Company and its advisors) (A) file a Registration Statement on Form S-8 (or any successor form), effective as of the Effective Time, with respect to the shares of Parent Common Stock issuable upon exercise of the Stock Options, or (B) file any necessary amendments to the Company's previously-filed Registration Statement(s) on Form S-8 in order that the Parent will be deemed a "successor registrant" thereunder, and, in either event the Parent shall use all reasonable efforts to maintain the effectiveness of such registration statement(s) (and maintain the current status of the prospectus or prospectuses relating thereto) for so long as such options shall remain outstanding. (v) At the Effective Time, each of the 599,726 Class A redeemable common stock purchase warrant expiring April 19, 1998 (the "Class A Warrants") to purchase one share of Company Common Stock at a purchase price of $4.50 and each of the 62,500 warrants expiring April 19, 2000 (the "Other Warrants") to purchase two shares of Company Common Stock and one Class A Warrant at a purchase price of $10.875 (the Class A Warrants and the Other Warrants are hereinafter known collectively as, the "Warrants"), shall be deemed to constitute a warrant to acquire, on the same terms and conditions as were applicable under such Warrant prior to the Effective Time (including anti-dilution provisions), the number (rounded to the nearest whole number) of Parent Shares as the holder of such Warrant would have been entitled to receive pursuant to the Merger had such holder exercised such Warrant in full immediately prior to the Effective Time, at a price per share equal to (x) the aggregate exercise price for Company Common Stock otherwise purchasable pursuant to such Warrant divided by (y) the number of Parent Shares deemed purchasable pursuant to such Warrant. (d) Capital Stock of Merger Sub. Each share of common stock, $.01 par value, of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into and exchanged for one validly issued, fully paid and nonassessable share of common stock, $.01 par value, of the Surviving Corporation. (e) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted to reflect fully the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into Parent Common Stock), reorganization, recapitalization or other like change with respect to Parent Common Stock occurring after the date hereof and prior to the Effective Time. (f) No Fractional Shares. No certificates or scrip representing less than one Parent Share shall be issued upon the surrender for exchange of a certificate or certificates which immediately prior to the Effective Time represented outstanding Shares (the "Certificates"). In lieu of any such fractional share, 3 each holder of Shares who would otherwise have been entitled to a fraction of a Parent Share upon surrender of Certificates for exchange shall be paid upon such surrender (without interest) cash equal to the product of (i) such fraction, multiplied by (ii) the average closing price per share of Parent Common Stock as reported in the Wall Street Journal for the twenty trading days on the New York Stock Exchange ending on the fifth day prior to the date on which the Effective Time occurs. Section 1.7 Exchange of Certificates. (a) Exchange Agent. Parent shall supply, or shall cause to be supplied, to or for the account of The First National Bank of Boston, or such other bank or trust company as shall be designated by Parent (the "Exchange Agent"), in trust for the benefit of the holders of Company Common Stock, for exchange in accordance with this Section 1.7, through the Exchange Agent, certificates evidencing the Parent Shares issuable pursuant to Section 1.6 in exchange for outstanding Shares. (b) Exchange Procedures. As soon as reasonably practicable after the Effective Time, Parent will instruct the Exchange Agent to mail to each holder of record of Certificates (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent may reasonably specify), and (ii) instructions to effect the surrender of the Certificates in exchange for the certificates evidencing Parent Shares. Upon surrender of a Certificate for cancellation to the Exchange Agent together with such letter of transmittal, duly executed, and such other customary documents as may be required pursuant to such instructions, the holder of such Certificate shall be entitled to receive in exchange therefor (A) certificates evidencing that number of whole Parent Shares which such holder has the right to receive in accordance with the Exchange Ratio in respect of the Shares formerly evidenced by such Certificate, (B) any dividends or other distributions to which such holder is entitled pursuant to Section 1.7(c), and (C) cash in respect of fractional shares as provided in Section 1.6(f) (the Parent Shares and the cash described in clauses (B) and (C) being, collectively, the "Merger Consideration"), and the Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of Shares which is not registered in the transfer records of the Company as of the Effective Time, Parent Shares, dividends and distributions may be issued and paid in accordance with this Article I to a transferee if the Certificate evidencing such Shares is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer pursuant to this Section 1.7(b) and by evidence that any applicable stock transfer taxes have been paid. Until so surrendered, each outstanding Certificate that, prior to the Effective Time, represented Shares of Company Common Stock will be deemed from and after the Effective Time, for all corporate purposes, other than the payment of dividends and subject to Section 1.6(f), to evidence only the right to receive the number of full Parent Shares into which such shares of Company Common Stock shall have been so converted. (c) Distributions With Respect to Unexchanged Parent Shares. No dividends or other distributions declared or made after the Effective Time with respect to Parent Shares with a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the Parent Shares they are entitled to receive until the holder of such Certificate shall surrender such Certificate. Subject to applicable law, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole Parent Shares issued in exchange therefor, without interest, at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole Parent Shares. (d) Transfers of Ownership. If any certificate for Parent Shares is to be issued in a name other than that in which the Certificate surrendered in exchange therefor is registered, it will be a condition to the issuance thereof that the Certificate so surrendered will be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange will have paid to Parent or any agent designated by it any transfer or other taxes required by reason of the issuance of a certificate for Parent Shares in any name other than that of the registered holder of the certificate surrendered, or have established to the satisfaction of Parent or any agent designated by it that such tax has been paid or is not payable. 4 (e) No Liability. Neither Parent, Merger Sub nor the Company shall be liable to any holder of Company Common Stock for any Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (f) Withholding Rights. Parent or the Exchange Agent shall be entitled to deduct and withhold from the Merger Consideration otherwise payable pursuant to this Agreement to any holder of Company Common Stock such amounts as Parent or the Exchange Agent is required to deduct and withhold with respect to the making of such payment under the Code, or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by Parent or the Exchange Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the Shares in respect of which such deduction and withholding was made by Parent or the Exchange Agent. Section 1.8 Stock Transfer Books. At the Effective Time, the stock transfer books of the Company shall be closed, and there shall be no further registration of transfers of Company Common Stock thereafter on the records of the Company. Section 1.9 No Further Ownership Rights in Company Common Stock. The Merger Consideration delivered upon the surrender for exchange of Shares in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to such Shares, and there shall be no further registration of transfers on the records of the Surviving Corporation of Shares which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article I. Section 1.10 Lost, Stolen or Destroyed Certificates. In the event any Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed Certificates, upon the making of an affidavit of that fact by the holder thereof, such Parent Shares as may be required pursuant to Section 1.6; provided, however, that Parent may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Parent or the Exchange Agent with respect to the Certificates alleged to have been lost, stolen or destroyed. Section 1.11 Tax and Accounting Consequences. It is intended by the parties hereto that the Merger shall (i) constitute a reorganization within the meaning of Section 368 of the Code and (ii) qualify for accounting treatment as a pooling of interests. The parties hereto hereby adopt this Agreement as a "plan of reorganization" within the meaning of Sections 1.368-2(g) and 1.368- 3(a) of the United States Treasury Regulations. Section 1.12 Taking of Necessary Action; Further Action. Each of Parent, Merger Sub and the Company will take all such reasonable and lawful action as may be necessary or appropriate in order to effectuate the Merger in accordance with this Agreement as promptly as possible. If, at any time after the Effective Time, any such further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of the Company and Merger Sub, the officers and directors of the Company and Merger Sub immediately prior to the Effective Time are fully authorized in the name of their respective corporations to take, and will take, all such lawful and necessary action. Section 1.13 Material Adverse Effect. When used in connection with the Company or any of its subsidiaries, or Parent or any of its subsidiaries, as the case may be, the term "Material Adverse Effect" means any change, effect or circumstance that, individually or when taken together with all other such changes, effects or circumstances that have occurred prior to the date of determination of the occurrence of the Material Adverse Effect, (a) is or would be materially adverse to the business, assets (including intangible assets), prospects, financial condition or results of operations of the Company and its subsidiaries or Parent and its subsidiaries, as the case may be, in each case taken as a whole or (b) is or would materially delay or prevent the consummation of the transactions contemplated hereby. 5 ARTICLE II Representations and Warranties of the Company The Company hereby represents and warrants to Parent and Merger Sub that, except as set forth in the written disclosure schedule delivered on or prior to the date hereof by the Company to Parent that is arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Article II and discloses the exception to the representation or warranty with reasonable particularity (the "Company Disclosure Schedule"): Section 2.1 Organization and Qualification; Subsidiaries. Each of the Company and each of its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the requisite corporate power and authority and is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exemptions, consents, certificates, approvals and orders ("Approvals") necessary to own, lease and operate the properties it purports to own, operate or lease and to carry on its business as it is now being conducted, except where the failure to be so organized, existing and in good standing or to have such power, authority and Approvals would not have a Material Adverse Effect. Each of the Company and each of its subsidiaries is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its properties owned, leased or operated by it or the nature of its activities makes such qualification or licensing necessary, except for such failures to be so duly qualified or licensed and in good standing that would not have a Material Adverse Effect. A true and complete list of all of the Company's subsidiaries, together with the jurisdiction of incorporation of each subsidiary, the authorized capitalization of each subsidiary, and the percentage of each subsidiary's outstanding capital stock owned by the Company or another subsidiary, is set forth in Section 2.1 of the Company Disclosure Schedule. Except as set forth in Section 2.1 of the Company Disclosure Schedule, the Company does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity, with respect to which interest the Company or any of its subsidiaries has invested or is required to invest $50,000 or more, excluding securities in any publicly traded company held for investment by the Company and comprising less than five percent of the outstanding stock of such company. Section 2.2 Certificate of Incorporation and By-Laws. The Company has heretofore furnished to Parent a complete and correct copy of its Certificate of Incorporation and By-Laws as most recently restated and subsequently amended to date, and has furnished or made available to Parent the Certificate of Incorporation and By-Laws (or equivalent organizational documents) of each of its subsidiaries (the "Subsidiary Documents"). Such Certificate of Incorporation, By-Laws and Subsidiary Documents are in full force and effect. Neither the Company nor any of its subsidiaries is in violation of any of the provisions of its Certificate of Incorporation or By-Laws or Subsidiary Documents, except for immaterial violations of the Subsidiary Documents which may exist. Section 2.3 Capitalization. The authorized capital stock of the Company consists of (1) 40,000,000 shares of Company Common Stock and (ii) 5,000,000 shares of preferred stock, $.01 par value per share, none of which is issued and outstanding and none of which is held in treasury. As of September 30, 1996, (i) 14,975,412 shares of Company Common Stock were issued and outstanding, all of which are validly issued, fully paid and nonassessable, and no shares were held in treasury, (ii) no shares of Company Common Stock were held by subsidiaries of the Company, (iii) 344,500 shares of Company Common Stock were reserved for future issuance pursuant to outstanding stock options granted under the Company Stock Option Plan, (iv) 10,000 shares of Company Common Stock were reserved for future issuance pursuant to the options described in Section 1.6(c) of the Company Disclosure Schedule, (v) 598,726 shares of Company Common Stock were reserved for future issuance upon exercise of the Class A Warrants and (vi) 187,500 shares of Company Common Stock were reserved for future issuance upon exercise of the Other Warrants (including the Class A Warrants underlying the Other Warrants). No material change in such capitalization has occurred between September 30, 1996 and the date hereof. Except as set forth in Section 2.3 or Section 2.11 of the Company Disclosure Schedule, there are no 6 options, warrants or other rights, agreements, arrangements or commitments of any character relating to the issued or unissued capital stock of the Company or any of its subsidiaries or obligating the Company or any of its subsidiaries to issue or sell any shares of capital stock of, or other equity interests in, the Company or any of its subsidiaries. All shares of Company Common Stock subject to issuance as aforesaid, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, shall be duly authorized, validly issued, fully paid and nonassessable. Except as disclosed in Section 2.3 of the Company Disclosure Schedule, there are no obligations, contingent or otherwise, of the Company or any of its subsidiaries to repurchase, redeem or otherwise acquire any shares of Company Common Stock or the capital stock of any subsidiary or to provide funds to or make any investment (in the form of a loan, capital contribution, guaranty or otherwise) in any such subsidiary or any other entity. Except as set forth in Sections 2.1 and 2.3 of the Company Disclosure Schedule, all of the outstanding shares of capital stock of each of the Company's subsidiaries are duly authorized, validly issued, fully paid and nonassessable, and all such shares are owned by the Company or another subsidiary of the Company free and clear of all security interests, liens, claims, pledges, agreements, limitations in voting rights, charges or other encumbrances of any nature whatsoever (collectively, "Liens"). Section 2.4 Authority Relative to this Agreement. The Company has all necessary corporate power and authority to execute and deliver this Agreement and, subject to the required approval of its stockholders, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action, and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions so contemplated (other than the adoption of this Agreement by the holders of at least a majority of the outstanding shares of Company Common Stock entitled to vote in accordance with the DGCL and the Company's Certificate of Incorporation and By-Laws). The Board of Directors of the Company has determined that it is advisable and in the best interest of the Company's stockholders for the Company to enter into a business combination with Parent upon the terms and subject to the conditions of this Agreement, and has recommended that the Company's stockholders approve and adopt this Agreement and the Merger. This Agreement has been duly and validly executed and delivered by the Company and, assuming the due authorization, execution and delivery by Parent and Merger Sub, as applicable, constitutes the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms. Section 2.5 No Conflict; Required Filings and Consents. (a) Section 2.5(a) of the Company Disclosure Schedule includes a list of (i) all loan agreements, indentures, mortgages, notes, pledges, conditional sale or title retention agreements, security agreements, equipment obligations, guaranties, standby letters of credit, equipment leases or lease purchase agreements to which the Company or any of its subsidiaries is a party or by which any of them is bound each in an amount equal to or exceeding $50,000, but excluding any such agreement between the Company and its wholly owned subsidiaries or between two or more wholly owned subsidiaries of the Company; and (ii) all contracts, agreements, commitments or other understandings or arrangements to which the Company or any of its subsidiaries is a party or by which any of them or any of their respective properties or assets are bound or affected, but excluding contracts, agreements, commitments or other understandings or arrangements entered into in the ordinary course of business and involving, in each case, payments or receipts by the Company or any of its subsidiaries of less than $50,000 in any single instance but not more than $250,000 in the aggregate; and (iii) all agreements which, as of the date hereof, are required to be filed as "material contracts" with the SEC pursuant to the requirements of the Securities Exchange Act of 1934, as amended, and the SEC's rules and regulations thereunder (the "Exchange Act"). (b) Except as disclosed in Section 2.5(b) of the Company Disclosure Schedule, (i) neither the Company nor any of its subsidiaries has breached, is in default under, or has received written notice of any breach of or default under, any of the agreements, contracts or other instruments referred to in clauses (i), (ii) or (iii) of Section 2.5(a), (ii) to the best knowledge of the Company, no other party to any of the agreements, contracts or other instruments referred to in clauses (i), (ii) or (iii) of Section 2.5 (a) has breached or is in default of any of 7 its obligations thereunder, and (iii) each of the agreements, contracts and other instruments referred to in clauses (i), (ii) or (iii) of Section 2.5(a) is in full force and effect, except in any such case for breaches, defaults or failures to be in full force and effect that would not have a Material Adverse Effect. (c) Except as set forth in Section 2.5(c) of the Company Disclosure Schedule, the execution and delivery of this Agreement by the Company does not, and, assuming that the conditions described in Sections 6.1(a), (b) and (c) are satisfied, the performance of this Agreement by the Company and the consummation of the transactions contemplated hereby will not, (i) conflict with or violate the Certificate of Incorporation or By-Laws of the Company, (ii) conflict with or violate any federal, foreign, state or provincial law, rule, regulation, order, judgment or decree (collectively, "Laws") applicable to the Company or any of its subsidiaries or by which its or any of their respective properties is bound or affected, or (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under or impair the Company's or any of its subsidiaries' rights or alter the rights or obligations of any third party under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a Lien on any of the properties or assets of the Company or any of its subsidiaries pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or its or any of their respective properties is bound or affected, except in any such case for any such conflicts, violations, breaches, defaults or other occurrences that would not have a Material Adverse Effect. (d) The execution and delivery of this Agreement by the Company does not, and the performance of this Agreement by the Company will not, require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority except (i) for applicable requirements, if any, of the Securities Act, the Exchange Act, state securities laws ("Blue Sky Laws"), the pre-merger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and the filing and recordation of appropriate merger or other documents as required by the DGCL, and (ii) where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not prevent or materially delay the Company from performing its obligations under this Agreement, or would not otherwise have a Material Adverse Effect. Section 2.6 Compliance, Permits. (a) Except as disclosed in Section 2.6(a) of the Company Disclosure Schedule, neither the Company nor any of its subsidiaries is in conflict with, or in default or violation of, (i) any Law applicable to the Company or any of its subsidiaries or by which its or any of their respective properties is bound or affected or (ii) any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or its or any of their respective properties is bound or affected, except for any such conflicts, defaults or violations which would not have a Material Adverse Effect. (b) The Company and its subsidiaries are in compliance with the terms of all Approvals from governmental authorities, except where the failure to so comply would not have a Material Adverse Effect. Section 2.7 SEC Filings; Financial Statements. (a) The Company has filed and has made available to Parent all forms, reports and documents required to be filed by the Company with the SEC since September 1, 1994 (collectively, the "Company SEC Reports"). Except as disclosed in Section 2.7 of the Company Disclosure Schedule, the Company SEC Reports (i) were prepared in all material respects in accordance with the requirements of the Securities Act or the Exchange Act, as the case may be, and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. None of the Company's subsidiaries is required to file any forms, reports or other documents with the SEC. 8 (b) Each of the consolidated financial statements (including, in each case, any related notes thereto) contained in the Company SEC Reports was prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto), and each fairly presents in all material respects the consolidated financial position of the Company and its subsidiaries as at the respective dates thereof and the consolidated results of its operations and cash flows and changes in stockholders' equity for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount and the addition of footnotes. Section 2.8 Absence of Certain Changes or Events. Except as set forth in Section 2.8 of the Company Disclosure Schedule or the Company SEC Reports filed with the SEC prior to the date hereof, since January 1, 1996, the Company has conducted its business in the ordinary course and there has not occurred: (a) any Material Adverse Effect; (b) any amendments or changes in the Certificate of Incorporation or By-laws of the Company; (c) any damage to, destruction or loss of any asset of the Company or any of its subsidiaries (whether or not covered by insurance) that would have a Material Adverse Effect; (d) any material change by the Company in its accounting methods, principles or practices; (e) any material revaluation by the Company of any of its assets, including, without limitation, writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business; (f) any other action or event that would have required the consent of Parent pursuant to Section 4.1 had such action or event occurred after the date of this Agreement; or (g) any sale of a material amount of assets of the Company or any of its subsidiaries, except in the ordinary course of business. Section 2.9 No Undisclosed Liabilities. Except as is disclosed in Section 2.9 of the Company Disclosure Schedule, neither the Company nor any of its subsidiaries has any liabilities (absolute, accrued, contingent or otherwise), except liabilities (a) in the aggregate adequately provided for in the Company's audited balance sheet (including any related notes thereto) for the fiscal year ended December 31, 1995 (the "1995 Company Balance Sheet") included in the Company's S-1 Registration Statement dated August 29, 1996, (b) incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected on the 1995 Company Balance Sheet, (c) incurred since December 31, 1995 in the ordinary course of business consistent with past practice, (d) incurred in connection with this Agreement, or (e) which would not have a Material Adverse Effect. Section 2.10 Absence of Litigation. Except as set forth in Section 2.10 of the Company Disclosure Schedule, there are no claims, actions, suits, proceedings or investigations pending or, to the knowledge of the Company, threatened against the Company or any of its subsidiaries, or any properties or rights of the Company or any of its subsidiaries, before any federal, foreign, state or provincial court, arbitrator or administrative, governmental or regulatory authority or body that would have a Material Adverse Effect. Section 2.11 Employee Benefit Plans, Employment Agreements. (a) Section 2.11 (a) of the Company Disclosure Schedule lists all employee pension plans (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), all material employee welfare plans (as defined in Section 3(1) of ERISA), and all other material bonus, stock option, stock purchase, incentive, deferred compensation, supplemental retirement, severance and other similar fringe or employee benefit plans, programs or arrangements, and any material current or former employment, executive compensation, consulting or severance agreements, written or otherwise, for the benefit of, or relating to, any employee of or consultant to the Company, any trade or business (whether or not incorporated) which is a member of a controlled group including the Company or which is under common control with the Company (an "ERISA Affiliate") within the meaning of Section 414 of the Code, or any subsidiary of the Company, as well as each plan with respect to which the Company or an ERISA Affiliate could incur liability under Section 4069 (if such plan has been or were terminated) or Section 4212(c) of ERISA (all such plans, practices and programs are referred to as the "Company Employee Plans"). There have been made available to Parent copies of (i) each such written Company Employee Plan (other than those referred to in Section 4(b)(4) of ERISA), (ii) the most 9 recent annual report on Form 5500 series, with accompanying schedules and attachments, filed with respect to each Company Employee Plan required to make such a filing, and (iii) the most recent actuarial valuation for each Company Employee Plan subject to Title IV of ERISA. For purposes of this Section 2.11 (a), the term "material," used with respect to any Company Employee Plan, shall mean that the Company or an ERISA Affiliate has incurred or may incur obligations in an annual amount exceeding $50,000 with respect to such Company Employee Plan. (b) (i) Except in each case as set forth in Section 2.11(b) of the Company Disclosure Schedule, none of the Company Employee Plans promises or provides retiree medical or other retiree welfare benefits to any person, and none of the Company Employee Plans is a "multiemployer plan" as such term is defined in Section 3(37) of ERISA; (ii) there has been no "prohibited transaction," as such term is defined in Section 406 of ERISA and Section 4975 of the Code, with respect to any Company Employee Plan, which could result in any material liability of the Company or any of its subsidiaries; (iii) all Company Employee Plans are in compliance in all material respects with the requirements prescribed by any and all Laws (including ERISA and the Code), currently in effect with respect thereto (including all applicable requirements for notification to participants or the Department of Labor, Pension Benefit Guaranty Corporation (the "PBGC"), Internal Revenue Service (the "IRS") or Secretary of the Treasury), and the Company and each of its subsidiaries have performed all material obligations required to be performed by them under, are not in any material respect in default under or violation of, and have no knowledge of any default or violation by any other party to, any of the Company Employee Plans; (iv) each Company Employee Plan intended to qualify under Section 401(a) of the Code and each trust intended to qualify under Section 501(a) of the Code is the subject of a favorable determination letter from the IRS, and nothing has occurred which may reasonably be expected to impair such determination; (v) all contributions required to be made to any Company Employee Plan pursuant to Section 412 of the Code, or the terms of the Company Employee Plan or any collective bargaining agreement, have been made on or before their due dates; (vi) with respect to each Company Employee Plan, no "reportable event" within the meaning of Section 4043 of ERISA (excluding any such event for which the 30 day notice requirement has been waived under the regulations to Section 4043 of ERISA) nor any event described in Section 4062, 4063 or 4041 of ERISA has occurred; and (vii) neither the Company nor any ERISA Affiliate has incurred, nor reasonably expects to incur, any liability under Title IV of ERISA (other than liability for premium payments to the PBGC arising in the ordinary course). (c) Section 2.11(c) of the Company Disclosure Schedule sets forth a true and complete list of each current or former employee, officer or director of the Company or any of its subsidiaries who holds (i) any option to purchase Company Common Stock as of the date hereof, together with the number of shares of Company Common Stock subject to such option, the option price of such option (to the extent determined as of the date hereof), whether such option is intended to qualify as an incentive stock option within the meaning of Section 422(b) of the Code (an "ISO"), and the expiration date of such option; (ii) any other right, directly or indirectly, to acquire Company Common Stock (other than the Warrants), together with the number of shares of Company Common Stock subject to such right. Section 2.11(c) of the Company Disclosure Schedule also sets forth the total number of such ISOs, such nonqualified options and such other rights. (d) Section 2.11(d) of the Company Disclosure Schedule sets forth a true and complete list of: (i) all employment agreements with officers of the Company or any of its subsidiaries; (ii) all agreements with consultants who are individuals obligating the Company or any of its subsidiaries to make annual cash payments in an amount exceeding $25,000; (iii) all employees of, or consultants to, the Company or any of its subsidiaries who have executed a non-competition agreement with the Company or any of its subsidiaries; (iv) all severance agreements, programs and policies of the Company or any of its subsidiaries with or relating to its employees, in each case with outstanding commitments exceeding $25,000, excluding programs and policies required to be maintained by law; and (v) all plans, programs, agreements and other arrangements of the Company or any of its subsidiaries with or relating to its employees which contain change in control provisions. Section 2.12 Labor Matters. Except as set forth in Section 2.12 of the Company Disclosure Schedule: (i) there are no claims or proceedings pending or, to the knowledge of the Company or any of its subsidiaries, 10 threatened, between the Company or any of its subsidiaries and any of their respective employees, asserting that the Company has committed an unfair labor practice which claims or proceedings have or would have a Material Adverse Effect; (ii) neither the Company nor any of its subsidiaries is a party to any collective bargaining agreement or other labor union contract applicable to persons employed by the Company or its subsidiaries, nor does the Company or any of its subsidiaries know of any activities or proceedings of any labor union to organize any such employees; and (iii) neither the Company nor any of its subsidiaries has any knowledge of any strikes, slowdowns, work stoppages, lockouts, or threats thereof, by or with respect to any employees of the Company or any of its subsidiaries. Section 2.13 Registration Statement, Proxy Statement/Prospectus. The information supplied by the Company for inclusion in the Registration Statement (as defined in Section 3.9) shall not at the time the Registration Statement is declared effective by the SEC contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The information supplied by the Company for inclusion in the proxy statement/prospectus (such proxy statement/prospectus as amended or supplemented is referred to herein as the "Proxy Statement/Prospectus") to be sent to the stockholders of the Company in connection with the meeting of the stockholders of the Company to consider the Merger (the "Stockholders Meeting"), will not, on the date the Proxy Statement/Prospectus (or any amendment thereof or supplement thereto) is first mailed to stockholders, at the time of the Stockholders Meetings, or at the Effective Time, contain any statement which, at such time and in light of the circumstances under which it shall be made, is false or misleading with respect to any material fact, or shall omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances in which they were made, not false or misleading, or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Stockholders Meeting which has become false or misleading. If at any time prior to the Effective Time any event relating to the Company or any of its respective affiliates, officers or directors should be discovered by the Company which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement/Prospectus, the Company shall promptly inform Parent and Merger Sub. Notwithstanding the foregoing, the Company makes no representation or warranty with respect to any information supplied by Parent or Merger Sub which is contained in any of the foregoing documents. Section 2.14 Restrictions on Business Activities. Except for this Agreement or as set forth in Section 2.14 of the Company Disclosure Schedule, to the best of the Company's knowledge, there is no agreement, judgement, injunction, order or decree binding upon the Company or any of its subsidiaries which has or would have the effect of prohibiting or impairing any business practice of the Company or any of its subsidiaries, acquisition of property by the Company or any of its subsidiaries or the conduct of business by the Company or any of its subsidiaries as currently conducted or as proposed to be conducted by the Company, except for any prohibition or impairment as would not have a Material Adverse Effect. Section 2.15 Title to Property. Except as set forth in Section 2.15 of the Company Disclosure Schedule, the Company and each of its subsidiaries have good and defensible title to all of their properties and assets, free and clear of all liens, charges and encumbrances, except liens for taxes not yet due and payable and such liens or other imperfections of title, which would not have a Material Adverse Effect; and, to the knowledge of the Company, all leases pursuant to which the Company or any of its subsidiaries lease from others material amounts of real or personal property, are in good standing, valid and effective in accordance with their respective terms, and there is not, to the knowledge of the Company, under any of such leases, any existing default or event of default (or event which with notice or lapse of time, or both, would constitute a default), except where the lack of such good standing, validity and effectiveness or the existence of such default or event of default would not have a Material Adverse Effect. Section 2.16 Taxes. (a) For purposes of this Agreement, "Tax" or "Taxes" shall mean taxes, fees, levies, duties, tariffs, imposts, and governmental impositions or charges of any kind in the nature of (or similar to) taxes, payable to 11 any federal, state, local or foreign taxing authority, including (without limitation) (i) income, franchise, profits, gross receipts, ad valorem, net worth, value added, sales, use, service, real or personal property, special assessments, capital stock, license, payroll, withholding, employment, social security, workers' compensation, unemployment compensation, utility, severance, production, excise, stamp, occupation, premiums, windfall profits, transfer and gains taxes, and (ii) interest, penalties, additional taxes and additions to tax imposed with respect thereto; and "Tax Returns" shall mean returns, reports, and information statements with respect to Taxes required to be filed with the IRS or any other federal, foreign, state or provincial taxing authority, domestic or foreign, including, without limitation, consolidated, combined and unitary tax returns. (b) Other than as disclosed in Section 2.16(b) of the Company Disclosure Schedule, (i) the Company and its subsidiaries have filed all Tax Returns required to be filed by them, (ii) the Company and its subsidiaries have paid and discharged all Taxes due in connection with or with respect to the periods or transactions covered by such Tax Returns and have paid all other Taxes as are due, except such as are being contested in good faith by appropriate proceedings (to the extent that any such proceedings are required) and with respect to which the Company is maintaining adequate reserves, and (iii) there are no other Taxes that would be due if asserted by a taxing authority, except with respect to which the Company is maintaining reserves to the extent currently required unless the failure to do so would not have a Material Adverse Effect. Except as does not involve or would not result in liability to the Company or any of its subsidiaries that would have a Material Adverse Effect: (i) there are no tax liens on any assets of the Company or any subsidiary thereof; and (ii) neither the Company nor any of its subsidiaries has granted any waiver of any statute of limitations with respect to, or any extension of a period for the assessment of, any Tax. The accruals and reserves for Taxes (including deferred taxes) reflected in the 1995 Company Balance Sheet are in all material respects adequate to cover all Taxes required to be accrued through the date thereof (including interest and penalties, if any, thereon and Taxes being contested) in accordance with generally accepted accounting principles. (c) Neither the Company nor any of its subsidiaries is, or has been, a United States real property holding corporation (as defined in Section 897(c)(2) of the Code) during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. To the best knowledge of the Company, neither the Company nor any of its subsidiaries owns any property of a character, the indirect transfer of which, pursuant to this Agreement, would give rise to any material documentary, stamp or other transfer tax. Section 2.17 Environmental Matters. Except as set forth in Section 2.17 of the Company Disclosure Schedule, and except in all cases as, in the aggregate, have not had and would not have a Material Adverse Effect, the Company and each of its subsidiaries: (i) have obtained all Approvals which are required to be obtained under all applicable federal, state, foreign or local laws or any regulation, code, plan, order, decree, judgment, notice or demand letter issued, entered, promulgated or approved thereunder relating to pollution or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, or hazardous or toxic materials or wastes into ambient air, surface water, ground water, or land or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants or hazardous or toxic materials or wastes by the Company or its subsidiaries or their respective agents ("Environmental Laws"); (ii) are in compliance with all terms and conditions of such required Approvals, and also are in compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in applicable Environmental Laws; (iii) as of the date hereof, are not aware of nor have received notice of any past or present violations of Environmental Laws or any event, condition, circumstance, activity, practice, incident, action or plan which is reasonably likely to interfere with or prevent continued compliance with or which would give rise to any common law or statutory liability, or otherwise form the basis of any claim, action, suit or proceeding, against the Company or any of its subsidiaries based on or resulting from the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling, or the emission, discharge or release into the environment, of any pollutant, contaminant or hazardous or toxic material or waste; and (iv) have taken all actions necessary under applicable Environmental Laws to register any products or materials required to be registered by the Company or its subsidiaries (or any of their respective agents) thereunder. 12 Section 2.18 Intellectual Property. (a) The Company, directly or indirectly, owns, or is licensed or otherwise possesses legally enforceable rights to use, all patents, trademarks, trade names, service marks, copyrights, and any applications therefor, technology, know-how, computer software programs or applications (in both source code and object code form), and tangible or intangible proprietary information or material that are material to the business of the Company and its subsidiaries as currently conducted or as proposed to be conducted by the Company or its subsidiaries (the "Company Intellectual Property Rights"). (b) Section 2.18(b) of the Company Disclosure Schedule sets forth a complete list of all patents, trademarks, registered copyrights, trade names and service marks, and any applications therefor, included in the Company Intellectual Property Rights. All registered trademarks, service marks and copyrights held by the Company are valid and subsisting. Section 2.19 Interested Party Transactions. Except as set forth in Section 2.19 of the Company Disclosure Schedule or in the Company SEC Reports filed with the SEC prior to the date hereof, no event has occurred that would be required to be reported as a Certain Relationship or Related Transaction, pursuant to Item 404 of Regulation S-K promulgated by the SEC. Section 2.20 Insurance. Section 2.20 of the Company Disclosure Schedule sets forth a complete list of all material fire and casualty, general liability, business interruption, product liability, professional liability and sprinkler and water damage insurance policies maintained by the Company or any of its subsidiaries. All such policies are with reputable insurance carriers, provide full and adequate coverage for all normal risks incident to the business of the Company and its subsidiaries and their respective properties and assets and are in character and amount at least equivalent to that carried by persons engaged in similar businesses and subject to the same or similar perils or hazards, except as would not have a Material Adverse Effect. Section 2.21 Accounts Receivable. The accounts receivable of the Company and its subsidiaries as reflected in the most recent financial statements contained in the Company SEC Reports, to the extent uncollected on the date hereof and the accounts receivable reflected on the books of the Company and its subsidiaries are valid and existing and represent monies due, and the Company has made reserves reasonably considered adequate for receivables not collectible in the ordinary course of business, and (subject to the aforesaid reserves) are subject to no refunds or other adjustments and to no defenses, rights of setoff, assignments, restrictions, encumbrances or conditions enforceable by third parties on or affecting any thereof, except for such refunds, adjustments, defenses, rights of setoff, assignments, restrictions, encumbrances or conditions as would not have a Material Adverse Effect. Section 2.22 Pooling Matters. Neither the Company nor any of its affiliates has, to the best of the Company's knowledge and based upon consultation with its independent accountants, taken or agreed to take any action that could affect the ability of Parent to account for the business combination to be effected by the Merger as a pooling of interests. The failure of this representation to be true and correct, shall, if the Merger is not able to be accounted for as a pooling of interests, constitute a breach of this Agreement by the Company for the purposes of Section 7.1(f). Section 2.23 Opinion of Financial Advisor. The Company has been advised by its financial advisor, Pacific Growth Equities, Inc., that in its opinion, as of the date hereof, the Exchange Ratio set forth herein is fair to the holders of Shares from a financial point of view. Section 2.24 Brokers. No broker, finder or investment banker (other than Pacific Growth Equities, Inc., the fees and expenses of whom will be paid by the Company) is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company or its subsidiaries. The Company has heretofore furnished to Parent a complete and correct copy of all agreements between the Company and Pacific Growth Equities, Inc. pursuant to which such firm would be entitled to any payment relating to the transactions contemplated hereunder. 13 Section 2.25 Section 203 of the DGCL Not Applicable. The Board of Directors of the Company has taken all actions so that the restrictions contained in Section 203 of the DGCL applicable to a "business combination" (as defined in Section 203) will not apply to the execution, delivery or performance of this Agreement or the respective Stockholders Agreements dated as of the date hereof between Parent and certain stockholders of the Company (collectively, the "Stockholders Agreements") or the consummation of the Merger or the other transactions contemplated by this Agreement or by the Stockholders Agreements. Section 2.26 Change in Control Payments. Except as set forth in Section 2.11(d) or Section 2.26 of the Company Disclosure Schedule, neither the Company nor any of its subsidiaries have any plans, programs or agreements to which they are parties, or to which they are subject, pursuant to which payments may be required or acceleration of benefits may be required upon a change of control of the Company. Section 2.27 Expenses. The Company has provided to Parent a good faith estimate and description of the expenses of the Company and its subsidiaries which the Company expects to incur, or has incurred, in connection with the transactions contemplated by this Agreement. Section 2.28 Healthcare Regulatory Compliance. (a) The relationships among the Company, its subsidiaries and third parties are in compliance with all applicable Laws and the rules of ethical conduct of applicable medical societies and accrediting bodies, except where the failure to be in compliance would not have a Material Adverse Effect. (b) To the best knowledge of the Company, the Company and its subsidiaries have not engaged knowingly and willfully in any activities which are prohibited under federal Medicare and Medicaid statutes, including, without limitation, 42 U.S.C. 1395 nn et seq., 42 U.S.C. (S) 1320a-7b et seq. and related state or local statutes or regulations or which otherwise constitutes fraud or false claims, including, without limitation, the following: (i) knowingly and willfully making or causing to be made a false statement or representation of a material fact in any application for any benefit or payment; (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; (iii) failing to disclose knowledge of the occurrence of any event affecting the initial or continued right to any benefit or payment on its behalf or on behalf of another, with intent to secure such benefit or payment fraudulently; and (iv) knowingly and willfully soliciting or receiving any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind or offering to pay such remuneration (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 (B) in return for purchasing, leasing, or ordering or arranging for or recommending purchasing, leasing or ordering any good, facility, service or item for which payment may be made in whole or in part by Medicare or Medicaid. ARTICLE III Representation and Warrants of Parent and Merger Sub Parent and Merger Sub hereby, jointly and severally, represent and warrant to the Company that, except as set forth in the written disclosure schedule delivered on or prior to the date hereof by Parent to the Company that is arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Article III and discloses the exception to the representation or warranty with reasonable particularity (the "Parent Disclosure Schedule"): Section 3.1 Organization and Qualification; Subsidiaries. Each of Parent and its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the requisite corporate power and authority and is in possession of all Approvals necessary to own, lease and operate the properties it purports to own, operate or lease and to carry on its business as it is now being conducted, except where the failure to be so organized, existing and in good standing or to have such 14 power, authority and Approvals would not have a Material Adverse Effect. Each of Parent and each of its subsidiaries is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its properties owned, leased or operated by it or the nature of its activities makes such qualification or licensing necessary, except for such failures to be so duly qualified or licensed and in good standing that would not have a Material Adverse Effect. A true and complete list as of the date hereof of all of Parent's subsidiaries, together with the jurisdiction of incorporation of each subsidiary and the percentage of each subsidiary's outstanding capital stock owned by Parent or another subsidiary, is set forth in Section 3.1 of the Parent Disclosure Schedule. Except as set forth in Section 3.1 of the Parent Disclosure Schedule as of the date hereof, Parent does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity, with respect to which Parent has invested or is required to invest $250,000 or more, excluding securities in any publicly traded Company held for investment by Parent and comprising less than five percent of the outstanding capital stock of such company. Section 3.2 Charter and By-Laws. Parent has heretofore furnished to the Company a complete and correct copy of the Certificates of Incorporation and By-Laws, as amended to date, of each of Parent and Merger Sub. Such Certificate of Incorporation and By-Laws are in full force and effect. Neither Parent nor Merger Sub is in violation of any of the provisions of its Certificate of Incorporation or By-Laws. Section 3.3 Capitalization. As of September 30, 1996, the authorized capital stock of Parent consisted of (i) 75,000,000 shares of Parent Common Stock, of which 21,029,705 shares were issued and outstanding, all of which are validly issued, fully paid and non-assessable, no shares were held in treasury, 2,579,709 shares were reserved for future issuance under Parent's stock plans and arrangements and 3,311,258 were reserved for issuance upon exercise of Parent's 5 1/4% Convertible Subordinated Notes due February 1, 2001 and (ii) 500,000 shares of preferred stock, $.01 par value per share, none of which was issued and outstanding and none of which was held in treasury. No material change in such capitalization has occurred between September 30, 1996 and the date hereof. Except as set forth in Section 3.3 of the Parent Disclosure Schedule, as of the date hereof there are no options, warrants or other rights, agreements, arrangements or commitments of any character relating to the issued or unissued capital stock of Parent or any of its subsidiaries or obligating Parent or any of its subsidiaries to issue or sell any shares of capital stock of, or other equity interests in, Parent or any of its subsidiaries. Except as set forth in Section 3.3 of the Parent Disclosure Schedule as of the date hereof, there are no obligations, contingent or otherwise, of Parent or any of its subsidiaries to repurchase, redeem or otherwise acquire any shares of Parent Common Stock or the capital stock of any subsidiary or to provide funds to or make any investment (in the form of a loan, capital contribution or otherwise) in any such subsidiary other than guarantees of bank obligations of subsidiaries entered into in the ordinary course of business. Except as set forth in Section 3.1 or 3.3 of the Parent Disclosure Schedule, all of the outstanding shares of capital stock of each of Parent's subsidiaries is duly authorized, validly issued, fully paid and nonassessable and all such shares are owned by Parent or another subsidiary of Parent free and clear of all security interests, liens, claims, pledges, agreements, limitations in Parent's voting rights, charges or other encumbrances of any nature whatsoever. Section 3.4 Authority Relative to this Agreement. Each of Parent and Merger Sub has all necessary corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by Parent and Merger Sub and the consummation by Parent and Merger Sub of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of Parent and Merger Sub, and no other corporate proceedings on the part of Parent or Merger Sub are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. The Board of Directors of Parent has determined that it is advisable and in the best interest of Parent's stockholders for Parent to enter into a business combination with the Company upon the terms and subject to the conditions of this Agreement. This Agreement has been duly and validly executed and delivered by Parent and Merger Sub and, assuming the due authorization, execution and delivery by the Company, constitutes a legal, valid and binding obligation of Parent and Merger Sub enforceable against each of them in accordance with its terms. 15 Section 3.5 No Conflict, Required Filings and Consents. (a) Section 3.5(a) of the Parent Disclosure Schedule includes a list as of the date hereof (or such other date specified in Section 3.5(a) of the Parent Disclosure Schedule) of: (i) all loan agreements, indentures, mortgages, notes, pledges, conditional sale or title retention agreements, security agreements, equipment obligations, guaranties, standby letters of credit, equipment leases or lease purchase agreements to which Parent or any of its subsidiaries is a party or by which any of them is bound, each in an amount equal to or exceeding $500,000, but excluding any such agreement between Parent and its wholly-owned subsidiaries or between two or more wholly-owned subsidiaries of Parent; (ii) all contracts, agreements, commitments or other understandings or arrangements to which Parent or any of its subsidiaries is a party or by which any of them or any of their respective property or assets are bound or affected, but excluding contracts, agreements, commitments or other understandings or arrangements entered into in the ordinary course of business and involving, in each case, payments or receipts by Parent or any of its subsidiaries of less than $1,000,000 in any single instance but not more than $2,000,000 in the aggregate; and (iii) all agreements which, as of the date hereof, are required to be filed with the SEC pursuant to the requirements of the Exchange Act as "material contracts." (b) Except as disclosed in Section 3.5(b) of the Parent Disclosure Schedule, (i) neither the Parent nor any of its subsidiaries has breached, is in default under, or has received written notice of any breach of or default under, any of the agreements, contracts or other instruments referred to in clauses (i), (ii) or (iii) of Section 3.5(a), (ii) to the best knowledge of Parent, no other party to any of the agreements, contracts or other instrument referred to in clauses (i), (ii) or (iii) of Section 3.5(a) has breached or is in default of any of its obligations thereunder, and (iii) each of the agreements, contracts and other instruments referred to in clauses (i), (ii) or (iii) of Section 3.5(a) is in full force and effect, except in any such case for breaches, defaults or failures to be in full force and effect that would not have a Material Adverse Effect. (c) Except as set forth in Section 3.5(c) of the Parent Disclosure Schedule, the execution and delivery of this Agreement by Parent and Merger Sub do not, and assuming that the conditions described in Sections 6.1(b) and (c) are satisfied, the performance of this Agreement by Parent and Merger Sub will not, (i) conflict with or violate the Certificate of Incorporation or By-Laws of Parent or Merger Sub, (ii) conflict with or violate any Law applicable to Parent or any of its subsidiaries or by which its or their respective properties are bound or affected, or (iii) result in any breach of or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or impair Parent's or any of its subsidiaries' rights or alter the rights or obligations of any third party under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a Lien on any of the properties or assets of Parent or any of its subsidiaries pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Parent or any of its subsidiaries is a party or by which Parent or any of its subsidiaries or its or any of their respective properties are bound or affected, except in any such case for any such conflicts, violations, breaches, defaults or other occurrences that would not have a Material Adverse Effect. (d) The execution and delivery of this Agreement by Parent and Merger Sub does not, and the performance of this Agreement by Parent and Merger Sub will not, require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, except (i) for applicable requirements, if any, of the Securities Act, the Exchange Act, the Blue Sky Laws, the pre-merger notification requirements of the HSR Act, and the filing and recordation of appropriate merger or other documents as required by the DGCL, and (ii) where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not prevent or materially delay Parent or Merger Sub from performing their respective obligations under this Agreement or would not otherwise have a Material Adverse Effect. Section 3.6 Compliance; Permits. (a) Except as disclosed in Section 3.6(a) of the Parent Disclosure Schedule, neither Parent nor any of its subsidiaries is in conflict with, or in default or violation of, (i) any law, rule, regulation, order, judgment or decree applicable to Parent or any of its subsidiaries or by which its or any of their respective properties is bound or 16 affected or (ii) any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Parent or any of its subsidiaries is a party or by which Parent or any of its subsidiaries or its or any of their respective properties is bound or affected, except for any such conflicts, defaults or violations which would not have a Material Adverse Effect. (b) Parent and its subsidiaries are in compliance with the terms of all Approvals from governmental authorities, except where the failure to so comply would not have a Material Adverse Effect. Section 3.7 SEC Filings; Financial Statements. (a) Parent has filed and has made available to the Company all forms, reports and documents required to be filed by Parent with the SEC since January 1, 1994 (collectively, the "Parent SEC Reports"). The Parent SEC Reports (i) were prepared in all material respects in accordance with the requirements of the Securities Act or the Exchange Act, as the case may be, and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. None of Parent's subsidiaries is required to file any forms, reports or other documents with the SEC. (b) Each of the consolidated financial statements (including, in each case, any related notes thereto) contained in the Parent SEC Reports has been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto) and each fairly presents in all material respects the consolidated financial position of Parent and its subsidiaries as at the respective dates thereof and the consolidated results of its operations and cash flows and changes in stockholders' equity for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount and the addition of footnotes. Section 3.8 Absence of Certain Changes or Events. Except as set forth in Section 3.8 of the Parent Disclosure Schedule or in the Parent SEC Reports filed with the SEC prior to the date hereof, since January 1, 1996, Parent has conducted its business in the ordinary course and there has not occurred: (i) any Material Adverse Effect; (ii) any amendments or changes in the Certificate of Incorporation or By-Laws of Parent; (iii) any damage to, destruction or loss of any assets of the Parent or any of its subsidiaries (whether or not covered by insurance) that would have a Material Adverse Effect; (iv) any material change by Parent in its accounting methods, principles or practices; (v) any material revaluation by Parent of any of its assets, including without limitation, writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business; (vi) any other action or event that would have required the consent of the Company pursuant to Section 4.3 had such action or event occurred after the date of this Agreement; or (vii) any sale of a material amount of assets of Parent or any of its subsidiaries except in the ordinary course of business. Section 3.9 Registration Statement; Proxy Statement/Prospectus. Subject to the accuracy of the representations of the Company in Section 2.13, the registration statement (the "Registration Statement") pursuant to which the Parent Common Stock to be issued in the Merger will be registered with the SEC shall not, at the time the Registration Statement (including any amendments or supplements thereto) is declared effective by the SEC, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements included therein not false or misleading. The information supplied by Parent for inclusion in the Proxy Statement/Prospectus will not, on the date the Proxy Statement/Prospectus is first mailed to stockholders, at the time of the Stockholders Meeting and at the Effective Time, contain any statement which, at such time and in light of the circumstances under which it shall be made, is false or misleading with respect to any material fact, or will omit to state any material fact necessary in order to make the statements therein not false or misleading; or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Stockholders Meeting which has become false or misleading. If at any time prior to the Effective Time any event relating to Parent, Merger Sub or any of their 17 respective affiliates, officers or directors should be discovered by Parent or Merger Sub which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement/Prospectus, Parent or Merger Sub will promptly inform the Company. Notwithstanding the foregoing, Parent and Merger Sub make no representation or warranty with respect to any information supplied by the Company which is contained in any of the foregoing documents. The Registration Statement and Proxy Statement/Prospectus shall comply in all material respects as to form and substance with the requirements of the Securities Act, the Exchange Act and the rules and regulations thereunder. Notwithstanding the foregoing, Parent makes no representation or warranty with respect to any information supplied by the Company which is contained in, or furnished in connection with the preparation of, the Registration Statement. Section 3.10 Pooling Matters. Neither Parent nor any of its affiliates has, to Parent's knowledge and based upon consultation with its independent accountants, taken or agreed to take any action that could affect the ability of Parent to account for the business combination to be effected by the Merger as a pooling of interests. The failure of this representation to be true and correct, shall, if the Merger is not able to be accounted for as a pooling of interests, constitute a breach of the Agreement by Parent for the purposes of Section 7.1(f). Section 3.11 No Undisclosed Liabilities. Except as is disclosed in Section 3.11 of the Parent Disclosure Schedule, neither Parent nor any of its subsidiaries has any liabilities (absolute, accrued, contingent or otherwise), except liabilities (a) in the aggregate adequately provided for in the Parent's audited balance sheet (including any related notes thereto) for the fiscal year ended December 31, 1995 (the "1995 Parent Balance Sheet") included in Parent's Annual Report on Form 10-K for the year ended December 31, 1995, (b) incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected on the 1995 Parent Balance Sheet, (c) incurred since December 31, 1995 in the ordinary course of business consistent with past practice, (d) incurred in connection with this Agreement, or (e) which would not have a Material Adverse Effect. Section 3.12 Absence of Litigation. Except as set forth in Section 3.12 of the Parent Disclosure Schedule, there are no claims, actions, suits, proceedings or investigations pending or, to the knowledge of the Parent, threatened against Parent or any of its subsidiaries, or any properties or rights of the Parent or any of its subsidiaries, before any federal, foreign, state or provincial court, arbitrator or administrative, governmental or regulatory authority or body that would have a Material Adverse Effect. Section 3.13 Ownership of Merger Sub; No Prior Activities. (a) Merger Sub was formed solely for the purpose of engaging in the transactions contemplated by this Agreement. (b) As of the date hereof and the Effective Time, except for obligations or liabilities incurred in connection with its incorporation or organization and the transactions contemplated by this Agreement and except for this Agreement and any other agreements or arrangements contemplated by this Agreement, Merger Sub has not and will not have incurred, directly or indirectly, through any subsidiary or affiliate, any obligations or liabilities or engaged in any business activities of any type or kind whatsoever or entered into any agreements or arrangements with any person. ARTICLE IV Conduct of Business Pending the Merger Section 4.1 Conduct of Business by the Company Pending the Merger. The Company covenants and agrees that, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, unless Parent shall otherwise agree in writing, the Company shall conduct its business and shall cause the businesses of its subsidiaries to be conducted only in, and the Company and its subsidiaries shall not take any action except in, the ordinary course of business and in a manner consistent 18 with prudent industry practice; and the Company shall use all reasonable commercial efforts to preserve substantially intact the business organization of the Company and its subsidiaries, to keep available the services of the present officers, employees and consultants of the Company and its subsidiaries and to preserve the present relationships of the Company and its subsidiaries with customers, suppliers and other persons with which the Company or any of its subsidiaries has significant business relations. By way of amplification and not limitation, except as contemplated by this Agreement, neither the Company nor any of its subsidiaries shall, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, directly or indirectly do, or propose to do, any of the following without the prior written consent of Parent: (a) amend or otherwise change the Certificate of Incorporation or By-Laws of the Company or any of its subsidiaries; (b) issue, sell, pledge, dispose of or encumber, or authorize the issuance, sale, pledge, disposition or encumbrance of, any shares of capital stock of any class, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of capital stock, or any other ownership interest (including, without limitation, any phantom interest) in the Company, any of its subsidiaries or affiliates (except for the issuance of shares of Company Common Stock issuable (i) pursuant to Stock Options which were granted under the Company Stock Option Plan and are outstanding on the date hereof, (ii) pursuant to options described in Section 1.6(c) of the Company Disclosure Schedule outstanding on the date hereof and (iii) pursuant to the Warrants). (c) sell, pledge, dispose of or encumber any assets of the Company or any of its subsidiaries (except for (i) sales of assets in the ordinary course of business and in a manner consistent with past practice, (ii) dispositions of obsolete or worthless assets, and (iii) sales of immaterial assets not in excess of $50,000 in the aggregate); (d) (i) declare, set aside, make or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of any of its capital stock, except that a wholly owned subsidiary of the Company may declare and pay a dividend to its parent, (ii) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or (iii) amend the terms or change the period of exercisability of, accelerate the vesting of, purchase, repurchase, redeem or otherwise acquire, or permit any subsidiary to purchase, repurchase, redeem or otherwise acquire, any of its securities or any securities of its subsidiaries, including, without limitation, shares of Company Common Stock or any option, warrant or right, directly or indirectly, to acquire shares of Company Common Stock, or propose to do any of the foregoing; (e) (i) acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof, except that the Company may (1) acquire complementary businesses or finance the acquisition by its affiliated physician groups of hospital medical service contracts in an amount not to exceed $1,000,000 in any single case and $2,750,000 in the aggregate, (2) with the prior written consent of Parent (which consent will not be unreasonably withheld or delayed) acquire the businesses described on Section 4.1(e) of the Company Disclosure Schedule and (3) finance the acquisition by its affiliated physician groups of the hospital medical service contracts described in Section 4.1(e) of the Company Disclosure Schedule not to exceed in the aggregate the amount previously specified in writing by the Company to Parent; (ii) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse or otherwise as an accommodation become responsible for, the obligations of any person or, except in the ordinary course of business consistent with past practice, make any loans or advances; (iii) enter into or amend any material contract or agreement, except that the Company may amend its existing $6,500,000 bank credit agreement to increase the amount of credit available thereunder to up to $25,000,000; (iv) authorize any capital expenditures or purchase of fixed assets which are, in the aggregate, in excess of $100,000 for the Company and its subsidiaries taken as a whole (except for purchases and leases of equipment not to exceed $1,000,000 in aggregate payments required for the development of new hyperbaric oxygen therapy and dialysis treatment facilities); or (v) enter into or amend any contract, agreement, commitment or arrangement to effect any of the matters prohibited by this Section 4.1(e); 19 (f) increase the compensation payable or to become payable to its officers or employees (except for increases in compensation of employees without employment agreements in amounts consistent with past practices), or grant any severance or termination pay to, or enter into any employment or severance agreement with any director, officer or other employee of the Company or any of its subsidiaries, or establish, adopt, enter into or amend any collective bargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any current or former directors, officers or employees, except, in each case, as may be required by law; (g) take any action to change accounting policies or procedures (including, without limitation, procedures with respect to revenue recognition, payments of accounts payable and collection of accounts receivable); (h) make any material tax election inconsistent with past practice or settle or compromise any material federal, state, local or foreign tax liability or agree to an extension of a statute of limitations; (i) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business and consistent with past practice of liabilities reflected or reserved against in the financial statements contained in the Company SEC Reports filed prior to the date of this Agreement or incurred in the ordinary course of business and consistent with past practice; or (j) take, or agree in writing or otherwise to take, any of the actions described in Sections 4.1 (a) through (i) above, or any action which would make any of the representations or warranties of the Company contained in this Agreement untrue or incorrect or prevent the Company from performing or cause the Company not to perform its covenants hereunder. Section 4.2 No Solicitation. (a) The Company shall not, directly or indirectly, through any officer, director, employee, representative or agent of the Company or any of its subsidiaries, (i) solicit, initiate or knowingly encourage the initiation of any inquiries or proposals regarding any merger, sale of substantial assets, sale of shares of capital stock (including without limitation by way of a tender offer) or similar transactions involving the Company or any subsidiaries of the Company other than the Merger (any of the foregoing inquiries or proposals being referred to herein as an "Acquisition Proposal"), (ii) engage in negotiations or discussions concerning, or provide any nonpublic information to any person relating to, any Acquisition Proposal or (iii) agree to, approve or recommend any Acquisition Proposal. Nothing contained in this Section 4.2(a) shall prevent the Board of Directors of the Company from considering, negotiating, approving and recommending to the stockholders of the Company a bona fide Acquisition Proposal not solicited in violation of this Agreement, provided the Board of Directors of the Company determines in good faith (upon advice of independent counsel) that it is required to do so in order to discharge properly its fiduciary duties. (b) The Company shall immediately notify Parent after receipt of any Acquisition Proposal, or any modification of or amendment to any Acquisition Proposal, or any request for nonpublic information relating to the Company or any of its subsidiaries in connection with an Acquisition Proposal or for access to the properties, books or records of the Company or any subsidiary by any person or entity that informs the Board of Directors of the Company or such subsidiary that it is considering making, or has made, an Acquisition Proposal. Such notice to Parent shall be made orally and in writing, and shall indicate whether the Company is providing or intends to provide the person making the Acquisition Proposal with access to information concerning the Company as provided in Section 4.2(c). (c) If the Board of Directors of the Company receives a request for material nonpublic information by a person who makes, or indicates that it is considering making, a bona fide Acquisition Proposal, and the Board of Directors determines in good faith and upon the advice of independent counsel that it is required to cause the Company to act as provided in this Section 4.2(c) in order to discharge properly the directors' fiduciary duties, 20 then, provided the person making the Acquisition Proposal has executed a confidentiality agreement substantially similar to the one then in effect between the Company and Parent, the Company may provide such person with access to information regarding the Company. (d) The Company shall immediately cease and cause to be terminated any existing discussions or negotiations with any persons (other than Parent and Merger Sub) conducted heretofore with respect to any of the foregoing. The Company agrees not to release any third party from the confidentiality provisions of any confidentiality agreement to which the Company is a party. (e) The Company shall ensure that the officers, directors and employees of the Company and its subsidiaries and any investment banker or other advisor or representative retained by the Company are aware of the restrictions described in this Section 4.2. Section 4.3 Conduct of Business by Parent Pending the Merger. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, Parent covenants and agrees that, unless the Company shall otherwise agree in writing, Parent shall conduct its business, and cause the businesses of its subsidiaries to be conducted, only in the ordinary course of business and in a manner consistent with past practices, other than actions taken by Parent or its subsidiaries in contemplation of the Merger, and shall not directly or indirectly do, or propose to do, any of the following without the prior written consent of the Company: (a) amend or otherwise change Parent's Certificate of Incorporation or By-Laws; (b) declare, set aside, make or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of any of its capital stock, except that a wholly owned subsidiary of Parent may declare and pay a dividend to its parent; or (c) take or agree in writing or otherwise to take any action which would make any of the representations or warranties of Parent contained in this Agreement untrue or incorrect or prevent Parent from performing or cause Parent not to perform its covenants hereunder. ARTICLE V Additional Agreements Section 5.1 HSR Act. As promptly as practicable after the date of the execution of this Agreement, the Company and Parent shall file notifications under and in accordance with the HSR Act in connection with the Merger and the transactions contemplated hereby and to respond as promptly as practicable to any inquiries received from the Federal Trade Commission (the "FTC") and the Antitrust Division of the Department of Justice (the "Antitrust Division") for additional information or documentation and to respond as promptly as practicable to all inquiries and requests received from any State Attorney General or other governmental authority in connection with antitrust matters. Section 5.2 Proxy Statement Prospectus; Registration Statement. As promptly as practicable after the execution of this Agreement, the Company and Parent shall prepare and file with the SEC preliminary proxy materials which shall constitute the Proxy Statement/Prospectus and the Registration Statement of the Parent with respect to the Parent Common Stock to be issued in connection with the Merger. As promptly as practicable after comments are received from the SEC thereon and after the furnishing by the Company and Parent of all information required to be contained therein, the Company and Parent shall file with the SEC a combined proxy and Registration Statement on Form S-4 (or on such other form as shall be appropriate) (the "S-4 Registration Statement") relating to the adoption of this Agreement and approval of the transactions contemplated hereby by the stockholders of the Company, and shall use all reasonable efforts to cause the Registration Statement to become effective, and to mail the Proxy Statement/Prospectus to the stockholders of the Company as soon thereafter as practicable. The Proxy Statement/Prospectus shall include the recommendation of the Board of Directors of the Company in favor of the Merger, subject to the last sentence of Section 5.3. 21 Section 5.3 Stockholders Meeting. The Company shall call and hold a Stockholders Meeting as promptly as practicable and in accordance with applicable laws for the purpose of voting upon the approval of the Merger, and the Company shall use its reasonable best efforts to hold the Stockholders Meeting as soon as practicable after the date on which the Registration Statement becomes effective. Unless otherwise required under the applicable fiduciary duties of the directors of the Company, as determined by such directors in good faith after consultation with and based upon the advice of independent counsel, the Company shall use all reasonable efforts to solicit from its stockholders proxies in favor of adoption of this Agreement and approval of the transactions contemplated hereby and shall take all other action necessary or advisable to secure the vote or consent of stockholders to obtain such approvals. Section 5.4 Access to Information; Confidentiality. Upon reasonable notice and subject to restrictions contained in confidentiality agreements to which such party is subject (from which such party shall use reasonable efforts to be released), the Company and Parent shall each (and shall cause each of their subsidiaries to) afford to the officers, employees, accountants, counsel and other representatives of the other, reasonable access, during the period to the Effective Time, to all its properties, books, contracts, commitments and records and, during such period, the Company and Parent each shall (and shall cause each of their subsidiaries to) furnish promptly to the other all information concerning its business, properties and personnel as such other party may reasonably request, and each shall make available to the other the appropriate individuals (including attorneys, accountants and other professionals) for discussion of the other's business, properties and personnel as either Parent or the Company may reasonably request. Each party shall keep such information confidential in accordance with the terms of the confidentiality letter dated September 13, 1996 as amended as of October 1, 1996 (the "Confidentiality Letter"), between Parent and the Company. Section 5.5 Consents; Approvals. The Company and Parent shall each use all reasonable efforts to obtain all consents, waivers, approvals, authorizations or orders (including, without limitation, all United States and foreign governmental and regulatory rulings and approvals), and the Company and Parent shall make all filings (including, without limitation, all filings with United States and foreign governmental or regulatory agencies) required in connection with the authorization, execution and delivery of this Agreement by the Company and Parent and the consummation by them of the transactions contemplated hereby, in each case as promptly as practicable. The Company and Parent shall furnish promptly all information required to be included in the Proxy Statement/Prospectus and the Registration Statement, or for any application or other filing to be made pursuant to the rules and regulations of any United States or foreign governmental body in connection with the transactions contemplated by this Agreement. Section 5.6 Agreements with Respect to Affiliates. Each of Parent and the Company shall deliver to the other, prior to the date the Registration Statement becomes effective under the Securities Act, a letter (the "Affiliate Letters") identifying all persons who are "affiliates" of the Parent or the Company, respectively, for purposes of Rule 145 under the Securities Act ("Rule 145"). Each of Parent and the Company shall use its reasonable best efforts to cause each person who is identified as an "affiliate" in its Affiliate Letter to deliver, prior to the Effective Time, a written agreement (an "Affiliate Agreement") in connection with restrictions on affiliates under Rule 145 and pooling of interests accounting treatment, in substantially the form of Exhibit 5.6. Section 5.7 Indemnification and Insurance. (a) The Certificate of Incorporation and By-Laws of the Surviving Corporation shall contain the provisions with respect to indemnification set forth in the Certificate of Incorporation and By-Laws of the Company, respectively, which provisions shall not be amended, repealed or otherwise modified for a period of five years from the Effective Time in any manner that would adversely affect the rights thereunder of individuals who at any time prior to the Effective Time were directors, officers, employees or agents of the Company, unless such modification is required by law. (b) The Company shall, to the fullest extent permitted under applicable law or under the Company's Certificate of Incorporation or By-Laws and regardless of whether the Merger becomes effective, indemnify and 22 hold harmless, and, after the Effective Time, Parent and the Surviving Corporation shall, to the fullest extent permitted under applicable law or under the Surviving Corporation's Certificate of Incorporation or By-Laws, indemnify and hold harmless, each present and former director, officer or employee of the Company or any of its subsidiaries (collectively, the "Indemnified Parties") against any costs or expenses (including attorneys' fees), judgments, fines, losses, claims, damages, liabilities and amounts paid in settlement in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, (x) arising out of or pertaining to the transactions contemplated by this Agreement or (y) otherwise with respect to any acts or omissions occurring at or prior to the Effective Time, to the same extent as provided in the Company's Certificate of Incorporation or By-Laws or any applicable contract or agreement as in effect on the date hereof, in each case for a period of five years after the date hereof. In the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Effective Time), (i) any counsel retained by the Indemnified Parties for any period after the Effective Time shall be reasonably satisfactory to the Surviving Corporation, (ii) after the Effective Time, Parent or the Surviving Corporation shall pay the reasonable fees and expenses of such counsel, promptly after statements therefor are received, and (iii) Parent and the Surviving Corporation will cooperate in the defense of any such matter; provided, however, that neither Parent nor the Surviving Corporation shall be liable for any settlement effected without its written consent (which consent shall not be unreasonably withheld); and provided, further, that, in the event that any claim or claims for indemnification are asserted or made within such five-year period, all rights to indemnification in respect of any such claim or claims shall continue until the disposition of any and all such claims. The Indemnified Parties as a group may retain only one law firm to represent them with respect to any single action unless there is, under applicable standards of professional conduct, a conflict on any significant issue between the positions of any two or more Indemnified Parties. (c) Parent and the Surviving Corporation shall honor and fulfill in all respects the obligations of the Company pursuant to indemnification agreements with the Company's directors and officers existing at or before the Effective Time. (d) For a period of three years after the Effective Time, Parent shall cause the Surviving Corporation to maintain in effect, if available, directors' and officers' liability insurance covering those persons who are currently covered by the Company's directors' and officers' liability insurance policy (a copy of which has been made available to Parent) on terms comparable to those now applicable to directors and officers of the Company; provided, however, that in no event shall Parent or the Surviving Corporation be required to expend in excess of 150% of the annual premium currently paid by the Company for such coverage; and provided further, that if the annual premium would exceed such amount, Parent shall cause the Surviving Corporation to obtain a policy with the maximum coverage available at a cost not exceeding such amount. (e) This Section shall survive the consummation of the Merger at the Effective Time, is intended to benefit the Company, the Surviving Corporation and the Indemnified Parties, shall be binding, jointly and severally, on all successors and assigns of Parent and the Surviving Corporation and shall be enforceable by the Indemnified Parties. Section 5.8 Notification of Certain Matters. The Company shall give prompt notice to Parent, and Parent shall give prompt notice to the Company, of (i) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of which would be likely to cause any representation or warranty contained in this Agreement to become materially untrue or inaccurate, or (ii) any failure of the Company, Parent or Merger Sub, as the case may be, materially to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice; and provided further that failure to give such notice shall not be treated as a breach of covenant for the purposes of Sections 6.2(a) or 6.3(a) unless the failure to give such notice results in material prejudice to the other party. Section 5.9 Further Action/Tax Treatment. Upon the terms and subject to the conditions hereof each of the parties hereto shall use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause 23 to be done, all other things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement, to obtain in a timely manner all necessary waivers, consents and approvals and to effect all necessary registrations and filings, and otherwise to satisfy or cause to be satisfied all conditions precedent to its obligations under this Agreement. The foregoing covenant shall not include any obligation by Parent to agree to divest, abandon, license or take similar action with respect to any assets (tangible or intangible) of Parent or the Company. Each of Parent, Merger Sub and the Company shall use its best efforts to cause the Merger to qualify, and will not (both before and after consummation of the Merger) take any actions which to its knowledge could reasonably be expected to prevent the Merger from qualifying, as a reorganization under the provisions of Section 368 of the Code. Section 5.10 Public Announcements. Parent and the Company shall consult with each other before issuing any press release with respect to the Merger or this Agreement and shall not issue any such press release or make any such public statement without the prior consent of the other party, which shall not be unreasonably withheld; provided, however, that a party may, without the prior consent of the other party, issue such press release or make such public statement as may upon the advice of counsel be required by law or the rules and regulations of the New York Stock Exchange ("NYSE") or Nasdaq National Market System ("Nasdaq"), if it has used all reasonable efforts to consult with the other party prior thereto. Section 5.11 Conveyance Taxes. Parent and the Company shall cooperate in the preparation, execution and filing of all returns, questionnaires, applications, or other documents regarding any real property transfer or gains, sales, use, transfer, value added, stock transfer and stamp taxes, any transfer, recording, registration and other fees, and any similar taxes which become payable in connection with the transactions contemplated hereby that are required or permitted to be filed at or before the Effective Time. Section 5.12 Accountants' Letters. Upon reasonable notice from the other, the Company and Parent shall use their respective best efforts to cause KPMG Peat Marwick LLP to deliver to Parent and the Company a letter, dated within 2 business days of the Effective Date of the S-4 Registration Statement covering such matters as are requested by Parent or the Company, as the case may be, and as are customarily addressed in accountant's "comfort" letters. Section 5.13 Pooling Accounting Treatment. Each of Parent and the Company agrees not to take any action that to its knowledge could reasonably be expected to adversely affect the ability of Parent to treat the Merger as a pooling of interests, and each of Parent and the Company agrees to take such action as may be reasonably required to negate the impact of any past actions which to its knowledge could reasonably be expected to adversely impact the ability of Parent to treat the Merger as a pooling of interests. The taking by Parent or the Company of any action prohibited by the previous sentence, or the failure of Parent or the Company to take any action required by the previous sentence, shall, if the Merger is not able to be accounted for as a pooling of interests, constitute a breach of this Agreement by Parent or the Company, as the case may be, for the purposes of Section 7.1(f). Section 5.14 Nasdaq Listing. The Company shall use its best efforts to continue the quotation of the Company Common Stock on the Nasdaq National Market during the term of this Agreement. Section 5.15 Listing of Parent Shares. Parent shall use its best efforts to cause the Parent Shares to be issued in the Merger to be approved for listing, upon official notice of issuance, on the NYSE. ARTICLE VI Conditions to the Merger Section 6.1 Conditions to Obligation of Each Party to Effect the Merger. The respective obligations of each party to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions: 24 (a) Effectiveness of the Registration Statement. The Registration Statement shall have been declared effective by the SEC under the Securities Act. No stop order suspending the effectiveness of the Registration Statement shall have been issued by the SEC and no proceedings for that purpose and no similar proceeding in respect of the Joint Proxy Statement/Prospectus shall have been initiated by the SEC; (b) Stockholder Approval. This Agreement and the Merger shall have been approved and adopted by the requisite vote of the stockholders of the Company; (c) HSR Act. The waiting period applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated; (d) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger shall be in effect, nor shall any proceeding brought by any administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking any of the foregoing be pending; and there shall not be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger, which makes the consummation of the Merger illegal; and (e) Governmental Actions. There shall not have been instituted, pending or overtly threatened any action or proceeding having a reasonable possibility of success by any governmental authority or administrative agency before any governmental authority, administrative agency or court of competent jurisdiction, nor shall there be in effect any judgment, decree or order of any governmental authority, administrative agency or court of competent jurisdiction, in either case, seeking to prohibit or limit Parent from exercising all material rights and privileges pertaining to its ownership of the Surviving Corporation or the ownership or operation by Parent or any of its subsidiaries of all or a material portion of the business or assets of Parent or any of its subsidiaries, or seeking to compel Parent or any of its subsidiaries to dispose of or hold separate all or any material portion of the business or assets of Parent or any of its subsidiaries (including the Surviving Corporation and its subsidiaries), as a result of the Merger or the transactions contemplated by this Agreement. Section 6.2 Additional Conditions to Obligations of Parent and Merger Sub. The obligations of Parent and Merger Sub to effect the Merger are also subject to the following conditions: (a) Representations and Warranties. The representations and warranties of the Company contained in this Agreement shall be true and correct in all respects at and as of the Effective Time as if made at and as of such time, except for (i) changes contemplated by this Agreement, (ii) those representations and warranties which address matters only as of a particular date (which shall have been true and correct as of such date, subject to clause (iii)), and (iii) where the failure to be true and correct would not have a Material Adverse Effect, with the same force and effect as if made at and as of the Effective Time, and Parent and Merger Sub shall have received a certificate to such effect signed by the President and the Chief Financial Officer of the Company; (b) Agreements and Covenants. The Company shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it at or prior to the Effective Time, and Parent and Merger Sub shall have received a certificate to such effect signed by the President and the Chief Financial Officer of the Company; (c) Consents Obtained. All consents, waivers, approvals, permits, licenses, authorizations or orders required to be obtained, and all filings required to be made, by the Company for the due authorization, execution and delivery of this Agreement and the consummation by it of the transactions contemplated hereby shall have been obtained and made by the Company, except where the failure to receive such consents, etc. would not (i) have a Material Adverse Effect on the Company or Parent, or (ii) materially delay or prevent the consummation of the Merger; (d) Opinion of Counsel. Parent shall have received a written opinion from Ropes & Gray, in form and substance reasonably satisfactory to Parent, to the effect that the Merger will constitute a reorganization within the meaning of Section 368 of the Code; 25 (e) Opinion of Accountant. Parent shall have received an opinion (the fees and expenses of which shall be borne by Parent) of KPMG Peat Marwick LLP, independent certified public accountants, to the effect that the Merger qualifies for pooling of interests accounting treatment if consummated in accordance with this Agreement; (f) Affiliate Agreements. Parent shall have received from each person who is identified in the Affiliate Letter as an "affiliate" of the Company, an Affiliate Agreement, and such Affiliate Agreement shall be in full force and effect. (g) Stockholders Agreement. The Stockholders Agreement shall be in full force and effective at and as of the Effective Time; and (h) Employment Agreements. Each of Russell D. Schneider, Ruben A. Perez, Daniel A. Perez and David Perez shall have executed and delivered to the Company and Parent an Employment Agreement in the form of Exhibit A providing for such salaries and severance benefits and specifying the number of Parent Shares that will be owned by each such person, as are specified for such person in Schedule 6.2(h), and each of William H. Rice and Victor R. Miranda shall have executed and delivered to the Company and Parent an Employment Agreement in the form of Exhibit B providing for such salaries and severance benefits and specify the number of Parent Shares that will be subject to options held by such person as are specified for such person in Schedule 6.2(h), and all such Employment Agreements shall be in full force and effect. Section 6.3 Additional Conditions to Obligation of the Company. The obligation of the Company to effect the Merger is also subject to the following conditions: (a) Representations and Warranties. The representations and warranties of Parent and Merger Sub contained in this Agreement shall be true and correct in all respects on and as of the Effective Time, except for (i) changes contemplated by this Agreement, (ii) those representations and warranties which address matters only as of a particular date (which shall have been true and correct as of such date, subject to clause (iii)), and (iii) where the failure to be true and correct would not have a Material Adverse Effect, with the same force and effect as if made on and as of the Effective Time, and the Company shall have received a certificate to such effect signed by the President and the Chief Financial Officer of Parent; (b) Agreements and Covenants. Parent and Merger Sub shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by them on or prior to the Effective Time, and the Company shall have received a certificate to such effect signed by the President and the Chief Financial Officer of Parent; (c) Consents Obtained. All consents, waivers, approvals, permits, licenses, authorizations or orders required to be obtained, and all filings required to be made, by Parent and Merger Sub for the authorization, execution and delivery of this Agreement and the consummation by them of the transactions contemplated hereby shall have been obtained and made by Parent and Merger Sub, except where the failure to receive such consents, etc. would not have a Material Adverse Effect on the Company or Parent; (d) Tax Opinions. The Company shall have received a written opinion of KPMG Peat Marwick LLP, in form and substance reasonably satisfactory to the Company, to the effect that the Merger will constitute a reorganization within the meaning of Section 368 of the Code; (e) Opinion of Accountant. The Company shall have received a copy of the opinions referred to in Section 6.2(e) above; (f) NYSE. The Parent Shares to be issued in the Merger shall have been approved, upon official notice of issuance, for listing on the NYSE; (g) Affiliate Agreements. Parent shall have received from each person who is identified in the Affiliate Letter as an "affiliate" of Parent, an Affiliate Agreement, and such Affiliate Agreement shall be in full force and effect; and (h) Parent Board Seat. Parent shall have taken all actions necessary to nominate and elect Russell D. Schneider as a member of its Board of Directors. 26 ARTICLE VII Termination Section 7.1 Termination. This Agreement may be terminated at any time prior to the Effective Time, notwithstanding approval thereof by the stockholders of the Company: (a) by mutual written consent duly authorized by the Boards of Directors of Parent and the Company; or (b) by either Parent or the Company if the Merger shall not have been consummated by March 31, 1997 (provided that the right to terminate this Agreement under this Section 7.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of or resulted in the failure of the Merger to occur on or before such date); or (c) by either Parent or the Company if a court of competent jurisdiction or governmental, regulatory or administrative agency or commission shall have issued a nonappealable final order, decree or ruling or taken any other action having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger (provided that the right to terminate this Agreement under this Section 7.1(c) shall not be available to any party who has not complied with any obligation under this Agreement and such noncompliance materially contributed to the issuance of any such order, decree or ruling or the taking of such action); or (d) by Parent, if the requisite vote of the stockholders of the Company shall not have been obtained by March 31, 1997; or (e) by Parent or the Company, if: (i) the Board of Directors of the Company shall withdraw, modify or change its approval or recommendation of this Agreement or the Merger in a manner adverse to Parent or shall have resolved to do so in accordance with Section 5.3 hereof; (ii) after the receipt by the Company of an Acquisition Proposal, Parent requests in writing that the Board of Directors of the Company reconfirm its recommendation of this Agreement and the Merger and the Board of Directors of the Company fails to do so within 10 business days; (iii) the Board of Directors of the Company shall have recommended to the stockholders of the Company an Alternative Transaction (as defined below); or (iv) a tender offer or exchange offer for 25% or more of the outstanding shares of Company Common Stock is commenced (other than by Parent or an affiliate of Parent) and the Board of Directors of the Company recommends that the stockholders of the Company tender their shares in such tender or exchange offer; provided, that, the Company shall not be entitled to exercise any termination rights under this Section 7.1(e) unless (x) any action of the Board of Directors of the Company referred to in either such clause is required to be taken by the Board of Directors in order to properly discharge its fiduciary duties and (y) the Company has complied with its obligations in Section 4.2; or (f) by Parent or the Company, (i) if any representation or warranty of the Company or Parent, respectively, set forth in this Agreement shall be untrue when made, or (ii) upon a breach of any covenant or agreement on the part of the Company or Parent, respectively, set forth in this Agreement and, in the case of any such breach that is curable, if such breach shall not have been cured within 10 days after the nonbreaching party gives the breaching written notice of such breach, in each case such that the conditions set forth in Section 6.2(a) or 6.2(b), or Section 6.3(a) or 6.3(b), as the case may be, would not be satisfied (either (i) or (ii) above being a "Terminating Breach"), provided, that, if such Terminating Breach is curable prior to March 31, 1997 by the Company or Parent, as the case may be, through the exercise of its reasonable best efforts and for so long as the Company or Parent, as the case may be, continues to exercise such reasonable best efforts, neither Parent nor the Company, respectively, may terminate this Agreement under this Section 7.1(f); or (g) by Parent, if any representation or warranty of the Company shall have become untrue such that the condition set forth in Section 6.2(a) would not be satisfied, or by the Company, if any representation or warranty of Parent shall have become untrue such that the condition set forth in Section 6.3(a) would not be satisfied, in either case other than by reason of a Terminating Breach. 27 As used herein, "Alternative Transaction" means any of (i) a transaction pursuant to which any person (or group of persons) other than Parent or its affiliates (a "Third Party") acquires or would acquire more than 25% of the outstanding Shares, whether from the Company or pursuant to a tender offer or exchange offer or otherwise, (ii) a merger or other business combination involving the Company pursuant to which any Third Party acquires more than 25% of the outstanding equity securities of the Company or the entity surviving such merger or business combination, or (iii) any other transaction pursuant to which any Third Party acquires or would acquire control of assets (including for this purpose the outstanding equity securities of subsidiaries of the Company, and the entity surviving any merger or business combination including any of them) of the Company or any of its subsidiaries having a fair market value (as determined by the Board of Directors of the Company in good faith) equal to more than 25% of the fair market value of all the assets of the Company and its subsidiaries, taken as a whole, immediately prior to such transaction. Section 7.2 Effect of Termination. In the event of the termination of this Agreement pursuant to Section 7.1, this Agreement shall forthwith become void and there shall be no liability on the part of any party hereto or any of its affiliates, directors, officers or stockholders except (i) as set forth in Section 7.3 and Section 8.1 hereof, and (ii) nothing herein shall relieve any party from liability for any breach hereof. Section 7.3 Fees and Expenses. (a) Except as set forth in this Section 7.3, all fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses, whether or not the Merger is consummated. (b) The Company shall pay Parent a fee of $4,500,000 (the "Company Fee"), plus actual, documented and reasonable out-of-pocket expenses of Parent (not to exceed $500,000 in the aggregate) relating to the transactions contemplated by this Agreement (including, but not limited to, fees and expenses of Parent's counsel, accountants and financial advisers), upon the first to occur of the following events: (i) the termination of this Agreement by Parent pursuant to Section 7.1(d) if a proposal for an Alternative Transaction shall have been made prior to the Stockholders Meeting; or (ii) the termination of this Agreement by Parent or the Company pursuant to Section 7.1(e); or (iii) the termination of this Agreement by Parent pursuant to Section 7.1(f) on account of a Terminating Breach by the Company. (c) Parent shall pay the Company a fee of $4,500,000 (the "Parent Fee"), plus actual, documented and reasonable out-of-pocket expenses of the Company (not to exceed $500,000 in the aggregate) relating to the transactions contemplated by this Agreement (including, but not limited to, fees and expenses of the Company's counsel, accountants and financial advisers) if the Company terminates this Agreement pursuant to Section 7.1(f) on account of a Terminating Breach by Parent. (d) The Company Fee and related expenses payable pursuant to Section 7.3(b) and the Parent Fee and related expenses payable pursuant to Section 7.3(c), as the case may be, shall be paid within one business day after the first to occur of any of the events described in Sections 7.3(b)(i), (ii) or (iii) or 7.3(c); provided, that, in no event shall the Company or Parent be required to pay such Fee and expenses to the other if, immediately prior to the termination of this Agreement, the party that was otherwise entitled to such Fee was in material breach of its obligations under this Agreement. ARTICLE VIII General Provisions Section 8.1 Effectiveness of Representations, Warranties and Agreements; Knowledge, Etc. (a) Except as otherwise provided in this Section 8.1, the representations, warranties and agreements of each party hereto shall remain operative and in full force and effect regardless of any investigation made by or on 28 behalf of any other party hereto, any person controlling any such party or any of their officers or directors, whether prior to or after the execution of this Agreement. The representations, warranties and agreements in this Agreement shall terminate at the Effective Time or upon the termination of this Agreement pursuant to Section 7.1, as the case may be, except that the agreements set forth in Article I and Section 5.7 shall survive the Effective Time indefinitely and those set forth in Section 7.3 shall survive such termination indefinitely. The Confidentiality Letter shall survive termination of this Agreement as provided therein. (b) Any disclosure made with reference to one or more sections of the Company Disclosure Schedule or the Parent Disclosure Schedule shall be deemed disclosed only with respect to such section. Section 8.2 Notices. All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed to have been duly given or made if and when delivered personally or by overnight courier to the parties at the following addresses or sent by electronic transmission, with confirmation received, to the telecopy numbers specified below (or at such other address or telecopy number for a party as shall be specified by like notice): (a) If to Parent or Merger Sub: American Medical Response, Inc. 2821 S. Parker Road, 10th Floor Aurora, Colorado 80014 Telecopier No.: (303) 614-8549 Telephone No.: (303) 614-8500 Attention: General Counsel With a copy to: Ann L. Milner, Esq. Ropes & Gray One International Place Boston, MA 02110 Telecopier No.: (617) 951-7050 Telephone No.: (617) 951-7000 (b) If to the Company: 12450 Greenspoint Drive, Suite 1200 Houston, Texas 77060 Attention: President Telecopier No.: (713) 876-2999 Telephone No.: (713) 872-6900 Attention: Chairman With a copy to: Carmelo M. Gordian, Esq. Brobeck, Phleger & Harrison LLP 301 Congress Avenue, Suite 1200 Austin, TX 78701 Telecopier No.: (512) 477-5813 Telephone No.: (512) 477-5495 Section 8.3 Certain Definitions. For purposes of this Agreement, the term: (a) "affiliates" means a person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the first mentioned person; including, without 29 limitation, any partnership or joint venture in which the first mentioned person (either alone, or through or together with any other subsidiary) has, directly or indirectly, an interest of 10% or more; (b) "beneficial owner" with respect to any shares of Company Common Stock means a person who shall be deemed to be the beneficial owner of such shares (i) which such person or any of its affiliates or associates (as such term is defined in Rule 12b-2 of the Exchange Act) beneficially owns, directly or indirectly, (ii) which such person or any of its affiliates orassociates has, directly or indirectly, (A) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (B) the right to vote pursuant to any agreement, arrangement or understanding, or (iii) which are beneficially owned, directly or indirectly, by any other persons with whom such person or any of its affiliates or associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares; (c) "business day" means any day other than a day on which banks in the State of Colorado and the State of Texas are required or authorized to be closed; (d) "control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of stock, as trustee or executor, by contract or credit arrangement or otherwise; (e) "generally accepted accounting principles" shall mean United States generally accepted accounting principles. (f) "person" means an individual, corporation, partnership, association, trust, unincorporated organization, other entity or group (as defined in Section 13(d)(3) of the Exchange Act); and (g) "subsidiary" or "subsidiaries" of the Company, Parent or any other person means any corporation, partnership, joint venture or other legal entity of which the Company, the Surviving Corporation, Parent or such other person, as the case may be (either alone or through or together with any other subsidiary), owns, directly or indirectly, more than 50% of the stock or other equity interests the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity. Section 8.4 Amendment. This Agreement may be amended by the parties hereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; provided, however, that, after approval of the Merger by the stockholders of the Company, no amendment may be made which by law requires further approval by such stockholders without such further approval. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. Section 8.5 Waiver. At any time prior to the Effective Time, any party hereto may with respect to any other party hereto (a) extend the time for the performance of any of the obligations or other acts, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto, or (c) waive compliance with any of the agreements or conditions contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party or parties to be bound thereby. Section 8.6 Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 8.7 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good 30 faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the fullest extent possible. Section 8.8 Entire Agreement. This Agreement constitutes the entire agreement and supersedes all prior agreements and undertakings (other than the Confidentiality Letters), both written and oral, among the parties, or any of them, with respect to the subject matter hereof. Section 8.9 Assignment; Guarantee of Merger Sub Obligations. This Agreement shall not be assigned by operation of law or otherwise, except that Parent and Merger Sub may assign all or any of their rights hereunder to any affiliate thereof provided that no such assignment shall relieve the assigning party of its obligations hereunder. Parent guarantees the full and punctual performance by Merger Sub of all the obligations hereunder of Merger Sub or any such assignees. Section 8.10 Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement, including, without limitation, by way of subrogation, other than Section 5.6 (which is intended to be for the benefit of the Indemnified Parties and may be enforced by such Indemnified Parties). Section 8.11 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available; provided, however, that if this Agreement shall be terminated in accordance with Sections 7.1(d), (e) or (f) by Parent, then the Company Fee and related expenses provided for in Section 7.3 shall be deemed liquidated damages to Parent for the loss of its bargain hereunder, and shall be Parent's sole and exclusive remedy in the event of termination of this Agreement by the Parent pursuant to Sections 7.1(d), (e) or (f); and provided further, that if this Agreement is terminated in accordance with Section 7.1(f) by the Company, then the Parent Fee and related expenses provided for in Section 7.3 shall be deemed liquidated damages to the Company for the loss of its bargain hereunder, and shall be the Company's sole and exclusive remedy in the event of termination of this Agreement by the Company pursuant to Section 7.1(f). Section 8.12 Governing Law. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Delaware applicable to contracts executed and fully performed within the State of Delaware. Section 8.13 Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. [This space intentionally left blank.] 31 IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. AMERICAN MEDICAL RESPONSE, INC. /s/ Paul T. Shirley By: _________________________________ Name: Paul T. Shirley Title: President SHI ACQUISITION CORP. /s/ Paul T. Shirley By: _________________________________ Name: Paul T. Shirley Title: President STAT HEALTHCARE, INC. /s/ Russell D. Schneider By: _________________________________ Name: Russell D. Schneider Title: Chief Executive Officer 32 ANNEX B [LETTERHEAD OF PACIFIC GROWTH EQUITIES, INC.] October 7, 1996 Board of Directors STAT Healthcare, Inc. 12450 Greenspoint Drive, Suite 1200 Houston, Texas 77060 Ladies and Gentlemen: STAT Healthcare, Inc. (the "Company") proposes to enter into an Agreement and Plan of Merger (the "Agreement") with American Medical Response, Inc. ("AMR") and SHI Acquisition Corp., a wholly-owned subsidiary of AMR ("Merger Sub"). Pursuant to the Agreement, at the Effective Time (as defined in the Agreement), Merger Sub will be merged with and into the Company (the "Merger") and each outstanding share of common stock, par value of $0.01 per share, of the Company ("Company Common Stock") (other than shares held by the Company, AMR or any of their respective subsidiaries) will be converted into the right to receive 0.25 shares of common stock, par value of $0.01 per share, of AMR ("AMR Common Stock") (the "Exchange Ratio"). We understand that the Merger will qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as amended, and that, for accounting purposes, the Merger will be accounted for as a pooling of interests in accordance with generally accepting accounting principles as described in Accounting Principles Board Opinion Number 16. You have requested our opinion as to the fairness, from a financial point of view, of the Exchange Ratio to the holders of Company Common Stock. Pacific Growth Equities, Inc. ("PGE"), as part of its investment banking business, is engaged in the evaluation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, and private placements. In conducting our investigation and analysis and in arriving at our opinion, we have reviewed such information and taken into account such financial and economic factors as we have deemed relevant under the circumstances. In that connection, we have, among other things: (i) reviewed forecasts concerning the business and operations of AMR furnished to us by or on behalf of AMR for purposes of our analysis, as well as publicly available information including but not limited to Annual Reports on Form 10-K, Quarterly Reports on Form 10- Q, proxy and information statements and other information filed with the Securities and Exchange Commission (the "SEC") by AMR and equity analyst research reports prepared by various investment banking firms; (ii) reviewed forecasts concerning the business and operations of the Company furnished to us by or on behalf of the Company for purposes of our analysis, as well as publicly available information, including but not limited to Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, proxy and information statements and other information filed with the SEC by the Company and equity analyst research reports prepared by various investment banking firms; (iii) reviewed the draft of the Agreement in the form presented to the Company's Board of Directors on the date hereof; (iv) compared the historical market prices and trading activity of the Company Common Stock and the AMR Common Stock with those of certain other publicly traded companies we deemed relevant; (v) compared the financial position and operating results of the Company and AMR with those of other publicly traded companies we deemed relevant; and (vi) reviewed, to the extent publicly available, the financial terms of certain other business combinations we deemed relevant. We have held discussions with certain members of the Company's and AMR's senior management concerning the Company's and AMR's respective historical and current financial condition and operating results, as well as the future prospects of the B-1 Company and AMR, respectively. We have also considered such other information, financial studies, analysis and investigations and financial, economic and market criteria which we deemed relevant for the preparation of this opinion. In arriving at our opinion, we have assumed and relied upon the accuracy and completeness of all of the financial and other information provided to us by or on behalf of the Company and AMR, or publicly available, and have not attempted independently to verify any such information. We have also assumed, with your consent that (i) the Merger will be accounted for as a pooling of interests and will be treated as a tax free reorganization for federal income tax purposes; (ii) all material assets and liabilities (contingent or otherwise, known or unknown) of the Company and AMR are as set forth in the consolidated financial statements of the Company (including the consolidated financial statements of the Company's affiliated physician group, South Texas Acute Trauma Physicians, P.A.) and AMR, respectively; and (iii) the Merger will be consummated in accordance with the terms of the Agreement, without any amendment thereto and without waiver by the Company or AMR of any of the conditions to their respective obligations thereunder. We have assumed that the financial forecasts examined by us were reasonably prepared on bases reflecting the best available estimates and good faith judgments of the senior managements of the Company and AMR, respectively, as to future performance of their respective companies. PGE relied upon assurances of management of STAT and AMR that such management was unaware of any fact that would make their respective information and forecasts provided to PGE incomplete or misleading. In conducting our review, we have assumed and relied upon the accuracy and completeness of all of the financial and other information provided to us by or on behalf of the Company and AMR, and have not made nor obtained (or assumed any responsibility for making or obtaining) an independent evaluation or appraisal of any of the assets or liabilities (contingent or otherwise) of the Company or AMR, nor have we made a physical inspection of the properties or facilities of the Company or AMR. Our opinion necessarily is based upon economic, monetary and market conditions as they exist and can be evaluated on the date hereof, and does not predict or take into account any changes which may occur, or information which may become available, after the date hereof. It should be understood that subsequent developments may affect this opinion and that we do not have any obligation to update, revise or reaffirm this opinion. This opinion does not address the relative merits of the Merger and any other potential transactions or business strategies considered by the Company's Board of Directors, and does not constitute a recommendation to any shareholder of the Company as to how any such shareholder should vote with respect to the Merger. This opinion does not imply any conclusion as to the likely trading range of the AMR Common Stock following the consummation of the Merger, which may vary depending upon, among other factors, changes in interest rates, dividend rates, market conditions, general economic conditions and other factors that generally influence the price of securities. PGE will receive a fee for rendering this opinion. In the past, we have provided certain investment banking services to the Company and have received customary compensation in connection with these services. In the ordinary course of our business, we may from time to time trade the securities of the Company or AMR for our own account or the accounts of our customers and, accordingly, may at any time hold long or short positions in such securities. Based upon and subject to the foregoing, we are of the opinion that, as of the date hereof, the Exchange Ratio is fair, from a financial point of view, to the holders of Company Common Stock. Our opinion has been prepared solely for the information of the Company's Board of Directors, and shall not be used for any other purpose or disclosed to or relied upon by any other party without the prior written consent of PGE; provided, however, that this letter may be reproduced in full in the Proxy Statement/Prospectus to be provided to the Company's shareholders in connection with the Merger. Very truly yours, PACIFIC GROWTH EQUITIES, INC. B-2 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law, as amended, provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Section 145 further provides that a corporation similarly may indemnify any such person serving in any such capacity who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor, against expenses actually and reasonably incurred in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or such other court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 102(b)(7) of the Delaware General Corporation Law, as amended, permits a corporation to include in its certificate of incorporation a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law (relating to unlawful payment of dividends and unlawful stock purchase and redemption) or (iv) for any transaction from which the director derived an improper personal benefit. The Registrant's Certificate of Incorporation provides that the Registrant's Directors shall not be liable to the Registrant or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent that exculpation from liabilities is not permitted under the Delaware General Corporation Law as in effect at the time such liability is determined. The Certificate of Incorporation further provides that the Registrant shall indemnify its directors and officers to the full extent permitted by the law of the State of Delaware. The Registrant has obtained an insurance policy that insures its directors and officers against certain liabilities. II-1 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The following exhibits are filed with, or incorporated by reference in, this Registration Statement: Exhibits EXHIBIT NO. DESCRIPTION ----------- ----------- 2.1 Agreement and Plan of Merger by and among the Registrant, SHI Acquisition Corp. and STAT Healthcare, Inc. ("STAT"), dated as of October 7, 1996 (the "Merger Agreement") (attached as Annex A to the Proxy Statement/Prospectus contained in this Registration Statement). The Exhibits to the Merger Agreement and the Disclosure Schedules of the Registrant and of STAT are not included with the Merger Agreement. A list briefly identifying the contents of such omitted schedules is included herein. The Registrant agrees to furnish supplementally to the Commission, upon request, a copy of such Exhibits and Disclosure Schedules. 4.1 Specimen stock certificate representing American Medical Response Common Stock, which is incorporated by reference to Exhibit 4.1 of the Registrant's Registration Statement on Form S-3, as amended, No. 33-67408. 4.2 Indenture dated February 1, 1996 by the Registrant and Bankers Trust as Agent with respect to the Registrant's 5- 1/4% Convertible Subordinated Notes, which is incorporated by reference to Exhibit 4.2 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. 5.1 Opinion of Ropes & Gray as to the legality of the securities being issued. 8.1 Form of Opinion of Ropes & Gray as to certain federal income tax consequences of the Merger. 8.2 Form of Opinion of KPMG Peat Marwick LLP as to certain federal income tax consequences of the Merger. 23.1 Consent of Ropes & Gray (included in its opinion filed as Exhibit 5.1). 23.2 Consent of KPMG Peat Marwick LLP with respect to its form of opinion as to certain federal income tax consequences of the Merger. 23.3 Consent of KPMG Peat Marwick LLP with respect to the Registrant's financial statements. 23.4 Consent of KPMG Peat Marwick LLP with respect to STAT's financial Statements. 23.5 Consent of KPMG Peat Marwick LLP with respect to South Texas Acute Trauma Physicians, P.A. 23.6 Consent of Long, Chilton, Payte & Hardin, LLP with respect to AmHealth Corporation. 23.7 Consent of Long, Chilton, Payte & Hardin, LLP with respect to STAT's financial statements. 23.8 Consent of Pacific Growth Equities. 24.1 Power of Attorney (part of the signature page of this Registration Statement). 99.1 Consent of Russell D. Schneider.
II-2 ITEM 22. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (1) That, for purposes of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the Registration Statement 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. (2) That prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the Registrant undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form. (3) That every prospectus (i) that is filed pursuant to the immediately preceding paragraph, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act, each such post-effective amendment 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. (4) That 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 foregoing provisions, 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, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (5) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. (6) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. II-3 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF AURORA, STATE OF COLORADO. AMERICAN MEDICAL RESPONSE, INC. By /s/ Paul T. Shirley ___________________________________ Paul T. Shirley President and Chief Executive Officer Dated: November 4, 1996 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED. EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY AUTHORIZES PAUL T. SHIRLEY, DAVID C. COLBY AND WILLIAM GEORGE AND EACH WITH FULL POWER OF SUBSTITUTION, TO EXECUTE IN THE NAME AND ON BEHALF OF SUCH PERSON ANY AMENDMENT OR ANY POST-EFFECTIVE AMENDMENT TO THIS REGISTRATION STATEMENT AND TO FILE THE SAME, WITH EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, MAKING SUCH CHANGES IN THIS REGISTRATION STATEMENT AS THE REGISTRANT DEEMS APPROPRIATE, AND APPOINTS EACH OF PAUL T. SHIRLEY, DAVID C. COLBY AND WILLIAM GEORGE, EACH WITH FULL POWER OF SUBSTITUTION, ATTORNEY- IN-FACT TO SIGN ANY AMENDMENT AND ANY POST-EFFECTIVE AMENDMENT TO THIS REGISTRATION STATEMENT AND TO FILE THE SAME, WITH EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ Paul T. Shirley President, Chief Executive November 4, 1996 ____________________________________ Officer (principal Paul T. Shirley executive officer) and Director /s/ David C. Colby Executive Vice President, November 4, 1996 ____________________________________ Chief Financial Officer and David C. Colby Director (principal financial and accounting officer) /s/ Paul M. Verrochi Chairman of the Board and November 4, 1996 ____________________________________ Director Paul M. Verrochi /s/ Charles D. Baker Director November 4, 1996 ____________________________________ Charles D. Baker ____________________________________ Director Michael A. Baker /s/ David B. Hammond Director November 4, 1996 ____________________________________ David B. Hammond /s/ James E. McGrath Director November 4, 1996 ____________________________________ James E. McGrath ____________________________________ Director Joseph R. Paolella /s/ Dominic J. Puopolo Director November 4, 1996 ____________________________________ Dominic J. Puopolo /s/ John Larkin Thompson Director November 1, 1996 ____________________________________ John Larkin Thompson
II-4 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGE ------- ----------- ------------ 2.1 Agreement and Plan of Merger by and among the Registrant, SHI Acquisition Corp. and STAT Healthcare, Inc. ("STAT"), dated as of October 7, 1996 (the "Merger Agreement") (attached as Annex A to the Proxy Statement/Prospectus contained in this Registration Statement). The Exhibits to the Merger Agreement and the Disclosure Schedules of the Registrant and of STAT are not included with the Merger Agreement. A list briefly identifying the contents of such omitted schedules is included herein. The Registrant agrees to furnish supplementally to the Commission, upon request, a copy of such Exhibits and Disclosure Schedules....... 4.1 Specimen stock certificate representing American Medical Response Common Stock, which is incorporated by reference to Exhibit 4.1 of the Registrant's Registration Statement on Form S-3, as amended, No. 33- 67408.................................................. 4.2 Indenture dated February 1, 1996 by the Registrant and Bankers Trust as Agent with respect to the Registrant's 5- 1/4% Convertible Subordinated Notes, which is incorporated by reference to Exhibit 4.2 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995................................ 5.1 Opinion of Ropes & Gray as to the legality of the securities being issued................................ 8.1 Form of Opinion of Ropes & Gray as to certain federal income tax consequences of the Merger.................. 8.2 Form of Opinion of KPMG Peat Marwick LLP as to certain federal income tax consequences of the Merger.......... 23.1 Consent of Ropes & Gray (included in its opinion filed as Exhibit 5.1)........................................ 23.2 Consent of KPMG Peat Marwick LLP with respect to its form of opinion as to certain federal income tax consequences of the Merger............................. 23.3 Consent of KPMG Peat Marwick LLP with respect to the Registrant's financial statements...................... 23.4 Consent of KPMG Peat Marwick LLP with respect to STAT's financial Statements................................... 23.5 Consent of KPMG Peat Marwick LLP with respect to South Texas Acute Trauma Physicians, P.A. ................... 23.6 Consent of Long, Chilton, Payte & Hardin, LLP with respect to AmHealth Corporation........................ 23.7 Consent of Long, Chilton, Payte & Hardin, LLP with respect to STAT's financial statements................. 23.8 Consent of Pacific Growth Equities .................... Power of Attorney (part of the signature page of this 24.1 Registration Statement)................................ 99.1 Consent of Russell D. Schneider........................
EX-2.1 2 AGREEMENT AND PLAN OF MERGER EXHIBIT 2.1 LIST OF OMITTED SCHEDULES AND EXHIBITS AGREEMENT AND PLAN OF MERGER
SCHEDULES --------- 1.5 Officers of the Surviving Corporation 6.2(h) Salary and Severance under Employment Agreements and Shares and Options subject to Employment Agreements EXHIBITS -------- 5.6 Form of Affiliate Agreement A Form of Employment Agreement B Form of Employment Agreement PARENT DISCLOSURE STATEMENT SCHEDULES --------- 3.1 Subsidiaries 3.3 Capitalization 3.5(a) Loan Agreements/Contracts 3.5(b) Breach of Contract 3.5(c) Breach/Default 3.6 Compliance; Permits 3.8 Absence of Certain Changes or Events 3.11 Undisclosed Liabilities 3.12 Litigation COMPANY DISCLOSURE SCHEDULE SCHEDULES --------- 1.6(c) Other Stock Options 2.1 Subsidiaries 2.3 Capitalization 2.5(a) Agreements 2.5(b) Defaults 2.5(c) Conflicts 2.5(d) Required Consents 2.6(a) Compliance; Permits 2.7 SEC Filings; Financial Statements 2.8 Changes or Events 2.9 Undisclosed Liabilities 2.10 Material Litigation 2.11(a) Employee Plans 2.11(b) ERISA Matters 2.11(c) Outstanding Options 2.11(d) Employment Agreements 2.12 Labor Claims and Union Activities 2.14 Restrictions on Business Activities 2.15 Liens on and Encumbrances to Property 2.16(a) Taxes 2.16(b) Taxes
2.17 Environmental Matters 2.18(b) Intellectual Property 2.19 Interested Party Transactions 2.20 Insurance 2.26 Change in Control Payments 4.1(e) Proposed Acquisitions
EX-5.1 3 OPINION OF ROPES & GRAY EXHIBIT 5.1 [LETTERHEAD OF ROPES & GRAY] November 6, 1996 American Medical Response, Inc. 2821 South Parker Road, 10th Floor Aurora, Colorado 80014 Ladies and Gentlemen: This opinion is furnished to you in connection with a registration statement on Form S-4 (the "Registration Statement") filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended, for the registration of 3,975,003 shares of Common Stock, $.01 par value per share (the "Shares"), of American Medical Response, Inc., a Delaware corporation (the "Company"). The Shares are to be issued in exchange for shares of common stock, $.01 par value per share, of STAT Healthcare, Inc. ("STAT") pursuant to an Agreement and Plan of Merger dated as of October 7, 1996, as amended (the "Merger Agreement") among the Company, STAT and SHI Acquisition Corp. ("Sub"), a Delaware corporation and a wholly-owned subsidiary of the Company, which provides for the merger of Sub with and into STAT (the "Merger"). We have acted as counsel for the Company in connection with the issuance of the Shares in connection with the Merger. For purposes of our opinion, we have examined and relied upon such documents, records, certificates and other instruments as we have deemed necessary. We express no opinion as to the applicability of, compliance with or effect of federal law or the law of any jurisdiction other than The Commonwealth of Massachusetts and the General Corporation Law of the State of Delaware. Based upon the foregoing, we are of the opinion that the Shares have been duly authorized and, when issued in accordance with the Merger Agreement, will be validly issued, fully paid and nonassessable. We hereby consent to the filing of this opinion, and our form of opinion attached as Exhibit 8.1 to the Registration Statement, as part of the Registration Statement and to the use of our name in the Registration Statement and in the related joint proxy statement/prospectus under the captions "SUMMARY--Certain Federal Income Tax Consequences," "THE MERGER-- Certain Federal Income Tax Consequences," and "VALIDITY OF THE SHARES AND TAX MATTERS." By giving such consent we do not thereby admit that we are experts with respect to any part of such Registration Statement within the meaning of the term "expert" as used in, or that we come within the category of persons whose consent is required under, the Securities Act of 1933 or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. This opinion is to be used only in connection with the issuance of the Shares while the Registration Statement is in effect. Very truly yours, ROPES & GRAY EX-8.1 4 OPINION OF ROPES & GRAY EXHIBIT 8.1 [LETTERHEAD OF ROPES AND GRAY] , 1996 American Medical Response, Inc. 2821 South Parker Road Aurora, Colorado 80014 Ladies and Gentlemen: We have acted as legal counsel to American Medical Response, Inc., a Delaware corporation ("AMR") and SHI Acquisition Corp., a Delaware corporation ("Merger Sub"), in connection with the planned merger (the "Merger") of Merger Sub with and into STAT Healthcare, Inc., a Delaware corporation ("STAT"), pursuant to an Agreement and Plan of Merger dated October 7, 1996 among AMR, Merger Sub and STAT (the "Merger Agreement"). In the Merger, Merger Sub will merge with and into STAT, and STAT will become a wholly-owned subsidiary of AMR. Unless otherwise indicated, capitalized terms used herein and not otherwise defined have the meanings set forth in the Merger Agreement. For purposes of the opinion set forth below, we have reviewed and relied upon (i) the Merger Agreement and the Registration Statement on Form S-4 filed by AMR with the Securities and Exchange Commission on November , 1996 (the "Registration Statement"), (ii) the tax representation letters, dated as of the date hereof, delivered to us by AMR, Merger Sub and STAT in connection with this opinion and attached as exhibits hereto, (iii) the continuity of interest certificates dated , 1996 delivered by the stockholders of STAT holding five percent (5%) or more of the outstanding STAT stock in connection with this opinion and attached as exhibits hereto, and (iv) such other documents, records and instruments as we have deemed necessary or appropriate as a basis for our opinion. We have assumed without investigation or verification that all statements contained in the foregoing documents (including without limitation all representations and warranties contained in the Merger Agreement) are true, correct, and complete as of the date hereof, that no actions inconsistent with such statements have occurred or will occur, and that all such statements made "to the best of the knowledge of" any persons or parties are true, correct and complete as if made without such qualification. We have also assumed that the Merger will be consummated in accordance with the Merger Agreement (including satisfaction of all covenants and conditions to the obligations of the parties without amendment or waiver thereof), that the Merger will be effective as a merger under the applicable laws of Delaware, and that each of AMR, STAT and Merger Sub will comply with all reporting obligations with respect to the Merger required under the Code and the Treasury regulations promulgated thereunder. Our opinion is based on current federal income tax law and Internal Revenue Service practice, which are subject to change with retroactive effect. Based upon and subject to the foregoing as well as the limitations set forth below, it is our opinion that the Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368 of the Code, and that no gain or loss will be recognized by American, Merger Sub, or STAT as a result of the Merger. Any inaccuracy in, or breach of, any of the aforementioned statements, representations and assumptions, or any change after the date hereof in applicable federal income tax law or Internal Revenue Service practice could adversely affect our opinion. No ruling has been sought from the Internal Revenue Service by AMR, STAT or Merger Sub as to the federal income tax consequences of any aspect of the Merger, and the Internal Revenue Service is not bound by our opinion herein. No opinion is expressed as to any matter not specifically addressed above, including the tax consequences of the Merger under any foreign, state, or local tax law, or the tax consequences of any other transactions contemplated or previously entered into by AMR, STAT or Merger Sub. We do not undertake to advise you as to any changes in federal income tax law or Internal Revenue Service practice after the date hereof that may affect our opinion. This opinion has been delivered to you as contemplated by Section 6.2(d) of the Merger Agreement and is intended solely for your benefit. It is not to be used for any other purpose without our express written permission. Very truly yours, Ropes & Gray EX-8.2 5 OPINION OF KPMG PEAT MARWICK LLP EXHIBIT 8.2 December __, 1996 STAT Healthcare, Inc. 12450 Greenspoint Drive, Suite 1200 Houston, Texas 77060 RE: MERGER OF SHI ACQUISITION CORP., A WHOLLY-OWNED SUBSIDIARY OF AMERICAN MEDICAL RESPONSE, INC., WITH AND INTO STAT HEALTHCARE, INC. Dear Sirs: You have requested the opinion of KPMG Peat Marwick LLP ("KPMG") as to certain federal income tax consequences of the merger (the "Merger") of SHI Acquisition Corp., a Delaware corporation ("Transitory Sub"), with and into STAT Healthcare, Inc., a Delaware corporation ("STAT"), pursuant to the Agreement and Plan of Merger dated as of October 7, 1996 (the "Merger Agreement") among STAT, American Medical Response, Inc., a Delaware corporation ("AMR"), and Transitory Sub. Our opinion is based on the representations and warranties set forth in the Merger Agreement and the representations and warranties set forth in the respective Stockholder Agreements dated as of October 7, 1996 between American and certain stockholders of STAT. With respect to the pertinent facts and circumstances regarding the proposed transaction our opinion is based solely upon information provided to us in the Agreements and information and representations provided to us as set forth in the sections of this letter entitled "FACTS," "PROPOSED TRANSACTION" and "REPRESENTATIONS." You have advised us that the information contained herein and in the Agreements and Proxy Statement/Prospectus of STAT related to the Merger provides an accurate and complete description of the facts and circumstances concerning the proposed transaction, and you are aware that KPMG has made no independent inquiry into them. Any variance or omission in the facts, circumstances, assumptions, or representations set forth below may adversely affect the views stated herein. We have reviewed no other legal documents which are necessary to effectuate the transaction. We assume that all steps will be properly effectuated under the applicable state and federal law and will be consistent with the information submitted to us. Page 2 STAT Healthcare, Inc. December__,1996 Further, in rendering our opinion, we are relying upon the Internal Revenue Code of 1986 and Treasury Department regulations thereunder, both as amended and in effect on the date hereof, and Revenue Rulings, Revenue Procedures and reported judicial decisions as they existed on the date of this opinion letter. Each of the foregoing is subject to change or modification by subsequent legislation, or regulatory, administrative or judicial decisions. Any such change could also have an effect on the validity of the conclusions set forth herein retroactively or prospectively. Further, the opinion which is rendered should be considered together with various risks set forth in the "CAVEAT" section of this letter. Unless requested otherwise, we undertake no responsibility to update our opinion in the event of any subsequent change in the foregoing. Our opinion is limited solely to the federal income tax consequences of the transaction to STAT Healthcare, Inc. American Medical Response, Inc., its transitory subsidiary, and the shareholders of STAT Healthcare, Inc. as set forth in the "OPINION" section of this letter and more specifically to the particular parties described in each separate paragraph therein. No opinion is rendered, expressed or implied with respect to the tax consequences of the proposed transaction to any other party. Furthermore, no opinion is expressed with respect to issues not specifically discussed herein or any other federal, state or local tax or the legal aspects of the proposed transaction. FACTS ----- STAT Healthcare, Inc. ("STAT") is a Delaware corporation engaged in business as a holding company. STAT's subsidiaries are engaged in the businesses of (1) offering physician practice management services to affiliated physician groups which staff hospital emergency rooms and (2) providing a continuum of disease management services primarily to patients with end-stage renal disease (chronic kidney failure). The authorized capital of STAT consists of 40,000,000 shares of $.01 par value common stock and 5,000,000 shares of $.01 par value preferred stock./1/ As of September 30, 1996, it had 14,975,412 shares of common stock issued and outstanding. Its common shares are traded on the NASDAQ National Market System. In addition, STAT has outstanding options to purchase 354,500/2/ __________________________________ /1/ In September 1994, STAT sold 74,000 shares of Series A convertible preferred stock (Preferred Stock) to STAT Physicians for $370,000. The Preferred Stock was converted into common stock at a rate of 20 shares of common stock for each share of Preferred Stock (1,480,000 common shares) upon the completion of STAT's initial public offering of common stock in 1995. /2/ 304,500 Incentive Stock Options and 50,000 Non-Statutory Stock Options. Page 3 STAT Healthcare, Inc. December__,1996 shares of its stock ("Options") and warrants to purchase 786,226 shares of its stock ("Warrants"). No shares of preferred stock have ever been outstanding other than as described in footnote 1. AMR is a Delaware corporation engaged in the business of providing emergency and non-emergency ambulance services. As of September 30, 1996, the authorized stock of AMR consisted of 75,000,000 shares of voting common stock, $.01 par value per share ("AMR Common Stock") of which 21,029,705 were issued and outstanding and 500,000 shares of $.01 par value preferred stock, none of which was issued and outstanding. The stock of AMR is publicly traded. Transitory Sub is a wholly-owned Delaware subsidiary of AMR created to accomplish the proposed transaction described below. STAT and AMR believe that a combination of their respective businesses will enable both companies to diversify, grow and to operate more efficiently. Specifically, the complementary nature of the businesses of AMR and STAT creates the expectation that AMR and STAT could obtain synergistic benefits from a combination. PROPOSED TRANSACTION -------------------- In order to accomplish the aforementioned goals, the following transaction is proposed: (1) AMR has established Transitory Sub as a wholly-owned subsidiary. (2) Pursuant to the Merger Agreement, Transitory Sub will merge with and into STAT ("the Merger") and STAT shall survive. As a result, the STAT shareholders will receive solely shares of AMR Common Stock in exchange for their STAT common shares (other than cash paid in lieu of fractional shares). As a result of the Merger, each share of STAT common stock issued and outstanding at the time thereof shall be converted into the right to receive .25 of a share of AMR Common Stock. No fractional shares of AMR Common Stock will be issued to STAT shareholders in the proposed transaction. Cash in lieu of such fractional shares will be paid to the STAT shareholders otherwise entitled to receive same. Page 4 STAT Healthcare, Inc. December__,1996 Furthermore, each outstanding Option to purchase STAT common stock shall be assumed by AMR and the holder of such Option shall be entitled to purchase the number of AMR shares as the holder would have been entitled to receive pursuant to the Merger had such holder exercised the Option in full immediately prior to the Merger, at an exercise price determined pursuant to the Merger Agreement. In addition, the Warrants that are not exercised or redeemed prior to the Merger shall be deemed to constitute a warrant to acquire the number of AMR shares as the holder of such Warrant would have been entitled to receive pursuant to the Merger had the holder exercised the Warrant in full immediately prior to the Merger, at an exercise price determined pursuant to the Merger Agreement. REPRESENTATIONS --------------- The following representations have been made to KPMG with respect to the proposed transaction described above. It is understood that KPMG is relying on these representations in rendering its opinions and that KPMG has not verified any of the representations. (a) The fair market value of the AMR Common Stock to be received by the shareholders of STAT will, in each instance, be approximately equal to the fair market value of the STAT stock surrendered in exchange therefor. (b) There is no plan or intention on the part of shareholders of STAT to sell or otherwise dispose of any AMR Common Stock to be received in the proposed transaction which will reduce STAT's shareholders' holdings to a number of shares having, in the aggregate, a value of less than 50 percent of the total value of all the formerly outstanding stock of STAT as of the same date. For purposes of their representation, all sales, redemptions or other dispositions of stock, including the receipt of cash in lieu of fractional shares of AMR Common Stock, occurring prior to or after the Merger which are part of the plan of reorganization will be considered in determining if there will be a 50 percent continuing interest through ownership in AMR Common Stock. (c) AMR does not presently own, directly or indirectly, nor has it owned within the preceding 5 years, directly or indirectly, any of the stock of STAT. Page 5 STAT Healthcare, Inc. December__,1996 (d) There is no indebtedness between STAT and AMR or STAT and Transitory Sub and there will be no indebtedness created between or among STAT and AMR as a result of the proposed transaction. (e) STAT is not under the jurisdiction of a court in a title 11 or similar case (within the meaning of Section 368(a)(3)(A))./3/ (f) AMR, STAT, and the shareholders of STAT will each pay their own expenses, if any, related to the proposed transaction./4/ (g) Following the proposed transaction, STAT will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets. For purposes of this representation, amounts paid by STAT to dissenters, amounts paid by STAT to shareholders who receive cash or other property, amounts used by STAT to pay reorganization expenses, and all redemptions, and distributions (except for regular, normal dividends) made by STAT will be included as the assets of STAT immediately prior to the transaction. (h) Prior to the proposed transaction, AMR will be in control of Transitory Sub within the meaning of Section 368(c). (i) STAT has no plan or intention to issue additional shares of its stock that would result in AMR losing control of STAT within the meaning of Section 368(c). (j) AMR has no plan or intention to reacquire any of its stock issued in the transaction, other than in the ordinary course of its business. (k) AMR has no plan or intention to liquidate STAT; to merge STAT with and into another corporation; to sell or otherwise dispose of the stock of STAT except for transfers of stock to corporations controlled by AMR; or to cause STAT to sell or otherwise dispose of any of its assets or of any of the assets _______________________________ /3/ Unless otherwise noted, all references herein to "Section" are to provisions of the Internal Revenue Code of 1986, as amended. /4/ Two STAT shareholders have received an advance from AMR for fees payable in connection with applications filed under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Page 6 STAT Healthcare, Inc. December__,1996 acquired from Transitory Sub, except for dispositions made in the ordinary course of business or transfers of assets to a corporation controlled by AMR. (l) Transitory Sub will have no liabilities assumed by STAT, and will not transfer to STAT any assets subject to liabilities in the transaction. (m) Following the transaction, STAT will continue its historic business or use a significant portion of its historic business assets in a business. (n) In the Merger, shares of stock representing control of STAT, as defined in Section 368(c), will be exchanged solely for voting stock of AMR. For purposes of this representation, shares of STAT stock exchanged for cash or other property originating with AMR will be treated as outstanding STAT stock on the date of the transaction. (o) At the time of the transaction, STAT will not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire stock in STAT that, if exercised or converted, would affect AMR's acquisition or retention of control of STAT, as defined in Section 368(c). (p) No two parties to the proposed transaction are investment companies as defined in Section 368(a)(2)(F)(iii) and (iv). (q) On the date of the proposed transaction, the fair market value of the assets of STAT will exceed the sum of its liabilities assumed, plus the amount of liabilities, if any, to which the assets are subject. (r) The issuance of cash in lieu of fractional shares merely represents the mechanical rounding off of the fractional share interests. This step will be undertaken solely for the purpose of saving the expense and inconvenience of issuing and transferring fractional shares, and is not separately bargained for consideration. Page 7 STAT Healthcare, Inc. December__,1996 (s) The total amount of cash distributed in lieu of fractional shares will constitute less than one percent in value of the total consideration distributed in the proposed transaction. OPINION ------- Based solely on the Agreements, the above facts, and representations set forth in items (a) through (s) above, it is the opinion of KPMG that the Federal income tax consequences of the merger of Transitory Sub with and into STAT are as follows: (1) Provided the proposed merger of Transitory Sub with and into STAT qualifies as a statutory merger under State law, after the transaction STAT will hold substantially all of its assets and the assets of Transitory Sub (other than the value of the AMR Common Stock distributed in the transaction), and in the transaction the shareholders of STAT will exchange an amount of stock constituting control of STAT (within the meaning of Section 368(c)) solely for AMR voting stock, then the proposed merger will constitute a reorganization within the meaning of Section 368(a)(1)(A). The reorganization will not be disqualified by reason of the fact that the voting stock of AMR is used in the merger (Section 368(a)(2)(E)). For purposes of this opinion, "substantially all" means at least 90 percent of the fair market value of the net assets and at least 70 percent of the fair market value of the gross assets of Transitory Sub and STAT. STAT, AMR and Transitory Sub will each be "a party to a reorganization" within the meaning of Section 368(b)(1). (2) No gain or loss will be recognized to the shareholders of STAT upon the receipt of solely AMR Common Stock in exchange for their shares of STAT common stock, (including any fractional share interest of AMR Common Stock to which they may be entitled). Section 354(a)(1). (3) The basis of the AMR Common Stock received by the shareholders of STAT (including any fractional share interest to which they may be entitled) will be the same as the basis of STAT common stock surrendered in exchange therefor. Section 358(a)(1). Page 8 STAT Healthcare, Inc. December__,1996 (4) The holding period of the AMR Common Stock received by the shareholders of STAT (including any fractional share interest to which they may be entitled) will include the period during which the STAT common stock surrendered therefor was held, provided the stock of STAT is a capital asset in the hands of the shareholders of STAT on the date of the exchange. Section 1223(l). (5) The payment of cash in lieu of fractional share interests in AMR Common Stock will be treated for Federal income tax purposes as if the fractional shares were issued as part of the exchange and then were redeemed by AMR for cash. The cash payments will be treated as having been received as distributions in full payment in exchange for the stock redeemed as provided in Section 302(a). (Rev. Proc. 77-41, 1977-2 C.B. 574). (6) No gain or loss will be recognized to Transitory Sub on the transfer of its assets to STAT in exchange for common stock of STAT and the assumption by STAT of Transitory Sub's liabilities, if any. (Sections 361(a) and 357(a)). (7) No gain or loss will be recognized to STAT upon the receipt of the assets of Transitory Sub in exchange for STAT common stock. (Section 1032(a)). (8) No gain or loss will be recognized to AMR upon the receipt of stock of STAT solely in exchange for stock of Transitory Sub. (Section 354(a)(1)). DISCUSSION ---------- Section 368(a)(1)(A) provides that the term "reorganization" includes a statutory merger or consolidation. Section 1.368-2 of the Income Tax Regulations provides that for a reorganization to qualify under (S)368(a)(1)(A), it must be "effected pursuant to the corporation laws of the United States or a State or territory or the District of Columbia." With regard to a statutory merger in which a controlled subsidiary of an acquiring corporation merges into the target corporation, (S)368(a)(2)(E) proves that such a merger will qualify as a (S)368(a)(1)(A) reorganization if certain requirements are met. Specifically, (S)368(a)(2)(E) provides as follows: Page 9 STAT Healthcare, Inc. December__,1996 STATUTORY MERGER USING VOTING STOCK OF CORPORATION CONTROLLING MERGED CORPORATION. -- A transaction otherwise qualifying under paragraph (1)(A) shall not be disqualified by reason of the fact that stock of a corporation (referred to in this subparagraph as the "controlling corporation") which before the merger was in control of the merged corporation is used in the transaction, if -- (i) after the transaction, the corporation surviving the merger holds substantially all of its properties and the properties of the merged corporation (other than stock of the controlling corporation distributed in the transaction); and (ii) in the transaction, former shareholders of the surviving corporation exchanged, for an amount of voting stock of the controlling corporation, an amount of stock in the surviving corporation which constitutes control of such corporation. Accordingly, the merger of a controlled subsidiary into a target corporation in exchange for stock of its parent will meet the requirements of this provision of the Code if: (a) after the transaction, the target corporation holds "substantially all" of its properties and properties of the merged corporation; (b) the merged corporation is merged into the target corporation pursuant to state law; and (c) the target shareholders transfer "control" of the target corporation solely for voting stock of the acquiring corporation. Statutory Requirements - ---------------------- With respect to the first requirement of (S)368(a)(2)(E), (S)1.368-2(j)(3)(iii) of the Income Tax Regulations provides, in part, as follows: After the transaction, .... the surviving corporation must hold substantially all of its own properties and substantially all of the properties of the merged corporation (other than stock of the controlling corporation distributed in the transaction). .... The "substantially all" test applies separately to the merged corporation and to the surviving corporation ....... Page 10 STAT Healthcare, Inc. December__,1996 For Internal Revenue Service advance ruling purposes, Rev. Proc. 77-37, (S)3.01, provides that the "substantially all" requirement of (S)368(a)(2)(E) will be satisfied if: there is a transfer of assets representing at least 90 percent of the fair market value of the net assets and at least 70 percent of the fair market value of the gross assets held by the corporation immediately prior to the transfer. All payments to dissenters and all redemptions and distributions (except for regular, normal distributions) made by the corporation immediately preceding the transfer and which are part of the plan of reorganization will be considered as assets held by the corporation immediately prior to the transfer. This rule does not establish a minimum percentage below which the "substantially all" test will not be met, but merely provides guidelines for advance rulings./5/ For example, one court has held that 51 percent of a corporation's assets (consisting of all of its operating assets) was sufficient to meet the "substantially all" test. See James Armour, Inc., 43 T.C. 295 (1965). ------------------ In the instant case, we assume that the "substantially all" requirement will be satisfied because STAT will retain all of its assets and the assets of the merged corporation after the proposed transaction, other than amounts necessary to pay reorganization expenses./6/ Transitory Sub, will hold only minimum capital and voting stock of AMR necessary to effectuate the proposed transaction. Further, it has been represented that STAT will retain sufficient properties to satisfy the "substantially all" test of Rev. Proc. 77-37, (S)3.01. The next requirement is that the target's former shareholders must receive in the transaction voting stock of the merged corporation's parent in exchange for an amount of the stock of the surviving corporation that constitutes control as defined in Section 368(c). The amount of stock constituting control is measured immediately before the transaction. See Regs. (S)1.368-2(j)(3)(i). ________________________________ /5/ Section 2.03 of Rev. Proc. 77-37 states that this operating rule does not define the lower limits of "substantially all of the properties" as a matter of law. /6/ Each party to the reorganization will pay its own expenses in connection with the transaction. Page 11 STAT Healthcare, Inc. December__,1996 In Rev. Rul. 68-637, 1968-1 C.B. 158, an acquiring corporation acquired all of the assets of a target corporation in exchange for its voting stock in a Section 368(a)(1)(C) reorganization. The target corporation had outstanding options and warrants to purchase shares of its stock. Pursuant to the plan of reorganization, the acquiring corporation agreed to substitute its stock for stock of the target under the terms of the warrants and options issued by the target. The ruling held that the substitution of the target's obligation to issue stock was an assumption of a liability of the target and did not violate the "solely for voting stock" requirement of Section 368(a)(1)(C). In Rev. Rul. 69-142, 1969-1 C.B. 107, an acquiring corporation in a Section 368(a)(1)(B) reorganization exchanged its own debentures for all of the outstanding debentures of the target corporation. The ruling held that the exchange of debentures did not violate the solely for voting stock requirement because the exchange of stock for stock and the exchange of debentures for debentures were two separate transactions. In Rev. Rul. 78-408, 1978-2 C.B. 203, the IRS addressed the tax consequences to warrant holders of a target corporations being acquired in a tax-free exchange. Specifically, the holders of warrants in the target corporation exchanged such warrants for warrants to acquire stock of the acquiring corporation. The IRS held that the exchange of the acquiring corporation's warrants of the target corporation did not violate the solely for voting stock requirement of Section 368(a)(1)(B). Accordingly, the assumption by AMR of the Options and the conversion of the Warrants into a right to purchase AMR stock will not violate the "solely for voting stock" requirement of Section 368(a)(2)(E) and AMR will acquire control of STAT solely for voting stock of AMR. General Requirements - -------------------- In addition to the above, a corporation participating in a reorganization must, pursuant to (S)368(b), be a "party to the reorganization." Section 1.368-2(f) of the Regulations provides an example which states that all three corporations in a triangular merger are parties to the reorganization. In this case, STAT, AMR and Transitory Sub will be considered "parties to a reorganization." Also for a transaction to qualify under (S)368, there must be a plan of reorganization pursuant to which the steps in the corporation readjustment are effectuated. A plan of reorganization is expressly required by (S)354, which grants tax-free treatment to reorganization exchanges only if they are made in pursuance of a plan. In this regard, Reg. (S)1.368-3(a) provides that: Page 12 STAT Healthcare, Inc. December__,1996 The plan of reorganization must be adopted by each of the corporations parties thereto; and the adoption must be shown by the acts of its duly constituted responsible officers, and appear upon the official records of the corporation. In the instant case, since the Agreements have been executed, the requirement for a plan of reorganization will be satisfied. Judicially Created Requirements - ------------------------------- As noted above, there are three additional tests that a transaction must satisfy in order to qualify as a reorganization within the meaning of (S)368(a). These tests have their origin in court decisions and are now set forth in Reg. (S)1.368-1(b), (c) and (d). The first requirement is that the reorganization have a valid business purpose and not a tax avoidance purpose. Section 1.368-1(b) of the Regulations states that the reorganization provisions permit "certain ... exchanges incident to such readjustments of corporate structures ..., as are required by business exigencies ..." to be excepted from the general rule of taxation. Thus, a transaction will not be accorded reorganization treatment for tax purposes unless it serves a corporate business purpose. In this instance, unrelated parties dealing at arm's-length will enter into an agreement to merge that is intended to benefit all parties. Accordingly, the business purpose requirement of the Regulations should be met. The second requirement is that a reorganization must result in a "continuity of the business enterprise under the modified corporate form." See Reg. (S)1.368- 1(b). On this regard, Reg. (S)1.368-1(d) states that the transferee corporation must either (i) continue the transferor corporation's "historic business" or (ii) "use a significant portion of [the transferor's] historic business assets in a business." It has been represented that STAT will continue to use the assets of STAT in an ongoing business. Furthermore, it has been represented that STAT's current business is its historic business. Based upon these representations, the continuity of business enterprise requirement of the Regulations should be met. The third prerequisite set forth in the Regulations is the continuity of shareholder interest requirement. Specifically, Reg. (S)1.368-1(b) provides that there must be a continuing Page 13 STAT Healthcare, Inc. December__,1996 equity interest on the part of those persons who, directly or indirectly, were owners of the acquired enterprise prior to the acquisition for the transaction to qualify as a tax-free reorganization. For purposes of advance rulings, the Service, in Rev. Proc. 77-37, (S)3.02, has stated that the continuity of interest requirement will be satisfied if: there is continuing interest through stock ownership in the acquiring [corporation] or transferee corporation [or its parent] ..... on the part of the former shareholders of the acquired or transferor corporation which is equal in value, as of the effective date of the reorganization, to at least 50 percent of the value of all of the formerly outstanding stock of the acquired or transferor corporation as of the same date./6/ It is not necessary that 50 percent of the consideration received by each shareholder of the acquired corporation consist of stock of the acquiring corporation or that 50 percent in number of the shareholders of the acquired corporation receive stock of the acquiring corporation. All that is required is that at least 50 percent of the value of the entire consideration transferred by the acquiring corporation to the shareholders of the acquired corporation in the aggregate consists of stock of the acquiring corporation or its parent. See Rev. Rul. 66-224, 1966-2 C.B. 114. Although the Service will not issue an advance ruling that a transaction qualifies as a reorganization unless the 50 percent test of Rev. Proc. 77-37 is satisfied, 50 percent is not the lower limit for determining whether the continuity of interest requirement is met. For instance, the Service has taken the position in a published ruling, Rev. Rul. 61-156, 1961-2 C.B. 62, that 45 percent qualifying consideration satisfied the continuity requirement. However, in a published Technical Advice Memorandum (TAM 7905011), the Service held that a continuing interest in an acquiring corporation by shareholders holding 34 percent of the stock of the acquired corporation did not represent sufficient continuity of interest to characterize the transaction as a reorganization under (S)368. In John A. Nelson Co. v. Helvering, 296 U.S. 374 (1935), the Supreme Court held ------------------------------- that sufficient continuity of interest existed when assets were transferred for consideration composed of 38 percent preferred stock and 62 percent cash. Moreover, in Ralph M. Heintz, 25 T.C. 132 (1955), the Service contended that a --------------- reorganization existed when the _____________________________ /7/ This rule is solely to provide guidance for advance ruling purposes. It does not, as a matter of law, define the lower limits of continuity of interest. See (S)2.03 of Rev. Proc. 77-37. Page 14 STAT Healthcare, Inc. December__,1996 consideration transferred to the acquired corporation's shareholders consisted of 37-1/2 percent stock and 62-1/2 percent cash. The continuity of interest requirement as developed by the courts involves two distinct elements: (a) the qualitative nature of the consideration given by the transferee (or its parent); and (b) the proportion or amounts thereof that consist of "continuity-preserving" interests. See Bittker and Eustice, Federal ------- Income Taxation of Corporations and Shareholders (P)12.21[2][b], p. 12-27 (6th - ------------------------------------------------ Ed. 1993). With respect to the former, only an equity interest evidenced by common or preferred stock, whether voting or nonvoting, qualifies. With respect to the latter, the proportion in question represents the proportion of equity consideration to aggregate consideration received for the transferred assets. See Bittker and Eustice, supra, at p. 12-28. In the instant case, the ----- shareholders of STAT (other than dissenters) will receive solely voting stock of AMR in exchange for their STAT stock. Accordingly, the first element set forth above should be met. With regard to the second element, certain large shareholders of STAT and the management of STAT have represented that they are aware of no plan or intent to sell or otherwise dispose of the stock of STAT after the proposed transaction in an amount that would violate the 50 percent standard of Rev. Proc. 77-37, as set forth above. Accordingly, the continuity of interest requirement should be met in the instant case. Operative Code Sections - ----------------------- Section 354(a)(1) provides that no gain or loss shall be recognized if stock in a corporation which is a party to a reorganization is, in pursuance of the plan of reorganization, exchanged solely for stock in another corporation which is a party to the reorganization. Therefore, the STAT shareholders should not recognize gain or loss upon the receipt of the AMR stock in exchange for their STAT common stock. Exchanging shareholders in a (S)354 exchange determine their basis for property acquired in the exchange under (S)358(a) which provides that the basis of stock received shall be the same as the basis of the stock transferred, decreased by the fair market value of any boot received, and increased by the amount of any gain recognized on the exchange. Accordingly, the basis of the AMR Common Stock received by the STAT shareholders will be equal to the basis of the STAT common stock surrendered in exchange therefor. Page 15 STAT Healthcare, Inc. December__,1996 Section 1223(l) provides that the holding period of property acquired in a nontaxable exchange can be computed by adding or tacking on the time that the old asset was held to the time the acquired asset was held if the property exchanged was a capital asset or a "(S)1231 asset" and the basis of the property received has the same basis as the property exchanged. Therefore, the holding period of the AMR Common Stock received by the STAT shareholders will include the holding period of the STAT common stock. Section 361 provides that no gain or loss shall be recognized if a corporation, a party to a reorganization, exchanges property, in pursuance of a plan of reorganization, solely for stock in another corporation a party to the reorganization. For the purposes of (S)361, (S)357(a) provides that the assumption of a transferor corporation's liabilities or the taking of property subject to liabilities will not constitute money or other property. In the instant case, Transitory Sub will recognize no gain or loss upon the merger with STAT. Section 1032 provides that no gain or loss will be recognized to a corporation on the receipt of property in exchange for stock of such corporation. Thus, STAT will recognize no gain or loss on the receipt of the Transitory Sub assets in exchange for its stock. Fractional Shares - ----------------- If fractional shares are not issued in the proposed transaction, and an adjustment is necessary to eliminate the need therefor, cash received by a STAT shareholder in lieu of a fractional share interest in AMR common stock will be treated as having been received in full payment for such fractional share interest subject to the provisions and limitations of (S)302. Rev. Proc. 77-41, 1977-2 C.B. 574, amplifies Rev. Proc. 77-37, by including a statement that: A ruling will usually be issued under (S) 302(a) ... that cash to be distributed to shareholders in lieu of fractional share interests arising in corporate reorganizations .... will be treated as having been received in part or full payment in exchange for the stock redeemed if the cash distribution is undertaken solely for the purpose of saving the corporation the expense and inconvenience of issuing and transferring fractional shares, and is not separately bargained-for consideration. In the instant case, since the conditions of Rev. Proc. 77-41 appear to be met, the receipt of cash in lieu of fractional shares will be treated under (S)302(a) resulting in long term Page 16 STAT Healthcare, Inc. December__,1996 capital gains, provided the STAT stock exchanged therefor was a capital asset held for more than 12 months. CAVEAT ------ No opinions are provided with respect to issues not specifically set forth in the "OPINION" section of this letter. Our opinion has not been requested and none is expressed with respect to any foreign, state or local tax consequences to STAT or the STAT shareholders including, but not limited to, income, franchise, sales, use, excise or transfer taxes which effect may be significant. Further, no opinion is rendered, expressed or implied with respect to the tax consequences to any other party as a result of the proposed transaction including the holders of the warrants and stock options to acquire STAT stock. In particular, KPMG expresses no opinion regarding the tax to the holders of the Options and Warrants, respectively, as a result of the Merger. This opinion letter sets forth our views based on the completeness and accuracy of the above stated facts and any assumptions that were included. If any of the foregoing is not entirely complete or accurate, it is imperative that we be informed immediately, as the inaccuracy or incompleteness could have a material effect on our conclusions. In rendering our opinion, we are relying upon the relevant provisions of the Internal Revenue Code of 1986, as amended, the regulations thereunder, and judicial and administrative interpretations thereof, which are subject to change or modification by subsequent legislative, regulatory, administrative, or judicial decisions. Any such changes could also have an effect on the validity of our opinion. Page 17 STAT Healthcare, Inc. December__,1996 Our opinion is effective as of the date hereof. * * * * * * * Very truly yours, KPMG Peat Marwick LLP EX-23.2 6 OPINION OF KPMG PEAT MARWICK LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors STAT Healthcare, Inc.: We consent to the use of the form of our opinion as to certain federal income tax consequences to the parties participating in the proposed transaction included as Exhibit 8.2 in the Registration Statement. KPMG PEAT MARWICK LLP Houston, Texas November 1, 1996 EX-23.3 7 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS The Board of Directors American Medical Response, Inc.: We consent to incorporation by reference in the registration statement on Form S-4 of American Medical Response, Inc. of our reports dated February 9, 1996, relating to the consolidated financial statements of American Medical Response, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995, and the related schedule, which reports appear in the December 31, 1995 annual report on Form 10-K of American Medical Response, Inc., and the references to our firm under the headings "Conditions to the Merger; Termination; Fees," "Anticipated Accounting Treatment," "Certain Income Tax Consequences," "Certain Federal Income Tax Consequences," "Additional Agreements," "Validity of the Shares and Tax Matters," and "Experts" in the prospectus. KPMG Peat Marwick LLP Denver, Colorado November 1, 1996 EX-23.4 8 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.4 CONSENT OF INDEPENDENT AUDITORS The Board of Directors STAT Healthcare, Inc.: We consent to the use of our report included herein on the consolidated financial statements of STAT Healthcare, Inc. and subsidiaries as of December 31, 1995 and 1994 and for the years then ended. We also consent to the references to our firm under the heading "Experts" in the Prospectus. KPMG Peat Marwick LLP Houston, Texas November 1, 1996 EX-23.5 9 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.5 CONSENT OF INDEPENDENT AUDITORS The Board of Directors South Texas Acute Trauma Physicians, P.A.: We consent to the use of our report included herein on the financial statements of South Texas Acute Trauma Physicians, P.A. as of August 31, 1994 and December 31, 1993, and for the eight months ended August 31, 1994 and the year ended December 31, 1993. We also consent to the references to our firm under the heading "Experts" in the Prospectus. KPMG Peat Marwick LLP Houston, Texas November 1, 1996 EX-23.6 10 CONSENT OF LONG, CHILTON, PAYTE & HARDIN, LLP EXHIBIT 23.6 CONSENT OF INDEPENDENT AUDITORS The Board of Directors/Partners AmHealth Corporation and its Related Health Care Entities: We consent to the use of our report included herein on the combined financial statements of AmHealth Corporation and its related health care entities as of December 31, 1994 and for the year then ended. We also consent to the references to our firm under the heading "Experts" in the Prospectus. Long, Chilton, Payte & Hardin, LLP Certified Public Accountants McAllen, Texas November 1, 1996 EX-23.7 11 CONSENT OF LONG, CHILTON, PAYTE & HARDIN, LLP EXHIBIT 23.7 CONSENT OF INDEPENDENT AUDITORS The Board of Directors STAT Healthcare, Inc.: We consent to the use of our report included herein on the consolidated financial statements of STAT Healthcare, Inc. and subsidiaries as of December 31, 1993 and for the year then ended. We also consent to the references to our firm under the heading "Experts" in the Prospectus. Long, Chilton, Payte & Hardin, LLP Certified Public Accountants McAllen, Texas November 1, 1996 EX-23.8 12 CONSENT OF PACIFIC GROWTH EQUITIES, INC. EXHIBIT 23.8 CONSENT OF PACIFIC GROWTH EQUITIES, INC We hereby consent to the use of our name and to the description of our opinion letter dated October 7, 1996, under the captions "SUMMARY--Opinion of Financial Adviser" and "THE MERGER--Opinion of STAT's Financial Advisor" in, and to the inclusion of such opinion letter as Annex B to, the Joint Proxy Statement/Prospectus of STAT Healthcare, Inc. and American Medical Response, Inc. included as part of the Registration Statement on Form S-4 of American Medical Response, Inc. By giving such consent we do not thereby admit that we are experts with respect to any part of such Registration Statement within the meaning of the term "expert" as used in, or that we come within the category of persons whose consent is required under, the Securities Act of 1933 or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. PACIFIC GROWTH EQUITIES, INC San Francisco, California November 5, 1996 EX-99.1 13 CONSENT OF RUSSELL D. SCHNEIDER EXHIBIT 99.1 CONSENT OF RUSSELL D. SCHNEIDER I hereby consent to being named as becoming a director of American Medical Response, Inc. in its Registration Statement on Form S-4 to be filed with the Securities and Exchange Commission in connection with the merger of SHI Acquisition Corp. and STAT Healthcare, Inc. /s/ Russell D. Schneider --------------------------------- Russell D. Schneider Dated: November 5, 1996 -----END PRIVACY-ENHANCED MESSAGE-----