<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarter period ended March 31, 1996 or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to
________
Commission File Number: 0-27162
NATIONAL SURGERY CENTERS, INC.
Delaware 36-3549627
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
35 East Wacker Drive, Suite 2800, Chicago, Illinois 60601
(Address of principal executive offices) (Zip Code)
(312) 553-4200
Registrants telephone number, including area code
________________________________________________________________________________
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [x] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common stock, par value $.01: 4,973,243 shares outstanding at May 9, 1996
Non-Voting common stock, par value $.01: 654,313 shares outstanding at
May 9, 1996
<PAGE> 2
NATIONAL SURGERY CENTERS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
--------------------- ----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income for the Three
Month Periods Ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the
Three Month Periods Ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of the Consolidated
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . 7
PART II OTHER INFORMATION
-----------------
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . None
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . None
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 9
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
Page 2
<PAGE> 3
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------ --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,360 $ 14,653
Short-term investments 5,150 8,190
Accounts receivable (less allowance for uncollectible accounts
of $1,645 and $1,167) 10,732 8,764
Inventories 2,253 2,154
Prepaid expenses 883 581
Other current assets 438 259
----------- -----------
32,816 34,601
----------- -----------
Property and equipment 38,867 32,310
Less accumulated depreciation and amortization (7,635) (6,758)
----------- -----------
31,232 25,552
----------- -----------
Other assets:
Excess of purchase price over net assets acquired (less accumulated
amortization of $1,434 and $1,295) 19,489 16,446
Deferred income taxes 4,144 4,425
Deferred development costs (less accumulated amortization
of $675 and $591) 563 180
Other long-term assets 1,737 1,083
---------- ----------
25,933 22,134
---------- ----------
$ 89,981 $ 82,287
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 7,714 $ 7,069
Accounts payable and accrued expenses 5,662 5,387
---------- ----------
13,376 12,456
---------- ----------
Long-term debt, less current installments:
Long-term debt 15,860 11,028
Convertible notes 5,977 5,977
---------- ----------
21,837 17,005
---------- ----------
Other long-term liabilities 437 449
Minority interests 4,788 4,185
Shareholders equity:
Preferred stock, $.01 par value; authorized 10,000,000 shares; no
shares issued and outstanding --- ---
Non-voting common stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 654,313 shares in 1996 and 1995 6 6
Common stock, $.01 par value; authorized 20,000,000 shares;
issued and outstanding 4,971,418 shares in 1996 and 4,971,118
shares in 1995 50 50
Additional paid-in-capital 87,710 87,814
Accumulated deficit (38,223) (39,678)
---------- ----------
49,543 48,192
---------- ----------
$ 89,981 $ 82,287
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 3
<PAGE> 4
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net revenue $ 16,159 $ 11,979
Costs and expenses:
Operating expenses 11,047 8,391
General and administrative expenses 724 555
Depreciation and amortization expense 1,136 819
---------- ----------
Total costs and expenses 12,907 9,765
---------- ----------
Operating income 3,252 2,214
Other (income) and expenses:
Interest expense 592 1,088
Interest income (134) (41)
Minority interests 591 276
Other, net (161) 43
---------- ----------
Total other expenses 888 1,366
---------- ----------
Income before income taxes 2,364 848
Provision for income taxes 909 338
---------- ----------
Net income $ 1,455 $ 510
========== ==========
Net income per common share:
Primary $ 0.24 $ 0.16
Fully diluted $ 0.24 $ 0.16
Weighted average number of common and
common equivalent shares outstanding:
Primary 6,001 3,282
Fully diluted 6,376 3,282
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 4
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Operating activities:
Net income $ 1,455 $ 510
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense 1,136 819
Minority interests 591 276
Distribution to minority interests (346) (285)
Deferred income taxes 269 191
Change in assets and liabilities, net of entities acquired:
Accounts receivable (767) 121
Inventories 70 35
Prepaid expenses 18 (159)
Other current assets 286 44
Other long-term assets (347) (167)
Accounts payable and accrued expenses (1,249) 485
Other long-term liabilities and other (114) 63
---------- ----------
Net cash provided by operating activities 1,002 1,933
---------- ----------
Investing activities:
Payments for entities acquired, net of cash acquired (3,653) (215)
Purchases of property and equipment (1,101) (686)
Proceeds from sale of short-term investments 3,040 ---
Proceeds from sale of property and equipment --- 21
Proceeds from sale of partnership interests 110 ---
---------- ----------
Net cash used in investing activities (1,604) (880)
---------- ----------
Financing activities:
Payments on long-term debt (587) (259)
Issuance costs of common stock (108) ---
Proceeds from issuance of warrants and options 4 ---
---------- ----------
Net cash used in financing activities (691) (259)
---------- ----------
Net increase (decrease) in cash and cash equivalents (1,293) 794
Cash and cash equivalents at beginning of period 14,653 4,478
---------- ----------
Cash and cash equivalents at end of period $ 13,360 $ 5,272
========== ==========
NON-CASH TRANSACTIONS:
Long-term debt issued in acquisitions and contingent payments $ 240 $ 300
Liabilities assumed in acquisitions 7,969 ---
Capital lease obligations 67 362
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 530 $ 323
Income taxes paid 875 74
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY ACCOUNTING POLICIES
The Company - National Surgery Centers, Inc. and subsidiaries (collectively
the "Company") acquires, develops and manages ambulatory surgery centers. Many
of the Company's surgery centers are operated in partnership with physicians
and other health care providers.
The accompanying unaudited interim financial statements of the Company have
been prepared in accordance with generally accepted accounting principles for
interim financial information. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) have been made which are
necessary for a fair presentation of the financial position, results of
operations, and cash flows for the interim periods presented. The interim
statements presented herein do not include all disclosures normally provided in
annual financial statements.
Principles of Consolidation - The consolidated financial statements include
all accounts of the Company and its wholly-owned subsidiaries and majority
owned partnerships. All significant intercompany balances and transactions
have been eliminated in consolidation.
Common Share Data - Primary income per common and common equivalent share and
income per common and common equivalent share assuming full dilution are
computed using the weighted average number of shares outstanding adjusted for
the incremental shares attributable to outstanding options and warrants to
purchase common stock. Certain convertible debt is dilutive and, therefore, is
included in the fully diluted weighted average number of shares outstanding for
the period ending March 31, 1996.
Stock Exchange - Effective September 14, 1995, the Company's Board of
Directors authorized a 1-for-3 stock exchange in conjunction with the Company's
merger and reincorporation in Delaware. The merger included changing the
Company's common stock par value from no par value to $.01 par value per share
and authorized 10,000,000 shares of preferred stock, $.01 par value per share,
with no specific terms. Accordingly, all references in these financial
statements to average number of shares outstanding and per share amounts have
been restated to reflect this stock exchange.
NOTE 2 - ACQUISITIONS
Purchases - During January and February, 1996, the Company acquired one
surgery center and one company which operated single specialty endoscopy
centers. The aggregate purchase price was $3.5 million in cash and of this
purchase price, $3.1 million was recorded as goodwill. Also, during August and
October, 1995, the Company acquired two surgery centers. The following
unaudited results of operations give effect to the operations of the entities
acquired in the first quarter of 1996 and during 1995 as if these respective
transactions had occurred as of the first day of the first quarter of 1995.
The pro forma results of operations do not purport to represent what the
Company's results would have been had such transactions in fact occurred at the
beginning of the periods presented or to project the Company's results of
operations in any future period.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1996 1995
---------------- --------------
(in thousands, except per
share amounts)
<S> <C> <C>
Net revenue $ 17,053 $ 14,293
Net income 1,353 550
Income per common share:
Primary $ 0.22 $ 0.17
Fully diluted 0.22 0.17
</TABLE>
The above pro forma operating results include adjustments to conform
accounting policies and excludes general and administrative expenses of the
single specialty endoscopy company.
Page 6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company's growth has resulted primarily from the acquisition and
development of ambulatory surgery centers. Since 1991, the Company has
completed the acquisition of 25 ambulatory surgery centers, including two
centers in which the Company has minority ownership positions and one center
that has subsequently been closed; developed two centers in which it has
majority equity ownership; and developed centers for other health care
providers, including one hospital.
In January 1996, the Company acquired one center and in February 1996
acquired a convertible subordinated note which was convertible into 90% of the
common stock of Endoscopy Center Affiliates, Inc. ("ECA"). The convertible
subordinated note was exercised in March 1996. In August and October 1995, the
Company acquired two surgery centers which are operating as limited
partnerships and are accounted for under the purchase method of accounting.
Because of the financial impact of the Company's recent acquisitions and
developments, it is difficult to make meaningful comparisons between the
Company's financial statements to the comparable period in 1995. In addition,
due to the limited number of operated surgery centers, each additional center
acquired or developed can affect the overall operating margin of the Company.
Upon the acquisition of a surgery center, the Company has typically implemented
certain steps to improve operating margins. The impact of such actions and of
other activities to improve operating margins may not occur immediately.
Consequently, the financial performance of an acquired surgery may adversely
affect overall operating margins in the near-term. As the Company makes
additional surgery center acquisitions, the Company expects that this effect
will be mitigated by the expanded financial base of the existing surgery
centers.
The Company's principal source of revenue is a facility fee charged for
surgical procedures performed in its surgery centers. This fee varies
depending on the procedure performed, but usually includes all charges for
operating room usage, special equipment usage, supplies, recovery room usage,
nursing staff and medications. Facility fees do not include the charges of the
patients' surgeons, anesthesiologists or attending physicians, which are billed
directly by such physicians. For those surgery centers providing extended
recovery care, an additional fee is typically charged for an overnight stay.
This fee generally includes a flat fee for post-operative care and may include
itemized amounts for medications and other supplies.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1996 1995
------------ ------------
(percentage of net revenue)
<S> <C> <C>
Net revenue 100.0% 100.0%
Costs and expenses:
Operating expenses 68.4 70.1
General and administrative expenses 4.5 4.6
Depreciation and amortization expense 7.0 6.8
----- -----
Total costs and expenses 79.9 81.5
----- -----
Operating income 20.1 18.5
----- -----
Other (income) and expenses:
Interest expense 3.7 9.1
Interest income ( .8) ( .3)
Minority interests 3.6 2.3
Other, net (1.0) .3
------- -----
Total other expenses 5.5 11.4
----- -----
Income before income taxes 14.6 7.1
Provision for income taxes 5.6 2.8
----- -----
Net income 9.0 4.3
===== =====
</TABLE>
Page 7
<PAGE> 8
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Net Revenue. Net revenue is net of provisions for contractual adjustments
and doubtful accounts. Net revenue increased 34.9% to $16.2 million in 1996
from $12.0 million in 1995. Same center net revenue increased 18.2% due to a
14.9% increase in cases combined with a 2.9% increase in net revenue per case
to $1,030 from $1,001. Of the remaining increase in net revenue, $1.1 million
and $918,000 resulted from centers acquired in 1995 and 1996, respectively.
Operating Expenses. Operating expenses include salaries and benefits, drugs
and medical supplies, utilities, marketing, maintenance costs and rent expense
of the centers. Operating expenses increased 31.7% to $11.0 million in 1996
from $8.4 million in 1995. Of this increase, $1.3 million resulted from
centers acquired in 1995 and 1996. As a percentage of net revenue, operating
expenses decreased to 68.4% in 1996 from 70.1% in 1995.
General and Administrative Expenses. General and administrative expenses
include only corporate-level expenses and do not include any center-level
administrative expenses. General and administrative expenses increased 30.5%
to $724,000 in 1996 from $555,000 in 1995. As a percentage of net revenue,
general and administrative expenses decreased to 4.5% in 1996 from 4.6% in
1995.
Depreciation and Amortization Expense. Depreciation and amortization
expenses increased 38.7% to $1.1 million in 1996 from $819,000 in 1995. Of
this increase in depreciation and amortization expense, $182,000 resulted from
centers acquired in 1995 and 1996. As a percentage of net revenue,
depreciation and amortization expense increased to 7.0% in 1996 from 6.8% in
1995.
Interest Expense. Interest expense decreased 45.6% to $592,000 in 1996 from
$1.1 million in 1995. The decrease in interest expense was primarily the
result of the repayment of the $20.0 million subordinated debt in November 1995
with proceeds from the Company's public offering. As a percentage of net
revenue, interest expense decreased to 3.7% in 1996 from 9.1% in 1995.
Minority Interests. Minority interests include the limited partners'
ownership share in the earnings (losses) of the operating center partnerships.
Minority interests increased 114.1% to $591,000 in 1996 from $276,000 in 1995.
This increase in minority interest resulted from improved center operating
performance. As a percentage of net revenue, minority interests increased to
3.6% in 1996 from 2.3% in 1995.
SEASONALITY
The Company's business experiences some degree of seasonality because
patients have discretion in scheduling elective surgery. The first quarter
tends to be lower due to beginning of the year deductibles while the third
quarter reflects the effects of vacations taken both by patients and
physicians. Although the Company's growth and development of centers may
obscure the effects of seasonality in the Company's financial results, the
Company's first and third quarters generally reflect lower net revenue on a
same center basis when compared to the Company's second and fourth quarters.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operations decreased to $1.0 million for
the three months ended March 31, 1996 from $1.9 million in 1995. The Company's
cash flow from operations combined with proceeds from sale of short-term
investments of $3.0 million were used primarily to finance acquisitions of $3.7
million, capital expenditures of $1.1 million, and repayment of long-term debt
of $587,000.
The Company expects that its principal use of funds in the near future
will be in connection with the acquisition and development of surgery centers,
working capital requirements, debt repayments and purchases of property and
equipment. The Company expects that cash and cash equivalents, short-term
investments, cash generated from operations and available credit borrowings
will be adequate to provide for the Company's cash requirements for at least
the next twelve months, unless the rate of acquisitions significantly increases
beyond current expectations. No assurances can be given that such proceeds,
cash and borrowings will be sufficient to provide for the Company's cash
requirements beyond the next twelve months. At March 31, 1996, the Company had
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<PAGE> 9
working capital of $19.4 million including cash and cash equivalents and
short-term investments of $18.5 million.
The Company's amended and restated loan agreement ("Loan Agreement")
provides for revolving and term loans of up to $20.0 million, to be used by the
Company for acquisitions and development of surgery centers and related
businesses. As of March 31, 1996, no amount was outstanding under the Loan
Agreement. Loans under the Loan Agreement are secured by substantially all the
assets of the Company (including the capital stock or partnership units of the
Company's subsidiaries) and matures in June 30, 2000. Loans under the Loan
Agreement are denominated at the Company's option as either Eurodollar Tranches
(loans bearing interest at a rate of 2.00% above the London Interbank Offered
Rate) or Base Rate Tranches (loans bearing interest at 1.00% above the prime
rate for U.S. commercial loans) subject to adjustments in certain
circumstances.
SUBSEQUENT EVENTS
On April 18, 1996, the Company's Board of Directors declared a
three-for-two stock split to be effected as a 50% stock dividend. The shares
will be distributed on May 31, 1996 to shareholders of record on May 15, 1996.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In April 1996, the Company acquired an 84% ownership interest in an
ambulatory surgery center in Kent, Ohio with net revenue of approximately $1.3
million in 1995. This transaction will be accounted for under the purchase
method of accounting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The exhibits to this report are listed in the Exhibit
Index set forth elsewhere herein.
b. Reports on Form 8-K
The registrant filed a report on Form 8-K on March 7, 1996.
Page 9
<PAGE> 10
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.
(REGISTRANT)
Date: May 14, 1996 /s/ E. Timothy Geary
---------------------- ---------------------------------------
E. Timothy Geary
President and Chief
Executive Officer
/s/ Bryan S. Fisher
-----------------------------------------
Bryan S. Fisher
Vice President and
Chief Financial Officer
Page 10
<PAGE> 11
EXHIBIT INDEX
Number and Description of Exhibit*
2 None
4 None
10 None
11 Computation of Income Per Common Share
12 None
15 None
18 None
19 None
22 None
23 None
24 None
27 None
99 None
______________________________________________
* Exhibits not listed are inapplicable.
Page 11
<PAGE> 1
EXHIBIT 11
COMPUTATION OF INCOME PER COMMON SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1996 1995
------------- ------------
<S> <C> <C>
PRIMARY INCOME PER SHARE
Average shares outstanding 5,631 3,282
Net effect of dilutive stock options and warrants - based
on the treasury stock method using average market price 370 ---
------------- ------------
Total 6,001 3,282
============ ============
Income:
Net income $ 1,455 $ 510
============ ============
Per common share amount:
Net income $ 0.24 $ 0.16
============ ============
FULLY DILUTED INCOME PER SHARE
Average shares outstanding 5,631 3,282
Net effect of dilutive stock options and warrants-based on
the treasury stock method using market closing price 458 ---
Assumed conversion of certain convertible debt 287 ---
------------- ------------
Total 6,376 3,282
============= ===========
Income:
Net income $ 1,455 $ 510
Add convertible debt interest, net of income tax effect 62 ---
----------- ------------
Net income $ 1,517 $ 510
============ ============
Per common share amount:
Net income $ 0.24 $ 0.16
============ ============
</TABLE>
NOTE: All number of shares and per share amounts have been adjusted to
reflect the one-for-three stock exchange related to the Company's
reincorporation in Delaware effected on September 14, 1995.
Page 12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of National Surgery Centers for the quarter ended March 31,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 13,360,000
<SECURITIES> 5,150,000
<RECEIVABLES> 12,377,000
<ALLOWANCES> 1,645,000
<INVENTORY> 2,253,000
<CURRENT-ASSETS> 32,816,000
<PP&E> 38,867,000
<DEPRECIATION> 7,635,000
<TOTAL-ASSETS> 89,981,000
<CURRENT-LIABILITIES> 13,376,000
<BONDS> 21,837,000
<COMMON> 56,000
0
0
<OTHER-SE> 87,710,000
<TOTAL-LIABILITY-AND-EQUITY> 89,981,000
<SALES> 16,159,000
<TOTAL-REVENUES> 16,159,000
<CGS> 12,183,000
<TOTAL-COSTS> 12,183,000
<OTHER-EXPENSES> 1,154,000
<LOSS-PROVISION> 553,000
<INTEREST-EXPENSE> 592,000
<INCOME-PRETAX> 2,364,000
<INCOME-TAX> 909,000
<INCOME-CONTINUING> 1,455,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,455,000
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
