<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
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 16 -- Exhibit Index appears on Page 16
================================================================================
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES ----
<S> <C>
Report of Independent Public Accountants........................................................................... 3
Consolidated Balance Sheets as of December 31, 1994 and 1995 and February 23, 1996................................. 4
Consolidated Statements of Operations for the years ended December 31, 1993, 1994
and 1995, and the period ended February 23, 1996................................................................ 5
Consolidated Statements of Stockholders' Deficit for the years ended December 31,
1993, 1994 and 1995, and the period ended February 23, 1996..................................................... 6
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995, and the period ended February 23, 1996................................................................ 7
Notes to Consolidated Financial Statements......................................................................... 8-14
</TABLE>
(c) Exhibits.
The Exhibits to this Report are listed in the Exhibit Index set
forth elsewhere herein.
<PAGE>
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 December 31, 1994, 1995, and February 23, 1996, and the related
consolidated statements of operations, stockholders' deficit and cash flows
for the years ended December 31, 1993, 1994 and 1995 and the period ended
February 23, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material 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 December 31, 1994, 1995, and
February 23, 1996, the results of their operations and their cash flows for
the years ended December 31, 1993, 1994 and 1995, and the period ended
February 23, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Los Angeles, California
May 3, 1996
3
<PAGE>
ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995, AND FEBRUARY 23, 1996
<TABLE>
<CAPTION>
ASSETS 1994 1995 1996
------ ------------ ------------ ------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......... $ 1,258,000 $ 1,501,000 $ 1,629,000
Accounts receivable, net of
allowance for doubtful accounts of
$66,000 in 1994, $156,000 in 1995
and $95,000 in 1996............... 583,000 1,249,000 1,260,000
Prepaid expenses and other assets.. 83,000 143,000 179,000
Notes receivable................... 980,000 499,000 248,000
------------ ------------ ------------
Total current assets............. 2,904,000 3,392,000 3,316,000
------------ ------------ ------------
Investment in partnerships........... 1,008,000 382,000 166,000
------------ ------------ ------------
Equipment, net....................... 4,135,000 5,384,000 5,914,000
------------ ------------ ------------
Other Assets:
Organizational costs, net.......... 256,000 337,000 195,000
Start-up costs, net................ 481,000 587,000 502,000
Other assets....................... 140,000 123,000 55,000
------------ ------------ ------------
Total other assets............... 877,000 1,047,000 752,000
------------ ------------ ------------
$ 8,924,000 $ 10,205,000 $ 10,148,000
============ ============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable................... $ 1,156,000 $ 217,000 $ 377,000
Accrued liabilities................ 297,000 402,000 752,000
Interest payable................... 703,000 2,434,000 2,800,000
Salaries payable................... 711,000 868,000 868,000
Current notes payable.............. 4,779,000 5,700,000 5,700,000
Current loans payable.............. 203,000 1,120,000 1,005,000
Current lease payable.............. -- 144,000 261,000
------------ ------------ ------------
Total current liabilities........ 7,849,000 10,885,000 11,763,000
------------ ------------ ------------
Long-term debt net of current
maturities:
Long-term notes payable............ 17,000 17,000 17,000
Long-term loans payable............ 1,515,000 2,657,000 2,657,000
Long-term lease payable............ -- 1,672,000 2,499,000
------------ ------------ ------------
Total long-term debt............. 1,532,000 4,346,000 5,173,000
------------ ------------ ------------
Minority interest.................... 661,000 591,000 670,000
------------ ------------ ------------
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................ (11,123,000) (15,622,000) (17,463,000)
------------ ------------ ------------
Total stockholders' deficit...... (11,118,000) (15,617,000) (17,458,000)
------------ ------------ ------------
$ 8,924,000 $ 10,205,000 $ 10,148,000
============ ============ ============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
4
<PAGE>
ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE PERIOD ENDED FEBRUARY 23, 1996
<TABLE>
<CAPTION>
1993 1994 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenues:
Net patient service
revenues................ $ 604,000 $ 897,000 $ 4,841,000 $ 894,000
Other operating revenues. 333,000 470,000 651,000 25,000
----------- ----------- ----------- -----------
Total operating
revenues.............. 937,000 1,367,000 5,492,000 919,000
----------- ----------- ----------- -----------
Operating expenses:
Salaries, wages and
benefits................ 211,000 291,000 1,541,000 282,000
Supplies and other....... 325,000 376,000 1,637,000 335,000
Depreciation and
amortization............ 126,000 380,000 1,359,000 459,000
Provision for bad debts.. 82,000 36,000 52,000 13,000
Selling, general, and
administrative expenses. 3,664,000 3,980,000 3,250,000 1,149,000
Loss on closure of
centers................. -- 474,000 104,000 112,000
Writedown of assets...... 554,000 -- -- --
----------- ----------- ----------- -----------
Total operating
expenses.............. 4,962,000 5,537,000 7,943,000 2,350,000
----------- ----------- ----------- -----------
Operating loss............. (4,025,000) (4,170,000) (2,451,000) (1,431,000)
Interest expense........... 866,000 1,167,000 2,146,000 439,000
Minority interest in loss
of subsidiaries........... (3,000) (68,000) (99,000) (29,000)
----------- ----------- ----------- -----------
Net loss before provision
for income taxes.......... (4,888,000) (5,269,000) (4,498,000) (1,841,000)
Provision for income taxes. 1,000 1,000 1,000 --
----------- ----------- ----------- -----------
Net loss................... $(4,889,000) $(5,270,000) $(4,499,000) $(1,841,000)
=========== =========== =========== ===========
Loss per common share...... $ (9.78) $ (10.54) $ (9.00) $ (3.68)
=========== =========== =========== ===========
Common shares outstanding.. 500,000 500,000 500,000 500,000
=========== =========== =========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
5
<PAGE>
ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE PERIOD ENDED FEBRUARY 23, 1996
<TABLE>
<CAPTION>
COMMON STOCK
-------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------- ------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1992........... 500,000 $5,000 $ (964,000) $ (959,000)
Net loss......................... -- -- (4,889,000) (4,889,000)
------- ------ ------------ ------------
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 Notes to Consolidated Financial Statements are an integral part of these
statements.
6
<PAGE>
ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE PERIOD ENDED FEBRUARY 23, 1996
<TABLE>
<CAPTION>
1993 1994 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................. $(4,889,000) $(5,270,000) $(4,499,000) $(1,841,000)
----------- ----------- ----------- -----------
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization............. 126,000 380,000 1,359,000 459,000
Writedown of assets....... 554,000 -- -- --
Gain on sale of centers... -- -- (294,000) --
Loss on sale of centers... -- 474,000 104,000 112,000
Minority interest in loss
of subsidiaries.......... (3,000) (68,000) (99,000) (29,000)
Change in assets and
liabilities:
Decrease (increase) in:
Accounts receivable,
net.................... 169,000 (286,000) (666,000) (11,000)
Prepaid expense and
other.................. (165,000) 84,000 (60,000) (36,000)
Deposits................ 11,000 (48,000) (15,000) 10,000
Increase (decrease) in:
Accounts payable........ 169,000 927,000 (939,000) 160,000
Accrued liabilities..... (45,000) 87,000 105,000 350,000
Interest payable........ (217,000) 703,000 1,731,000 366,000
Salaries payable........ 342,000 368,000 157,000 --
Minority interest....... 550,000 -- -- --
----------- ----------- ----------- -----------
Total adjustments...... 1,491,000 2,621,000 1,383,000 1,381,000
----------- ----------- ----------- -----------
Net cash used in
operating activities.. (3,398,000) (2,649,000) (3,116,000) (460,000)
----------- ----------- ----------- -----------
Cash flows from investing
activities:
Notes receivable.......... -- (980,000) -- --
Investment in
partnerships............. -- (1,008,000) -- --
Additions to equipment.... (787,000) (3,771,000) (958,000) (827,000)
Increase in organization
costs.................... (33,000) (223,000) (98,000) --
Increase in start up
costs.................... (44,000) (544,000) (608,000) --
Proceeds from sale of
partnership interests.... -- -- 263,000 586,000
Increase in goodwill...... (231,000) -- -- --
----------- ----------- ----------- -----------
Net cash used in
investing activities.. (1,095,000) (6,526,000) (1,401,000) (241,000)
----------- ----------- ----------- -----------
Cash flows from financing
activities:
Principal payments on
loans payable............ -- -- -- (115,000)
Principal payments on
capital lease
obligations.............. -- -- (36,000) --
Issuance of notes and
loans.................... 83,000 6,431,000 4,652,000 --
Increase in capital lease
obligations.............. -- 36,000 144,000 944,000
----------- ----------- ----------- -----------
Net cash provided by
financing activities.. 83,000 6,467,000 4,760,000 829,000
----------- ----------- ----------- -----------
Net increase (decrease) in
cash and cash equivalents. (4,410,000) (2,708,000) 243,000 128,000
Cash and cash equivalents,
beginning of year......... 8,376,000 3,966,000 1,258,000 1,501,000
----------- ----------- ----------- -----------
Cash and cash equivalents,
end of period............. $ 3,966,000 $ 1,258,000 $ 1,501,000 $ 1,629,000
=========== =========== =========== ===========
Supplemental disclosure of
cash flow information:
Interest paid............. $ 1,079,000 $ 459,000 $ 393,000 $ 95,000
=========== =========== =========== ===========
Taxes paid................ $ 1,000 $ 1,000 $ 1,000 $ --
=========== =========== =========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
7
<PAGE>
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:
<TABLE>
<S> <C>
Furniture and fixtures................... 3-5 Years
Machinery and equipment.................. 3-5 Years
Tenant improvements...................... lesser of lease life or 10 Years
</TABLE>
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 December 31, 1994, 1995 and February 23, 1996, were $0, $17,000,
and $38,000, respectively.
8
<PAGE>
ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 December 31, 1994, 1995 and
February 23, 1996, there was $117,000, $619,000, and $718,000, 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 the provision
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 1994, 1995 and 1996, 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.
4. EQUIPMENT
Equipment consisted of the following at December 31, 1994 and 1995 and
February 23, 1996:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Furniture and fixtures............... $ 364,000 $ 491,000 $ 486,000
Machinery and equipment.............. 1,678,000 2,765,000 3,609,000
Tenant improvements.................. 2,471,000 2,949,000 3,146,000
---------- ---------- ----------
4,513,000 6,205,000 7,241,000
Less--Accumulated depreciation and
amortization........................ (378,000) (821,000) (1,327,000)
---------- ---------- ----------
$4,135,000 $5,384,000 $5,914,000
========== ========== ==========
</TABLE>
Included in equipment is capitalized leased equipment which aggregated
$3,573,000, $5,059,000, and $4,795,000 with accumulated depreciation of
$108,000, $740,000, and $781,000 at December 31, 1994, 1995 and February 23,
1996.
9
<PAGE>
ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
1993 1994 1995 1996
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Gross patient service
revenues............... $ 817,000 $1,296,000 $ 8,122,000 $1,437,000
Contractual discounts... (213,000) (399,000) (3,281,000) (543,000)
--------- ---------- ----------- ----------
Net patient service
revenues............... $ 604,000 $ 897,000 $ 4,841,000 $ 894,000
========= ========== =========== ==========
</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 1994, 1995 and 1996, approximately 51, 52, and 58 percent,
respectively, of gross patient service revenues were derived from services
provided to Medicare patients.
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 years ended December 31, 1993, 1994 and 1995 was
approximately $115,000, $244,000 and $613,000, respectively and for the period
ended February 23, 1996 rent expense was $112,000.
10
<PAGE>
ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. SUBORDINATED CONVERTIBLE DEBENTURE
ECA has a Floating Rate Convertible Subordinated Debenture (the Debenture)
due in 1997 in the amount of $10,000,000 issued to 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 did not comply with certain covenants including quarterly
interest payments and audited financial statement reporting requirements for
1994 and 1995. As of February 23, 1996, the Company received a waiver for
these conditions of noncompliance.
8. NOTES PAYABLE
During 1992, ECA obtained $10 million standby promissory notes (the Notes)
from Caremark. The interest rate on the Notes is based on a certain bank's
prime rate (8.25 at February 23, 1996) plus 2.50 percent. The Notes are
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 Notes.
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 Notes Payable is an unsecured note payable to a physician
corporation. The interest rate on this unsecured note is 8 percent. The note
is due in March 1997.
9. LOANS PAYABLE
During 1994 and 1995, several of the Company's centers obtained loans from
various sources for funding working capital and the acquisition of fixed
assets. The interest rate on these loans ranges from 12 percent to 13.25
percent. The term of the loans is 60 months, with principal and interest
payments due monthly. Caremark is the guarantor of $2,163,000 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 financial statement noncompliance.
10. DEBT MATURITY SCHEDULE
Long-term debt maturities at February 23, 1996 were 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 50 percent guarantor for the loan payable of an unconsolidated
center. The loan balance was approximately $861,000 at February 23, 1996.
11
<PAGE>
ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. 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 eligible
employees. ECA's contribution to this plan was approximately $29,000, $34,000,
$58,000 and $13,000 during 1993, 1994, 1995 and the short period of 1996,
respectively.
13. 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 a total of $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.
14. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1993 1994 1995 1996
------ ------ ------ ----
<S> <C> <C> <C> <C>
Current......................................... $1,000 $1,000 $1,000 $--
Deferred........................................ -- -- -- --
------ ------ ------ ----
$1,000 $1,000 $1,000 --
------ ------ ------ ----
</TABLE>
The components of the deferred tax assets and liabilities as of December 31,
1994, and 1995 and February 23, 1996, were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for bad debts............... $ 41,000 $ 201,000 $ 145,000
Net operating loss carryforwards...... 2,795,000 3,485,000 4,058,000
Depreciation and amortization......... 46,000 160,000 248,000
Accounts payable, salaries payable and
accrued liabilities.................. 629,000 1,382,000 1,583,000
Valuation allowance................... (3,285,000) (4,954,000) (5,754,000)
----------- ----------- -----------
Total deferred tax assets........... 226,000 274,000 280,000
Deferred tax liabilities:
Accounts receivable................... 222,000 272,000 279,000
Prepaid expenses...................... 4,000 2,000 1,000
----------- ----------- -----------
Total deferred tax liability........ 226,000 274,000 280,000
----------- ----------- -----------
Net deferred tax asset.............. $ -- $ -- $ --
=========== =========== ===========
</TABLE>
12
<PAGE>
ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. 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. The adoption
of SFAS 121 did not have a material impact on the Company's financial
statements.
16. 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.
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 December 31, 1995 and February 23, 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents.......... $1,501,000 $1,501,000 $1,629,000 $1,629,000
Notes receivable................... 499,000 499,000 248,000 248,000
Accounts payable and accrued
liabilities....................... 619,000 619,000 1,129,000 1,129,000
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......... 5,610,000 5,610,000 6,439,000 6,439,000
</TABLE>
17. 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 December 31,
1994, 1995 and February 23, 1996, was $26,000, $26,000, and $36,000,
respectively. These amounts were included in notes receivable.
13
<PAGE>
ENDOSCOPY CENTER AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
18. SUBSEQUENT EVENTS
Subsequent to February 23, 1996, ECA has sold its investment in two centers.
The Company received cash of $413,000 and loans payable and capital lease
obligations of $1,707,000 were assumed by the purchasers. The Company recorded
a loss of $112,000 in the period ended February 23, 1996 in connection with
the sale of these centers.
On February 23, 1996, Caremark sold its interest in the Company's
subordinated convertible debenture and certain demand notes, including accrued
interest and certain other liabilities to National Surgery Centers, Inc.
("NSC"). On March 31, 1996 NSC exercised its right under the terms of the
subordinated convertible debenture to exchange such indebtedness for 4.5
million newly issued shares of the Company's common stock. NSC has since
replaced the Company's senior management and intends to provide financial and
operational resources necessary to continue surgery center operations.
14
<PAGE>
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: July 15, 1996
<PAGE>
NATIONAL SURGERY CENTERS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL*
NUMBER AND DESCRIPTION OF EXHIBIT PAGE NUMBER
<S> <C>
None
</TABLE>
