<PAGE>
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, 1997 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.
<TABLE>
<S> <C>
Delaware 36-3549627
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
30 South Wacker Drive, Suite 2302, Chicago, Illinois 60606
(Address of principal executive offices) (Zip Code)
(312) 655-1400
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. [_] Yes [X] 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; 11,732,993 shares outstanding at May 12, 1997
Non-Voting common stock, par value $.01; 254,313 shares outstanding at
May 12, 1997
<PAGE>
National Surgery Centers, Inc.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996............................................... 3
Consolidated Statements of Income for the Three
Month Periods Ended March 31, 1997 and 1996..................... 4
Consolidated Statements of Cash Flows for the
Three Month Periods Ended March 31, 1997 and 1996............... 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. Exhibits and Reports on Form 8-K................................ 10
SIGNATURES................................................................ 11
Page 2
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CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,472 $ 9,721
Short-term investments 35,110 41,614
Accounts receivable (less allowance for uncollectible accounts
of $1,880 and $1,723) 13,463 13,223
Inventories 2,614 2,548
Prepaid expenses 998 2,383
Other current assets 565 724
-------- --------
66,222 70,213
-------- --------
Property and equipment 45,584 44,167
Less accumulated depreciation and amortization (12,012) (10,805)
-------- --------
33,572 33,362
-------- --------
Other assets:
Excess of purchase price over net assets acquired (less accumulated
amortization of $2,290 and $2,045) 36,911 32,181
Deferred income taxes 2,428 3,074
Other long-term assets 3,734 3,422
-------- --------
43,073 38,677
-------- --------
$142,867 $142,252
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 1,796 $ 3,464
Accounts payable and accrued expenses 5,590 6,781
-------- --------
7,386 10,245
-------- --------
Long-term debt, less current installments:
Long-term debt 6,298 6,353
Convertible notes 637 637
-------- --------
6,935 6,990
-------- --------
Other long-term liabilities 859 703
Minority interests 6,967 6,645
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 254,313 shares in 1997 and
654,313 shares in 1996 3 6
Common stock, $.01 par value; authorized 20,000,000 shares;
issued and outstanding 11,699,244 shares in 1997 and 11,278,995
shares in 1996 117 113
Additional paid-in-capital 150,753 150,314
Accumulated deficit (30,153) (32,764)
-------- --------
120,720 117,669
-------- --------
$142,867 $142,252
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 3
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CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1997 1996
-------- ----------
<S> <C> <C>
Net revenue $22,116 $16,159
Costs and expenses:
Operating expenses 14,249 11,047
General and administrative expenses 1,047 724
Depreciation and amortization expense 1,605 1,136
------- -------
Total costs and expenses 16,901 12,907
------- -------
Operating income 5,215 3,252
Other (income) and expenses:
Interest expense 153 592
Interest income (391) (134)
Minority interests 1,343 591
Other, net (51) (161)
------- -------
Total other expenses 1,054 888
------- -------
Income before income taxes 4,161 2,364
Provision for income taxes 1,550 909
------- -------
Net income $ 2,611 $ 1,455
======= =======
Income per common share:
Primary $ 0.21 $ 0.16
Fully diluted $ 0.21 $ 0.16
Weighted average number of common and
common equivalent shares outstanding:
Primary 12,432 9,002
Fully diluted 12,461 9,564
</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,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 2,611 $ 1,455
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense 1,605 1,136
Minority interests 1,343 591
Distribution to minority interests (1,070) (346)
Deferred income taxes 305 269
Change in assets and liabilities, net of entities acquired:
Accounts receivable 321 (767)
Inventories 23 70
Prepaid expenses 1,385 18
Other current assets 159 286
Other long-term assets (186) (347)
Accounts payable and accrued expenses (1,034) (1,249)
Other (2) (114)
------- -------
Net cash provided by operating activities 5,460 1,002
------- -------
Investing activities:
Payments for entities acquired, net of cash acquired (5,751) (3,653)
Purchases of property and equipment (1,127) (1,101)
Proceeds from sale of short-term investments 6,504 3,040
Proceeds from sale of property and equipment 3 --
Proceeds from sale of partnership interests 69 110
------- -------
Net cash used in investing activities (302) (1,604)
------- -------
Financing activities:
Payments on long-term debt (1,513) (587)
Proceeds from issuance of common stock 87 (108)
Proceeds from issuance of warrants and options 19 4
------- -------
Net cash used in financing activities (1,407) (691)
------- -------
Net increase (decrease) in cash and cash equivalents 3,751 (1,293)
Cash and cash equivalents, beginning of period 9,721 14,653
------- -------
Cash and cash equivalents, end of period $13,472 $13,360
======= =======
NON-CASH TRANSACTIONS:
Long-term debt issued in acquisitions and contingent payments $ -- $ 240
Common stock issued upon conversion of convertible debt 334 --
Liabilities assumed in acquisitions 435 7,969
Capital lease obligations 28 67
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 180 $ 530
Income taxes paid 208 875
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
Page 5
<PAGE>
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 controlled
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. On a fully-diluted basis, both income and weighted
average number of shares outstanding are adjusted to assume the conversion of
convertible notes, when such notes are dilutive.
Stock Exchange - Effective May 31, 1996, the Company effected a 3-for-2
stock split in the form of a 50% stock dividend. Accordingly, all references in
these unaudited interim financial statements to shares, average number of shares
outstanding and per share amounts have been restated, when applicable, to
reflect this stock split.
Note 2 - Acquisitions
Purchases - During January 1997, the Company acquired one multi-specialty
surgery center. The purchase price was $5.6 million in cash and of this purchase
price, $5.0 million was recorded as goodwill. Also, during January, February,
April, May and November 1996, the Company acquired four multi-specialty surgery
centers and two companies which operated specialty endoscopy centers. The
following unaudited results of operations give effect to the operations of the
entities acquired in the first quarter of 1997 and during 1996 as if these
respective transactions had occurred as of the first day of 1996. The pro forma
results of operations do not purport to represent what the Company's results
would have been had the 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,
-------------------
1997 1996
---------- ----------
<S> <C> <C>
(in thousands, except
per share amounts)
Net revenue $22,116 $21,312
Net income 2,611 1,505
Income per common share:
Primary $ 0.21 $ 0.17
Fully diluted 0.21 0.16
</TABLE>
The above pro forma operating results include adjustments to conform
accounting policies and excludes general and administrative expenses of one of
the specialty endoscopy companies.
Page 6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company's growth has resulted primarily from the acquisition and
development of ambulatory surgery centers. The Company currently operates a
network of 32 ambulatory surgery centers, including three centers in which the
Company has a minority ownership position. The Company's acquisitions have been
funded with cash, debt, convertible notes and shares of common stock.
Additionally, the Company continues to increase surgical capacity in existing
centers by adding operating rooms and continues to expand its ability to perform
higher acuity and more complex cases by offering extended recovery in twelve of
its twenty-one multi-specialty centers.
During the first quarter of 1997, the Company continued to execute its
strategy for growth, in addition to other activities which continue to enhance
its financial condition. Some of the key activities during the quarter
included:
. Acquired one multi-specialty surgery center.
. Completed the first full quarter of operations for a developed specialty
endoscopy center accounted for under the equity method of accounting.
. Prepaid $1.2 million in acquisition debt.
. Converted $334,000 of its convertible notes into 13,348 shares of common
stock and redeemed $24,000 principal of such notes.
During 1996, the Company experienced significant growth through acquisition
and other activities which impact the comparability of operating results between
the current and comparable prior year quarter. These activities included:
. Acquired five multi-specialty surgery centers (including one center in
which it acquired a minority interest) and two companies which operated
specialty endoscopy centers.
. Declared a 3-for-2 stock split for all holders of record of its common
stock on May 15, 1996, which was effected as a stock dividend on May 31,
1996.
. Converted $6,699,000 of its convertible notes into 512,039 shares of
common stock and redeemed $71,000 principal of such notes.
. Completed a public offering of 2.42 million shares of common stock at
$24.25 per share. In conjunction with this offering, the Company prepaid
$9.2 million in debt.
. Divested its interest in two centers, including one multi-specialty and
one specialty endoscopy center.
Because of the financial impact of the Company's recent acquisitions and
developments and other financial related activities, it is difficult to make
meaningful comparisons between the Company's financial statements for the first
quarter 1997 and the comparable period in 1996. 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 center may adversely affect overall operating
margins in the near-term. As the Company makes additional surgery center
acquisitions or completes the development of de novo facilities, 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.
Page 7
<PAGE>
The Company receives payments for services rendered to patients from
private insurers, (HMOs, PPOs), the patients directly and governmental payors,
including Medicare and Medicaid. In many instances, the Company has agreed with
certain payors to provide services at discounted prices. The Company charges for
services rendered on a fee-for-service basis and may in the future enter into
capitation agreements with payors whereby the Company may share some of the
financial risk of delivering health care services. The sources and amounts of
the Company's revenues derived from its surgery centers are determined by a
number of factors, including the number of patient procedures performed, the mix
of patient procedures and the rates of reimbursement among payor categories.
Generally, private insurance reimbursement is greater than HMO/PPO reimbursement
which, in turn, is greater than Medicare and Medicaid reimbursement.
Results of Operations
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1997 1996
------------- -------------
(percentage of net revenue)
<S> <C> <C>
Net revenue 100.0% 100.0%
Costs and expenses:
Operating expenses 64.4 68.4
General and administrative expenses 4.7 4.5
Depreciation and amortization expense 7.3 7.0
----- -----
Total costs and expenses 76.4 79.9
----- -----
Operating income 23.6 20.1
----- -----
Other (income) and expenses:
Interest expense 0.7 3.7
Interest income (1.8) (.8)
Minority interests 6.1 3.6
Other, net (0.2) (1.0)
----- -----
Total other expenses 4.8 5.5
----- -----
Income before income taxes 18.8 14.6
Provision for income taxes 7.0 5.6
----- -----
Net income 11.8 9.0
===== =====
</TABLE>
Three Months Ended March 31, 1997 and 1996
Net Revenue. Net revenue is net of provisions for contractual adjustments
and doubtful accounts. Net revenue increased 36.9% to $22.1 million in 1997 from
$16.2 million in 1996. Same center net revenue increased $1.9 million or 12.6%
due to an 11.2% increase in cases to 16,658 combined with a 1.2% increase in net
revenue per case to $1,031 from $1,019. Overall net revenue per case declined
8.3% to $908 in 1997 from $990 in 1996, primarily due to the inclusion of eleven
specialty endoscopy centers acquired during 1996. Separately, net revenue per
case was $1,019 for the multi-specialty centers and $503 for the specialty
endoscopy centers.
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 29.0% to $14.2 million in 1997 from
$11.0 million in 1996 primarily as a result of the addition of multi-specialty
and specialty endoscopy centers acquired since the first quarter of 1996. As a
percentage of net revenue, operating expenses decreased to 64.4% in 1997 from
68.4% in 1996 as a result of continued expense efficiencies resulting from
same-center growth.
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 44.6% to
$1,047,000 in 1997 from $724,000 in 1996. As a percentage of net revenue,
general and administrative expenses increased to 4.7% in 1997 from 4.5% in 1996.
The increases in terms of overall dollars is primarily attributable to the
hiring of additional personnel to handle the management of centers acquired or
developed as the Company continues to expand its network of centers.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 41.3% to $1.6 million in 1997 from $1.1 million in 1996. The
increase in depreciation and amortization expense resulted primarily from the
Page 8
<PAGE>
addition of the centers acquired since the beginning of 1996 and includes
amortization of deferred development costs associated with the specialty
endoscopy centers which are being amortized over a two year period.
Interest Expense. Interest expense decreased 74.2% to $153,000 in
1997 from $592,000 in 1996. The decrease in interest expense was primarily the
result of the conversion of $7.1 million of convertible notes during the second
half of 1996 and in the first quarter 1997, and the repayment of $10.4 million
of capital leases and acquisition debt with proceeds from the Company's October
1996 public offering.
Minority Interests. Minority interests include the limited partners'
ownership share in the earnings of the operating center partnerships. Minority
interests increased 127.2% to $1,343,000 in 1997 from $591,000 in 1996. The
increase in minority interests resulted primarily from improved operating
performance at existing surgery centers and the effects resulting from the
acquisition of 14 centers since the beginning of 1996 which are operated as
limited or general partnerships.
Provision for Income Taxes. Provision for income taxes increased to
$1,550,000 in 1997 from $909,000 in 1996. The effective tax rate decreased to
37.3% in 1997 from 38.5% in 1996 due primarily to the effects of tax-exempt
interest earned during 1997 from short-term investments.
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 and operating income margins on a
same center basis when compared to the Company's second and fourth quarters.
Liquidity and Capital Resources
At March 31, 1997, the Company had working capital of $58.8 million
including cash and cash equivalents and short-term investments of $48.6 million.
The Company's cash flow from operations increased to $5.5 million for the three
months ended March 31, 1997 from $1.0 million in 1996. The Company's cash flow
from operations combined with proceeds from sale of short-term investments of
$6.5 million and existing cash and cash equivalents were used primarily to
finance acquisitions of $5.8 million, capital expenditures of $1.1 million, and
repayment of long-term debt of $1.5 million, including $1.2 million of which was
early retirement of debt.
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. No
assurances can be given that cash and borrowings will be sufficient to provide
for the Company's cash requirements beyond the next twelve months.
The Company's credit 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, 1997, no
amount was outstanding under the credit agreement. Loans under the credit
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 on June 30, 2000. Loans under the credit agreement are denominated at
the Company's option as either Eurodollar Tranches (loans bearing interest at a
rate of 1.25% above the London Interbank Offered Rate) or Base Rate Tranches
(loans bearing interest at 0.25% above the prime rate for U.S. commercial loans)
subject to adjustments in certain circumstances.
Page 9
<PAGE>
Subsequent Events
Part II. Other Information
Item 5. 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 did not file a Form 8-K in the period.
Page 10
<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.
(Registrant)
Date: May 14, 1997 /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 11
<PAGE>
Exhibit Index
Number and Description of Exhibit*
2 None
4 None
10 Form of Agreement dated April 22, 1997 by and between
John G. Rex-Waller and National Surgery Centers, Inc.
11 Computation of Income Per Common Share
12 None
15 None
18 None
19 None
22 None
23 None
24 None
27 Schedule of Summary Financial Information
99 None
- ----------------
* Exhibits not listed are inapplicable.
Page 12
<PAGE>
EXHIBIT 10
AGREEMENT
This Agreement is made and entered into as of this 22nd day of April, 1997,
by and between JOHN G. REX-WALLER, an individual residing at 210 Broadway,
Wilmette, Illinois 60091, and NATIONAL SURGERY CENTERS, INC., a Delaware
corporation with its principal office located at 30 South Wacker Drive, Suite
2302, Chicago, Illinois 60606.
RECITALS
--------
WHEREAS, John G. Rex-Waller (hereinafter "Rex-Waller") was hired by
National Surgery Centers, Inc. (hereinafter "NSC") on or about July 1991; served
as NSC's Chief Financial Officer from July 1991 until January 1996; has served
as NSC's Treasurer and Secretary since July 1991; and has also served as NSC's
Executive Vice President since January 1996; and
WHEREAS, NSC and Rex-Waller have agreed that Rex-Waller's employment with
NSC shall terminate as of April 22, 1997 (the "Termination Date").
NOW, THEREFORE, Rex-Waller and NSC do hereby voluntarily enter into this
Agreement (hereinafter "Agreement") in compromise and settlement of all claims,
actions and disputes between the parties.
TERMS OF AGREEMENT
------------------
In consideration of the premises, the recitals of which are incorporated in
and by this reference made a part of this Agreement, the following mutual
covenants, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Rex-Waller and NSC hereby agree as
follows:
1. It is understood and agreed that nothing contained in this Agreement
shall be construed as an admission of liability or violation of any law, public
policy or contract on the part of either party, all such liability being
specifically denied. Rex-Waller represents and warrants that he has filed no
complaints or charges with any court or administrative agencies against NSC.
2. Rex-Waller promises and agrees as follows:
a. he will resign as (i) an employee of NSC and (ii) a member of the
Board of Directors of NSC, both effective as of the Termination Date, and shall
execute and return, on the Termination Date, a resignation in the form attached
hereto and made a part hereof as Exhibit 1.
b. he will execute and return, on the Termination Date, the General
Release And Covenant Not To Sue in the form attached hereto and made a part
hereof as Exhibit 2.
c. he shall not, either directly or indirectly, for a period of two
years following the Termination Date engage, anywhere in the United States of
America, in the development, management, or direct or indirect ownership of
other ambulatory surgery centers or in any other business which would be
competitive with the business being conducted by NSC on such Termination Date
(the "Restricted Business"), or acquire or retain any direct or indirect
financial interest in any business which is so engaged; provided, however, that
Rex-Waller may invest in, or be an employee, director, partner or shareholder
of, or a consultant to (i) any company (including, without limitation, a
Page 1
<PAGE>
company whose business is physician practice management) which incidentally
includes the Restricted Business, provided that Rex-Waller does not participate
in any of such company's activities that involve the Restricted Business which
take place within a twenty-five mile radius of any facility operated, managed,
or being developed by NSC on such Termination Date or (ii) any firm or entity
which invests in companies ("Portfolio Companies") which engage in the
Restricted Business; provided, however, that Rex-Waller may not participate in
any of such Portfolio Companies' activities that involve the Restricted Business
unless (i) the Portfolio Company only incidentally includes the Restricted
Business and (ii) such activities do not take place within a twenty-five mile
radius of any facility operated, managed, or being developed by NSC on such
Termination Date . Notwithstanding the foregoing, nothing contained in this
paragraph 2c shall prohibit Rex-Waller from being (A) a shareholder in a mutual
fund or a diversified investment company or (B) a passive owner of not more than
two percent of the outstanding stock of any class of a company so long as Rex-
Waller has no active participation in the business of such company.
d. for a period of two years from the Termination Date, he shall
not, nor shall he cause any person to, solicit to employ any of the current
officers or employees of NSC, without obtaining the prior written consent of
NSC.
3. NSC promises and agrees as follows:
a. to provide Rex-Waller with a payment in the amount of $50,000, on
January 2, 1998, for his consulting services in connection with the possible
acquisition by NSC of two additional ambulatory surgery centers.
b. to make available to Rex-Waller continued COBRA health insurance
coverage, ending when Rex-Waller is no longer eligible for continued coverage,
as defined under COBRA.
c. to execute and return, on the Termination Date, the General
Release And Covenant Not To Sue in the form attached hereto and made a part
hereof as Exhibit 3.
d. in the event a Change in Control of NSC, as defined herein,
occurs prior to March 31, 1998, NSC shall pay to Rex-Waller within 30 days of
such Change of Control, in a lump sum an amount equal to the sum of $284,000,
representing (i) Rex-Waller's annual base salary for 1996 and (ii) the annual
bonus paid to Rex-Waller for 1996 by NSC. For purposes of this paragraph 3d, a
"Change in Control" shall mean a change in control of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A promulgated under the Securities Exchange Act of 1934; provided that,
without limitation, such a Change in Control shall be deemed to have occurred if
during any period of two consecutive years subsequent to November 9, 1995,
individuals who at the beginning of such period constitute members of the board
of directors cease for any reason to constitute at least a majority thereof,
unless the nomination or election of each director who was not a director at the
beginning of the period was approved by a vote of a majority of the directors
still in office at the time of such nomination or election who were directors at
the beginning of the period. If a tax is imposed pursuant to Section 4999 of the
Internal Revenue Code, or successor provision of like import, upon payments due
under this paragraph 3d, Rex-Waller shall be paid an additional amount
calculated so as to provide Rex-Waller, after he has paid the tax imposed by
Section 4999 of the Code, with the same compensation he would have received had
no tax been imposed by Section 4999.
4. NSC represents and warrants that (a) the Compensation Committee of
NSC's Board of Directors (the "Committee") (i) accelerated the vesting of all of
Rex-Waller's options under the Stock Option Plan to the Termination Date, (ii)
pursuant to clause (iii) of Section 6 of the Stock Option Plan, extended to
December 31, 1997 the period during which Rex-Waller may exercise options to
purchase 90,000 shares of NSC's common stock ("Common Stock") at an exercise
price of $27.50 per share, which options were granted to Rex-Waller on June 21,
1996, (iii) approved Rex-Waller's exercise within three months following the
Termination Date of options to purchase up to 182,500 shares of Common Stock by
his tendering to NSC shares of Common Stock owned by him in full payment of the
exercise price of such shares in accordance with clause (i) of Section 8 of the
Stock Option Plan and (iv) approved Rex-Waller's
Page 2
<PAGE>
exercise within three months following the Termination Date of options to
purchase up to 182,500 shares of Common Stock by his delivery to NSC in
accordance with clause (ii) of Section 8 of the Stock Option Plan of an
irrevocable written notice instructing NSC to deliver the shares of Common Stock
being purchased to a broker selected by NSC, subject to such broker's written
guarantee to deliver cash to NSC equal to the aggregate exercise price for the
shares being purchased, (b) at the date hereof NSC has, and at the time of the
exercise of such options and the sale of the shares of Common Stock underlying
such options NSC will continue to have, an effective registration statement on
Form S-8 registering the sale of such shares under the Securities Act of 1933,
as amended, and (c) NSC has not and will not require Rex-Waller to deliver an
investment representation with respect to the shares of Common Stock to be
acquired upon his exercise of such options and has not and will not impose any
restrictions upon Rex-Waller's exercise of such options or his sale of such
shares.
5. NSC agrees not to criticize or disparage Rex-Waller, either within or
without NSC, either orally or in writing, and not to authorize or condone any
such criticism or disparagement; provided, that nothing contained in this
paragraph 5 shall preclude NSC from making any statement to its attorneys on a
confidential basis or from making any statement in good faith which is required
by law, regulation or order of any court or regulatory commission, department or
agency. Likewise, Rex-Waller agrees not to criticize or disparage NSC, NSC's
officers or agents, or NSC's business or employment practices, either orally or
in writing; provided, that nothing contained in this paragraph 5 shall preclude
Rex-Waller from making any statement to his attorneys on a confidential basis or
from making any statement in good faith which is required by law, regulation or
order of any court or regulatory commission, department or agency. Rex-Waller
further agrees that he will not intentionally or knowingly instigate, cause,
advise or encourage any person, group of persons or entity to file suit against
NSC; and that he will not join in, or if named will opt out of, any suit that
may be filed against NSC based on any facts and events occurring up to and
including the date of this Agreement.
6. Rex-Waller promises and agrees that he will continue to hold in
strictest confidence and will not use or disclose to any person, firm or
corporation, without the prior, written authorization of an officer of NSC, any
of NSC's trade secrets and other proprietary and confidential business
information, or trade secrets and other proprietary and confidential business
information of a third party provided to NSC. Rex-Waller understands that this
agreement applies to computerized as well as written information. It is
expressly understood, however, that the obligations of this paragraph 6 shall
(a) only apply for as long as and to the extent that said trade secrets and
other proprietary and confidential business information have not become
generally known to or available for use by the public other than by an act or
omission of Rex-Waller, and (b) not apply if such disclosure is required by any
law, regulation or order of any court or regulatory commission, department or
agency.. The term "trade secrets and other proprietary and confidential business
information" means business and technical information treated as confidential by
NSC, including, without limitation, information relating to sales, customers and
customer lists, financial and marketing data, business plans, and personnel and
personnel related practices, policies and procedures, all of which Rex-Waller
became aware of as a result of his employment with NSC.
7. Rex-Waller acknowledges NSC's title to, and exclusive right to
possession and use of, all reports, papers or documents of NSC, or any copies,
abstracts or summaries thereof, including drawings, which came into his
possession during his employment with NSC. Rex-Waller also acknowledges that he
has returned to NSC all such reports, papers or documents, except for those
reports, papers or documents which NSC has advised Rex-Waller, in writing, he
may keep. If NSC later believes that Rex-Waller has not complied with the
requirements of this paragraph 7 in any respect, it shall request in writing and
with specificity the report, paper or document to be returned by Rex-Waller.
Rex-Waller shall have a reasonable period of time following such written request
to return the report, paper or document so requested, but if Rex-Waller does not
have control of, or access to, such report, paper or document, he shall notify
NSC of such fact in writing and, upon such notification, he shall have complied
fully with the requirements of this paragraph 7. This provision is not intended
to require Rex-Waller to turn over to NSC information acquired by Rex-Waller
from sources not connected or related to NSC or created by Rex-Waller for his
own use or for use in his profession and which is not a trade secret of NSC or
proprietary to NSC.
Page 3
<PAGE>
8. a. NSC agrees to indemnify, defend and hold Rex-Waller harmless from
any liability arising out of actions taken by Rex-Waller as an employee of NSC,
including without limitation liability brought about or con tributed to by
actions covered by NSC's professional liability policy, and reimburse Rex-
Waller, within 15 days following his request therefor, for his reasonable
expenses incurred in the defense thereof, such as transportation, meals, lodging
and lost wages. Rex-Waller shall advise NSC promptly of any proceeding in which
he is named a party defendant, reasonably cooperate with NSC in connection
therewith, and not settle any proceeding without the prior, written consent of
NSC. Rex-Waller also agrees to reasonably cooperate with NSC in any proceeding
against NSC relating to or concerning matters or issues involving his employment
at NSC, even if he is not named a party defendant in such proceeding, and,
provided that Rex-Waller and NSC are not adverse parties in such proceeding, NSC
will provide legal representation to Rex-Waller at NSC's expense and selection
and reimburse Rex-Waller, within 15 days following his request therefor, for his
reasonable expenses incurred in connection therewith, such as transportation,
meals, lodging and lost wages.
b. Notwithstanding anything to the contrary contained in paragraph
8a hereof, NSC agrees that the limitation of liability now existing in favor of
Rex-Waller contained in Article Tenth of NSC's Certificate of Incorporation and
all rights to indemnification now existing in favor of Rex-Waller contained in
Article Tenth of NSC's Certificate of Incorporation and Article VII Section 5 of
NSC's By-laws, in each case as in effect on the date hereof, shall not be
amended in any manner that would adversely affect the rights of Rex-Waller,
unless such amendment is required by law. To the extent permitted by the laws of
the State of Delaware, such indemnification shall be mandatory and not
permissive and NSC shall advance all fees and expenses (including attorneys' and
paralegals' fees for legal counsel retained by NSC on Rex-Waller's behalf and
other costs and expenses) as incurred in connection with such indemnification.
c. Notwithstanding anything to the contrary contained in paragraph
8a hereof, pursuant to the rights to indemnification referred to in paragraph 8b
hereof, NSC agrees to indemnify and hold harmless Rex-Waller and his successors
to the fullest extent permitted by the laws of the State of Delaware with
respect to any claim arising at any time out of any event, action or omission
related to or in connection with Rex-Waller having been (i) a director, officer
or employee of NSC or having served as a director of Endoscopy Center
Affiliates, Inc., a Delaware corporation and a wholly-owned subsidiary of NSC,
or as a director or officer of another corporation or other organization at the
request of NSC, and (ii) the trustee and a fiduciary of the National Surgery
Centers, Inc. 401(k) Plan to the fullest extent permitted by the Employee
Retirement Income Security Act of 1974, as amended. This indemnification shall
continue in full force and effect for a period of not less than the duration of
all statutes of limitations applicable to such matters (or in the case of
events, actions or omissions giving rise to matters which have not been resolved
prior to the expiration of such period, until such matters are finally
resolved). Without limiting the foregoing, NSC shall periodically advance all
fees and expenses (including the fees of attorneys' and paralegals retained by
NSC on Rex-Waller's behalf and other costs and expenses) as incurred with
respect to the foregoing to the fullest extent permitted by the laws of the
State of Delaware, and Rex-Waller shall be defended by counsel of NSC's choice.
9. References and inquiries concerning Rex-Waller's employment at NSC
shall be directed only to E. Timothy Geary, NSC's President, or his successor.
10. Rex-Waller represents and warrants that, prior to and including the
date of this Agreement, no claim, demand or cause of action which is the subject
of this Agreement has been assigned or transferred to any other person or
entity; that no other person or entity has or has had any interest in any claim,
demand or cause of action which is the subject of this Agreement; that no person
or entity has or has had any subrogated interest in any claim, demand, cause of
action or payment of settlement funds which is the subject of this Agreement;
and that he has the sole right and authority to execute this Agreement.
11. This Agreement shall be binding in all respects upon, and inure to the
benefit of, any and all agents,
Page 4
<PAGE>
administrators, executors, heirs, successors, assigns, transferees and parties
claiming under and through Rex-Waller, and any of them. This Agreement shall
also be binding in all respects upon, and inure to the benefit of, NSC's
successors and assigns and all parties claiming under and through NSC.
12. This Agreement may be pleaded as a full and complete defense to, and
may be used as a basis for an injunction against, any action at law, proceeding
in equity or any other judicial or non-judicial proceeding that either party may
institute, prosecute or maintain, or continue to prosecute or maintain, in
breach thereof.
13. This Agreement contains the entire agreement between Rex-Waller on the
one hand and NSC on the other. The parties acknowledge that they have not relied
upon any promises made by a representative of the other, other than those
specifically contained herein, as an inducement to sign this Agreement or the
Exhibits to this Agreement. No change, modification or waiver of any provision
of this Agreement shall be valid or binding unless it is in writing and signed
by the party to be bound. This Agreement supersedes the Employment Agreement
dated as of November 9, 1995, between NSC and Rex-Waller and such agreement
shall be of no further force or effect.
14. If any provision of paragraph 2c of this Agreement, as applied to any
party or to any circumstances, is adjudged by a court to be invalid or
unenforceable, the same will in no way affect any other provision of the said
paragraph 2c or any other part of this Agreement, the application of such
provision in any other circumstances or the validity or enforceability of this
Agreement. If any such provision, or any part thereof, is held to be
unenforceable because of the duration of such provision or the area covered
thereby, the parties agree that the court making such determination will have
the power to reduce the duration and/or area of such provision, and/or to delete
specific words or phrases, and in its reduced form such provision will then be
enforceable and will be enforced.
15. Rex-Waller represents and warrants that he was given a reasonable
amount of time (14 days) to consider the terms of this Agreement and has had an
opportunity to inquire into all material facts pertinent to this Agreement; and
that he is represented by counsel (Sidley & Austin) and has consulted with
counsel prior to signing this Agreement.
16. The undersigned represent and warrant that they are fully authorized
and competent to enter into the terms of and execute this Agreement, and that
they do so knowingly and voluntarily.
Page 5
<PAGE>
IT IS SO AGREED:
- ----------------------------------------------- Date:
John G. Rex-Waller -----------------------
NATIONAL SURGERY CENTERS, INC.
By:
---------------------------------------- Date:
-----------------------
Title:
----------------------------------------
Page 6
<PAGE>
EXHIBIT 1
RESIGNATION
-----------
I, John G. Rex-Waller, do hereby resign as (i) an employee (including my
positions as Executive Vice President, Secretary, and Treasurer) and a member of
the Board of Directors of National Surgery Centers, Inc., a Delaware corporation
("NSC"), (ii) an officer and a member of the Board of Directors of each of the
subsidiaries of NSC in which I am currently serving in either or both of these
capacities (including, without limitation, as an officer and a member of the
Board of Directors of Endoscopy Center Affiliates, Inc., a Delaware corporation
and wholly-owned subsidiary of NSC), and (iii) the trustee and a fiduciary of
the National Surgery Centers, Inc. 401(k) Plan, effective on the date hereof.
Dated this 22nd day of April, 1997
--------------------------------------
John G. Rex-Waller
<PAGE>
EXHIBIT 2
---------
GENERAL RELEASE AND COVENANT NOT TO SUE
---------------------------------------
In consideration of the good and valuable consideration set forth in the
Agreement, dated April 22, 1997, between John G. Rex-Waller ("Rex-Waller") and
National Surgery Centers, Inc., the receipt and sufficiency of which are hereby
acknowledged, Rex-Waller agrees as follows:
A. Rex-Waller agrees to and does hereby release, acquit and forever
discharge National Surgery Centers, Inc.; its successors and assigns;
and its present and former agents, directors, employees, officers and
representatives (hereinafter collectively referred to as the "Released
Parties"), of and from any and all claims, demands and causes of
action of every kind or character, in every proceeding whatsoever,
known or unknown, now existing or which may hereafter arise, by reason
of any act or omission on the part of the Released Parties occurring
at any time up to and including the date of execution of this General
Release and Covenant Not to Sue. Without restricting the generality of
the foregoing, Rex-Waller agrees to and does hereby release, acquit
and forever discharge the Released Parties of and from any and all
claims, demands and causes of action, known or unknown, arising out of
or in any way connected with or relating to his employment and
termination of employment with National Surgery Centers, Inc., from
the beginning of said employment up to and including the date of
execution of this General Release and Covenant Not to Sue, including
but not limited to claims, demands and causes of action based in whole
or in part on (i) breach of contract, including breach of the
Employment Agreement, dated November 9, 1995, by and between Rex-
Waller and National Surgery Centers, Inc.; (ii) impairment of economic
opportunity, intentional infliction of emotional harm, negligent
infliction of emotional distress, defamation, interference with
contractual relations, interference with prospective economic
advantage, or other tort; (iii) the Age Discrimination in Employment
Act, the Americans With Disabilities Act, the Equal Pay Act, the
Employee Retirement Income Security Act, Title VII of the Civil Rights
Act, the Civil Rights Act of 1991, the State of Illinois Human Rights
Act, the Cook County Human Rights Ordinance, and any other federal,
state or municipal statute or ordinance relating to discrimination in
employment, and (iv) any other legal restrictions prohibiting, in
whole or in part, the actual or constructive discharge of employees.
Notwithstanding anything to the contrary set forth in this General
Release and Covenant Not to Sue, this release shall not apply to, or
release the Released Parties from, any obligation contained in the
Agreement dated April 22, 1997, between Rex-Waller and National
Surgery Centers, Inc. or any obligation under any benefit plan or
arrangement of National Surgery Centers, Inc., including National
Surgery Centers, Inc.'s Amended and Restated 1992 Stock Option Plan,
which entitles Rex-Waller to the receipt of any benefit, or any claim
for benefits that Rex-Waller may have under any ERISA covered employee
benefit plan in which he was a participant.
<PAGE>
B. Rex-Waller agrees that he will not commence or bring any action at
law, proceeding in equity, or any other judicial or non-judicial
proceeding against the Released Parties relating, in whole or in part,
to his employment and termination of employment with National Surgery
Centers, Inc.. Notwithstanding anything to the contrary set forth in
this General Release and Covenant Not to Sue, this covenant not to sue
shall not apply to, or release the Released Parties from, any
obligation contained in the Agreement dated April 22, 1997, between
Rex-Waller and National Surgery Centers, Inc. or any obligation under
any benefit plan or arrangement of National Surgery Centers, Inc.,
including National Surgery Centers, Inc.'s Amended and Restated 1992
Stock Option Plan, which entitles Rex-Waller to the receipt of any
benefit, or any claim for benefits that Rex-Waller may have under any
ERISA covered employee benefit plan in which he was a participant.
Rex-Waller acknowledges that he was advised in writing to consult with an
attorney prior to executing this General Release And Covenant Not To Sue, and
that he was given a reasonable amount of time to consider the terms of this
General Release And Covenant Not To Sue.
- ----------------------------------- Date:
John G. Rex-Waller ------------------
Subscribed and sworn to
before me this __ day of
April, 1997.
- ------------------------
Notary Public
Page 2
<PAGE>
EXHIBIT 3
GENERAL RELEASE AND COVENANT NOT TO SUE
---------------------------------------
In consideration of the good and valuable consideration set forth in the
Agreement, dated April 22, 1997, between John G. Rex-Waller ("Rex-Waller") and
National Surgery Centers, Inc., a Delaware corporation ("NSC"), the receipt and
sufficiency of which are hereby acknowledged, NSC agrees as follows:
A. NSC, on behalf of itself and each of its divisions, subsidiaries,
affiliates and other related entities (whether or not such entities
are wholly owned) and its past, present and future directors,
officers, employees and agents, and the predecessors, successors and
assigns of each of them, agrees to and does hereby release, acquit and
forever discharge Rex-Waller and anyone claiming through him
including, but not limited to, his past, present and future agents,
family members, representatives, heirs, executors and administrators,
or the predecessors, successors and assigns of each of them
(hereinafter collectively referred to as the "Released Parties"), of
and from any and all claims, demands and causes of action of every
kind or character, in every proceeding whatsoever, known or unknown,
now existing or which may hereafter arise, by reason of any act or
omission on the part of the Released Parties occurring at any time up
to and including the date of execution of this General Release and
Covenant Not to Sue. Without restricting the generality of the
foregoing, NSC agrees to and does hereby release, acquit and forever
discharge the Released Parties of and from any and all claims, demands
and causes of action, known or unknown, arising out of or in any way
connected with or relating to Rex-Waller's employment and termination
of employment with NSC from the beginning of said employment up to and
including the date of execution of this General Release and Covenant
Not to Sue, including but not limited to claims, demands and causes of
action based in whole or in part on breach of contract, including
breach of the Employment Agreement, dated November 9, 1995, by and
between Rex-Waller and NSC. Notwithstanding anything to the contrary
set forth in this General Release and Covenant Not to Sue, this
release shall not apply to, or release the Released Parties from, any
obligation contained in the Agreement dated April 22, 1997, between
Rex-Waller and NSC.
B. NSC agrees that it will not commence or bring any action at law,
proceeding in equity, or any other judicial or non-judicial proceeding
against the Released Parties relating, in whole or in part, to Rex-
Waller's employment and termination of employment with NSC.
Notwithstanding anything to the contrary set forth in this General
Release and Covenant Not to Sue, this release shall not apply to, or
release the Released Parties from, any obligation contained in the
Agreement dated April 22, 1997, between Rex-Waller and NSC.
NATIONAL SURGERY CENTERS, INC.
By: Date:
---------------------------------- ------------------
Title:
----------------------------------
SUBSCRIBED and sworn to
before me this ___ day of
April, 1997.
- -------------------------
Notary Public
<PAGE>
EXHIBIT 11
Computation of Income Per Common Share
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1997 1996
-------- --------
<S> <C> <C>
PRIMARY INCOME PER SHARE
Average shares outstanding 11,953 8,447
Net effect of dilutive stock options
and warrants-based on the treasury
stock method using average market price 479 555
-------- --------
Total 12,432 9,002
======== ========
Income:
Net income $ 2,611 $ 1,455
======== ========
Per common share amount:
Net income $ 0.21 $ 0.16
======== ========
FULLY DILUTED INCOME PER SHARE
Average shares outstanding 11,953 8,447
Net effect of dilutive stock options
and warrants-based on the treasury
stock method using the greater of average
market price or market closing price 479 687
Assumed conversion of certain convertible debt 29 430
-------- --------
Total 12,461 9,564
======== ========
Income:
Net income $ 2,611 $ 1,455
Add convertible debt interest, net of income
tax effect 4 62
-------- --------
Net income after convertible debt interest $ 2,615 $ 1,517
======== ========
Per common share amount:
Net income $ 0.21 $ 0.16
======== ========
</TABLE>
NOTE: All number of shares and per share amounts have been adjusted, when
applicable, to reflect the three-for-two stock split in the form of a 50%
stock dividend effected on May 31, 1996.
Page 1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the financial statements of National Surgery Centers for the three months ended
March 31, 1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 13,472,000
<SECURITIES> 35,110,000
<RECEIVABLES> 15,343,000
<ALLOWANCES> 1,880,000
<INVENTORY> 2,614,000
<CURRENT-ASSETS> 66,222,000
<PP&E> 45,584,000
<DEPRECIATION> 12,012,000
<TOTAL-ASSETS> 142,867,000
<CURRENT-LIABILITIES> 7,386,000
<BONDS> 6,935,000
0
0
<COMMON> 120,000
<OTHER-SE> 120,600,000
<TOTAL-LIABILITY-AND-EQUITY> 142,867,000
<SALES> 22,116,000
<TOTAL-REVENUES> 22,116,000
<CGS> 16,901,000
<TOTAL-COSTS> 16,901,000
<OTHER-EXPENSES> 901,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 153,000
<INCOME-PRETAX> 4,161,000
<INCOME-TAX> 1,550,000
<INCOME-CONTINUING> 2,611,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,611,000
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
