<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
AMENDMENT NO. 1
TO
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 23, 1996
____________________
NATIONAL SURGERY CENTERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-27162 36-3549627
(State or other jurisdiction of (Commission File (IRS Employer
incorporation or organization) Number) Identification No.)
35 EAST WACKER DRIVE, SUITE 2800
CHICAGO, ILLINOIS 60601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 553-4200
____________________
Page 1 of -- Exhibit Index appears on Page
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES PAGE
-----
<S> <C>
Report of Independent Public Accountants ......................................... 3
Consolidated Balance Sheets - February 23, 1996, December 31, 1995 and 1994 ...... 4-5
Consolidated Statements of Operations for the period ended February 23, 1996,
and the years ended December 31, 1995 and 1994 ............................... 6
Consolidated Statements of Stockholders' Deficit for the period ended February 23,
1996, and the years ended December 31, 1995 and 1994 ......................... 7
Consolidated Statements of Cash Flows for the period ended February 23, 1996,
and the years ended December 31, 1995 and 1994 ............................... 8-9
Notes to Consolidated Financial Statements ....................................... 10-17
</TABLE>
<PAGE> 3
[ARTHUR ANDERSEN LLP LOGO]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To National Surgery Centers, Inc.:
We have audited the accompanying consolidated balance sheets of ENDOSCOPY
CENTER AFFILIATES, INC. (a Delaware corporation) and subsidiaries (the Company)
as of February 23, 1996, December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the period ended February 23, 1996 and the years ended December 31, 1995 and
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Endoscopy Center
Affiliates, Inc. and subsidiaries as of February 23, 1996, December 31, 1995
and 1994, and the results of their operations and their cash flows for the
period ended February 23, 1996 and the years ended December 31, 1995 and 1994
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
May 3, 1996
<PAGE> 4
ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - FEBRUARY 23, 1996, DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,629,000 $ 1,501,000 $ 1,258,000
Accounts receivable, net of
allowance for doubtful
accounts of $95,000 in
1996, $156,000 in 1995
and $66,000 in 1994 1,260,000 1,249,000 583,000
Prepaid expenses and
other assets 179,000 143,000 83,000
Notes receivable 248,000 499,000 980,000
------------ ----------- -----------
Total current assets 3,316,000 3,392,000 2,904,000
------------ ----------- -----------
INVESTMENT IN PARTNERSHIPS 166,000 382,000 1,008,000
------------ ----------- -----------
EQUIPMENT, net 5,914,000 5,384,000 4,135,000
------------ ----------- -----------
OTHER ASSETS:
Organizational costs, net 195,000 337,000 256,000
Start-up costs, net 502,000 587,000 481,000
Other assets 55,000 123,000 140,000
------------ ----------- -----------
Total other assets 752,000 1,047,000 877,000
------------ ----------- -----------
$ 10,148,000 $10,205,000 $ 8,924,000
============ =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE> 5
ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - FEBRUARY 23, 1996, DECEMBER 31, 1995 AND 1994
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 377,000 $ 217,000 $ 1,156,000
Accrued liabilities 752,000 402,000 297,000
Interest payable 2,800,000 2,434,000 703,000
Salaries payable 868,000 868,000 711,000
Current notes payable 5,700,000 5,700,000 4,779,000
Current loans payable 1,005,000 1,120,000 203,000
Current lease payable 261,000 144,000 -
----------- ----------- -----------
Total current
liabilities 11,763,000 10,885,000 7,849,000
----------- ----------- -----------
LONG-TERM DEBT NET OF CURRENT
MATURITIES:
Long-term notes payable 17,000 17,000 17,000
Long-term loans payable 2,657,000 2,657,000 1,515,000
Long-term lease payable 2,499,000 1,672,000 -
----------- ----------- -----------
Total long-term
debt 5,173,000 4,346,000 1,532,000
----------- ----------- -----------
MINORITY INTEREST 670,000 591,000 661,000
----------- ----------- -----------
SUBORDINATED CONVERTIBLE DEBENTURE 10,000,000 10,000,000 10,000,000
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock $.01 par value,
10,000,000 shares authorized;
500,000 shares issued and
outstanding 5,000 5,000 5,000
Accumulated deficit (17,463,000) (15,622,000) (11,123,000)
------------ ----------- -----------
Total stockholders'
deficit (17,458,000) (15,617,000) (11,118,000)
------------ ----------- -----------
$ 10,148,000 $10,205,000 $ 8,924,000
============ =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE> 6
ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED FEBRUARY 23, 1996, AND THE YEARS ENDED DECEMBER 31, 1995
AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
OPERATING REVENUES:
Net patient service revenues $ 894,000 $ 4,841,000 $ 897,000
Other operating revenues 25,000 651,000 470,000
----------- ----------- -----------
Total operating revenues 919,000 5,492,000 1,367,000
----------- ----------- -----------
OPERATING EXPENSES:
Salaries, wages and benefits 282,000 1,541,000 291,000
Supplies and other 335,000 1,637,000 376,000
Depreciation and amortization 459,000 1,359,000 380,000
Provision for bad debts 13,000 52,000 36,000
Loss on closure of centers 112,000 104,000 474,000
----------- ----------- -----------
Total operating expenses 1,201,000 4,693,000 1,557,000
----------- ----------- -----------
OPERATING INCOME/(LOSS) (282,000) 799,000 (190,000)
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES 1,149,000 3,250,000 3,980,000
INTEREST 439,000 2,146,000 1,167,000
MINORITY INTEREST IN LOSS OF
SUBSIDIARIES (29,000) (99,000) (68,000)
----------- ----------- -----------
NET LOSS BEFORE PROVISION FOR
INCOME TAXES (1,841,000) (4,498,000) (5,269,000)
PROVISION FOR INCOME TAXES - 1,000 1,000
----------- ----------- -----------
NET LOSS $ (1,841,000) $(4,499,000) $(5,270,000)
=========== =========== ===========
LOSS PER COMMON SHARE $ (3.68) $ (9.00) $ (10.54)
=========== =========== ===========
COMMON SHARES OUTSTANDING 500,000 500,000 500,000
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE> 7
ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD ENDED FEBRUARY 23, 1996, AND THE YEARS ENDED DECEMBER 31, 1995
AND 1994
<TABLE>
<CAPTION>
Common Stock
-----------------------
Accumulated
Shares Amount Deficit Total
------ ------ ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993 500,000 $5,000 $ (5,853,000) $ (5,848,000)
Net loss - - (5,270,000) (5,270,000)
------- ------ ----------- -----------
BALANCE, December 31, 1994 500,000 5,000 (11,123,000) (11,118,000)
Net loss - - (4,499,000) (4,499,000)
------- ------ ----------- -----------
BALANCE, December 31, 1995 500,000 $5,000 (15,622,000) (15,617,000)
Net loss (1,841,000) (1,841,000)
------- ------ ----------- -----------
BALANCE, February 23, 1996 500,000 $5,000 $(17,463,000) $(17,458,000)
------- ------ ----------- -----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE> 8
ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD ENDED FEBRUARY 23, 1996 AND THE YEARS ENDED DECEMBER 31, 1995
AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(1,841,000) $(4,499,000) $(5,270,000)
----------- ----------- -----------
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and
amortization 459,000 1,359,000 380,000
Gain on sale of centers - (294,000) -
Loss on sale of centers 112,000 104,000 474,000
Minority interest in loss of
subsidiaries (29,000) (99,000) (68,000)
Change in assets and
liabilities:
Decrease (increase) in:
Accounts receivable, net (11,000) (666,000) (286,000)
Prepaid expense and other (36,000) (60,000) 84,000
Deposits 10,000 (15,000) (48,000)
Increase (decrease) in:
Accounts payable 160,000 (939,000) 927,000
Accrued liabilities 350,000 105,000 87,000
Interest payable 366,000 1,731,000 703,000
Salaries payable - 157,000 368,000
----------- ----------- -----------
Total adjustments 1,381,000 1,383,000 2,621,000
----------- ----------- -----------
Net cash used in
operating activities (460,000) (3,116,000) (2,649,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Notes receivable - - (980,000)
Investment in partnerships - - (1,008,000)
Additions to equipment (827,000) (958,000) (3,771,000)
Increase in organization costs - (98,000) (223,000)
Increase in start up costs - (608,000) (544,000)
Proceeds from sale of partnership
interests 586,000 263,000 -
----------- ----------- -----------
Net cash used in
investing activities (241,000) (1,401,000) (6,526,000)
----------- ----------- -----------
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principle payments on loans
payable $ (115,000) $ - $ -
Principle payments on capital
lease obligations - (36,000) -
Issuance of notes and loans - 4,652,000 6,431,000
Increase in capital lease
obligations 944,000 144,000 36,000
----------- ----------- -----------
Net cash provided by
financing activities 829,000 4,760,000 6,467,000
----------- ----------- -----------
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS 128,000 243,000 (2,708,000)
CASH AND CASH EQUIVALENTS,
beginning of year 1,501,000 1,258,000 3,966,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of period $1,629,000 $1,501,000 $1,258,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 95,000 $ 393,000 $ 459,000
=========== =========== ===========
Taxes paid $ - $ 1,000 $ 1,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE> 10
ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 23, 1996
1. Operations and Organization
These financial statements present the financial position and operations of
Endoscopy Center Affiliates, Inc. and subsidiaries (ECA or the Company). ECA,
a Delaware corporation, was formed on September 1, 1992 from the merger of
Medicenter Development, Inc., a California corporation, Surgicenter Development
Corporation, a California corporation and Endoscopy Center Affiliates, Inc., a
California corporation. The Company invests in, develops, owns and manages
out-patient, ambulatory endoscopy centers (ECs). The centers are typically
organized as general partnerships.
2. Summary of Significant Accounting Policies
a. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
b. Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and the partnerships in which the Company owns a
majority interest. All significant intercompany transactions and
balances have been eliminated.
c. Cash and Cash Equivalents
The Company considers only highly liquid investments with an original
maturity of three months or less to be cash equivalents.
d. Equipment
Equipment is stated at cost. Property and equipment under
capital leases are recorded at the lower of the present value of lease
payments or fair market value. When equipment is sold or otherwise
disposed of, the cost and related accumulated depreciation are removed
from the accounts, and any resulting gain or loss is included in
income. The costs of normal maintenance and repairs and minor
replacements are charged to expense when incurred. The Company
provides for depreciation using the straight line method over the
following estimated useful lives:
<PAGE> 11
- 2 -
Furniture and fixtures 3-5 Years
Machinery and equipment 3-5 Years
Tenant improvements lesser of lease life or 10
Years
e. Organization Costs
The Company is deferring costs of bringing the partnership into legal
existence. The organization costs are being amortized over 5-10 years
once the centers are operational. Accumulated amortization related to
organizational costs as of February 23, 1996, December 31, 1995 and
1994 were $38,000, $17,000, and $0, respectively.
f. Start-up Costs
The Company is deferring certain costs that are directly attributable
to the start up operation of its centers. Start-up costs include such
costs as development fees, personnel, rent, and other direct costs
incurred prior to a center obtaining licenses and state approvals
which permit the center to begin performing surgeries. These costs
will be amortized over 2 years once the surgery centers are available
for use. As of February 23, 1996, December 31, 1995 and 1994, there
was $718,000, $619,000, and $117,000, respectively, in accumulated
amortization of start-up costs.
g. Net Patient Service Revenues
Net revenue consists of charges by the Company's centers at
established billing rates for services which generally include all
fees for operating room, recovery room, supplies, and medications.
Net revenue is net of provisions for contractual adjustments.
h. Insurance
Each center has professional liability insurance with a $1,000,000
limit per occurrence and an aggregate limit of $3,000,000.
3. Notes Receivable
During 1996, 1995 and 1994, ECA extended short-term notes to several of the
centers. The notes bear interest at the prime rate (8.25 percent at February
23, 1996) plus two percent.
<PAGE> 12
- 3 -
4. Equipment
Equipment consisted of the following at February 23, 1996, December 31, 1995,
and December 31, 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Furniture and fixtures $ 486,000 $ 491,000 $ 364,000
Machinery and equipment 3,609,000 2,765,000 1,678,000
Tenant improvements 3,146,000 2,949,000 2,471,000
--------- --------- ---------
7,241,000 6,205,000 4,513,000
Less--Accumulated
depreciation and amortization (1,327,000) (821,000) (378,000)
--------- --------- ---------
$5,914,000 $5,384,000 $4,135,000
========= ========= =========
</TABLE>
Included in equipment is capitalized leased equipment which aggregated
$4,795,000, $5,059,000, and $3,573,000 with accumulated depreciation of
$781,000, $740,000, and $108,000 at February 23, 1996, December 31, 1995 and
1994.
5. Net Patient Service Revenues
The difference between charges generated from agreements with third-party
payors and the related payment amounts are reflected as contractual discounts
as shown below:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C>
Gross patient service
revenues $1,437,000 $8,122,000 $1,296,000
Contractual discounts (543,000) (3,281,000) (399,000)
--------- --------- ---------
Net patient service
revenues $ 894,000 $4,841,000 $ 897,000
========= ========== ==========
</TABLE>
A summary of the payment arrangements with third party payors is as follows:
a. Medicare
The Company is reimbursed for outpatient services based on a fee
schedule. During 1996, 1995 and 1994, approximately 58, 52, and 51
percent, respectively, of gross patient service revenues were derived
from services provided to Medicare patients.
<PAGE> 13
- 4 -
b. Managed Care
The Company has also entered into other payment arrangements
with certain commercial insurance carriers, health maintenance
organizations, and preferred provider organizations. The basis for
payment to the Company under these agreements are at discounts from
established charges.
6. Lease Obligations
The Company leases certain equipment and facilities under noncancellable
operating and capital leases. Certain rental amounts in the operating leases
are subject to escalation clauses throughout the next several years. Future
minimum lease payments under noncancellable operating and capital leases with a
remaining term of one year or more are as follows at February 23, 1996:
<TABLE>
<CAPTION>
Capital Operating
leases leases
----------- ----------
<S> <C> <C>
1996 $ 358,000 $ 524,000
1997 763,000 616,000
1998 778,000 500,000
1999 778,000 517,000
2000 778,000 475,000
Thereafter 675,000 1,289,000
----------- -----------
Total lease payments 4,130,000 $ 3,921,000
===========
Less - amount representing interest (1,370,000)
-----------
Present value of minimum lease
payments $ 2,760,000
===========
</TABLE>
Rent expense for the period ended February 23, 1996 was $112,000, and for the
years ended December 31, 1995 and 1994 was approximately $613,000 and $244,000,
respectively.
7. Subordinated Convertible Debenture
ECA has a Floating Rate Convertible Subordinate Debenture (the Debenture) due
in 1997 in the amount of $10,000,000 issued by Caremark, Inc. (Caremark). The
interest rate at February 23, 1996 was 10.75 percent. Pursuant to the terms of
the Debenture, it may be converted into 4,500,000 of ECA's common stock at the
rate of $2.22 per share. Interest is due quarterly.
The Company must comply with certain covenants in the debenture agreement. As
of February 23, 1996, December 31, 1995 and 1994, the Company had obtained a
waiver for conditions of noncompliance.
<PAGE> 14
- 5 -
On February 23, 1996 Caremark sold its convertible Subordinated Debenture and
demand notes (see note 8) to National Surgery Centers. All rights and interest
in the indebtedness were transferred on that date. On March 31,1996, National
Surgery Centers converted the debt into 4,500,000 shares of ECA's common stock
(see note 19).
8. Notes Payable
During 1992, ECA obtained a $10 million standby promissory note (the Note) from
Caremark. The interest rate on the Note is based on a certain bank's prime
rate (8.25 at February 23, 1996) plus 2.50 percent. The Note is subject to ECA
meeting certain targeted revenues identified in ECA's business plan. On
February 23, 1996 ECA had $5.7 million outstanding under the Note. On February
23, 1996, Caremark sold its interest in these notes to National Surgery
Centers. National Surgery Centers does not intend to call these notes in 1996.
Also, included in this amount are two unsecured notes from a payable to a
physician corporation in the amount of $47,000. The interest rate on these
unsecured notes is 8 percent. One of the notes was due and paid on June 1995
and the other note is due in March 1997.
9. Loans Payable
During 1994 and 1995, several of the centers obtained loans from various
sources for funding working capital and acquisition of fixed assets. The
interest rate on these loans ranges from 12 percent to 13.25 percent and the
term of the loans is for 60 months with payments made monthly. Caremark is
the guarantor on some of these loans. The loans are collateralized by the
various assets of the individual centers including fixed assets.
The Company must comply with certain covenants in certain loan agreements. As
of February 23, 1996 and December 31, 1995, the Company had obtained a waiver
for conditions of noncompliance.
10. Debt Maturity Schedule
Long-term debt maturities at February 23, 1996 were are as follows:
<TABLE>
<S> <C>
1996 $ 6,705,000
1997 10,655,000
1998 824,000
1999 922,000
2000 273,000
-----------
TOTAL $ 19,379,000
===========
</TABLE>
11. Off-Balance Sheet Risk
ECA is a guarantor on several of the centers' loans payable (see note 9).
Additionally, ECA is a 50 percent guarantor for the loan payable for an
unconsolidated center. The loan was approximately $861,000 at February 23,
1996.
<PAGE> 15
- 6 -
12. Financial Liquidity
National Surgery Centers acquired ECA on February 23, 1996 when they purchased
the convertible subordinated debenture. National Surgery Centers will support
the operations of ECA and does not intend to call the debt during 1996.
13. Employee Benefit Plan
Effective September 1, 1992, ECA adopted a Profit Sharing 401(k) Plan (the
Plan) covering all employees after minimum eligibility requirements have been
met. The Plan allows individuals to make pretax contributions and provides for
a profit-sharing contribution plus a partial matching by ECA for all its
eligible employees. ECA's contribution to this plan was approximately $13,000,
$58,000 and $34,000 at February 23, 1996, December 31, 1995 and December 31,
1994, respectively.
14. Commitments and Contingencies
a. Salaries Payable Contract
On September 1, 1992 ECA entered into four year employment agreements
with four ECA officers. Each of the agreements provides for annual
compensation (subject to upward adjustment). As of February 23, 1996
salaries payable to these officers was $100,000.
b. Litigation
The Company is from time to time subject to claims arising in
the ordinary course of business. In the opinion of management, the
ultimate resolution of such proceedings will not have a material
adverse effect on the financial position of the Company or result in a
substantial impairment of its operations.
c. Healthcare Reform
Legislation and regulations at all levels of government have
affected and are likely to continue to affect the operations of
healthcare providers. Numerous national healthcare reform bills have
been introduced in the U.S. Congress. These bills are complex and
address such matters as health insurance coverage, benefits,
malpractice reform and cost controls or cost containment. At this
time, it is not possible to determine the impact of any national
healthcare reform legislation that might be enacted.
15. Income Taxes
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ---------
<S> <C> <C> <C>
Current $ - $ 1,000 $ 1,000
Deferred - - -
---------- --------- ---------
$ - $ 1,000 $ 1,000
========== ========= =========
</TABLE>
<PAGE> 16
- 7 -
The components of the deferred tax assets and liabilities as of February 23,
1996, December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for bad debts $ 145,000 $ 201,000 $ 41,000
Net operating loss
carryforwards 4,058,000 3,485,000 2,795,000
Depreciation and amortization 248,000 160,000 46,000
Accounts payable, salaries
payable and accrued
liabilities 1,583,000 1,382,000 629,000
Valuation allowance (5,754,000) (4,954,000) (3,285,000)
----------- ----------- -----------
Total deferred
tax assets 280,000 274,000 226,000
Deferred tax liabilities:
Accounts receivable 279,000 272,000 222,000
Prepaid expenses 1,000 2,000 4,000
----------- ----------- -----------
Total deferred
tax liability 280,000 274,000 226,000
----------- ----------- -----------
Net deferred tax asset $ - $ - $ -
=========== =========== ===========
</TABLE>
16. Financial Accounting Standards No. 121
The Financial Accounting Standards Board has promulgated a new standard which
is applicable to the Company: Statement No. 121 Accounting for the Impairment
of Long-Lived Assets to be Disposed of (SFAS 121). The Company's management
adopted this standard as required on January 1, 1996. Management has analyzed
the impact of SFAS 121 on the Company's financial statements and believes that
the standard did not have a material impact.
17. Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments:
Cash and cash equivalents: The carrying amount reported in the
consolidated balance sheets for cash and cash equivalents approximates
its fair value.
Notes receivable: The carrying amount reported in the consolidated
balance sheets for notes receivables approximates its fair value.
Accounts payable and accrued expenses: The carrying amount
reported in the consolidated balance sheets for accounts payable
and accrued expenses approximates its fair value.
<PAGE> 17
- 8 -
Subordinated convertible debenture and current notes payable: The fair
value was based upon the sale price at February 23, 1996 (see note 7)
of these debt instruments.
Long-term notes payable and loans payable: The fair value was estimated
based upon current rates offered for debts of the same remaining
maturities, approximates the carrying amount reported in the
consolidated balance sheets.
The carrying amounts and fair values of the Company's financial
instruments at February 23, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Cash and cash equivalents $1,629,000 $1,629,000 $ 1,501,000 $1,501,000
Notes receivable 248,000 248,000 499,000 499,000
Accounts payable and
accrued liabilities 1,129,000 1,129,000 619,000 619,000
Subordinated convertible
debenture and current
notes payable 15,700,000 1,750,000 15,700,000 1,750,000
Long-term notes payable,
loans payable and lease
payable 6,439,000 6,439,000 5,610,000 5,610,000
</TABLE>
18. Related Party Transaction
ECA had a loan to an employee with an interest rate of prime (8.25 at February
23, 1996) plus 2 percent. The amounts of the loan at February 23, 1996,
December 31, 1995, and 1994 was $36,000, $26,000, and $26,000, respectively.
These amounts were included in notes receivable.
19. Subsequent Events
Since February 23, 1996, ECA has sold their investment in two centers. The
total losses related to these transactions were $112,000 and were recorded as
of February 23, 1996.
On March 31, 1996, National Surgery Centers converted the subordinated
debenture into 4,500,000 shares of ECA common stock based on a conversion price
of $2.22 a share. Upon conversion of the debt, National Surgery Centers
relinquishes the debenture.
<PAGE> 18
(b) Pro forma financial information
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Consolidated Statements of Operations
for the year ended December 31, 1995, and Consolidated Balance Sheets at
December 31, 1995, are based on the audited historical consolidated financial
statements of National Surgery Centers, Inc. ("NSC" or the "Company") and
Endoscopy Center Affiliates ("ECA" or the "Recent Acquisition"). The Unaudited
Pro Forma Consolidated Statements of Operations are adjusted as if the
following events occurred on January 1, 1995 while the Unaudited Pro Forma
Consolidated Balance Sheets are adjusted as if the acquisition of ECA had
occurred at December 31, 1995. The Unaudited Pro Forma Consolidated Statements
of Operations combine the historical operations of the Company with the
historical operations of ECA prior to the dates the Company made such
acquisition, using the purchase method of accounting. These Pro Forma
Consolidated Financial Statements are not necessarily indicative of the
operating results that would have been achieved had the aforementioned
transactions occurred at the beginning of each period presented nor do they
purport to indicate the results of future operations.
These Unaudited Pro Forma Consolidated Financial Statements are based on
the assumptions set forth in the notes to such statements and should be read in
conjunction with the related consolidated financial statements and notes
thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------
NSC RECENT ADJUST- PRO
HISTORICAL ACQUISITION(1) MENTS FORMA
---------- -------------- --------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Net revenue ............................................ $53,165 $ 4,841 $ - $58,006
Cost and expenses:
Operating expenses .................................. 36,982 3,334 - 40,316
General and administrative expenses ................. 2,365 3,250 (2,900)(2) 2,715
Depreciation and amortization ....................... 3,581 1,359 19 (3) 4,959
------- -------- ---------- -------
Total costs and expenses ............................ 42,928 7,943 (2,881) 47,990
------- -------- ---------- -------
Operating income (loss) ............................. 10,237 (3,102) 2,881 10,016
Other (income) expense:
Interest expense .................................... 4,139 2,146 (1,555)(4)(5) 4,730
Interest income ..................................... (278) - - (278)
Minority interests .................................. 1,382 (99) - 1,283
Other, net .......................................... (86) (651) - (737)
------- -------- ---------- -------
Total other (income) expense ........................ 5,157 1,396 (1,555) 4,998
------- -------- ---------- -------
Net income (loss) before taxes and extraordinary item .. 5,080 (4,498) 4,436 5,018
Provision for income taxes ............................. 1,981 1 (25)(6) 1,957
------- -------- ---------- -------
Net income (loss) before extraordinary item ............ 3,099 (4,499) 4,461 3,061
Early extinguishment of debt, net ...................... (253) - - (253)
------- -------- ---------- -------
Net Income (loss) ...................................... $ 2,846 $ (4,499) $ 4,461 $ 2,808
======= ======== ========== =======
Income (loss) per common shares:
Primary:
Before extraordinary item ........................ $ 0.85 $ - $ - $ 0.84
Extraordinary item ............................... (0.07) - - (0.07)
------- -------- ---------- -------
Net income (loss) ................................ $ 0.78 $ - $ - $ 0.77
======= ======== ========== =======
Fully Diluted:
Before extraordinary item ........................ $ 0.81 $ - $ - $ 0.80
Extraordinary item ............................... (0.06) - - (0.06)
------- -------- ---------- -------
Net income (loss) ................................ $ 0.75 $ - $ - $ 0.74
======= ======== ========== =======
Weighted average number of common and
common equivalent shares outstanding:
Primary ............................................. 3,638 - - 3,638
Fully diluted ....................................... 3,807 - - 3,807
</TABLE>
The accompanying notes on the following page are an integral part of the
Unaudited Pro Forma Consolidated Financial Statements.
<PAGE> 19
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------------
NSC RECENT ADJUST- PRO
HISTORICAL ACQUISITION(7) MENTS FORMA
---------- -------------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEETS:
ASSETS
Current Assets:
Cash and cash equivalents ............................ $ 14,653 $ 1,501 $ - 16,154
Short-term investments ............................... 8,190 - - 8,190
Accounts receivable, net ............................. 8,764 1,349 - 10,013
Other current assets ................................. 2,994 642 - 3,636
---------- --------- --------- --------
Total current assets ............................. 34,601 3,392 - 37,993
---------- --------- --------- --------
Property and equipment, net ............................. 25,552 5,384 - 30,936
Excess of purchase price over net assets acquired, net .. 16,446 - 727 (8) 17,173
Other assets ............................................ 5,688 1,429 - 7,117
---------- --------- --------- --------
$ 82,287 $ 10,205 $ 727 $93,219
========== ========= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current installments of long-term debt ............... $ 7,069 $ 6,964 $ (5,700)(9) $ 8,333
Accounts payable and accrued expenses ................ 5,387 3,921 (2,999)(9) 6,309
---------- --------- --------- --------
Total current liabilities ......................... 12,456 10,885 (8,699) 14,642
---------- --------- --------- --------
Long-term debt, less current installments ............... 17,005 14,346 (8,013)(9)(10) 23,338
Other long-term liabilities ............................. 449 - - 449
Minority Interests ...................................... 4,185 591 - 4,776
Shareholders' Equity:
Preferred stock ...................................... - - - -
Non-voting common stock .............................. 6 - - 6
Common stock ......................................... 50 5 (5)(9) 50
Additional paid-in-capital ........................... 87,814 - (9) 87,814
Accumulated deficit .................................. (39,678) (15,622) 17,444 (9)(10) (37,856)
---------- --------- --------- --------
Total shareholders' equity ........................ 48,192 (15,617) 17,439 50,014
---------- --------- --------- --------
$ 82,287 $ 10,205 $ 727 $93,219
========== ========= ========= ========
</TABLE>
---------------
(1) Reflects the historical net revenue and operating expenses of the Recent
Acquisition on a consolidated basis as if the Recent Acquisition had
occurred on January 1, 1995.
(2) Reflects general and administrative expense eliminated as a result of
the Recent Acquisition.
(3) Reflects incremental amortization of goodwill as a result of the Recent
Acquisition.
(4) Reflects reduction of interest expense attributable to debt acquired by
NSC as a direct result of the Recent Acquisition.
(5) Reflects additional interest expense attributable to debt issued as a
direct result of the Recent Acquisition.
(6) Represents an adjustment to reflect income tax benefit at an assumed
effective tax rate of 40.0% after offset of Recent Acquisition loss.
(7) Reflects the historical balance sheet for the acquisition of the Recent
Acquisition as if the Recent Acquisition had occurred on
December 31, 1995.
(8) Reflects excess purchase price over net assets acquired, net of
amortization for 1995, as a result of the Recent Acquisition.
(9) Adjustments reflect accrued salaries, accrued interest, demand notes and
long-term debt acquired by NSC and thus eliminated in consolidation
as a result of the Recent Acquisition.
(10) Reflects debt issued by NSC to acquired accrued salaries, accrued
interest, demand notes, long-term debt and common stock.
(c) Exhibits.
The Exhibits to this Report are listed in the Exhibit Index set
forth elsewhere herein.
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL SURGERY CENTERS, INC.
By:/s/ Bryan S. Fisher
------------------------
Bryan S. Fisher
Chief Financial Officer
DATE: MAY 8, 1996
<PAGE> 21
NATIONAL SURGERY CENTERS, INC.
EXHIBIT INDEX
SEQUENTIAL
NUMBER AND DESCRIPTION OF EXHIBIT PAGE NUMBER
23. Consent of Arthur Andersen & Co.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of
our reports included in this Form 8-K.
ARTHUR ANDERSEN LLP
May 3, 1996
