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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 0-27162
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NATIONAL SURGERY CENTERS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3549627
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
30 SOUTH WACKER DRIVE, SUITE 2302, CHICAGO, ILLINOIS 60606
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (312) 655-1400
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, PAR VALUE $.01 PER SHARE
NON-VOTING COMMON STOCK, PAR VALUE $.01 PER SHARE
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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 No X
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANT HELD BY
STOCKHOLDERS WHO WERE NOT AFFILIATES (AS DEFINED BY REGULATIONS OF THE
SECURITIES AND EXCHANGE COMMISSION) OF THE REGISTRANT WAS APPROXIMATELY
$327,912,406 AT MARCH 13, 1997 (BASED ON THE CLOSING SALE PRICE ON THE NASDAQ
NATIONAL MARKET ON MARCH 13, 1997, AS REPORTED BY THE WALL STREET JOURNAL
(MIDWEST EDITION)). AT MARCH 13, 1997, THE REGISTRANT HAD ISSUED AND OUTSTANDING
AN AGGREGATE OF 11,952,563 SHARES OF COMMON STOCK.
DOCUMENTS INCORPORATED BY REFERENCE
THOSE SECTIONS OR PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO
SHAREHOLDERS FOR THE FISCAL YEAR ENDED 1996, DESCRIBED IN PART II HEREOF, ARE
INCORPORATED BY REFERENCE IN THIS REPORT.
THOSE SECTIONS OR PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 21, 1997, DESCRIBED IN PART III
HEREOF, ARE INCORPORATED BY REFERENCE IN THIS REPORT.
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PART I
ITEM 1. BUSINESS
The Company was incorporated in 1987 in the State of Illinois and was
reincorporated in the State of Delaware in 1995. The Company owns, manages and
operates ambulatory surgery centers. The Company also pursues opportunities to
develop new facilities with hospitals and physician groups.
The Company owns and operates freestanding ambulatory surgery centers that
provide the medical and administrative support necessary for physicians to
perform non-emergency surgical procedures. The Company operates a network of 32
surgery centers in twelve states and is developing new surgery centers. The
Company provides alternate-site settings for high-quality surgical care that is
more cost effective than hospital-based surgical care and that is increasingly
preferred by physicians, payors and patients.
The Company believes that many physicians prefer the efficiencies of
freestanding ambulatory surgery centers because they enhance physicians'
productivity by providing them with greater scheduling flexibility, more
consistent nurse staffing and faster turnaround time between cases, allowing
physicians to perform more surgeries in a defined period of time. In addition,
new technology and advances in anesthesia and the addition of overnight recovery
have significantly expanded the number and types of surgical procedures that are
being performed in ambulatory surgery centers.
The Company's objective is to establish a nationwide organization of
freestanding ambulatory surgery centers in secondary and other selected markets
by acquiring established centers and developing new centers. The Company seeks
to provide a broad range of high-quality surgical services and to collaborate
with other participants in local health care delivery systems. The key
components of the Company's strategy are as follows:
- - Acquire established ambulatory surgery centers that are seeking affiliation
with an experienced operator having access to capital and other resources;
- - Focus on secondary and other selected markets where the Company can
establish a significant local presence or play an important role in the
development of local integrated delivery systems;
- - Develop new ambulatory surgery centers in markets where attractive
acquisitions are not available or where the opportunity exists to increase
the Company's presence in its existing markets;
- - Develop joint ventures with hospitals and other providers to increase
patient flow through joint marketing, access to managed care contracts and
participation in a broader network of health care providers; and
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- - Expand the range of services offered to physicians and payors by offering
state-of-the-art technology, administrative conveniences, flexible pricing
alternatives and cost-effective care.
THE INDUSTRY
The Company believes that overall health care expenditures will continue to
increase with the aging of the population and the extension of health care
coverage to previously uninsured groups. In recent years, government programs,
private insurance companies, managed care organizations and self-insured
employers have implemented various cost-containment measures to limit the growth
of health care expenditures. These cost-containment measures, together with
technological advances, have resulted in a significant shift in the delivery of
health care services away from traditional inpatient hospitals to more
cost-effective alternate sites, including ambulatory surgery centers.
Industry sources estimate that in 1994 outpatient surgical procedures
represented approximately 64.7% of all surgical procedures performed in the
United States, compared with 31.3% in 1984, and that surgical procedures
performed in freestanding ambulatory surgery centers comprised 19.0% of total
outpatient surgery, compared with 7.9% in 1984. As of May 1996, there were
approximately 2,340 surgery centers in the U.S., of which approximately 130 were
owned by hospitals and approximately 510 were owned by corporate chains. The
remaining approximately 1,700 centers were independently owned, primarily by
physicians.
Managed care organizations with significant numbers of covered lives are
seeking to direct large numbers of patients to high-quality, low-cost providers
and provider groups. In order to compete for the growing number of managed care
patients, hospitals, physicians and other providers, including alternate site
outpatient providers, are forming integrated delivery systems or provider joint
ventures. The Company believes that there will be opportunities for
well-positioned ambulatory surgery centers to participate in the development of
these delivery systems and joint ventures.
The Company believes that the following factors contribute to the growth of
ambulatory surgery:
Cost-Effective Alternative. Ambulatory surgery is generally less expensive
than hospital inpatient surgery. In addition, the Company believes that surgery
performed at a freestanding ambulatory surgery center is generally less
expensive than hospital-based ambulatory surgery for a number of reasons,
including lower facility development costs, more efficient staffing and space
utilization and a specialized operating environment focused on cost containment.
Managed Care. The Company believes managed care enrollment will continue to
increase and that managed care organizations will seek high-quality,
cost-effective health care services for their enrollees. As a result, the
Company believes that interest in ambulatory surgery will grow as capitation and
other reimbursement arrangements shift the risk for health care costs from
traditional payors to providers such as hospitals and physician groups.
"Capitation" is a reimbursement arrangement in which a health care provider
receives a fixed payment per member per month for the provision of defined
health care services to members of a managed care plan.
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Physician and Patient Preference. The Company believes that many physicians
prefer freestanding ambulatory surgery centers. The Company believes that such
centers enhance physicians' productivity by providing them with greater
scheduling flexibility, more consistent nurse staffing and faster turnaround
time between cases, allowing physicians to perform more surgeries in a defined
period of time. In contrast, hospitals generally serve a broader group of
physicians, including those involved with emergency procedures that must be
given priority over scheduled non-emergency procedures, resulting in postponed
or delayed surgeries. Additionally, many physicians choose to perform surgery in
an ambulatory surgery center because their patients prefer the simplified
admissions and discharge procedures and the less institutional atmosphere.
New Technology. New technology and advances in anesthesia, which have been
increasingly accepted by physicians, have significantly expanded the types of
surgical procedures that are being performed in ambulatory surgery centers.
Lasers, enhanced endoscopic techniques and fiber optics have reduced the trauma
and recovery time of many surgical procedures. Improved anesthesia has shortened
recovery time by minimizing post-operative side effects such as nausea and
drowsiness, thereby avoiding, in some cases, overnight hospitalization.
Extended Recovery. In recent years, some states have permitted extended
recovery in ambulatory surgery centers. While states typically restrict the time
period a patient may remain in an ambulatory surgery center after surgery, a
number of states, including seven states in which the Company operates, allow
extended recovery stays of up to 24 hours. Longer recovery stays are being
considered in some states. Extended recovery significantly increases the types
of procedures that can be performed in ambulatory surgery centers.
GROWTH STRATEGY
The Company's objective is to establish a nationwide network of ambulatory
surgery centers in secondary and other selected markets by acquiring established
centers and developing new centers. The Company seeks to provide a broad range
of high-quality surgical services and to collaborate with other participants in
the health care delivery system. The key components of the Company's strategy
are as follows:
Focus on Secondary and Other Selected Markets. The Company plans to focus
on those markets where, either directly or through affiliation with physicians,
payors or hospitals, it can establish a significant local presence or play an
important role in the development of local integrated delivery systems. The
Company generally views secondary markets as those metropolitan areas with fewer
than 250,000 residents and one or two hospitals. The Company believes that in
secondary markets its centers can more easily achieve the scale that allows them
to become a significant local health care provider and a more attractive partner
in such delivery systems.
Acquire Established Ambulatory Surgery Centers. The Company plans to
continue acquiring established ambulatory surgery centers. The ambulatory
surgery center industry is highly fragmented and is consolidating due to the
increasing complexity of the regulatory and business aspects of health care, the
growing influence of managed care, the rising cost of technology and the need
for capital.
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In addition, physician operators of surgery centers are experiencing increasing
practice demands. The Company believes that a significant opportunity exists to
acquire ambulatory surgery centers that are seeking affiliation with experienced
operators having access to capital and other resources. The Company's goal is to
acquire four to six additional ambulatory surgery centers by the end of 1997.
See "Acquisition and Development Programs."
Develop New Ambulatory Surgery Centers. The Company plans to develop new
ambulatory surgery centers in selected markets. The Company pursues new center
development in markets where attractive acquisitions are not available or where
the opportunity exists to increase the Company's presence in its existing
markets. In the future, the Company's new center development efforts will
generally be undertaken in partnership with physicians, hospitals and other
local health care participants, including, where the opportunity presents
itself, acquisitions of centers that are currently under development. The
Company believes that such partnerships or acquisitions minimize the time
required to become an established provider. The Company's goal is to develop one
to two additional ambulatory surgery centers by the end of 1997.
Develop Joint Ventures with Hospitals, Physicians and Other Providers. The
Company has established four joint ventures, established limited or general
partnerships in 29 of its network of 32 centers, and is exploring additional
alliances in selected markets. The Company believes that such affiliations
increase patient flow through joint marketing, access to managed care contracts
and participation in a broader network of health care providers. As part of its
joint venture strategy, the Company intends to manage the surgery centers in
which it and other health care providers have an equity interest. See
"Acquisition and Development Programs."
Expand Range of Services. The Company plans to continue to increase the
number and types of surgeries performed at its centers. The Company is committed
to adding programs and services for physicians and payors by providing
state-of-the-art technology, administrative conveniences, flexible pricing
alternatives and cost-effective care. The Company is also committed to offering
extended recovery services wherever possible, enabling its centers to
accommodate a wider range of higher-acuity procedures.
ACQUISITION AND DEVELOPMENT PROGRAMS
Acquisition Program
The Company typically targets for acquisition ambulatory surgery centers
that meet certain criteria, including market demographics, size, profitability,
specialty mix, prominence within the local medical community, access to payors
and opportunities for growth. The Company principally targets physician-owned
ambulatory surgery centers. The Company believes that due to the increasing
complexity of the regulatory and business aspects of health care, physicians are
increasingly seeking affiliation with experienced ambulatory surgery center
operators having access to capital and other resources. Approximately 48% of the
approximately 1,700 physician-owned ambulatory surgery centers in the United
States are smaller centers performing fewer than 1,000 cases per year and are
often single specialty centers. The Company believes that, although some of
these smaller centers represent acquisition opportunities, the remaining
approximately 880 centers represent the more likely
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universe of acquisition candidates and that in excess of 200 of these centers
meet the Company's acquisition criteria. In addition to the acquisitions of
multi-specialty centers, the Company may take advantage of other opportunities
that present themselves. Opportunities, such as the acquisition of single
specialty centers or ambulatory centers operated by multi-market chains, may be
pursued if those opportunities fit into the Company's growth strategy and
compliment its existing base of centers. During 1996, the Company acquired 16
centers in seven separate transactions. The Company's goal is to effect four to
six acquisitions by the end of 1997 and the Company is currently in various
levels of discussion with additional centers regarding possible acquisition.
There can be no assurance that the Company will be able to acquire additional
surgery centers or, if acquired, that they can be operated profitably.
Acquisition pricing has varied widely in recent years. In the late 1980's
and early 1990's, large amounts of capital were being directed at many new
ventures in the ambulatory surgery center industry. The Company believed that
establishing scale and credibility were primary considerations to ensure its
future access to capital. As a result, from mid-1991 through 1992, the Company
acquired ten centers. However, during this period, the purchase prices for
surgery centers escalated due to the large amounts of capital available to
acquirors, the increased number of new acquirors in the market and the
relatively low cost of capital to the publicly traded acquirors. The Company
believes that during 1993, because of problems encountered by the non-surgery
center operations of certain of its larger competitors and the uncertainty
surrounding the changes in the health care industry, the capital available to
acquirors of surgery centers began to shrink. However, sellers' expectations
remained high. In light of this, the Company's management chose to (i) impose a
stricter pricing discipline upon its proposed acquisitions and (ii) review
carefully the position in existing markets of each center that the Company
proposed to acquire to evaluate the likelihood of each center's continued growth
and viability, taking into account the likely effects of the various federal and
state health care reform efforts. Although the Company continued to make
acquisition proposals during this period, the Company consummated only two
acquisitions in 1993 and 1994.
The Company believes that more recently, the pricing environment for
acquisitions of ambulatory surgical centers has improved and it appears that
significant government reform of the U.S. health care delivery system is
unlikely. The Company believes that the current pricing environment for
acquisitions is attractive and that acquisitions prices have declined for
several reasons, including a reduction in potential sellers' expectations and a
reduction in the potential universe of buyers as many of the early acquirors of
surgery centers have either been unable to raise additional capital or have been
acquired themselves.
Development Program
The Company develops new centers in markets where attractive acquisitions
are not available or where the Company seeks to increase its presence in markets
in which it already operates. In its development efforts, the Company targets
markets that have attractive size and demographic characteristics and a high
level of interest on the part of local physicians, hospitals or payors.
Historically, the Company's development strategy was based on a structure
involving majority Company ownership through joint venture arrangements with
local physicians. In the future, the Company's development strategy may also
include joint venture arrangements with local hospitals,
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physicians and other providers, including the acquisition of centers that are
currently under development. In some cases, this may include instances of
minority ownership by the Company. In light of the Company's experience and the
slower than anticipated startup of the development centers opened by the Company
in 1994, the Company believes that this broadened development strategy will
provide greater access to patients and minimize the time required to become an
established provider.
OPERATION OF SURGERY CENTERS
The Company operates a network of 32 surgery centers in twelve states and
is currently developing three new surgery centers. The Company's surgery center
network has a total of 93 operating rooms and 46 treatment rooms. The Company's
surgery centers are typically owned through limited or general partnerships in
which a wholly owned subsidiary of the Company owns a general partnership
interest and is the managing general partner of the surgery center. Local
physicians and the subsidiary generally own the limited partnership interests
and, in three instances, hospitals also own limited partnership interests.
The Company's typical multi-specialty surgery center is a freestanding
facility with three to five fully equipped operating rooms, one or two treatment
rooms and ancillary areas for reception, pre-operative preparation, recovery and
administration. The Company's typical endoscopy center, which performs primarily
gastroenterological procedures, has two treatment rooms and ancillary areas for
reception, pre-operation preparation, recovery and administration and may also
have an operation room. The Company's surgery centers are generally located in
close proximity to physicians' offices. Each of the Company's surgery centers is
available for use only by licensed physicians who have been approved by the
center's medical credentialling committee.
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The following table sets forth information regarding each of the centers
operated by the Company.
<TABLE>
<CAPTION>
Date Number of Number of Extended
operations Percentage operating treatment recovery
Location began by NSC ownership(1) rooms rooms service
- ------------------ ------------ ------------ ----- ----- -------
<S> <C> <C> <C> <C>
Bremerton, WA October 1991 89.0 3 1 X
Brownsville, TX November 1991 59.0 4 1
Fayetteville, NC November 1991 50.2 9 -- X
Norman, OK November 1991 90.0 4 1 X
Greensboro, NC June 1992 100.0 11 3 X
Seattle, WA June 1992 54.0 7 -- X
Provo, UT October 1992 100.0 5 -- X
Elizabethtown, KY November 1992 79.5 3 1 X
Bakersfield, CA January 1993 89.0 2 1
Somerset, KY November 1993 87.5 2 1 X
Las Vegas, NV August 1994 69.6 4 3 X
Santa Monica, CA August 1994 88.9 5 3 X
Las Vegas, NV February 1995 10.0 2 1
Oxnard, CA August 1995 85.0 4 1
Greensboro, NC October 1995 80.3 2 --
Chula Vista, CA February 1996 51.0 -- 2
Ft. Worth, TX February 1996 51.0 -- 2
Long Beach, CA February 1996 50.0 -- 3
Newport Beach, CA February 1996 70.0 -- 2
San Diego, CA February 1996 58.3 -- 3
Thousand Oaks, CA February 1996 80.0 -- 2
Kent, OH April 1996 84.0 2 1
Atlanta, GA May 1996 66.0 3 --
Billings, MT January 1996 100.0 4 --
Cincinnati, OH May 1996 58.0 1 1
Houston, TX May 1996 60.8 3 1 X
Miami, FL May 1996 60.0 4 3
Sarasota, FL May 1996 60.0 1 2
Humble, TX September 1996 10.0 4 2 X
Auburn, CA November 1996 88.3 2 2
San Mateo, CA December 1996 38.5 -- 2
Port St. Lucie, FL January 1997 80.0 2 1
</TABLE>
(1) Includes general partnership and limited partnership units
The Company provides services to a wide range of specialties including:
ophthalmology, orthopedic surgery, otorhinolaryngology (ear, nose and throat),
gynecology, general surgery, gastroenterology, anesthesiology, neurosurgery,
oral surgery, plastic surgery, podiatry and urology. Medicare currently approves
over 2,400 types of surgical procedures that may be performed in ambulatory
surgery centers, up from 1,500 types in 1992. Common procedures performed in the
Company's surgery centers include knee and shoulder arthroscopy, laparoscopy,
hernia repair, tubal ligations and removal of cataracts.
Twelve of the Company's multi-specialty surgery centers currently provide
for extended
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recovery stays. The Company intends to offer extended recovery services at its
multi-specialty facilities if permitted by state law. The Company's ability to
develop such recovery care facilities is dependent on state regulatory
environments. Extended recovery capability generally permits higher acuity and
higher revenue procedures to be performed, including the following:
<TABLE>
<CAPTION>
SPECIALTY HIGHER ACUITY PROCEDURES
--------- ------------------------
<S> <C>
Orthopedic surgery Anterior cruciate ligament repair, shoulder
surgery, total knee replacements, micro discectomies
and laminectomies (back surgery)
Gynecology Laparascopically assisted vaginal hysterectomies
General surgery Laparascopically assisted hernia repair and
laparascopic cholecystectomy
</TABLE>
After a physician determines that surgery is necessary and can be
appropriately performed in an ambulatory surgery center, the physician and
patient schedule the surgery and, if appropriate, request extended recovery
services. The surgery center's staff subsequently contacts the patient by
telephone to obtain payor and other patient information and to ensure that the
patient has arranged to be transported home following the recovery period.
Patients generally arrive at the center approximately one hour before scheduled
surgery to allow time for admission and a review of their medical history. A
local or general anesthetic is administered and the surgery is performed. After
surgery, patients generally spend three hours in the recovery area before being
discharged by the center's anesthesiologist or being transferred to the surgery
center's extended recovery area.
The Company's multi-specialty surgery centers generally employ a staff of
between 15 and 30 and its endoscopy centers generally employ a staff of between
five and fifteen, depending on the size of the facility and the volume of cases.
The staff includes a center administrator, a business manager, a clinical
director, registered nurses, operating room technicians and clerical workers.
The center administrator is responsible for general oversight of the center's
operations, including liaison with physicians and coordination of marketing
efforts and reports to a regional or corporate vice president. The business
manager is responsible for the center's financial records and patient billing
and collections. The clinical director is responsible for providing leadership
and coordination for the professional and support staff and ensuring efficient
scheduling and staffing for the physicians.
The Company provides each of its surgery centers with a full range of
financial, marketing and operating services as well as data processing support
both for internal operational control and for the orderly conduct of business
office functions. This includes a financial reporting and accounting package, a
billing and accounts receivable system, inventory and accounts payable systems
and a patient record-keeping system. Corporate management also supports local
marketing activities, including the analysis of market conditions and patient
utilization patterns and the development of prices and services which are
competitive with those offered by other local health care providers. The
Company, where appropriate, executes master agreements for purchasing equipment
and supplies enabling each center to realize the economies of scale available
through volume purchases. In addition, the Company provides support for Medicare
certification, local regulatory licensure and
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accreditation efforts.
QUALITY ASSURANCE
The Company's surgery centers implement quality assurance procedures to
ensure a high level of care provided at the surgery centers. Each center has a
medical advisory committee comprised of three to ten physicians that reviews the
professional credentials of physicians applying for medical staff privileges at
the center. In addition, each center has a medical director who supervises and
is responsible for the quality of medical care provided at the center. The
medical director, who is generally a practicing surgeon or anesthesiologist,
reports directly to the center's medical advisory committee. The center
administrator or clinical director, in conjunction with the medical director,
reviews and monitors surgical outcomes along with procedures performed and the
quality of the logistical, medical and technological support provided to the
physician. In addition, the patient is contacted by a center nurse on the day
following discharge to check on the patient's condition and to survey the
patient as to the quality of care provided. The Company believes that this
direct, systematic feedback from both physician and patient is an effective way
to monitor the level of care at each center. All of the Company's centers are
Medicare certified, which certification is required to obtain Medicare
reimbursement. Additionally, the Company's surgery centers seek approval by
either the Joint Commission for Accreditation of Health Care Organizations
("JCAHO") or the Accrediting Association of Ambulatory Health Care ("AAAHC"),
which are industry-based, self-regulatory organizations which grant
accreditation of surgery centers based on established criteria as an additional
indication of a center's quality. The Company is seeking accreditation in all of
its centers that have not been approved by either the JCAHO or the AAAHC.
MARKETING
Marketing activities directed at physicians and other health care providers
are coordinated locally by the individual center and are supplemented by
corporate management. These activities generally emphasize advantages offered by
the Company's surgery centers, such as the proximity of surgery centers to
physicians' offices, the ability to schedule consecutive cases without
preemption by inpatient or emergency procedures, the rapid turnaround time
between cases, the high technical capability and low turnover and consistency of
nurse staffing, state-of-the-art surgical equipment and the simplified
administrative procedures. A target list of physicians is developed at each
local surgery center. Although the center administrator is the primary point of
contact, physicians who utilize the Company's surgery centers are important
sources of recommendation to other physicians regarding the benefits of using
the Company's surgery centers. The Company periodically reviews each center's
physician marketing list and its progress in contacting and successfully
attracting local physicians.
The Company also markets its surgery centers directly to payors, including
HMOs, PPOs, other managed care organizations, employers and other payor-groups.
Payor-group marketing activities conducted by the Company's management and
center administrators emphasize the high quality of care, cost advantages and
convenience of the Company's surgery centers and are focused on making each
center an approved provider under local managed care plans. In addition, the
Company is pursuing relationships with physician groups in its markets in order
to promote jointly
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its surgery centers and the physician groups to payors. In some instances, this
may involve invoicing the centers' charges, on a case rate basis, with the
surgeon, anesthesiologist, lab, x-ray and pathology charges combined to provide
the payor with one all-inclusive bill to cover an episode of care.
COMPETITION
In each of its markets, the Company competes principally with hospitals and
other operators of freestanding surgery centers to attract physicians and
patients to its ambulatory surgery centers and for inclusion in managed care
programs. In developing new surgery centers and acquiring existing surgery
centers the Company competes with other surgery center companies and local
hospitals. In competing for physicians and patients, important competitive
factors are convenience, cost, quality of service, physician loyalty and
reputation. Hospitals have many competitive advantages in attracting physicians
and patients, including established standing in the community, historical
physician loyalty and convenience for physicians making rounds or performing
inpatient surgery in the hospital. However, the Company believes that many
physicians prefer to utilize and affiliate with freestanding ambulatory surgery
centers due to greater scheduling flexibility, more consistent nurse staffing
and faster turnaround time between cases, thereby allowing a physician to
perform more surgeries in a defined period of time.
GOVERNMENT HEALTH CARE REGULATION
Health Care Reform
In recent years, a variety of legislative proposals designed to change
access to and payment for health care services in the United States have been
introduced. Although no health reform proposals were passed by Congress to date,
other proposed health care reform legislation, including the regulation of
patient referral practices, reimbursement of health care providers, formation
and operation of physician joint ventures and tort reform, has been and may be
considered by Congress and the legislatures of many of the states in which the
Company operates. No predictions can be made as to whether health care reform
legislation or similar legislation will be enacted or, if enacted, its effect on
the Company. Any federal or state legislation prohibiting, among other things,
the referral to or treatment of patients at surgery centers by health care
providers with an investment interest in the surgery centers may have a material
adverse effect on the Company. In the event that Federal or state regulations
prohibit the ownership of surgery centers by physicians, the Company would seek
to purchase the interests held by its limited partner physicians. Some of the
Company's limited partnership agreements contain a provision which allows the
Company to purchase the interest of each limited partner for an amount equal to
a multiple of the partner's allocation of taxable income in the most recent
calendar year. The Company may, at its option, issue cash, notes, or stock,
including unregistered stock, to purchase such limited partners' interests. The
Company believes that it would be able to buy out all of its limited partners if
required.
Regulatory Environment
The Company's surgery centers and the physicians utilizing its centers are
subject to numerous
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regulatory, accreditation and certification requirements, including requirements
related to licensure, certificate of need, reimbursement from insurance
companies and other private third-party payors, Medicare and Medicaid
participation and reimbursement, and utilization and quality review
organizations. The grant and renewal of these licenses, certifications and
accreditations are based upon governmental and private regulatory agency
inspections, surveys, audits, investigations or other reviews, including
self-reporting requirements. An adverse review or determination by any
regulatory authority could result in denial of a center's plan of development or
proposed expansion of facilities or services, the loss or restriction of
licensure by a center or one of its practitioners, or loss of center
certification or accreditation. A regulatory authority could also reduce, delay
or terminate reimbursement to a center or require repayment of reimbursement
received. The loss, denial or restriction of any such licensure, accreditation,
certification (including certificates of need or exemption therefrom) or
reimbursement through changes in the regulatory requirements, an enforcement
action, or otherwise, could have a material adverse effect on the Company.
Federal Fraud and Abuse Statute. Under the Medicare and Medicaid programs,
the federal government enforces a federal statute (the "Fraud and Abuse
Statute") that prohibits the offer, payment, solicitation or receipt of any
remuneration, directly or indirectly, overtly or covertly, in cash or in kind to
induce or in exchange for (i) the referral of patients covered by the programs,
or (ii) the leasing, purchasing, ordering, or arranging for or recommending the
lease, purchase, or order of any item, good, facility or service covered by the
programs. The federal courts have held that an arrangement violates the Fraud
and Abuse Statute if one purpose of a transaction which results in the payment
of remuneration (including the distribution of profits) is to induce the
referral of patients covered by the Medicare and Medicaid programs, even if
another purpose of the payment is to compensate an individual for professional
services. Violations of such statute can result in criminal penalties, civil
monetary penalties and exclusion from the Medicare and Medicaid programs. In an
attempt to clarify which arrangements are exempt from program exclusion, civil
sanctions or criminal prosecution under the Fraud and Abuse Statute, the
Department of Health and Human Services published in 1991 a set of "safe harbor"
regulations outlining practices that are deemed not to violate the Fraud and
Abuse Statute. Although compliance with one of the safe harbors assures
participants that an arrangement does not violate the Fraud and Abuse Statute,
failure of an arrangement to fit within a safe harbor provision does not
necessarily mean that arrangement violates the Fraud and Abuse Statute. Although
the Company has determined that the current ownership structure of its surgery
centers does not fit within any of the safe harbors applicable to investments in
health care providers by physicians who are in a position to make or influence
referrals, it believes that its arrangements with physicians do not fall within
the activities prohibited by the Fraud and Abuse Statute. However, no assurances
can be given that regulatory authorities might not assert a contrary position or
that new laws, or the interpretation of existing laws, might not adversely
affect relationships established by the Company with physicians or other health
care providers or result in the imposition of penalties on the Company or its
facilities.
"Stark Laws." The Company's surgery centers and their physicians, dentists
and podiatrists are also subject to the Ethics in Patient Referrals Act of 1989
(the "Stark Law"). Unless excepted, a physician, dentist or podiatrist may not
make a referral of a Medicaid or Medicare patient to any clinical laboratory
services provider with whom he or she has a financial relationship (either
12
<PAGE> 13
investment or compensation) for such restricted services and any provider who
accepts such a referral may not bill for the service provided pursuant to the
referral. Sanctions for violating the Stark Law can include civil monetary
penalties and exclusion from Medicare and Medicaid. Unlike the Fraud and Abuse
Statute in which an activity may fall outside a safe harbor and still not
violate the law, a referral under the Stark Law that does not fall within an
exception is strictly prohibited. In August 1993, Congress passed legislation
("Stark II") that, effective January 1, 1995, expanded the self-referral ban to
include a number of health care services provided by entities with which the
physicians may have an ownership interest or a financial relationship, although
it does not specifically prohibit referrals by physicians with an ownership
interest in, or financial relationship with, an ambulatory surgery center,
provided that the surgery services are not provided as "outpatient hospital
services." Ambulatory surgery is not included in the list of restricted services
and the Company does not believe that ambulatory surgery is subject to the Stark
restrictions.
AMA Restrictions. In June 1994, the American Medical Association severely
restricted the ability of physicians to refer to entities in which such
physicians have an ownership interest, except when the physician directly
provides care or services at a facility that is an extension of the physician's
practice and in very limited circumstances such as in rural areas where there is
lack of available capital from non-physician sources. If the American Medical
Association changes its ethical requirements to preclude all referrals by
physicians, physician referrals to the Company's ambulatory surgery centers
could be adversely affected. It is possible that a prohibition on physician
ownership could adversely affect the Company's future operations, although the
Company believes that the majority of physicians would continue to perform
surgery at the surgery centers even if they were no longer limited partners.
State Anti-Referral Laws. In addition to the federal Fraud and Abuse
Statute and the Stark Laws, certain states in which the Company operates have
enacted similar patient referral legislation. The Company believes its surgery
centers' operations are consistent with applicable statutes of the states in
which they operate because either the state statute (i) excludes from the
definition of referral the recommendation by a health care provider that a
patient utilize the types of services provided at the center, (ii) exempts
health care provider investors who directly provide services at the facility and
are personally involved in the rendering of care to the referred patient, or
(iii) does not encompass the provider specialty or services rendered at the
center.
Infectious Waste. As generators of infectious waste, the Company's surgery
centers are required to satisfy all federal, state and local waste disposal
requirements. If any regulatory agency finds a center to be in violation of
waste laws, penalties and fines may be imposed for each day of violation, and
the affected center could be forced to cease operations. The Company believes
its surgery centers dispose of such waste properly.
INSURANCE
The Company maintains medical malpractice insurance under one insurance
policy in the amount of $1.0 million per occurrence and $3.0 million in the
aggregate, with retention limits of $100,000 per occurrence and $200,000 in the
aggregate. In addition, the Company maintains excess
13
<PAGE> 14
medical malpractice and general liability insurance in the amount of $25.0
million.
EMPLOYEES
As of December 31, 1996, the Company had 519 full-time employees, 24 of
whom were corporate personnel. The remaining full-time employees, most of whom
are nurses and office personnel, work at the surgery centers. None of the
Company's employees is covered by a collective bargaining agreement. The Company
considers relations with its employees to be good.
RECENT DEVELOPMENTS
Effective January 1, 1997, the Company purchased an 80% interest in Day
Surgery Center located in Port St. Lucie, Florida. The acquisition was accounted
for using the purchase method of accounting.
ITEM 2. PROPERTIES
The Company's multi-specialty surgery centers range from 4,900 to 26,000
square feet, with the typical surgery center occupying approximately 13,000
square feet, while the endoscopy centers range from 2,600 to 4,800 square feet.
The Company's surgery centers typically lease their facilities pursuant to
long-term lease agreements expiring from 1997 to 2015, most of which contain
options to extend the lease period for up to ten additional years. In certain
instances, the Company has financed the surgery center facility through
long-term mortgages or other financing arrangements in which the lender has a
secured or collateralized interest. The Company's principal executive officers
are situated in approximately 8,500 square feet located at 30 South Wacker
Drive, Suite 2302, Chicago, Illinois 60606. The Company leases this property and
the current lease expires in 2002. See "Operation of Surgery Centers" above for
a list of the Company's surgery centers.
<TABLE>
<CAPTION>
EXPIRATION TYPE OF
LOCATION DATE ENCUMBRANCE
-------- ---- -----------
<S> <C> <C>
Billings, MT Month to Month Lease
Greensboro, NC May 1999 Lease
Auburn, CA June 1999 Lease
Chula Vista, CA January 2000 Lease
Bremerton, WA August 2000 Lease
Atlanta, GA November 2000 Lease
San Mateo, CA March 2001 Lease
Houston, TX May 2002 Lease
Norman, OK June 2002 Lease
Seattle, WA November 2002 Lease
San Diego, CA January 2003 Lease
Somerset, KY June 2003 Lease
Port St. Lucie, FL August 2003 Lease
Greensboro, NC January 2004 Lease
</TABLE>
14
<PAGE> 15
<TABLE>
<S> <C> <C>
Sarasota, FL March 2004 Lease
Newport Beach, CA April 2004 Lease
Santa Monica, CA April 2004 Lease
Kent, OH May 2004 Lease
Long Beach, CA May 2004 Lease
Fort Worth, TX June 2004 Lease
Cincinnati, OH October 2004 Lease
Miami, FL December 2004 Lease
Thousand Oaks, CA January 2005 Lease
Bakersfield, CA May 2008 Lease
Las Vegas, NV June 2008 Lease
Las Vegas, NV July 2009 Lease
Provo, UT September 2012 Lease
Fayetteville, NC July 2015 Lease
Brownsville, TX November 2001 Collateralized
Elizabethtown, KY February 2008 Mortgage
Oxnard, CA --- Owned
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company is party to certain claims and litigation in the ordinary
course of business. The Company is not involved in any legal proceeding that it
believes will result, individually or in the aggregate, in a material adverse
effect upon its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's security holders during the
fourth quarter of fiscal 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER MATTERS
The common stock of the Company has been included for quotation in the
Nasdaq National Market under the symbol "NSCI" since the Company's initial
public offering of common stock on November 10, 1995. Prior to that time, there
was no public market for the common stock. The following table sets the high and
low closing prices for the common stock for the periods indicated as reported by
the Nasdaq National Market.
15
<PAGE> 16
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Year Ended December 31, 1995
Fourth Quarter (1)(2) $15.33 $12.17
Year Ended December 31, 1996
First Quarter(1) $22.00 $14.33
Second Quarter(1) 31.50 18.67
Third Quarter 30.25 22.50
Fourth Quarter 38.00 24.75
</TABLE>
(1) Adjusted to reflect the 3-for-2 stock split of the Company's common stock
effected in May 1996.
(2) Represents trading of the common stock from November 10, 1995 to
December 31, 1995.
The Company has never paid cash dividends on its common stock and the Board
of Directors intends to continue a policy of retaining any earnings for use in
the Company's operations and to fund the Company's and its area developers'
expansion program. The Company does not anticipate paying any cash dividends in
the foreseeable future. In addition, the Company's loan agreement contains a
prohibition on the payment of any cash dividends. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information contained in the Company's Annual Report to Shareholders
for the fiscal year ended 1996 (the "Annual Report"), under the caption
"Selected Consolidated Financial Highlights," and only such information, is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information contained in the Company's Annual Report to Shareholders,
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and only such information, is incorporated herein by
reference.
16
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information contained in the Company's Annual Report to Shareholders,
under the captions "Consolidated Balance Sheets," "Consolidated Statements of
Income," "Consolidated Statements of Shareholders' Equity," "Consolidated
Statements of Cash Flows," "Notes to Consolidated Financial Statements" and "
Report of Independent Auditors," and only such information, is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH THE ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
The information appearing under the captions "Election of Class II
Directors" and "Class I and Class III Directors" in the Company's proxy
statement for the Annual Meeting of the Stockholders scheduled for May 21, 1997
(the "Proxy Statement") is incorporated herein by reference.
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Officer
Executive Officer's Name Age Position(s) Since
- ------------------------ --- ----------- -------
<S> <C> <C> <C>
E. Timothy Geary 46 Chairman of the Board of Directors, Chief 1987
Executive Officer and President
John G. Rex-Waller 44 Executive Vice President, 1991
Secretary and Treasurer
Bryan S. Fisher 38 Vice President and Chief Financial Officer 1993
Dennis D. Solheim 45 Vice President of Development 1991
Richard D. Pence 42 Vice President of Operations 1991
Dennis J. Zamojski 39 Vice President of Operations 1992
</TABLE>
Mr. Geary, has served as the Company's Chief Executive Officer, President
and Chairman of the Board since its founding in 1987. Mr. Geary served as a Vice
President of Operations and Development, respectively, with Medical Care
International, Inc. ("Medical Care"), a large owner and operator of freestanding
ambulatory surgery centers, from 1983 to 1987. Mr. Geary is a graduate of the
College at the University of Chicago and the University of Chicago Graduate
School of Business. Mr. Geary serves on the Board of the Federated Ambulatory
Surgery Association ("FASA"), an industry association.
17
<PAGE> 18
Mr. Rex-Waller has served as a director, Secretary and Treasurer, since
1991; as its Chief Financial Officer from 1991 to 1995; and as its Executive
Vice President since 1996. Mr. Rex-Waller was a Senior Vice President-Corporate
Finance with Dean Witter Reynolds Inc. from 1984 to 1991. Mr. Rex-Waller is a
graduate of the University of Chicago Graduate School of Business, attended
Hertford College, Oxford as a Rhodes Scholar and has an undergraduate degree in
Civil Engineering from the University of Cape Town.
Mr. Fisher joined the Company in 1991 as Controller, has served as a Vice
President of the Company since 1993, and as the Company's Chief Financial
Officer since 1996. Mr. Fisher was an Accounting Manager and Assistant
Controller for Medical Care and, prior to that, an auditor for KPMG Peat Marwick
from 1984 to 1989. Mr. Fisher is a graduate of Brigham Young University and is a
certified public accountant.
Mr. Solheim joined the Company as Project Manager in 1988 and has served as
a Vice President of the Company since 1991. Mr. Solheim was a Regional Director
for Medical Care from 1983 to 1988. Mr. Solheim is a graduate of Iowa State
University.
Mr. Pence joined the Company as a Vice President in 1991. Mr. Pence was a
Vice President and, previously Controller, for Medical Care from 1982 to 1991.
Mr. Pence is a graduate of the University of Alabama and the Masters of Business
Administration program of Southern Methodist University.
Mr. Zamojski joined the Company as a Vice President in 1992. Mr. Zamojski
was a Vice President with Medical Care from 1983 to 1992. Mr. Zamojski is a
graduate of the nursing program of Erie Community College, the State University
of New York and the Masters of Health Care Administration program of the Medical
College of Virginia/Virginia Commonwealth University.
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing under the caption "Executive Compensation" in the
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under the caption "Principal Stockholders and
Securities Ownership of Management" in the Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under the captions "Compensation of Directors"
and "Compensation Committee Interlocks and Insider Participation" in the Proxy
Statement are incorporated herein by reference.
18
<PAGE> 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(A)(1) FINANCIAL STATEMENTS
Reference is made to the information set forth in Part II, Item 8 of this
Report, which information is incorporated herein by reference.
(A)(2) FINANCIAL STATEMENT SCHEDULES
(i) Schedule II -- Valuation of Qualifying Accounts S-1
(ii) Report of Independent Auditors on Schedules See Exhibit 23.1
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission have been
omitted because the required information is not significant or is included in
the financial statements or the notes thereto, or is not applicable.
(A)(3) EXHIBITS
The exhibits to this report are listed in the Exhibit Index included
elsewhere herein. Included in the exhibits listed therein are the following
exhibits which constitute management contracts or compensatory plans or
arrangements:
<TABLE>
<S> <C>
10.1 Amended and Restated 1992 Stock Option Plan of the Company
10.2 Employee Stock Purchase Plan of the Company
10.9 Form of Employment Agreement between the Company and E. Timothy Geary
10.10 Form Employment Agreement between the Company and John G. Rex-Waller
10.11 Form of Employment Agreement between the Company and Dennis D. Solheim
10.12 Form of Employment Agreement between the Company and Richard D. Pence
10.13 Form of Employment Agreement between the Company and Dennis J. Zamojski
10.14 Management Agreement dated November 22, 1991 among Physicians Ambulatory
Management Corp., NSC Fayetteville, Inc. and Fayetteville Ambulatory Surgery
Center Limited Partnership
10.27 1997 Non-Employee Directors Stock Option Plan
</TABLE>
(B) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
of 1996.
19
<PAGE> 20
(C) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit Page +
------- ---------------------- ------
<S> <C> <C>
3.1* Certificate of Incorporation of the Company
3.2 Bylaws of the Company
4.1* Specimen certificate representing shares of Common Stock
4.2* Debenture and Warrant Purchase Agreement dated June 22,
1992 between the Company and WCAS Capital Partners II, L.P.
("WCAS II")
4.3* 10 1/2% Subordinated Redeemable Debenture Due June 22,
2002 dated June 22, 1992 issued by the Company to WCAS II
4.4* 10 1/2% Subordinated Redeemable Debenture Due October 27,
2002 dated October 27, 1992 issued by the Company to WCAS
II
10.1 Amended and Restated 1992 Stock Option Plan of the Company
10.2** Employee Stock Purchase Plan of the Company
10.3* Lease dated December 22, 1988 between Surgical Center Investors,
Ltd. ("SCI") and Surgical Center of Greensboro, Inc. ("SCE")
10.4* Agreement dated June 23, 1992 among SCI, Surgical Care and SCE
10.5* Second Amendment to Lease dated September 24, 1992 between SCI
and NSC Greensboro, Inc.
10.6* Common Stock Purchase Agreement dated August 18, 1994 between
the Company and J.P. Morgan Capital Corporation ("JPMCC")
10.7* Amended and Restated Credit Agreement dated August 18, 1994
between the Company and Continental Bank
10.8* Supplemental Agreement No. 3 dated March 31, 1995 between the
Company and Bank of America Illinois (formerly known as
Continental Bank)
10.9* Form of Employment Agreement between the Company and
E. Timothy Geary ("ETG")
10.10* Form Employment Agreement between the Company and John G.
Rex-Waller ("JRW")
10.11* Form of Employment Agreement between the Company and
Dennis D. Solheim
10.12* Form of Employment Agreement between the Company and
Richard D. Pence
10.13* Form of Employment Agreement between the Company and
Dennis J. Zamojski
10.14* Management Agreement dated November 22, 1991 among
Physicians Ambulatory Management Corp. ("PAM"), NSC
Fayetteville, Inc. and Fayetteville Ambulatory Surgery Center
Limited Partnership
10.15* Amended and Restated Registration Rights Agreement dated
August 18, 1994 among the Company, Welsh, Carson, Anderson
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
<S> <C> <C>
& Stowe V, L.P. ("WCAS V"), WCA Management Corp., Camp
Hill Associates II, WILBLAIRCO Associates, ETG, JRW and
JPMCC
10.16* Convertible Subordinated Note dated December 16, 1994,
for $1,750,000 of the Company made payable to Village
Ambulatory Surgery Associates, Inc. ("VASA")
10.17* Subordinated Note dated December 16, 1994, for $350,000, of
the Company made payable to VASA
10.18* Convertible Subordinated Note dated December 16, 1994, for
$780,000, of the Company made payable to VASA
10.19* Convertible Subordinated Note dated December 16, 1994, for
for $275,000, of the Company made payable to PAM
10.20* Convertible Subordinated Note dated December 16, 1994, for
for $68,752, of the Company made payable to John T. Henley, Jr.
10.21* Warrant Purchase Agreement dated June 24, 1992 between the
Company and WCAS V
10.22* Stock Subscription Warrant dated June 24, 1992 issued by the
Company to WCAS V
10.23* Warrant Amendment dated August 18, 1994 between the Company
and WCAS II
10.25* Second Amendment to Warrant dated August 18, 1994 between the
Company and WCAS II
10.26* Second Amendment to Warrant dated December 31, 1994 between
the Company and WCAS II
10.27 1997 Non-Employee Directors Stock Option Plan
11.1 Computation of Income Per Common Share
13.1 Registrant's Annual Report to Shareholders for the fiscal year
ended 1996 (for the information of the Commission and not
deemed "filed" with the Commission, except for the
portions expressly incorporated by reference in this
report).
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
</TABLE>
*Incorporated by reference to the corresponding exhibit to the Company's
registration statement on Form S-1 Registration No. 33-96996
**Incorporated by reference to the corresponding exhibit to the Company's
registration statement on Form S-1 Registration No. 333-12927.
+This information appears only in the manually signed copy of this Registration
Statement.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this to be signed on its behalf by the
undersigned, thereunto duly authorized.
NATIONAL SURGERY CENTERS, INC.
By: /s/ E. Timothy Geary
-----------------------------------------
E. Timothy Geary
Chairman of the Board of Directors, Chief
Executive Officer and President
Date: March 24, 1997
------------------------------------------
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ E. Timothy Geary Chairman of the Board of Directors,
---------------------------- Chief Executive Officer and President
E. Timothy Geary
March 24, 1997
----------------------------
Date
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
/s/ Bryan S. Fisher Vice President and Chief Financial Officer
----------------------------
Bryan S. Fisher
March 24, 1997
----------------------------
Date
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
<S> <C>
Directors:
/s/ John G. Rex-Waller Director
----------------------------
John G. Rex-Waller
March 24, 1997
----------------------------
Date
/s/ John K. Carlyle Director
----------------------------
John K. Carlyle
March 24, 1997
----------------------------
Date
/s/ Russell L. Carson Director
----------------------------
Russell L. Carson
March 24, 1997
----------------------------
Date
/s/ John T. Henley, Jr., M.D. Director
----------------------------
John T. Henley, Jr., M.D.
March 24, 1997
----------------------------
Date
/s/ Donald E. Linder, M.D. Director
----------------------------
Donald E. Linder, M.D.
March 24, 1997
----------------------------
Date
/s/ Rocco A. Ortenzio Director
----------------------------
Rocco A. Ortenzio
March 24, 1997
----------------------------
Date
</TABLE>
23
<PAGE> 24
Schedule II - Valuation of Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Charge to Charged to
Beginning Costs and Other Ending
Balance Expenses Accounts(1) Deductions(2) Balance
--------- --------- ----------- ------------- -------
<S> <C> <C> <C> <C> <C>
Allowance for Uncollectible Accounts Receivable
Year ended December 31, 1994 $ 768 $1,067 $ - $ 737 $1,098
Year ended December 31, 1995 1,098 1,166 46 1,143 1,167
Year ended December 31, 1996 1,167 2,674 94 2,212 1,723
</TABLE>
- --------
1 Represents allowances for uncollectible accounts of acquired centers
net of centers divested.
2 Represents charges off of accounts receivable net of recoveries.
24
<PAGE> 1
EXHIBIT 3.2
NATIONAL SURGERY CENTERS, INC.
BYLAWS
ARTICLE I
CORPORATE OFFICES
SECTION 1. DELAWARE REGISTERED OFFICE. The registered office of the
corporation in the State of Delaware shall be in the City of Wilmington, County
of New Castle.
SECTION 2. OTHER OFFICES. The corporation may also have offices at such
other places, both within and outside the State of Delaware, as the board of
directors may from time to time determine or the business of the corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. TIME AND PLACE. A meeting of stockholders for any purpose may be
held at such time and place, within or outside the State of Delaware, as shall
be stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
SECTION 2. ANNUAL MEETINGS. A meeting of the stockholders shall be held
annually for the election of directors and for the transaction of such other
business as may properly come before the meeting (a) in accordance with
applicable statutes, (b) by or at the direction of the board of directors, or
(c) by any stockholder who complies with the procedures set forth in the
certificate of incorporation with respect thereto. The date, place and time of
said annual meeting of the stockholders shall be determined by the board of
directors.
SECTION 3. SPECIAL MEETINGS. Special meetings of stockholders, for any
purpose or purposes, unless otherwise prescribed by law or by the certificate of
incorporation, may be called by the chairman of the board and shall be called by
the chairman of the board or corporate secretary pursuant to a resolution
adopted by the affirmative vote of a majority of the entire board of directors.
Such resolution shall state the purpose or purposes of the proposed meeting.
Business transacted at any special meeting of stockholders shall be limited to
the purposes stated in the resolution.
SECTION 4. NOTICE. Written notice of a meeting, annual or special, stating
the place, date and hour of the meeting, and in the case of a special meeting
stating the purpose or purposes for which the meeting is called, shall be given
to each stockholder entitled to vote at such meeting, not less than ten
<PAGE> 2
nor more than sixty days, or if a vote of stockholders on a merger or
consolidation is one of the stated purposes of the meeting, not less than twenty
nor more than sixty days before the date of the meeting.
SECTION 5. STOCKHOLDER LIST. The officer who has charge of the stock ledger
of the corporation shall prepare or cause to be prepared and make, at least ten
days before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof and may be inspected by any
stockholder who is present.
SECTION 6. QUORUM. The holders of a majority of the stock outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at any meeting of stockholders for the transaction of
business, except as otherwise required by law or by the certificate of
incorporation. Abstentions shall be counted as present in person or represented
by proxy for purposes of determining the existence of a quorum for purposes of
this Section 6 of Article II. If, however, such quorum shall not be present or
represented at a meeting of stockholders, the stockholders entitled to vote
thereat, present in person or represented by proxy, shall have the power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting of the place, date and hour of the adjourned meeting, until a quorum
shall be present or represented by proxy. At such adjourned meeting at which a
quorum shall be present or represented by proxy, any business may be transacted
which might have been transacted at the meeting as originally notified. If the
adjournment is for more than thirty days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
SECTION 7. REQUIRED VOTE. When a quorum is present at any meeting of
stockholders, the vote of the holders of a majority of the stock having voting
power present in person or represented by proxy and voting thereon shall decide
any question (other than the election of directors which shall be determined by
a plurality vote) brought before such meeting, unless the question is one upon
which by express provision of law or statute or of the certificate of
incorporation or of these bylaws, a different vote is required, in which case
such express provision shall govern and control the decision of such question."
SECTION 8. VOTING. Except as otherwise required by law or by the provisions
of the certificate of incorporation or any amendment thereto or by the
resolution or resolutions of the board of directors providing for the issue of
any class or series of preferred stock of the corporation, the holders of the
common stock of the corporation shall have sole voting power. No proxy shall be
voted on after three years from its date, unless the proxy provides for a longer
period. A duly executed proxy shall be irrevocable if it states that it is
irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power, regardless of whether the
interest with which it is
2
<PAGE> 3
coupled is an interest in the stock itself or an interest in the corporation
generally. A stockholder may revoke any proxy which is not irrevocable by
attending the meeting and voting in person or by filing with the corporate
secretary an instrument in writing revoking the proxy or another duly executed
proxy bearing a later date.
SECTION 9. MEETING PROCEDURE. Meetings of stockholders shall be presided
over by the chairman of the board, or in the absence of the chairman of the
board by the president, or in the absence of the president by a vice president,
or in the absence of the foregoing persons by a chairman designated by the board
of directors, or in the absence of such designation by a chairman chosen at the
meeting. The corporate secretary, or in the absence of the corporate secretary
an assistant corporate secretary, shall act as secretary of the meeting, but in
the absence of the corporate secretary and any assistant corporate secretary,
the chairman of the meeting may appoint any person to act as secretary of the
meeting.
The order of business at each such meeting shall be as determined by the
chairman of the meeting. The chairman of the meeting shall have the right and
authority to prescribe such rules, regulations and procedures and to do all such
acts and things as are necessary or desirable for the proper conduct of the
meeting, including, without limitation, the establishment of procedures for the
maintenance of order and safety, limitations on the time allotted to questions
or comments on the affairs of the corporation, restrictions on entry to such
meeting after the time prescribed for the commencement thereof and the opening
and closing of the voting polls. The chairman of any meeting of stockholders
shall have full and complete authority over the interpretation of any rules,
regulations or procedures prescribed in connection with such meeting, and there
shall be no appeal from the ruling of the chairman. The chairman may ask or
require anyone who is not a bona fide stockholder or holder of a valid proxy, or
who is disrupting or inhibiting the orderly conduct of the meeting, to leave the
meeting. If disorder or any other event should arise which prevents continuation
of the legitimate business of the meeting, the chairman may announce the
adjournment of the meeting; and upon his or her doing so, the meeting will be
immediately adjourned until such later time as the chairman may determine,
without notice other than the announcement at the meeting of the place, date and
hour of the adjourned meeting. At such adjourned meeting at which a quorum shall
be present or represented by proxy, any business may be transacted which might
have been transacted at the meeting as originally notified. If the adjournment
is for more than thirty days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
SECTION 10. INSPECTORS. Prior to any meeting of stockholders, the board of
directors, the chairman of the board or the president shall appoint one or more
inspectors to act at such meeting and make a written report thereof and may
designate one or more persons as alternate inspectors to replace any inspector
who fails to act. If no inspector or alternate is able to act at the meeting of
stockholders, the chairman of the meeting shall appoint one or more inspectors
to act at the meeting. Each inspector, before entering upon the discharge of his
or her duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall ascertain the number of shares outstanding and the
voting power of each, determine the shares represented at the meeting and the
validity of proxies and ballots, count all votes
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and ballots, determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the inspectors and
certify their determination of the number of shares represented at the meeting
and their count of all votes and ballots. The inspectors may appoint or retain
other persons to assist them in the performance of their duties. The date and
time of the opening and closing of the polls for each matter upon which the
stockholders will vote at a meeting shall be announced at the meeting. No
ballot, proxy or vote, nor any revocation thereof or change thereto, shall be
accepted by the inspectors after the closing of the polls. In determining the
validity and counting of proxies and ballots, the inspectors shall be limited to
an examination of the proxies, any envelopes submitted therewith, any
information provided by a stockholder who submits a proxy by telegram, cablegram
or other electronic transmission from which it can be determined that the proxy
was authorized by the stockholder, the ballots and the regular books and records
of the corporation, and the inspectors may also consider other reliable
information for the limited purpose of reconciling proxies and ballots submitted
by or on behalf of banks, brokers, their nominees or similar persons which
represent more votes than the holder of a proxy is authorized by the record
owner to cast or more votes than the stockholder holds of record. If the
inspectors consider other reliable information for such purpose, they shall, at
the time they make their certification, specify the precise information
considered by them, including the person or persons from whom they obtained the
information, when the information was obtained, the means by which the
information was obtained and the basis for the inspectors' belief that such
information is accurate and reliable.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND TERM. The number of directors constituting the whole
board shall be fixed from time to time by resolution adopted by the affirmative
vote of a majority of the entire board of directors, except that the minimum and
maximum number of directors shall be as set forth in the certificate of
incorporation. Directors shall be elected at annual meetings of stockholders,
except as provided in Section 2 of this Article III, and each director shall
hold office until a successor is elected and qualified or until that director's
earlier resignation or removal. Directors need not be stockholders.
SECTION 2. NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Except as otherwise
required by law or by the certificate of incorporation, any newly created
directorships resulting from any increase in the number of directors and any
vacancies on the board of directors resulting from death, resignation,
disqualification, removal or other cause shall be filled by the affirmative vote
of a majority of the directors then in office, even though less than a quorum,
or by the sole remaining director, as the case may be. If there are no directors
in office, then an election of directors may be held in the manner provided by
law. Any additional director of any class elected to fill a newly created
directorship or vacancy in such class shall hold office for a term that shall
coincide with the remaining term of that class. A director shall hold office
until the annual meeting for the year in which such director's term expires and
until such director's successor shall have been elected and qualified, or until
such director's earlier death, resignation, disqualification or removal. No
decrease in the number of directors constituting the board of directors shall
shorten the term of any incumbent director.
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SECTION 3. POWERS. The business and affairs of the corporation shall be
managed by or under the direction of the board of directors, which may exercise
all such powers of the corporation and do all such lawful acts and things as are
not by law or by the certificate of incorporation or by these bylaws directed or
required to be exercised or done by the stockholders.
SECTION 4. PLACE OF MEETINGS. The board of directors of the corporation may
hold meetings, both regular and special, either within or outside the state of
Delaware.
SECTION 5. REGULAR MEETINGS. A regular meeting of the board of directors
may be held without other notice than this bylaw immediately following and at
the same place as the annual meeting of stockholders. In the event such meeting
is not held at the time and place specified in the preceding sentence, the
meeting may be held at such time and place as shall be specified in a notice
given as hereinafter provided for special meetings of the board or as shall be
specified in written waivers signed by all of the directors. Other regular
meetings of the board may be held without notice at such time and at such place
as shall from time to time be determined by the board.
SECTION 6. SPECIAL MEETINGS. Special meetings of the board of directors may
be called by the chairman of the board and shall be called by the chairman of
the board or corporate secretary on the written request of two directors, on not
less than two days' notice to each director.
SECTION 7. QUORUM. At any meeting of the board of directors a majority of
the total number of directors then constituting the whole board of directors
shall constitute a quorum for the transaction of business, and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the board of directors, except as otherwise required by law
or by the certificate of incorporation or these bylaws. If there is not a quorum
at a meeting of the board, a majority of the directors present may adjourn the
meeting from time to time without further notice.
SECTION 8. PARTICIPATION WITH COMMUNICATIONS EQUIPMENT. Unless otherwise
restricted by law or by the certificate of incorporation or these bylaws,
members of the board of directors, or of any committee designated by the board
of directors, may participate in a meeting of the board of directors, or of any
committee, by conference telephone or similar communications equipment by means
of which all persons participating in the meeting can hear each other, and
participation in a meeting by such means shall constitute presence at the
meeting.
SECTION 9. COMMITTEES OF DIRECTORS. The board of directors may, by
resolution passed by the affirmative vote of a majority of the entire board of
directors, designate one or more committees, each committee to consist of one or
more of the directors of the corporation. Such committee or committees shall
have such name or names as may be determined from time to time by resolution
adopted by the board of directors. The board may designate one or more directors
as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
she or they constitute a quorum, may unanimously appoint another member of the
board of directors to
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act at the meeting in the place of any such absent or disqualified member;
provided that at any such meeting, the committee shall not revise or rescind any
previous action of the committee without the affirmative vote of a majority of
the regular members present. Any such committee, to the extent provided in the
resolution of the board of directors, shall have and may exercise all of the
powers and authority of the board of directors in the management of the business
and affairs of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require the seal; but no such committee shall
have the power or authority in reference to amending the certificate of
incorporation, adopting an agreement of merger or consolidation, recommending to
the stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending the
bylaws of the corporation; and, unless the resolution designating such committee
or the certificate of incorporation expressly so provides, no such committee
shall have the power or authority to declare a dividend, to authorize the
issuance of stock or to adopt a certificate of ownership and merger. The member
of a committee of one or a majority of the members of any other committee shall
constitute a quorum for the transaction of business at a meeting thereof, and
action by any committee must be authorized by the affirmative vote of the member
of a committee of one or of a majority of the members of any other committee
present at a meeting at which a quorum is present. Each committee shall have a
chairman, appointed by the board of directors, who shall preside at all meetings
of such committee. Each committee shall keep regular minutes of its meetings and
shall furnish them to the board of directors when required.
Special meetings of any committee of the board may be called by the
chairman of the board or the chairman of the committee on not less than
forty-eight hours' notice to each member of the committee. Special meetings of
any committee of the board at which members participate by means of conference
telephone or similar communications equipment as provided by Section 9 of this
Article III of these bylaws, and at which at least a majority of the members of
the committee participate, may be called by the chairman of the board on not
less than six hours notice to each member of the committee.
SECTION 10. COMPENSATION OF DIRECTORS. Unless otherwise restricted by the
certificate of incorporation, the board of directors shall have the authority to
fix the compensation of directors. The receipt of such compensation shall not
preclude any director from serving the corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees may
be allowed like compensation for attending committee meetings. The directors may
be reimbursed for any expenses of attending meetings of the board of directors
and of committees of the board.
SECTION 11. RESIGNATION OF DIRECTORS. A resignation of a director shall be
effective upon receipt by the chairman of the board of a signed written notice
of such resignation, or, should such notice contain a specified date of
resignation, at such specified date. No acceptance by the board of directors is
required for such resignation to be effective.
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ARTICLE IV
NOTICES
SECTION 1. METHOD OF GIVING NOTICE. Whenever notice is required to be given
to any director or stockholder pursuant to any provision of law, the certificate
of incorporation, these bylaws or the resolutions or other governing provisions
relating to a committee of the board of directors, such notice may be given in
writing, personally, by mail or reputable courier or overnight delivery service.
If mailed or sent by courier or overnight delivery service, such notice shall be
deemed to be given when deposited in the United States mail or with the courier
or overnight delivery service, as the case may be, addressed to such director or
stockholder at that person's address as it appears on the records of the
corporation, with postage thereon or payment therefor prepaid. Notice to
directors may also be given by telegram and shall be deemed to be given at the
time of delivery to the telegraph company, or by telex or facsimile transmission
to such number as shall appear on the records of the corporation, which telex or
facsimile notice shall be deemed to be given at the time of transmission
thereof.
SECTION 2. WAIVER OF NOTICE. Whenever notice is required to be given
pursuant to any provision of law, the certificate of incorporation, these bylaws
or the resolutions or other governing provisions relating to a committee of the
board of directors, a written waiver of such notice, signed by the person or
persons entitled to notice, whether before or after the time stated therein,
shall be deemed equivalent to such notice. Attendance of a person at a meeting
shall constitute a waiver of notice of such meeting, except when the person
attends the meeting for the express purpose of objecting, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened.
ARTICLE V
OFFICERS
SECTION 1. OFFICES. The officers of the corporation shall be elected by the
board of directors and shall be a chairman of the board, a president, one or
more vice presidents (the number and designation thereof to be determined by the
board of directors), a corporate secretary, a treasurer, a controller and such
assistant corporate secretaries, assistant treasurers, assistant controllers and
other subordinate officers as may be elected or appointed by the board of
directors. Any number of offices may be held by the same person, unless the
certificate of incorporation or these bylaws otherwise provide.
SECTION 2. ADDITIONAL OFFICERS. The board of directors may appoint such
other officers and agents as it shall deem necessary, who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the board.
SECTION 3. COMPENSATION OF OFFICERS. The compensation of all officers of
the corporation shall be fixed by or under the direction of the board of
directors.
SECTION 4. TERM OF OFFICE AND VACANCY. Each officer shall hold office until
a successor is chosen and qualifies or until the officer's earlier resignation
or removal. Any officer elected or
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appointed by the board of directors may be removed at any time by or under the
direction of the board of directors. Any vacancy occurring in any office of the
corporation shall be filled by the board of directors.
SECTION 5. CHAIRMAN OF THE BOARD. The chairman of the board shall preside
at all meetings of the stockholders and the board of directors, and shall have
general authority over the business and affairs of the corporation, subject to
the direction of the board of directors.
SECTION 6. PRESIDENT. The president shall (a) be the chief executive
officer of the corporation, (b) have immediate supervision and control over the
business and operations of the corporation, subject to the direction of the
board of directors and the chairman of the board, (c) see that all orders and
resolutions of the board of directors are carried into effect and (d) have the
power to execute bonds, mortgages and other contracts, agreements and
instruments, except where required or permitted by law to be otherwise signed
and executed or where the signing and execution thereof shall be expressly
delegated by the board of directors to some other officer or agent of the
corporation. In the absence of the chairman of the board, or in the event of his
inability to act, the president shall perform the duties of the chairman of the
board and when so acting shall have all the powers of, and be subject to all the
restrictions upon, the chairman of the board.
SECTION 7. VICE PRESIDENTS. In the absence of the president or in the event
of the disability of the president, the vice president (or if there be more than
one, first, the executive vice presidents (if any), then the senior vice
presidents (if any), then the vice presidents, within each category in the order
designated by the board of directors, or in the absence of any designation, then
in the order of their most recent election) shall perform the duties of the
president and when so acting shall have all the powers of and be subject to all
the restrictions upon the president. The vice presidents shall perform such
other duties and have such other powers as the board of directors, the chairman
of the board or the president may from time to time prescribe.
SECTION 8. CORPORATE SECRETARY. The corporate secretary shall (a) attend
all meetings of the board of directors and all meetings of the stockholders and
record all of the proceedings of the meetings of the board of directors and of
the stockholders in a book to be kept for that purpose and perform like duties
for the standing committees when required, (b) give, or cause to be given,
notice of all special meetings of the board of directors and all meetings of the
stockholders and (c) perform such other duties as may be prescribed by the board
of directors, the chairman of the board or the president. The corporate
secretary shall have custody of the corporate seal of the corporation and shall
have authority to affix it to any instrument requiring the seal, and when so
affixed, the seal may be attested by the signature of such officer. The board of
directors may give general authority to any other officer to affix the seal of
the corporation and to attest the affixing by signature.
SECTION 9. ASSISTANT CORPORATE SECRETARIES. The assistant corporate
secretary (or if there be more than one, the assistant corporate secretaries in
the order determined by the board of directors, or if there be no such
determination, then in the order of their most recent election or appointment)
shall, in the absence of the corporate secretary or in the event of the
disability of the corporate secretary, perform the duties and exercise the
powers of the corporate secretary and shall perform such other duties and have
such other powers as the board of directors, the chairman of the
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board or the president may from time to time prescribe.
SECTION 10. TREASURER. The treasurer shall (a) have custody of the
corporate funds and securities, (b) deposit all moneys and other valuable
effects in the name and to the credit of the corporation in such depositories as
may be designated by the board of directors, (c) disburse the funds of the
corporation as may be ordered by the board of directors, taking proper vouchers
for such disbursements, (d) keep full and accurate records of such receipts,
deposits, and disbursements in books belonging to the corporation, (e) render to
the chairman of the board and the board of directors, at its regular meetings,
or when the board of directors so requests, an account of all the transactions
of the treasurer, and (f) perform such other duties and have such other powers
as the board of directors, the chairman of the board or the president may from
time to time prescribe.
SECTION 11. ASSISTANT TREASURERS. The assistant treasurer (or if there
shall be more than one, the assistant treasurers in the order determined by the
board of directors, or if there be no such determination, then in the order of
their most recent election or appointment) shall, in the absence of the
treasurer or in the event of the disability of the treasurer, perform the duties
and exercise the powers of the treasurer and shall perform such other duties and
have such other powers as the board of directors, the chairman of the board or
the president may from time to time prescribe.
SECTION 12. CONTROLLER. The controller shall (a) be the principal
accounting officer of the corporation, (b) supervise the preparation and
maintenance of the accounting books, records and reports of the Company, (c)
render to the chairman of the board and the board of directors, at its regular
meetings, or when the board of directors so requests, an account of all the
transactions of the controller and of the financial condition of the
corporation, and (d) perform such other duties and have such other powers as the
board of directors, the chairman of the board or the president may from time to
time prescribe.
SECTION 13. ASSISTANT CONTROLLERS. The assistant controller (or if there
shall be more than one, the assistant controllers in the order determined by the
board of directors, or if there be no such determination, then in the order of
their most recent election or appointment) shall, in the absence of the
controller or in the event of the disability of the controller, perform the
duties and exercise the powers of the controller and shall perform such other
duties and have such other powers as the board of directors, the chairman of the
board or the president may from time to time prescribe.
ARTICLE VI
STOCK CERTIFICATES
SECTION 1. RIGHT OF HOLDER TO CERTIFICATE. Each holder of stock in the
corporation shall be entitled to have a certificate signed by or in the name of
the corporation by the chairman of the board, the president or a vice president
and by the corporate secretary or an assistant corporate secretary, or the
treasurer or an assistant treasurer of the corporation, certifying the number of
shares owned by him or her and sealed with the seal or a facsimile of the seal
of the corporation. Any of or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar
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who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, such certificate may be issued by the corporation with
the same effect as if such former officer, transfer agent or registrar were such
officer, transfer agent or registrar at the date of issue.
SECTION 2. MORE THAN ONE CLASS OR SERIES OF STOCK. If the corporation shall
be authorized to issue more than one class of stock or more than one series of
any class of stock, the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and rights shall be set forth in full or summarized on the face or back of the
certificate that the corporation shall issue to represent such class or series
of stock, provided that, except as otherwise provided in Section 202 of the
General Corporation Law of the State of Delaware, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate a
statement that the corporation will furnish, without charge to each stockholder
who so requests, the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
or rights.
SECTION 3. UNCERTIFICATED SHARES. The board of directors of the corporation
may provide by resolution that some or all of any or all classes and series of
its shares shall be uncertificated shares, and may provide an election by
individual stockholders to receive certificated or uncertificated shares and the
conditions of such election, provided that such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
corporation. Within a reasonable time after the registration of issuance or
transfer of uncertificated shares, the corporation shall send to the registered
owner thereof a written notice containing the information required to be set
forth or stated on certificates pursuant to the General Corporation Law of the
State of Delaware or these bylaws. Except as otherwise expressly provided by
law, the rights and obligations of the holders of uncertificated shares and
rights and obligations of the holders of certificates representing shares of the
same class and series shall be identical.
SECTION 4. LOST CERTIFICATES. The board of directors or any two officers of
the corporation authorized to sign a stock certificate as provided in Section 1
of this Article VI may authorize the issuance of a new certificate in lieu of a
certificate alleged by the holder thereof to have been lost, stolen or
destroyed, upon compliance by such holder, or his legal representatives, with
such requirements as the board of directors or such officers may impose or
authorize. Any authorization by the board of directors or the officers
contemplated by the preceding sentence may be general or confined to specific
instances.
SECTION 5. REGISTRATION OF TRANSFERS. Upon surrender to the corporation or
the transfer agent of the corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignation or authority to
transfer, the corporation or its transfer agent shall cancel the old
certificate, record the transaction upon its stock records, and either issue a
new certificate to the person entitled thereto or credit the proper number of
shares to an account of the person entitled thereto maintained on the books of
the corporation. Upon request the corporation or transfer agent shall issue a
certificate for all or any part of the shares held in such an account.
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SECTION 6. RECORD DATE. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, the board of directors may fix a record date, which
shall not precede the date upon which the resolution fixing the record date is
adopted by the board of directors, and which shall not be more than sixty nor
less than ten days before the date of such meeting. If no record date is fixed
by the board of directors, the record date for determining stockholders entitled
to notice of or to vote at a meeting of stockholders shall be the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the board of directors may fix a new
record date for the adjourned meeting.
In order that the corporation may determine the stockholders entitled to
receive payment of any dividend or other distribution or allotment of any rights
or the stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the board of directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall be not more than sixty days prior to such action. If
no record date is fixed, the record date for determining stockholders for any
such purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
SECTION 7. REGISTERED STOCKHOLDERS. The corporation shall be entitled to
recognize the exclusive right of a person registered in its stock records as the
owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such shares on the part of any other person, whether or not it
shall have express or other notice thereof, except as otherwise required by law.
ARTICLE VII
OTHER PROVISIONS
SECTION 1. DIVIDENDS. Dividends upon the capital stock of the corporation,
subject to the provisions of the certificate of incorporation, if any, may be
declared by the board of directors at any regular or special meeting, pursuant
to applicable law. Dividends may be paid in cash, in property, or in shares of
the capital stock, subject to the provisions of the certificate of incorporation
and requirements of applicable law.
SECTION 2. SIGNATURES ON CHECKS AND NOTES. All checks or demands for money
and notes of the corporation shall be signed by such officer or officers or such
other person or persons as the board of directors may from time to time
designate.
SECTION 3. FISCAL YEAR. The fiscal year of the corporation shall end on
December 31 in each year.
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SECTION 4. SEAL. The corporate seal shall be inscribed with the name of the
corporation and the words "Corporate Seal" and "Delaware." The seal may be used
by causing it or a facsimile thereof to be impressed or affixed or in any other
manner reproduced.
SECTION 5. INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS. Each person
who is or was a director or officer of the corporation and each person who
serves or served at the request of the corporation as a director or officer (or
equivalent) of another corporation, partnership, joint venture, trust or other
enterprise (and the heirs, executors, administrators and estates of any such
persons), shall be indemnified by the corporation in accordance with, and to the
fullest extent authorized by, the provisions of the General Corporation Law of
the State of Delaware as it may from time to time be amended, except as to any
action, suit or proceeding brought by or on behalf of the director or officer of
the corporation without prior approval of the board of directors. Each person
who is or was an employee or agent of this corporation, and each person who
serves or has served at the request of the corporation as an employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
may be similarly indemnified at the discretion of the board of directors.
Expenses incurred by an officer or director in defending a civil or criminal
action, suit or proceeding shall be paid by the corporation in advance of such
action, suit or proceeding upon receipt of an undertaking by or on behalf of
such director or officer to repay such amount if it shall ultimately be
determined that he is not entitled under applicable law to be indemnified by the
corporation as authorized in this section. Such expenses incurred by other
employees and agents may be so paid upon such terms and conditions, if any, as
the board of directors deems appropriate. The indemnification and advancement of
expenses provided by, or granted pursuant to, this Section 5 of Article VII
shall not be deemed exclusive of any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding such office. Any amendment or repeal of this bylaw shall not limit the
right of any person to indemnity with respect to actions taken or omitted to be
taken by such person prior to such amendment or repeal.
ARTICLE VIII
AMENDMENTS
These bylaws may be altered, amended or repealed or new bylaws may be
adopted either (i) at any meeting of the stockholders, provided that any
alteration, amendment, repeal or adoption proposed to be acted upon at such
meeting shall have been described or referred to in the notice of such meeting,
or (ii) at any meeting of the board of directors, provided that any such
alteration, amendment, repeal or adoption proposed to be acted upon at such
meeting shall have been described or referred to in the notice of such meeting
or an announcement with respect thereto shall have been made at the last
previous board of directors meeting.
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EXHIBIT 10.1
NATIONAL SURGERY CENTERS, INC.
AMENDED AND RESTATED
1992 STOCK OPTION PLAN
This Stock Option Plan, originally adopted and authorized by the Board of
Directors of National Surgery Centers, Inc. (the "Company") on February 13,
1992, is amended and restated as of April 18, 1996 in its entirety as set forth
below:
1. STATEMENT OF PURPOSE. The purpose of this Amended and Restated Stock
Option Plan (the "Plan") is to benefit National Surgery Centers, Inc. (the
"Company") and its subsidiaries through the maintenance and development of the
management by offering certain present and future executives and key personnel a
favorable opportunity to become holders of stock in the Company over a period of
years, thereby giving them a permanent stake in the growth and prosperity of the
Company and encouraging the continuance of their services with the Company or
its subsidiaries.
2. ADMINISTRATION. The Plan shall be administered by a committee (the
"Committee") of the Board of Directors composed of no fewer than two directors
designated by the Board of Directors, each of whom is (i) a "disinterested
person" (as such term is defined under Rule 16b-3 of the Securities Exchange Act
of 1934 (the "Exchange Act")), and (ii) an "outside director" (as such term is
defined under Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code"). A majority of the Committee shall constitute a quorum, and the
acts of a majority of the members present at any meeting at which a quorum is
present, or acts approved in writing by all of the members, shall be the acts of
the Committee.
Subject to the provisions of the Plan, the Committee shall have full and
final authority, in its absolute discretion, (a) to determine the persons to be
granted options under the Plan, (b) to determine the number of shares subject to
each option, (c) to determine the time or times at which options will be
granted, (d) to determine the option price of the shares subject to each option,
which price shall not be less than the minimum specified in Section 4 of the
Plan, (e) to determine the time or times when each option becomes exercisable
and the duration of the exercise period, (f) to determine whether or not an
option is intended to be treated as an incentive stock option as defined in
Section 422 of the Internal Revenue Code of 1986 as amended (the "Code") (f) to
prescribe the form or forms of the agreements evidencing any options granted
under the Plan (which forms shall be consistent with the Plan), (g) to adopt,
amend and rescind such rules and regulations as, in the Committee's opinion, may
be advisable in the administration of the Plan, and (h) to construe and
interpret the Plan, the rules and regulations and the agreements evidencing
options granted under the Plan and to make all other determinations deemed
necessary or advisable for the administration of the Plan. Any decision made or
action taken in good faith by the Committee in connection with the
administration, interpretation, and implementation of the Plan and of its rules
and regulations shall, to the extent permitted by law, be conclusive and binding
upon all optionees under the Plan and upon any person claiming under or through
such an optionee, and no director of the Company shall be
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<PAGE> 2
liable for any such decision made or action taken by the Committee.
3. ELIGIBILITY. Options shall be granted only to key employees of the
Company and its subsidiaries (other than members of the Committee) selected
initially and from time to time thereafter by the Committee on the basis of the
special importance of their services in the management, development and
operations of the Company or its subsidiaries.
4. GRANTING OF OPTIONS. The Committee may grant options under which a total
of not in excess of 1,000,000 shares of the common stock of the Company may be
purchased from the Company, subject to adjustment as provided in Paragraph 11.
The Committee has the authority to designate whether or not an option is
intended to be treated as an incentive stock option as defined in the Code.
Unless otherwise expressly provided by the Committee in any specific
instance, the action of the Committee in selecting an individual to receive a
grant, determining the number of shares subject to the option and setting the
option price constitutes the granting of the option. The date of the Committee's
action will be considered the date the option is granted. However, under no
circumstances shall the Committee grant an option or options for more than
100,000 shares to any individual in any given calendar year, subject to
adjustment as provided in Paragraph 11.
No options shall be granted under the Plan subsequent to December 31, 2004.
In the event that an option expires or is terminated or canceled unexercised as
to any shares, such released shares may again be optioned (including a grant in
substitution for a canceled option). Shares subject to options may be made
available from unissued or reacquired shares of common stock.
The aggregate fair market value (determined at the time of grant of the
option) of the shares of common stock with respect to which incentive stock
options are exercisable for the first time during any calendar year by an
employee granted incentive stock options under this Plan or any other plan of
the Company or its parent or any subsidiary shall not exceed $100,000; provided
however, that this limit shall not apply to those options which are not intended
to be treated as incentive stock options as defined in the Code.
Nothing contained in the Plan or in any option granted pursuant thereto
shall confer upon any optionee any right to be continued in the employment of
the Company or any subsidiary of the Company, or interfere in any way with the
right of the Company or its subsidiaries to terminate his employment at any
time.
5. OPTION PRICE. The option price shall be determined by the Committee and,
subject to the provisions of Paragraph 11 hereof, shall be not less than the
fair market value, at the time the option is granted, of the stock subject to
the option, provided however, that in the case of an option granted to an
employee who, at the time the option is granted, owns more than 10% of the total
combined voting power of all classes of stock of the Company or of the parent or
any subsidiary of the Company (a "10% Holder"), the option price shall not be
less than 110% of the fair market value, at the time the option is granted, of
the stock subject to the option. For purposes of this Plan, the
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<PAGE> 3
term "fair market value" shall mean the average of the closing prices per share
of the common stock of the Company as quoted on the New York Stock Exchange (as
reported in the Wall Street Journal, Midwest Edition) on each of the five
trading days preceding the day the option is granted or, in the event that the
common stock is not listed or quoted on the New York Stock Exchange or any other
national stock exchange and is not so quoted, an amount which, in the
Committee's reasonable determination, represents the fair market value of the
Common Stock on that date.
6. DURATION OF OPTIONS, INCREMENTS, AND EXTENSIONS. Subject to the
provisions of Paragraph 9 hereof, each option shall be for such term of not more
than ten years, as shall be determined by the Committee at the date of the
grant, provided, however, that no option granted to an employee who, at the time
the option is granted, is a 10% Holder, shall have a term of more than five
years. Each option shall become exercisable with respect to one-quarter of the
total number of shares subject to the option twelve months after the date of its
grant and with respect to an additional one-quarter at the end of each
twelve-month period thereafter during the succeeding three years (each twelve
month period sometimes referred to herein as a "Vesting Year" and each share
increment sometimes referred to herein as an "Annual Vesting Amount"). Provided
however, that unapproved leaves of absence which continue for more than twelve
months shall be deemed to delay the exercisability of the options for a period
equal in duration to the length of the unapproved absence. In the event that the
number of shares subject to the option is not a whole number, any fractional
shares will vest in the last Vesting Year, provided that the exercise date shall
be deemed to be the date such notice is actually received by the Secretary.
Notwithstanding the foregoing, the Committee may in its discretion (i)
specifically provide at the date of the grant for another time or times of
exercise; (ii) accelerate the exercisability of any option subject to such terms
and conditions as the Committee deems necessary and appropriate to effectuate
the purpose of the Plan including, without limitation, a requirement that the
optionee grant to the Company an option to repurchase all or a portion of the
number of shares acquired upon exercise of the accelerated option for their fair
market value on the date of grant; or (iii) at any time prior to the expiration
or termination of any option previously granted, extend the term of any option
(including such options held by officers or directors) for such additional
period as the Committee, in its discretion shall determine. In no event,
however, shall the aggregate option period with respect to any option, including
the original term of the option and any extensions thereof, exceed ten years (or
five years, in the case of an option granted to any employee who, at the time
the option is granted, is a 10% Holder) Subject to the foregoing, all or any
part of the shares to which the right to purchase has accrued may be purchased
at the time of such accrual or at any time or times thereafter during the option
period; provided, however, that the minimum number of shares purchased shall be
no less than the greater of either (i) 100 shares or (ii) 25% of the Annual
Vesting Amount, unless the total number of shares purchasable shall be less than
100.
7. CHANGE IN CONTROL. Any option previously granted under the Plan to an
optionee who is an employee of the Company or any of its subsidiaries on the
date of a "Change in Control" shall be immediately exercisable in full on such
date, without regard to any times of exercise established under Paragraph 6
hereof. The term "Change in Control" shall mean the occurrence, at any time
during the specified term of an option granted under the Plan, of any of the
following events:
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<PAGE> 4
(a) The Company is merged or consolidated or reorganized into or with or
shares of stock of the Company are exchanged for stock or securities
of, another corporation or other legal person and as a result of such,
merger, consolidation, reorganization or exchange less than 51% of the
outstanding voting securities or other capital interests of the
surviving, resulting or acquiring corporation or other legal person
are owned in the aggregate by the stockholders of the Company
immediately prior to such merger, consolidation, reorganization or
exchange;
(b) The Company sells all or substantially all of its business and/or
assets to any other corporation or other legal person, less than 51%
of the outstanding voting securities or other capital interests of
which are owned in the aggregate by the stockholders of the Company,
directly or indirectly, immediately prior to or after such sale;
(c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any
successor schedule, form or report), as promulgated pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
disclosing that any person or group (as the terms "person" and "group"
are used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act
and the rules and regulations promulgated thereunder) has become the
beneficial owner (as the term "beneficial owner" is defined under Rule
13d-3 or any successor rule or regulation promulgated under the
Exchange Act) of 20% or more of the issued and outstanding shares of
voting securities of the Company; or
(d) During any period of two consecutive years, individuals who at the
beginning of any such period constitute the directors of the Company
cease for any reason to constitute at least a majority thereof unless
the election, or nomination for election by the Company's stockholders
of each new director of the Company was approved by a vote of at least
two-thirds of such directors of the Company then still in office who
were directors of the Company at the beginning of any such period.
Notwithstanding any other provisions in the Plan, during the period of 30
days after any Change in Control, each optionee (or other person entitled to
exercise an option granted under the Plan) (in either case, the "Optionholder")
shall have the right to require the Company to purchase from him any option
granted under the Plan at a purchase price equal to (1) the excess of the fair
market value per share (as defined in Section 5) over the option price (2)
multiplied by the number of option shares specified by the Optionholder for
purchase in a written notice to the Company, attention of the Secretary. The
amount payable to each Optionholder by the Company shall be in cash or by
certified check and shall be reduced by any taxes required to be withheld.
8. EXERCISE OF OPTION. An option may be exercised by giving written notice
to the Company, attention of the Secretary specifying the number of shares to be
purchased, accompanied by the full purchase price for the shares to be purchased
in cash or by check, provided, however, that in lieu of cash an optionee may,
with the approval of the Committee, exercise his or her option by (i) tendering
to the Company shares of Common Stock owned by him or her and with the
certificates therefor registered in his or her name, having a fair market value
equal to the cash exercise price of
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<PAGE> 5
the shares being purchased; or (ii) delivery of an irrevocable written notice
instructing the Company to deliver the shares of Common Stock being purchased to
a broker selected by the Company, subject to the broker's written guarantee to
deliver cash to the Company, in each case equal to the full consideration of the
exercise price for the shares being purchased. For these purposes, the per share
value of the Company's common stock shall be the fair market value at the close
of business on the date preceding the date of exercise (or, if that date is not
a trading day, on the trading day next preceding the date of exercise of the
option).
At the time of any exercise of any option, the Committee may, if it shall
determine it necessary or desirable for any reason, require the optionee (or his
heirs, legatees, or legal representative, as the case may be) as a condition
upon the exercise thereof, to deliver to the Company a written representation of
present intention to purchase the shares for investment and not for distribution
or resale. In the event such representation is required to be delivered, an
appropriate legend may be placed upon each certificate delivered to the optionee
upon his exercise of part of all of the option and a stop transfer order may be
placed with the transfer agent. Each option shall also be subject to the
requirements that, if at any time the Company determines, in its discretion,
that the listing, registration or qualification of the shares subject to the
option upon any securities exchange or under any state or Federal law, or the
consent or approval of any governmental regulatory body is necessary or
desirable as a condition of, or in connection with, the issue or purchase of
shares thereunder, the option may not be exercised in whole or in part unless
such listing, registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Company.
If the Committee shall determine it necessary or desirable for any reason,
an option shall provide that it is contemplated that the shares acquired through
the exercise of the option will not be registered under applicable federal and
state securities laws and that such shares cannot be resold unless they are
registered under such laws or unless an exemption from registration is
available, and the certificate for any such shares issued upon the exercise of
the option shall bear a legend making appropriate reference to such provisions
and a stop transfer order may be placed with the transfer agent.
At the time of the exercise of any option the Company may require, as a
condition of the exercise of such option, the optionee to pay the Company an
amount equal to the amount of the tax the Company may be required to withhold as
a result of the exercise of such option by the optionee.
At any time when an optionee is required to pay to the optionee's employer
an amount required to be withheld under applicable income tax laws in connection
with the exercise of an option, the optionee may satisfy this obligation in
whole or in part by making an election (the "Election") to (i) require the
recipient of the shares of Common Stock to remit to the Company an amount in
cash sufficient to satisfy all withholding taxes, (ii) have the Company withhold
shares of common stock of the Company having a fair market value equal to the
amount required to be withheld or (iii) deduct from the cash payment pursuant to
a broker-assisted option exercise (net to optionee in cash or shares of Common
Stock) an amount sufficient to satisfy any withholding tax requirements. The
value of the shares to be withheld shall be based on the fair market value of
the common stock of the company
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<PAGE> 6
on the date that the amount of tax to be withheld shall be determined (the "Tax
Date"). Each Election must be made on or prior to the Tax Date and shall be
irrevocable. The Committee may disapprove of any Election or may suspend or
terminate the right to make Elections. If an optionee is a person described in
Section 16(a) of the Exchange Act, then an Election is subject to the following
additional restrictions: (a) no election shall be effective for a Tax Date which
occurs within six months of the grant of the option; and (b) the Election must
be made either (i) at least six months prior to the Tax Date or (ii) during a
period beginning on the third business day following the date of release for
publication of the Company's quarterly or annual summary consolidated statements
of income and ending on the twelfth business day following such date.
9. TERMINATION OF EMPLOYMENT--EXERCISE THEREAFTER. In the event the
employment of an optionee with the Company or any of its subsidiaries is
terminated for any reason other than death, permanent disability or a Change in
Control such optionee's option shall expire and all rights to purchase shares
pursuant thereto shall terminate three months after such termination. Temporary
absence from employment because of illness, vacation, approved leaves of
absence, and transfers of employment among the Company and its subsidiaries,
shall not be considered to terminate employment or to interrupt continuous
employment.
In the event of termination of employment because of disability (as that
term is defined in Section 22(e)(3) of the Code, as now in effect or as shall be
subsequently amended) or death, the option may be exercised in full, without
regard to any times of exercise established under Paragraph 6 hereof, by his
heirs, legatees, or legal representative, as the case may be, during its
specified term prior to one year after the date of termination.
10. NON-TRANSFERABILITY OF OPTIONS. No option shall be transferable by the
optionee otherwise than by will or the laws of descent and distribution and each
option shall be exercisable during an optionee's lifetime only by him.
11. ADJUSTMENT. The number of shares subject to the Plan and to options
granted under the Plan shall be adjusted as follows: (a) in the event that the
Company's outstanding common stock is changed by any stock dividend, stock split
or combination of shares, the number of shares subject to the Plan and to
options granted thereunder shall be proportionately adjusted; (b) in the event
of any merger, consolidation or reorganization of the Company with any other
corporation or corporations, there shall be substituted, on an equitable basis
as determined by the Committee, for each share of common stock then subject to
the Plan, whether or not at the time subject to outstanding options, the number
and kind of shares of stock or other securities to which the holders of common
stock of the Company will be entitled pursuant to the transaction; (c) in the
event of any other relevant change in the capitalization of the Company, the
Committee shall provide for an equitable adjustment in the number of shares of
common stock then subject to the Plan, whether or not then subject to
outstanding options; and (d) in the event of any such adjustment the purchase
price per share shall be proportionately adjusted.
12. AMENDMENT OF PLAN. The Committee or the Board of Directors of the
Company may amend or discontinue the Plan at any time. However, no such
amendment or discontinuance shall
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<PAGE> 7
(a) change or impair any option previously granted without the consent of the
optionee, (b) increase the maximum number of shares which may be purchased by
all employees, (c) change the minimum purchase price, (d) change the limitations
on the option period or increase the time limitations on the grant of options,
or (e) permit the granting of options to members of the Committee.
13. EFFECTIVE DATE. On February 13, 1992, the Plan was initially adopted
and authorized by the Board of Directors of the Company and subsequently
approved by the shareholders of the Company on August 15, 1995. On April 18,
1996, this Amended and Restated Stock Option Plan was adopted and authorized by
the Board of Directors and, subject to stockholder approval, shall be deemed to
have become effective on April 18, 1996. Options granted under the Plan prior to
the August 1995 approval by stockholders of the Company are valid and the date
of grant shall be determined without reference to the date of approval.
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<PAGE> 1
Exhibit 10.27
NATIONAL SURGERY CENTERS, INC.
1997 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
1. STATEMENT OF PURPOSE. The purpose of this 1997 Non-Employee Directors'
Stock Option Plan (the "Plan") is to benefit National Surgery Centers, Inc. (the
"Company") through offering its directors who are not employees or officers of
the Company or its subsidiaries, if any, a favorable opportunity to become
holders of the common stock of the Company ("Common Stock"), thereby giving them
a long term stake in the growth and prosperity of the Company, in order to
enable them to represent the viewpoint of other stockholders of the Company more
effectively and to encourage them to continue serving as directors of the
Company.
2. ELIGIBILITY. Options shall be granted under this Plan only to members of
the Board of Directors who are not employees or officers of the Company or its
subsidiaries, if any, ("Eligible Directors").
3. GRANT AND VESTING OF OPTIONS. An option shall automatically be granted
to each Eligible Direct on the date on which this Plan is approved, based upon
the year in which his or her term expires, as follows:
<TABLE>
<CAPTION>
Year in Which Term Expires Number and Vesting of Shares
-------------------------- ----------------------------------------------------------------
<S> <C>
1997 5,000 shares, all fully vested
1998 7,500 shares, of which 5,000 are fully vested and 2,500 vest on
the date of the 1997 annual meeting of shareholders
1999 10,000 shares, of which 5,000 are fully vested, 2,500 vest on the
date of the 1997 annual meeting of shareholders, and 2,500 vest
on the date of the 1998 annual meeting of shareholders
</TABLE>
Thereafter, each Eligible Director shall automatically receive a grant of
option shares upon his or her election or re-election as an Eligible Director,
commencing with the Eligible Directors who are elected or reelected at the
annual meeting of shareholders held in 1997. Each such option shall be for 7,500
shares if the Eligible Director is elected to a full three year term, of which
2,500 shall be fully vested, 2,500 shall vest on the first anniversary of the
grant and 2,500 shall vest on the second anniversary. If the Eligible Director
is elected to fill a term of less than three years, the number of shares shall
be equal to 2,500 for each full year of his or her term.
In addition, the entire Board of Directors of the Company may grant
additional options under which a total of not in excess of 25,000 shares of the
common stock of the Company may be purchased from the Company, subject to
adjustment as provided in Paragraph 9. The aggregate number of shares which
shall be available for such options under this Plan shall be 250,000 shares.
Such number of shares, and the number of shares subject to options outstanding
under the Plan, shall be subject in all cases to adjustment as provided in
Paragraph 9. No option shall be granted under the Plan subsequent to February
11, 2007. Options granted under the Plan are intended not to be treated as
incentive stock options as defined in Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code").
Notwithstanding any of the foregoing to the contrary, in the event an
option expires unexercised as to any shares, such shares may again be optioned.
Shares subject to options may be made available from unissued or reacquired
shares of Common Stock.
Nothing contained in the Plan or in any option granted pursuant thereto
shall in itself confer upon any optionee any right to continue serving as a
director of the Company or interfere in any way with any right of the Board of
Directors or stockholders of the Company pursuant to the certificate of
incorporation or by-laws of the Company or applicable law to remove such
director.
4. OPTION PRICE. Subject to adjustment under Paragraph 9, the option price
shall be the fair market value at the time the option is granted of the shares
of Common Stock subject to the option.
<PAGE> 2
5. DURATION OF OPTIONS, INCREMENTS AND EXTENSIONS. Subject to the
provisions of Paragraph 7, each option shall be for a term of ten years and
shall become exercisable at the end of six months after the option is granted
(or, if later, the date on which such option vests).
6. EXERCISE OF OPTION. An option may be exercised by giving written notice
to the Company, attention of the Secretary, specifying the number of shares to
be purchased, accompanied by the full purchase price for the shares to be
purchased in cash or by check, provided, however, that in lieu of cash an
optionee may, with the approval of the Board of Directors, exercise his or her
option by (i) tendering to the Company shares of Common Stock owned by him or
her and with the certificates therefor registered in his or her name, having a
fair market value equal to the cash exercise price of the shares being
purchased; or (ii) instructing the Company to withhold from the shares of Common
Stock otherwise issuable upon the exercise of the option that number of shares
having a fair market value equal to the cash exercise price of the shares being
purchased; provided, however, that an election pursuant to clause (ii) must be
made by the optionee during the period beginning on the third business day
following the date of release for publication of the Company's quarterly or
annual financial summary of its results of operations and ending on the twelfth
business day following such date. For these purposes, the per share value of the
Company's common stock shall be the fair market value at the close of business
on the date preceding the date of exercise (or, if that date is not a trading
day, on the trading day next preceding the date of exercise of the option).
At the time of any exercise of any option, the Company may, if it shall
determine it necessary or desirable for any reason, require the optionee (or his
heirs, legatees, or legal representative, as the case may be) as a condition
upon the exercise thereof, to deliver to the Company a written representation of
present intention to purchase the shares for investment and not for distribution
or resale. In the event such representation is required to be delivered, an
appropriate legend may be placed upon each certificate delivered to the optionee
upon his exercise of part or all of the option and a stop transfer order may be
placed with the transfer agent. Each option shall also be subject to the
requirements that, if at any time the Company determines, in its discretion,
that the listing, registration or qualification of the shares subject to the
option upon any securities exchange or under any state or Federal law, or the
consent or approval of any governmental regulatory body is necessary or
desirable as a condition of, or in connection with, the issue or purchase of
shares thereunder, the option may not be exercised in whole or in part unless
such listing, registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Company.
If the Company shall determine it necessary or desirable for any reason, an
option shall provide that it is contemplated that the shares acquired through
the exercise of the option will not be registered under applicable federal and
state securities laws and that such shares cannot be resold unless they are
registered under such laws or unless an exemption from registration is
available, and the certificate for any such shares issued upon the exercise of
the option shall bear a legend making appropriate reference to such provisions
and a stop transfer order may be placed with the transfer agent.
7. TERMINATION -- EXERCISE THEREAFTER. In the event an optionee ceases to
be a director of the Company for any reason other than death, permanent
disability or resignation, such optionee's option shall expire and all rights to
purchase shares pursuant thereto shall terminate, except that any then
exercisable option shall be exercisable for a period of 15 days after the date
of such termination (or until the scheduled termination of the option, if
earlier).
In the event of death or permanent disability (as that term is defined in
Section 22(e)(3) of the Code, as now in effect or as it shall be subsequently
amended), an exercisable option may be exercised in full by the optionee or, if
he is not living, by his or her heirs, legatees, or legal representative, as the
case may be, during its specified term prior to one year after the date of death
or permanent disability. In the event of resignation, an exercisable option may
be exercised, to the extent vested at the time of resignation, by the optionee
(or, if he or she dies within three months after such termination, by his or her
heirs, legatees, or legal representative, as the case may be), at any time
during its specified term prior to three months after the date of such
resignation.
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<PAGE> 3
8. NON-TRANSFERABILITY OF OPTIONS. An Eligible Director may transfer
options granted under this Plan to his spouse, his descendants or their spouses
(including descendants by adoption), or a trust for any of the foregoing. Any
such transfer shall be made by written assignment, shall not be effective until
written notice thereof is actually received by the Company, and shall be subject
to such conditions as the Board of Directors may require. If any option is so
transferred, the transferee shall have the right to exercise the option and to
purchase the Common Stock, but all other provisions of this Plan shall be
applied as if the optionee still owned the option. Except as otherwise
specifically provided in this Section 8, an option granted under the Plan shall
be exercisable during the life of the optionee only by the optionee, and shall
not be transferable by the optionee (or any transferee) other than by will or
the laws of descend and distribution.
9. ADJUSTMENT. The number of shares subject to the Plan and to options
granted under the Plan shall be adjusted as follows: (a) in the event that the
Company's outstanding common stock is changed by any stock dividend, stock split
or combination of shares, the number of shares subject to the Plan and to
options granted thereunder shall be proportionately adjusted; (b) in the event
of any merger, consolidation or reorganization of the Company with any other
corporation or corporations, there shall be substituted, on an equitable basis
as determined by the Board of Directors, for each share of common stock then
subject to the Plan, whether or not at the time subject to outstanding options,
the number and kind of shares of stock or other securities to which the holders
of common stock of the Company will be entitled pursuant to the transaction; (c)
in the event of any other relevant change in the capitalization of the Company,
the Board of Directors shall provide for an equitable adjustment in the number
of shares of common stock then subject to the Plan, whether or not then subject
to outstanding options; and (d) in the event of any such adjustment the purchase
price per share shall be proportionately adjusted..
10. CHANGE IN CONTROL. Any option previously granted under the Plan to an
optionee who is an Eligible Director on the date of a "Change in Control" shall
be immediately exercisable in full on such date, without regard to any times of
exercise established under Paragraph 6 hereof. The term "Change in Control"
shall mean the occurrence, at any time during the specified term of an option
granted under the Plan, of any of the following events:
(a) The Company is merged or consolidated or reorganized into or with
or shares of stock of the Company are exchanged for stock or
securities of, another corporation or other legal person and as a
result of such, merger, consolidation, reorganization or exchange
less than 51% of the outstanding voting securities or other
capital interests of the surviving, resulting or acquiring
corporation or other legal person are owned in the aggregate by
the stockholders of the Company immediately prior to such merger,
consolidation, reorganization or exchange;
(b) The Company sells all or substantially all of its business and/or
assets to any other corporation or other legal person, less than
51% of the outstanding voting securities or other capital
interests of which are owned in the aggregate by the stockholders
of the Company, directly or indirectly, immediately prior to or
after such sale;
(c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any
successor schedule, form or report), as promulgated pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), disclosing that any person or group (as the terms "person"
and "group" are used in Section 13(d)(3) or Section 14(d)(2) of
the Exchange Act and the rules and regulations promulgated
thereunder) has become the beneficial owner (as the term
"beneficial owner" is defined under Rule 13d-3 or any successor
rule or regulation promulgated under the Exchange Act) of 20% or
more of the issued and outstanding shares of voting securities of
the Company; or
(d) During any period of two consecutive years, individuals who at
the beginning of any such period constitute the directors of the
Company cease for any reason to constitute at least a majority
thereof unless the election, or nomination for election by the
Company's stockholders of each new director of the Company was
approved by a vote of at least two-thirds of such directors of
the Company then still in office who were directors of the
Company at the beginning of any such period.
3
<PAGE> 4
Notwithstanding any other provisions in the Plan, during the period of 30
days after any Change in Control, each optionee (or other person entitled to
exercise an option granted under the Plan) (in either case, the "Optionholder")
shall have the right to require the Company to purchase from him any option
granted under the Plan at a purchase price equal to (1) the excess of the fair
market value per share (as defined in Section 5) over the option price (2)
multiplied by the number of option shares specified by the Optionholder for
purchase in a written notice to the Company, attention of the Secretary. The
amount payable to each Optionholder by the Company shall be in cash or by
certified check and shall be reduced by any taxes required to be withheld.
11. AMENDMENT OF PLAN. The Board of Directors may amend or discontinue the
Plan at any time; provided, however, that no amendment or discontinuance shall
change or impair any options previously granted without the consent of the
optionee.
12. EFFECTIVE DATE. The Board of Directors adopted and approved the Plan on
February 11, 1997.
13. MISCELLANEOUS.
(a) No shares of Common Stock shall be issued hereunder with respect to
any option unless counsel for the Company shall be satisfied that such issuance
will be in compliance with applicable federal, state, local and foreign legal,
securities exchange and other applicable requirements.
(b) It is the intent of the Company that the Plan comply in all
respects with Rule 16b-3 under the Exchange Act, that any ambiguities or
inconsistencies in construction of the Plan be interpreted to give effect to
such intention and that if any provision of the Plan is found not to be in
compliance with Rule 16b-3, such provision shall be deemed null and void to the
extent required to permit the Plan to comply with Rule 16b-3.
(c) The Company shall have the right to deduct from any payment made
under the Plan any federal, state, local or foreign income or other taxes
required by law to be withheld with respect to such payment. It shall be a
condition to the obligation of the Company to issue Common Stock, other
securities or property, or other forms of payment, or any combination thereof,
upon exercise, settlement or payment of any option under the Plan, that the
participant (or any beneficiary or person entitled to act) pay to the Company,
upon its demand, such amount as may be required by the Company for the purpose
of satisfying any liability to withhold federal, state, local or foreign income
or other taxes. If the amount requested is not paid, the Company may refuse to
issue Common Stock, other securities or property, or other forms of payment, or
any combination thereof. Notwithstanding anything in the Plan to the contrary,
the Board of Directors may, in its discretion, permit an eligible participant
(or any beneficiary or person entitled to act) to elect to pay a portion or all
of the amount requested by the Company for such taxes with respect to such
option, at such time and in such manner as the Board of Directors shall deem to
be appropriate (including, but not limited to, by authorizing the Company to
withhold, or agreeing to surrender to the Company on or about the date such tax
liability is determinable, Common Stock, other securities or property, or other
forms of payment, or any combination thereof, owned by such person or a portion
of such forms of payment that would otherwise be distributed, or have been
distributed, as the case may be, pursuant to such option to such person, having
a fair market value equal to the amount of such taxes).
(d) The expense of the Plan shall be borne by the Company.
4
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF INCOME PER COMMON SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
PRIMARY INCOME PER SHARE
Average shares outstanding 9,257 5,388 4,269
Net effect of dilutive stock options and warrants - based
on the treasury stock method using average market
price 560 69 --
-------- ------- -------
TOTAL 9,817 5,457 4,269
======== ======= =======
Income:
Before extraordinary item $ 7,377 $ 3,099 $ 1,493
Extraordinary item (463) (253) (373)
-------- ------- -------
Net income $ 6,914 $ 2,846 $ 1,120
======== ======= =======
Per Common Share Amount:
Before extraordinary item $ 0.75 $ 0.57 $ 0.35
Extraordinary item (0.05) (0.05) (0.09)
-------- ------- -------
Net income $ 0.70 $ 0.52 $ 0.26
======== ======= =======
FULLY DILUTED INCOME PER SHARE
Average shares outstanding 9,257 5,388 4,269
Net effect of dilutive stock options and warrants - based
on the treasury stock method using average market price 794 323 --
Shares assumed issued upon conversion of dilutive
convertible debt 319 -- --
-------- ------- -------
TOTAL 10,370 5,711 4,269
======== ======= =======
Income:
Before extraordinary item $ 7,377 $ 3,099 $ 1,493
Interest expense on dilutive convertible debt 182 -- --
-------- ------- -------
Adjusted income before extraordinary item 7,559 3,099 1,493
Extraordinary item (463) (253) (373)
-------- ------- -------
Net income $ 7,096 $ 2,846 $ 1,120
======== ======= =======
Per Common Share Amount:
Before extraordinary item $ 0.73 $ 0.54 $ 0.35
Extraordinary item (0.05) (0.04) (0.09)
-------- ------- -------
Net income $ 0.68 $ 0.50 $ 0.26
======== ======= =======
</TABLE>
NOTE: Number of shares and per share amounts have been adjusted, when
applicable, to reflect the three-for-two stock dividend effected May 31,
1996 and the one-for-three stock exchange related to the Company's
reincorporation in Delaware effected on September 14, 1995.
<PAGE> 1
Exhibit 13.1
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
(In thousands, except per share and center data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA(1):
Net revenue $ 77,359 $ 53,165 $ 41,707 $ 35,230 $18,894
Writedown of goodwill(2) -- -- -- (50,871) --
Operating income (loss)(2) 17,205 10,237 7,566 (44,385) 2,827
Interest expense 2,616 4,139 4,186 4,016 1,778
Income (loss) before income
taxes and extraordinary item(2) 11,993 5,080 2,511 (49,463) 319
Income (loss) before extraordinary item(2) 7,377 3,099 1,493 (43,236) 2
Net income (loss)(2) 6,914 2,846 1,120 (43,236) 2
Income (loss) per share:
Before extraordinary item(2) $ 0.75 $ 0.57 $ 0.35 $(11.35) $ 0.00
Extraordinary item (0.05) (0.05) (0.09) -- --
- -----------------------------------------------------------------------------------------------------------------
Net income (loss)(2) $ 0.70 $ 0.52 $ 0.26 $(11.35) $ 0.00
=================================================================================================================
Weighted average number of common
and common equivalent shares outstanding 9,817 5,457 4,269 3,810 2,987
GENERAL DATA:
Centers at end of year 32 16 14 12 10
Cases(3) 84,970 53,460 43,419 38,113 22,234
Net revenue per case(3) $ 910 $ 994 $ 961 $ 924 $ 850
Operating margin(4) 22.2% 19.3% 18.1% 18.4% 15.0%
SAME CENTER DATA(5):
Net revenue growth 16.0% 12.6% 11.7% 22.8% n/a
Case growth 13.1% 9.1% 6.6% 12.3% n/a
Net revenue per case growth 2.6% 3.2% 4.8% 9.4% n/a
BALANCE SHEET DATA(1):
Working capital $ 59,968 $ 22,145 $ 6,300 $ 2,789 $ 4,845
Total assets 142,252 82,287 56,954 49,393 87,046
Long-term debt, less current installments 6,990 17,005 38,200 41,882 38,982
Shareholders' equity (deficit) 117,669 48,192 6,724 (3,134) 39,950
</TABLE>
(1) The Company's financial statements for the periods presented are not
strictly comparable due to the significant effect that acquisitions
have on such statements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(2) Operating results for the year ended December 31, 1993, include a
non-recurring charge of approximately $50.9 million ($43.8 million
after tax benefit), principally incurred in connection with the
writedown of goodwill.
(3) Excludes data from three centers in which the Company has a minority
ownership position.
(4) Excludes effects of goodwill writedown for the year ended December 31,
1993.
(5) Same center data is calculated based on centers that the Company
operated for all of both the current and prior year periods.
1
<PAGE> 2
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. 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 has increased surgical capacity at existing centers by adding additional
operating rooms and has expanded its ability to perform higher acuity and more
complex cases by offering extended recovery in twelve of its twenty-one
multi-specialty centers.
During 1996, the Company has continued to execute its strategy for
growth in addition to other activities which have continued to enhance its
financial condition. Some of the key activities during the year included:
- Acquired six multi-specialty surgery centers (including one
center in which it acquired a minority interest) and two
companies which operated specialty endoscopy centers.
- Developed a specialty endoscopy center.
- 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 million 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.
During 1995, the Company renewed its strategy for growth by increasing its
activity for the acquisition and development of ambulatory surgery centers. Some
of the key activities during the year included:
- Acquired three multi-specialty surgery centers (including one
center in which it acquired a minority interest).
- Completed a public offering of 3.45 million shares of common
stock at $12.00 per share. In conjunction with the offering,
the Company prepaid $20.0 million of 10.5% subordinated
debentures.
Because of the financial impact of the Company's recent acquisitions
and development and other financial related activities, it is difficult to make
meaningful comparisons between the Company's financial statements for the fiscal
years presented. In addition, due to the limited number of operating 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, the
Company expects that this effect will be mitigated by the expanded financial
base of 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 patient's surgeon,
anesthesiologist or other 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.
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
2
<PAGE> 3
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. Changes in the Company's payor mix can
significantly affect its profitability. The following table provides certain
information concerning the Company's payor mix during the periods indicated:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------
PAYOR (percentage of gross revenue)
<S> <C> <C> <C>
Medicare/Medicaid 38.2% 38.4% 39.7%
HMO/PPO 28.7 27.2 22.7
Private insurance, discounted fee for service and other 33.1 34.4 37.6
- -----------------------------------------------------------------------------------------
100.0% 100.0% 100.0%
=========================================================================================
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data as a
percentage of net revenue for the periods indicated:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------
(percentage of net revenue)
<S> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0%
Costs and expenses:
Operating expenses 65.6 69.6 71.1
General and administrative expenses 4.7 4.4 4.6
Depreciation and amortization expense 7.5 6.7 6.2
- ----------------------------------------------------------------------------------------
Total costs and expenses 77.8 80.7 81.9
- ----------------------------------------------------------------------------------------
Operating income 22.2 19.3 18.1
- ----------------------------------------------------------------------------------------
Other (income) expenses:
Interest expense 3.3 7.8 10.0
Interest income (0.9) (0.5) (0.4)
Minority interests 4.7 2.6 2.5
Other, net (0.4) (0.1) --
- ----------------------------------------------------------------------------------------
Total other expenses 6.7 9.8 12.1
- ----------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 15.5 9.5 6.0
Provision for income taxes 6.0 3.7 2.4
- ----------------------------------------------------------------------------------------
Income before extraordinary item 9.5 5.8 3.6
Early extinguishment of debt, net of applicable taxes (0.6) (0.5) (0.9)
- ----------------------------------------------------------------------------------------
Net income 8.9% 5.3% 2.7%
========================================================================================
</TABLE>
YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Revenue. Net revenue is net of provisions for contractual adjustments and
doubtful accounts. Net revenue increased 45.5% to $77.4 million in 1996 from
$53.2 in 1995. Same center net revenue increased 16.0% due to a 13.1% increase
in cases combined with a 2.6% increase in net revenue per case to $1,017 from
$991. Of the remaining increase in net revenue, $12.5 million resulted from
centers acquired in 1996. Additionally, during 1996, the Company divested two
centers which had revenues of $2.1 million. Overall payor mix, as a percentage
of gross revenue, changed with private insurance and discounted fee for service
decreasing to 33.1% from 34.4%, HMO/PPO increasing to 28.7% from 27.2% and
Medicare/Medicaid decreasing to 38.2% from 38.4%.
Operating Expenses. Operating expenses include salaries and benefits, drugs and
medical supplies, utilities, marketing and maintenance costs and rent expense of
the centers. Operating expenses increased 37.1% to $50.7 million in 1996 from
$37.0 million in 1995. As a percentage of net revenues, operating expenses
decreased to 65.6% in 1996 from 69.6% in 1995 as a result of continued expense
efficiencies resulting from strong same-center growth and the effect of acquired
centers, particularly the specialty endoscopy centers, which have operating
expenses slightly below the Company's overall average.
3
<PAGE> 4
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 52.2% to $3.6 million in
1996 from $2.4 million in 1995. The increase in terms of overall dollars is
primarily attributable to additional personnel to handle the management of the
centers acquired or developed during 1996 as the total network of centers
doubled from sixteen to thirty-two. The Company believes that as same center
cases and revenues increase and if, as the Company anticipates, additional
acquisitions are made or centers are developed, further leverage of existing
management will occur and general and administrative expenses will decline as a
percentage of revenues.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased 62.9% to $5.8 million in 1996 from $3.6 million in 1995. The increase
in depreciation and amortization expense resulted primarily from centers
acquired in 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 36.8% to $2.6 million in 1996 from
$4.1 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 initial public offering and the conversion of $6.7 million of
convertible notes during the second half of 1996. As a percentage of net
revenue, interest expense decreased to 3.3% in 1996 from 7.8% in 1995.
Interest Income. Interest income increased 157.2% to $715,000 in 1996 from
$278,000 in 1995. The increase in interest income is primarily attributable to
investment of excess proceeds from the November 1995 initial public offering and
the October 1996 public offering which were invested in tax-exempt or other
short-term investments.
Minority Interests. Minority interests include the limited partners' ownership
share in the earnings (losses) of the operating center partnerships. Minority
interests increased 163.0% to $3.6 million in 1996 from $1.4 million in 1995.
The increase in minority interests resulted primarily from improved operating
performance at existing surgery centers and the acquisition or development of 16
centers in 1996 which are operating as limited or general partnerships.
Provision for Income Taxes. Provision for income taxes increased 133.0% to $4.6
million in 1996 from $2.0 million in 1995. The effective tax rate decreased to
38.5% in 1996 from 39.0% in 1995 due to effects of increased tax-exempt interest
income in 1996.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Net Revenue. Net revenue increased 27.5% to $53.2 million in 1995 from $41.7 in
1994. Same center net revenue increased 12.6% due to a 9.1% increase in cases
combined with a 3.2% increase in net revenue per case to $988 from $957. Of the
remaining increase in net revenue, $5.5 million resulted from the development of
two surgery centers that opened in the third quarter of 1994 and $1.5 million
resulted from centers acquired in 1995. Effective January 1, 1995, the Company
closed its surgery center in Phoenix, Arizona which had revenue of $450,000 in
1994. Overall payor mix, as a percentage of gross revenue, changed with private
insurance and discounted fee for service decreasing to 34.4% from 37.6%, HMO/PPO
increasing to 27.2% from 22.7% and Medicare/Medicaid decreasing to 38.4% from
39.7%.
Operating Expenses. Operating expenses increased 24.7% to $37.0 million in 1995
from $29.6 million in 1994. Of the increase in operating expenses, $4.4 million
resulted from the two developed centers. As a percentage of net revenue,
operating expenses decreased to 69.6% in 1995 from 71.1% in 1994. Excluding the
two development surgery centers, operating expenses would have decreased to
66.1% of net revenue for 1995 from 68.6% in 1994.
General and Administrative Expenses. General and administrative expenses
increased 23.2% to $2.4 million in 1995 from $1.9 million in 1994.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased 39.2% to $3.6 million in 1995 from $2.6 million in 1994. Of the
increase in depreciation and amortization expense, $672,000 resulted from the
two development centers and includes deferred development costs which are being
amortized over a two-year period.
Interest Expense. Interest expense decreased 1.1% to $4.1 million in 1995 from
$4.2 million in 1994. 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 initial public offering.
4
<PAGE> 5
Minority Interests. Minority interests increased 34.6% to $1.4 million in 1995
from $1.0 million in 1994. This increase in minority interests resulted from
improved operating performance and one center formed as a partnership in 1994.
Provision for Income Taxes. Provision for income taxes increased to $2.0 million
in 1995 from $1.0 million in 1994. The effective tax rate decreased to 39.0% in
1995 from 40.5% in 1994 due primarily to the effects of non-deductible goodwill
amortization in 1994.
SEASONALITY
The Company's business experiences some degree of seasonality because patients
have some degree of discretion in scheduling elective surgery. Accordingly,
surgical procedures at the Company's centers are lower in the first and third
quarter. The first quarter tends to be lower due to beginning of the year
deductibles while the third quarter reflects the effects of vacations taken by
both 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. For example, for the centers owned and operated during the entire
twelve months of 1996, net revenue for the first, second, third and fourth
quarters was 23.8%, 25.3%, 24.5% and 26.4% as a percentage of net revenue for
the year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operations increased to $9.1 million in 1996 from
$7.6 in 1995. In October 1996, the Company completed a second public offering of
2,415,511 shares of common stock at $24.25 per share (the "Offering"). The net
proceeds from the Offering, after deducting applicable issuance costs and
expenses, were $54.9 million. The proceeds were used to repay $9.2 million in
debt and capital leases, with excess funds to be used for general corporate
purposes. The Company's cash flow from operations combined with net proceeds
from the Offering and sale of short-term investments were used primarily to
finance acquisitions and developments of $17.9 million, capital expenditures of
$5.1 million, purchases of short-term investments of $41.6 million and repayment
of long-term debt of $13.2 million, including $9.2 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 acquisition and development of centers, working
capital requirements, debt repayments and purchases of property and equipment.
The Company expects that the excess proceeds from the Offering, 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 December 31, 1996, the Company had working capital of $60.0 million
including cash, cash equivalents and short-term investments of $51.3 million, as
compared to working capital of $22.1 million including cash, cash equivalents
and short-term investments of $22.8 million at December 31, 1995.
The Company has a loan agreement (the "Loan Agreement") with Bank of
America, Illinois which currently 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 December 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 mature on June 30, 2000.
The Loan Agreement provides for equal quarterly principal payments which occur
over a five year period based on the timing of the borrowings under the Loan
Agreement. Loans under the Loan Agreement are denominated at the Company's
option as either Eurodollar Tranches (loans bearing interest at a rate 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
adjustment in certain circumstances.
5
<PAGE> 6
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenue $ 77,359 $ 53,165 $ 41,707
Costs and expenses:
Operating expenses 50,720 36,982 29,648
General and administrative expenses 3,599 2,365 1,920
Depreciation and amortization expense 5,835 3,581 2,573
- -------------------------------------------------------------------------------------------
Total costs and expenses 60,154 42,928 34,141
- -------------------------------------------------------------------------------------------
Operating income 17,205 10,237 7,566
Other (income) expenses:
Interest expense 2,616 4,139 4,186
Interest income (715) (278) (180)
Minority interests 3,634 1,382 1,027
Other, net (323) (86) 22
- -------------------------------------------------------------------------------------------
Total other expenses 5,212 5,157 5,055
- -------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 11,993 5,080 2,511
Provision for income taxes 4,616 1,981 1,018
- -------------------------------------------------------------------------------------------
Income before extraordinary item 7,377 3,099 1,493
Early extinguishment of debt, net of applicable taxes (463) (253) (373)
- -------------------------------------------------------------------------------------------
Net income $ 6,914 $ 2,846 $ 1,120
===========================================================================================
Income per share:
Primary:
Before extraordinary item $ 0.75 $ 0.57 $ 0.35
Extraordinary item (0.05) (0.05) (0.09)
- -------------------------------------------------------------------------------------------
Net income $ 0.70 $ 0.52 $ 0.26
===========================================================================================
Fully diluted:
Before extraordinary item $ 0.73 $ 0.54 $ 0.35
Extraordinary item (0.05) (0.04) (0.09)
- -------------------------------------------------------------------------------------------
Net income $ 0.68 $ 0.50 $ 0.26
===========================================================================================
Weighted average number of common and common
equivalent shares outstanding:
Primary 9,817 5,457 4,269
Fully diluted 10,370 5,711 4,269
</TABLE>
The Notes to Consolidated Financial Statements are an
integral part of these statements.
6
<PAGE> 7
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,721 $ 14,653
Short-term investments 41,614 8,190
Accounts receivable (less allowance for uncollectible accounts
of $1,723 and $1,167) 13,223 8,764
Inventories 2,548 2,154
Prepaid expenses 2,383 581
Other current assets 724 259
- ----------------------------------------------------------------------------------------------
70,213 34,601
- ----------------------------------------------------------------------------------------------
Property and equipment 44,167 32,310
Less accumulated depreciation and amortization (10,805) (6,758)
- ----------------------------------------------------------------------------------------------
33,362 25,552
- ----------------------------------------------------------------------------------------------
Other assets:
Excess of purchase price over net assets acquired (less accumulated
amortization of $2,045 and $1,295) 32,181 16,446
Deferred income taxes 3,074 4,425
Other long-term assets 3,422 1,263
- ----------------------------------------------------------------------------------------------
38,677 22,134
- ----------------------------------------------------------------------------------------------
$ 142,252 $ 82,287
==============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 3,464 $ 7,069
Accounts payable and accrued expenses 6,781 5,387
- ----------------------------------------------------------------------------------------------
10,245 12,456
- ----------------------------------------------------------------------------------------------
Long-term debt, less current installments:
Long-term debt 6,353 11,028
Convertible notes 637 5,977
- ----------------------------------------------------------------------------------------------
6,990 17,005
- ----------------------------------------------------------------------------------------------
Other long-term liabilities 703 449
Minority interests 6,645 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 6 6
Common stock, $.01 par value; authorized 20,000,000 shares;
issued and outstanding 11,278,995 and 4,971,118 shares 113 50
Additional paid-in capital 150,314 87,814
Accumulated deficit (32,764) (39,678)
- ----------------------------------------------------------------------------------------------
117,669 48,192
- ----------------------------------------------------------------------------------------------
$ 142,252 $ 82,287
==============================================================================================
</TABLE>
The Notes to Consolidated Financial Statements are an
integral part of these statements.
7
<PAGE> 8
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Stock
---------------------------------
Number Amount Additional Total
of ---------------------- paid-in Accumulated equity
shares Voting Non-voting capital deficit (deficit)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 7,592 $ 40,510 $ -- $ -- $(43,644) $ (3,134)
Net income -- -- -- -- 1,120 1,120
Stock issued, net of issuance costs 2,476 2,093 8,232 -- -- 10,325
Stock issued in connection with
acquisitions 35 280 -- -- -- 280
Repurchase of stock (257) (2,055) -- -- -- (2,055)
Issuance of warrants -- 188 -- -- -- 188
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 9,846 41,016 8,232 -- (42,524) 6,724
Net income -- -- -- -- 2,846 2,846
Stock issued, net of issuance costs 74 318 -- -- -- 318
Exercise of stock options 7 29 -- -- -- 29
Issuance of warrants -- -- -- 2 -- 2
1-for-3 stock exchange (6,618) -- -- -- -- --
Change in par value -- (41,336) (8,226) 49,562 -- --
Stock issued, net of issuance costs 2,300 23 -- 38,007 -- 38,030
Stock issued in connection with
acquisitions 15 -- -- 225 -- 225
Exercise of stock options 1 -- -- 18 -- 18
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 5,625 50 6 87,814 (39,678) 48,192
Net income -- -- -- -- 6,914 6,914
Exercise of stock options 4 -- -- 51 -- 51
3-for-2 stock dividend 2,815 25 3 (28) -- --
Stock issued, net of issuance costs 2,415 24 -- 54,925 -- 54,949
Stock issued upon conversion of
convertible debt 512 5 -- 6,694 -- 6,699
Exercise of stock options 20 -- -- 185 -- 185
Exercise of warrants 476 2 3 (5) -- --
Conversion of non-voting stock -- 6 (6) -- -- --
Stock issued under employee stock
ownership plan 66 1 -- 678 -- 679
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 11,933 $ 113 $ 6 $ 150,314 $(32,764) $ 117,669
==========================================================================================================================
</TABLE>
The Notes to Consolidated Financial Statements are an
integral part of these statements.
8
<PAGE> 9
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 6,914 $ 2,846 $ 1,120
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense 5,835 3,581 2,573
Minority interests 3,634 1,382 1,027
Distributions to minority interests (3,103) (1,343) (964)
Deferred income taxes 1,510 1,480 829
Extraordinary charges -- 383 565
Change in assets and liabilities, net of entities acquired:
Accounts receivable (1,840) (1,266) (1,683)
Inventories (8) 17 (489)
Prepaid expenses (1,275) 102 (116)
Other current assets 167 (142) (30)
Other assets (1,319) (213) (1,076)
Accounts payable and accrued expenses (1,340) 1,531 (1,080)
Other (48) (793) 177
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,127 7,565 853
- ------------------------------------------------------------------------------------------------------------------
Investing activities:
Payments for entities acquired, net of cash acquired (17,943) (2,489) (1,426)
Investment in unconsolidated affiliate (1,500) -- --
Purchases of property and equipment (5,100) (3,255) (5,324)
Purchases of short-term investments (41,614) (8,190) --
Proceeds from sale of short-term investments 8,190 -- --
Proceeds from sale of property and equipment 984 26 1,541
Proceeds from sale of partnership interests 253 903 926
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (56,730) (13,005) (4,283)
- ------------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from issuance of long-term debt -- -- 3,858
Payments on long-term debt (13,193) (22,782) (7,844)
Proceeds from issuance of common stock, net of issuance costs 55,628 38,348 10,175
Repurchases of common stock -- -- (1,138)
Proceeds from issuance of warrants and exercise of options 236 49 5
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 42,671 15,615 5,056
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (4,932) 10,175 1,626
Cash and cash equivalents, beginning of year 14,653 4,478 2,852
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 9,721 $ 14,653 $ 4,478
==================================================================================================================
Non-cash transactions:
Common stock issued in acquisitions, contingent payments and other $ -- $ 225 $ 430
Long-term debt issued in acquisitions and contingent payments 240 750 --
Liabilities assumed in acquisitions 11,411 3,277 --
Capital lease obligations 228 574 2,094
Common stock issued upon conversion of convertible debt 6,699 -- --
Convertible notes issued in common stock repurchases -- -- 917
Convertible notes canceled -- -- 760
Issuance of warrants -- -- 183
</TABLE>
The Notes to Consolidated Financial Statements are an
integral part of these statements.
9
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
The Company - National Surgery Centers, Inc. and Subsidiaries (the "Company")
acquires, develops and manages ambulatory surgery centers. Many of the Company's
surgery centers are operated in partnership with physicians or other health care
providers.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Investments in unconsolidated affiliates in which the Company owns 20%
or more are accounted for using the equity method of accounting and other
investments are stated at cost.
Net Revenue - Net revenue consists of charges by the Company's centers at
established billing rates for services which generally include all fees for
operating room, recovery room, supplies and medications. Net revenue is net of
provisions for contractual adjustments and doubtful accounts.
Excess of Purchase Price Over Net Assets Acquired ("Goodwill") - The value of
goodwill acquired, including any arising from contingent payments based upon
earnings and performance of the acquired business and the purchase of limited
partners' ownership interest in majority owned partnerships, is generally
amortized using a straight-line method over forty years in accordance with
provisions of APB No. 17. The Company believes that the life of the ambulatory
surgery business and the delivery of such health care services is indeterminate
and likely to exceed forty years.
The Company periodically evaluates whether events and circumstances
subsequent to acquisition have occurred that would indicate that the remaining
unamortized balance of goodwill may not be fully recoverable or that the
remaining useful-life may warrant revision. When such events or circumstances
indicate that the carrying value of goodwill may not be recoverable, the Company
performed an analysis over the remaining life of the related assets to determine
if the asset is impaired. Historically, impairment of goodwill has been measured
by comparing discounted future cash flows to the net carrying value. If this
analysis indicated that goodwill acquired was not fully recoverable, then the
Company adjusted the carrying value to the estimated recoverable value.
In addition, the Company assesses long-lived assets for impairment
under FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. Under those rules, goodwill
associated with assets acquired in a purchase business combination is included
in impairment evaluations when events or circumstances exist that indicate the
carrying amount of those assets may not be recoverable.
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 attributed to outstanding options and warrants to
purchase common stock. On a fully-diluted basis, both income and the weighted
average number of shares outstanding are adjusted to assume the conversion of
convertible subordinated notes, when such notes are dilutive.
Stock-Based Compensation - In October 1995, Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), was
issued which, if elected, would require companies to use a new fair value method
of valuing stock-based compensation plans. The Company has elected to continue
following present accounting rules under Accounting Principles Board Opinion No.
25 ("APB 25"), "Accounting for Stock Issued to Employees" which uses an
intrinsic value method and often results in no compensation expense. Under APB
25, because the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Income Taxes - The Company's method of accounting for income taxes is based on
an asset and liability method. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
Property and Equipment - Property and equipment are stated at original cost,
except property and equipment acquired through business combinations accounted
for as purchases which are stated at fair market value at the date of
acquisition. Property and equipment under capital leases are recorded at the
lower of the present value of the minimum lease payments or the fair market
value of the leased property.
Depreciation and amortization are computed using the straight-line
method over the estimated useful lives or the terms of the leases of the related
assets. The general range of estimated useful lives is forty years for
buildings; seven to ten years for medical, surgical and capital leased
equipment; terms of the leases for leasehold improvements; and five to ten years
for furniture and fixtures.
10
<PAGE> 11
When assets are sold or retired, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
included in the statement of income.
Inventories - Inventories, comprised principally of medical supplies, drugs and
gases, are stated at the lower of cost (first-in, first-out method) or market.
Cash Equivalents - The Company considers all investments in highly liquid
investments with maturities of three months or less to be cash equivalents.
Investments in cash equivalents are carried at cost which approximates market
with any associated purchases discount or premium amortized over the period to
maturity.
Short-Term Investments - Short-term investments consist primarily of highly
liquid debt securities or investments in pooled investment accounts. Management
considers these investments to be available-for-sale and these securities are
carried at market which approximates cost.
Management Fees. The Company charges the operating centers a management fee
based on the net revenues of the centers. These fees are to cover
administrative, accounting and other support costs incurred by the Company.
These management fees are eliminated in the consolidated financial statements
except for the share allocated to minority interests.
Management Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts. These estimates and assumptions
are based on knowledge and experience about past and current events and on
assumptions about future events. Management will accrue estimated liabilities
when the financial impact is probable and estimable, however, actual results
could differ from these estimates.
Liability Insurance - The Company carries professional malpractice and general
liability insurance, subject to certain self insured retention limits, on a
claims-made basis for all of its centers. Additionally, the Company maintains an
umbrella liability insurance policy. The Company has procedures in place to
monitor incidents of significance. The Company does not have any malpractice
claims or other litigation in which the ultimate resolution could have a
material financial impact.
Off-Balance Sheet Risk and Concentrations of Credit Risk - Financial instruments
which potentially subject the Company to concentrations of credit risk consist
principally of cash, cash equivalents, short-term investments and trade
receivables. The Company places its cash, cash equivalents and short-term
investments with high credit quality financial institutions and instruments.
Concentrations of credit risk with respect to trade receivables is
limited due to the large number of customers comprising the Company's customer
base and their dispersion across many different insurance companies, health
maintenance and preferred provider organizations, individuals and geographic
locations.
For all periods presented, the Company had no significant
concentrations of credit risk or financial instruments with off-balance sheet
risk.
NOTE 3 -- ACQUISITIONS
During 1996, the Company acquired sixteen surgery centers for a total cash
purchase price of $17,943,000. Of the $17,943,000 purchase price, $15,728,000
was recorded as goodwill.
During August and October 1995, the Company acquired two surgery
centers. The total purchase price of $3,164,000 included $2,489,000 in cash,
$450,000 in a promissory note and the issuance of 15,000 shares of the Company's
common stock. Of the $3,164,000 purchase price, $2,567,000 was recorded as
goodwill.
The purchase agreements of certain acquired centers entitle the former
owners to receive further consideration which is contingent primarily upon
increases in future earnings of the acquired centers. In 1994, payments of
$1,289,000 in cash and the issuance of 11,667 shares of common stock were made.
During 1995, payments of $171,000 in cash and $300,000 in convertible notes were
made. During 1996, a payment of $240,000 in a convertible note was made. A
future contingent payment for an additional $300,000 is anticipated to be paid
in 1997. Obligations related to these contingencies are reflected as increases
to goodwill in the period they became known if conditions and facts permit
capitalization.
The acquisitions have been accounted for under the purchase method of
accounting.
The following unaudited results of operations give effect to the
operations of the entities acquired in fiscal 1996 and 1995 as if the respective
transactions had occurred as of the first day of the fiscal year immediately
preceding the year of the transactions. 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 years presented or to
project the Company's results of operations in any future period.
11
<PAGE> 12
<TABLE>
<CAPTION>
Years ended December 31,(a)
----------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net revenues $ 83,646 $73,801 $ 45,672
Income before extraordinary item 7,373 3,684 1,640
Net income 6,910 3,431 1,267
Income per share:
Primary:
Before extraordinary item $ 0.75 $ 0.68 $ 0.38
Net income 0.70 0.63 0.30
Fully diluted:
Before extraordinary item $ 0.73 $ 0.65 $ 0.38
Net income 0.68 0.60 0.30
</TABLE>
(a) The above pro forma operating results include adjustments to conform
the accounting policy of the acquired businesses for the amortization
of certain intangible assets and accounts receivable allowances.
NOTE 4 -- SHAREHOLDERS' EQUITY
Public Offerings - In October 1996, the Company completed a public offering of
2,415,511 shares of common stock at $24.25 per share (the "Offering"). The net
proceeds of the Offering, after deducting applicable issuance costs and
expenses, was $54.9 million. The net proceeds were used to repay $9.2 million of
debt and capital leases, with excess funds to be used for general corporate
purposes. Pro forma net income and earnings per share assuming the debt and
capital leases had been paid at the beginning of the year or when the debt was
acquired, if later, would not have been materially different from that reported
for the year.
In November 1995, the Company completed an initial public offering of
3,450,000 shares of common stock at $12.00 per share (the "Initial Offering").
Prior to the Initial Offering, there was no public market for the Company's
common stock. The net proceeds of the Initial Offering, after deducting
applicable issuance costs and expenses, were $38.0 million. The net proceeds
were used to repay $20.0 million of 10.5% subordinated notes, plus accrued
interest, with excess funds used for general corporate purposes.
Stock Dividend - On April 18, 1996, the Board of Directors of the Company
declared a 3-for-2 stock split for all holders of record of the Company's common
stock on May 15, 1996, which was effected as a stock dividend on May 31, 1996.
Accordingly, all references in these financial statements to average number of
shares outstanding and related prices, per share amounts, and the stock option
plan and warrant data have been restated to reflect this stock dividend.
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 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 related prices, per share amounts, and the stock option
plan and warrant data have been restated to reflect this stock exchange.
Stock Options - The Company has a stock option plan (the "Plan") whereby the
Company may issue to officers and other key employees, options to purchase up to
1,500,000 shares of the Company's common stock. The Plan is administered by a
committee of the Board of Directors which has the authority to determine the
employees to whom awards will be made, the amount of the awards, and the other
terms and conditions of the awards. Each option allows the individual to
purchase one share of the Company's common stock for each option granted. All
options are granted at not less than fair market value at the date of the grant
and generally vest over a four-year period.
On October 19, 1994, the Company's Board of Directors authorized an adjustment
of the exercise price on all outstanding options to $8.50 for key employees and
$10.00 for officers.
12
<PAGE> 13
A summary of the Company's stock option activity, and related
information for the years ended December 31 is as follows (options in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------------ -----------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 628 $11.78 104 $ 9.39 104 $ 9.46
Granted 584 27.35 549 12.05 1 8.50
Exercised (25) 9.55 (5) 8.50 -- --
Forfeited (14) 17.10 (20) 8.68 (1) 14.27
----- --- ---
Outstanding - end of year 1,173 $19.45 628 $11.75 104 $ 9.39
Exercisable at end of year 182 $11.46 50 $ 9.56 38 $ 9.30
Weighted-average fair value of
options granted during the year $ 6.82 $ 2.83
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged from
$8.50 to $28.125. The weighted-average remaining contractual life of those
options is 4.07 years.
Employee Stock Purchase Plan - In November 1995, the Board of Directors of the
Company adopted, and the shareholders of the Company approved, the Employee
Stock Purchase Plan (the "Stock Purchase Plan" ) which will be administered by
the Compensation Committee. Under the Stock Purchase Plan, a total of 750,000
shares of common stock are reserved for issuance upon the exercise of one-year
options which may be granted under the Stock Purchase Plan. The Stock Purchase
Plan permits eligible employees to purchase common stock at 85% of the fair
market value of the common stock at the beginning of the option plan year or at
the end of the option plan year, whichever is lower. As of December 31, 1996,
the Company has issued 66,579 shares under the Stock Purchase Plan.
Pro Forma Effects of Options and Employee Stock Purchase Plan - Pro forma
information regarding net income and earnings per share is required by SFAS 123,
which also requires that the information be determined as if the Company has
accounted for its employee stock options granted subsequent to December 31, 1994
under the fair value method. The fair value for these options was estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1996 and 1995, respectively: risk-free interest
rates of 6.35% and 5.53%; volatility factor of the expected market price of the
Company's common stock of 20%; a weighted-average expected life of the option of
3.5 years; and no dividend yield.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. The Company does not have a market tradable option and because
employee stock options have characteristics significantly different from those
of similarly traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
13
<PAGE> 14
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. SFAS 123 is
applicable only to options granted subsequent to December 31, 1994, therefore,
pro forma effects are only presented for 1996 and 1995. The pro forma effects of
this plan is as follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C>
Net income before extraordinary item $ 6,390 $ 3,029
Net income 5,927 2,776
Income per share:
Primary:
Before extraordinary item $ 0.65 $ 0.56
Net income 0.60 0.51
Fully diluted:
Before extraordinary item $ 0.63 $ 0.53
Net income 0.59 0.49
</TABLE>
Warrants - The Company has outstanding warrants at December 31, 1996 providing
for the purchase of 41,760 shares of the Company's common stock. The warrants
are exercisable at an average price of $14.61 and expire through the year 2000.
Shares Reserved - The Company has reserved 2,272,558 shares of the Company's
common stock for issuance in conjunction with warrants, convertible notes, and
the stock option plan.
NOTE 5 -- LONG-TERM DEBT AND LEASE COMMITMENTS
Long-Term Debt - In November and December, 1996, the Company prepaid certain
debt and capital leases, which by their terms are not prepayable. The $4.2
million in debt had interest rates ranging from 8% to 12.8% and matured through
the year 2010. The $5.0 million of capital leases had imputed interest rates
ranging from 9% to 13.4% and matured through the year 2000. The early prepayment
included prepayment premiums of $701,000, with associated tax benefit of
$238,000, and is presented as an extraordinary item in the Consolidated
Statements of Income.
In November 1995, the Company fully extinguished $20,000,000 of 10.5%
Subordinated Debentures (the "Debentures") with proceeds from its Initial
Offering. The early retirement of this debt resulted in the accelerated
amortization of unamortized debt issuance costs and discount of $383,000, with
associated tax benefits of $130,000 and is presented as an extraordinary item in
the Consolidated Statements of Income. The Debenture agreement was with an
affiliate of which two of the Company's directors are general partners.
In November 1995, the Company amended its bank credit agreement dated
December 17, 1992. The amended credit agreement contained modifications of
interest rates and other financial covenants giving effect to the Company's
Initial Offering. The amended agreement provides for borrowings of up to
$20,000,000, to be used for the acquisition and development of surgery centers
and related businesses. The credit agreement includes a $2,500,000 revolving
note and a $17,500,000 term note. The agreement provides for equal quarterly
principal repayments which occur over a five year period based on the timing of
the take down with any remaining outstanding balances due on June 30, 2000. The
notes bear interest at varying rates at either prime plus 0.25% or the
Eurodollar rate (LIBOR) plus 1.25%, subject to adjustment in certain
circumstances, with interest payments made from time to time. The annual
commitment fees payable on the unused portion of the facility is 0.375% per
annum. The agreement contains various financial covenants, including interest
coverage, debt coverage, fixed charge and net worth and prohibits payment of
dividends or distributions on the Company's common stock.
In August, 1994, the Company amended its bank credit agreement dated
December 17, 1992. The amended credit agreement contained modification of terms,
maturity and other financial covenants or conditions. In August, 1994,
concurrent with a private equity placement, the Company fully extinguished the
revolving and term notes due in 1999. The early retirement included the
accelerated amortization of unamortized debt issuance costs of $565,000, with
associated tax benefits of $192,000 and is presented as an extraordinary item in
the Consolidated Statements of Income.
The convertible notes mature five to seven years from the date of
issuance. Certain notes are redeemable at the option of the Company on or after
three years from the date of issuance, or earlier under certain circumstances,
at a price equal to 100% of the principal amount thereof. During 1996, the
Company converted $6.7 million of its convertible subordinated notes into
512,039 shares of common stock and redeemed $71,000 principal amount of such
notes. The remaining outstanding notes are convertible into shares of the
Company's common stock at any time prior to and including the maturity date of
the note at an average conversion price of $18.66 per share.
14
<PAGE> 15
The 7.5% subordinated note is payable to a member of the Company's
board of directors as part of the payment for the acquisition of a center
previously owned by him and was repaid in full on January 2, 1997.
Substantially all the Company's assets not otherwise pledged as
collateral on existing loans are pledged as collateral under the bank credit
agreement.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
- ----------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Revolving and term notes due 2000 (unamortized discount of
$108,000 at December 31, 1996 and $139,000 at
December 31, 1995) $ (108) $ (139)
Convertible notes, interest ranging from 7% to 9.5%, due
1997 through 2001, interest payable quarterly or
annually 1,458 7,989
7.5% subordinated note due 1997, interest payable quarterly 1,200 2,400
Installment notes payable, interest ranging from 7% to 13.25%,
due through 2008 4,755 7,692
Notes payable, interest rate at 6%, due through 2000 2,867 3,890
Obligations under capital leases, interest ranging from 7%
to 15% due through 1999 282 2,242
- ----------------------------------------------------------------------------------------
10,454 24,074
Less current installments (3,464) (7,069)
- ----------------------------------------------------------------------------------------
$ 6,990 $ 17,005
========================================================================================
</TABLE>
Lease Commitments - The Company leases corporate office space, operating
facilities and various equipment under operating leases. The real estate upon
which the Company's surgical centers are located is leased usually on terms
whereby all costs associated with maintaining the property are paid by the
Company. The lease agreements usually have lease terms ranging from five to
twenty-five years, excluding renewal option periods, and have payment increases
based on scheduled or consumer price index adjustments.
Lease expenses for operating leases aggregated $6,104,000 , $4,748,000
and $3,599,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Scheduled Long-Term Debt and Lease Payments - Future minimum lease payments
under non-cancelable capital and operating leases and long-term debt payments as
of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Capital Operating Long-term
leases leases debt
- -----------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
1997 $ 158 $ 4,949 $ 3,464
1998 $ 133 4,630 1,259
1999 21 4,662 1,051
2000 - 4,501 1,842
2001 - 4,420 1,900
Thereafter - 16,121 938
- -----------------------------------------------------------------------------------------
Total payments 312 $39,283 $ 10,454
Less amount representing interest 30 =======================
- -----------------------------------------------------------------
Present value of minimum lease payments $ 282
=================================================================
</TABLE>
Interest Payments - Total interest paid was $2,660,000, $4,084,000 and
$4,096,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
15
<PAGE> 16
NOTE 6 -- INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Deferred tax assets:
Book over tax amortization of intangibles $ 3,127 $ 4,623 $ 5,789
Tax over book depreciation (liability) (2,558) (1,749) (1,132)
Capital loss carryforward 802 205 5
Other 1,703 1,346 1,115
- -------------------------------------------------------------------------------------
3,074 4,425 5,777
Deferred tax liabilities 341 181 53
- -------------------------------------------------------------------------------------
Net deferred tax asset $ 2,733 $ 4,244 $ 5,724
=====================================================================================
</TABLE>
Capital Loss Carryforward - The Company has capital loss carryforwards available
for income tax reporting purposes of approximately $2,359,000 expiring in 1999
through 2001, which upon recognition, based on current tax rates, may result in
future tax benefits of approximately $802,000.
A reconciliation of income tax expenses computed at the Federal
statutory tax rate to reported income tax expense is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Tax at statutory rate 34.0% 34.0% 34.0%
Non-deductible goodwill amortization 0.9 1.5 2.8
State income taxes, net of federal tax benefits 4.0 3.8 3.8
Other (0.4) (0.3) (0.1)
- --------------------------------------------------------------------------------
38.5% 39.0% 40.5%
================================================================================
</TABLE>
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Current:
State $ 681 $ 173 $ (27)
Federal 2,425 328 216
- --------------------------------------------------------------------------------
3,106 501 189
- --------------------------------------------------------------------------------
Deferred:
State 49 215 171
Federal 1,461 1,265 658
- --------------------------------------------------------------------------------
1,510 1,480 829
- --------------------------------------------------------------------------------
Tax provisions before extraordinary item 4,616 1,981 1,018
Tax benefit of extraordinary item (238) (130) (192)
- --------------------------------------------------------------------------------
$4,378 $1,851 $ 826
================================================================================
</TABLE>
Income Taxes Paid - Total income taxes paid, net of refunds received, were
$4,237,000, $211,000 and $189,000 for the years ended December 31, 1996, 1995
and 1994, respectively.
16
<PAGE> 17
NOTE 7 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Land and land improvements $ 2,318 $ 1,795
Buildings 4,560 4,557
Medical and surgical equipment 23,973 17,997
Leasehold improvements 10,432 6,237
Furniture and fixtures 2,858 1,708
Construction in progress 26 16
- --------------------------------------------------------------------------------
$44,167 $ 32,310
================================================================================
</TABLE>
Included in property and equipment is capitalized leased property and equipment
which aggregated $603,000 and $3,008,000 with accumulated depreciation of
$73,000 and $472,000 at December 31, 1996 and 1995, respectively.
NOTE 8 -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
- ----------------------------------------
(in thousands)
<S> <C> <C>
Accounts payable $1,837 $1,487
Accrued payroll 1,884 1,056
Accrued rent 810 787
Accrued other 2,250 2,057
- ----------------------------------------
$6,781 $5,387
========================================
</TABLE>
NOTE 9 -- DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company evaluates the carrying amounts of significant classes of
financial instruments on the consolidated balances for disclosure of fair values
for which it is practicable. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments for which it is
practicable to estimate that value.
The carrying amounts of cash and cash equivalents, short-term
investments, accounts receivable, other current assets, accounts payable, and
accrued expenses approximate fair value because of the short maturity of those
instruments. The fair value of the Company's outstanding debt is estimated based
on similar issues or on the current rates offered to the Company for debt of the
same remaining maturities and the carrying value is a reasonable estimate of its
fair market value.
The fair value of the Company's convertible notes is estimated based on
the current price of the Company's common stock. The carrying value and
estimated fair value of the Company's convertible notes at December 31, 1996,
were $1,458,000 and $2,970,000, respectively.
NOTE 10 -- RELATED PARTY TRANSACTIONS
The Company leases one of its operating facilities under a long-term
non-cancelable lease arrangement from a partnership controlled by a director of
the Company. In addition to the minimum annual lease payments, the lease
provides for a percentage rental based on gross receipts subject to certain
minimum exclusions. Lease payments made to this partnership for each of the
three years in the period ended December 31, 1996, 1995 and 1994 were $979,000,
$995,000 and $934,000, respectively. Total minimum future lease payments payable
to this partnership are $2,382,000.
One director of the Company is an officer and shareholder in a
corporation which provides day-to-day management services at one of the
Company's limited partnership centers. Management fees paid to this corporation
were $186,000, $163,000 and $146,000 for the years ended December 31, 1996, 1995
and 1994, respectively.
17
<PAGE> 18
NOTE 11 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the two years ended December 31, 1996 is
summarized below:
<TABLE>
<CAPTION>
Quarter
----------------------------------------
1st 2nd 3rd 4th(1)
----------------------------------------
(in thousands, except per share data)
1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $16,159 $19,752 $20,101 $ 21,347
Income before income taxes and extraordinary item 2,364 3,037 2,813 3,779
Income before extraordinary item 1,455 1,838 1,704 2,380
Net income 1,455 1,838 1,704 1,917
Income per share(2)
Before extraordinary item $ 0.16 $ 0.20 $ 0.18 $ 0.21
Extraordinary item -- -- -- (0.4)
- ----------------------------------------------------------------------------------------------------
Net income $ 0.16 $ 0.20 $ 0.18 $ 0.17
====================================================================================================
1995
- ----------------------------------------------------------------------------------------------------
Net revenue $11,979 $13,118 $13,391 $ 14,677
Income before income taxes and extraordinary item 848 1,277 905 2,050
Income before extraordinary item 510 772 535 1,282
Net income 510 772 535 1,029
Income per share(2)
Before extraordinary item $ 0.10 $ 0.16 $ 0.11 $ 0.18
Extraordinary item -- -- -- (0.4)
- ----------------------------------------------------------------------------------------------------
Net Income $ 0.10 $ 0.16 $ 0.11 $ 0.14
====================================================================================================
</TABLE>
(1) The fourth quarter of 1995 includes non-recurring other income of
$436,000 ($266,000 after tax effects) or $.04 per share, arising
primarily from gain on sale of limited partnership interests in certain
centers.
(2) Income per share is calculated independently for each quarter and the
sum of the quarters may not necessarily be equal to the full year
income per share amount.
18
<PAGE> 19
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
National Surgery Centers, Inc.
We have audited the accompanying consolidated balance sheets of National Surgery
Centers, Inc. and Subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 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 consolidated financial position of
National Surgery Centers, Inc. and Subsidiaries at December 31, 1996 and 1995
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
February 5, 1997
Chicago, Illinois
19
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Corporations (Jurisdiction)
Endoscopy Center Affiliates, Inc.(Delaware)
KPSC, Inc. (Washington)
National Surgery Centers - Bakersfield, Inc. (California)
National Surgery Centers - Santa Monica, Inc. (California)
Northern Rockies Surgicenter, Inc. (Montana)
NSC Atlanta, Inc. (Delaware)
NSC Auburn, Inc. (California)
NSC Brownsville, Inc. (Texas)
NSC Channel Islands, Inc. (California)
NSC Dallas, Inc. (Texas)
NSC Elizabethtown, Inc. (Kentucky)
NSC Fayetteville, Inc. (North Carolina)
NSC Greensboro, Inc. doing business as Surgical Center of Greensboro
(North Carolina)
NSC Greensboro West, Inc. (North Carolina)
NSC Houston, Inc. (Texas)
NSC Kent, Inc. (Ohio)
NSC Las Vegas East, Inc. (Nevada)
NSC Las Vegas, Inc. (Nevada)
NSC Miami, Inc. (Florida)
NSC Norman, Inc. (Oklahoma)
NSC Phoenix, Inc. (Arizona)
NSC Port St. Lucie, Inc. (Florida)
NSC Provo, Inc. doing business as Provo Surgical Center (Utah)
NSC Sarasota, Inc. (Delaware)
NSC Seattle, Inc. (Washington)
Walk In and Out Surgery Center, Inc. (Kentucky)
Partnerships (Jurisdiction)
2121 Surgery Center, Limited Partnership doing business as Surgery Center of
Santa Monica (California)
Ambulatory Surgical Centre of Miami, Limited Partnership (Florida)
Auburn Surgery Center, Limited Partnership (California)
Bakersfield Surgery Center Limited Partnership (California)
Biloxi Endoscopy Center, General Partnership (Mississippi)
Brownsville Surgery Center, Ltd. doing business as Brownsville Surgicare (Texas)
Brunswick Endoscopy Center, General Partnership (Louisiana)
Channel Islands Surgicenter, L.P. (California)
Columbia Endoscopy Center, General Partnership (South Carolina)
Day Surgery Center, Ltd. (Florida)
Desert Surgery Center, Limited Partnership (Nevada)
<PAGE> 2
Endoscopy West, General Partnership (Ohio)
Fayetteville Ambulatory Surgery Center, Limited Partnership (North Carolina)
Fort Worth Endoscopy Center, General Partnership (Texas)
Greensboro Specialty Surgery Center, Limited Partnership (North Carolina)
Kitsap Peninsula Surgery Center Limited Partnership doing business as Olympic
Ambulatory Surgery Center (Washington)
Las Palmas Surgery Center Limited Partnership (Arizona)
Laser Northwest, Ltd. (Washington)
Long Beach Endoscopy Center, General Partnership (California)
Mid-Peninsula Endoscopy Center, General Partnership (California)
Newport Beach Endoscopy Center, General Partnership (California)
North Atlanta Endoscopy Center, General Partnership (Georgia)
NSCSM, Ltd. (California)
Physicians Surgical Center Limited Partnership (Oklahoma)
San Diego Endoscopy Center, General Partnership (California)
San Mateo Endoscopy Center, General Partnership doing business as Mid-Peninsula
Endoscopy Center (California)
Sarasota Endoscopy Center, General Partnership (Florida)
Seattle Surgery Center, Limited Partnership (Washington)
Somerset Surgery Center, Limited Partnership (Kentucky)
South Bay Endoscopy Center (California)
Suburban Endoscopy Center, General Partnership (Illinois)
Surgery Center of Elizabethtown, Limited Partnership (Kentucky)
Thousand Oaks Endoscopy Center, General Partnership (California)
Valley View Surgery Center, Limited Partnership (Nevada)
Western Reserve Surgery Center, Limited Partnership (Ohio)
Westside Surgery Center, Ltd. (Texas)
2
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Form 10-K of National
Surgery Centers, Inc. of our report dated February 5, 1997, included in the 1996
Annual Report to Shareholders of National Surgery Centers, Inc.
Our audits also included the financial statement schedule of National Surgery
Centers, Inc. listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
February 5, 1997
Chicago, Illinois
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF NATIONAL SURGERY CENTERS FOR THE YEAR ENDED DECEMBER 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 9,721,000
<SECURITIES> 41,614,000
<RECEIVABLES> 14,946,000
<ALLOWANCES> 1,723,000
<INVENTORY> 2,548,000
<CURRENT-ASSETS> 70,213,000
<PP&E> 44,167,000
<DEPRECIATION> 10,805,000
<TOTAL-ASSETS> 142,252,000
<CURRENT-LIABILITIES> 10,245,000
<BONDS> 6,990,000
0
0
<COMMON> 119,000
<OTHER-SE> 117,550,000
<TOTAL-LIABILITY-AND-EQUITY> 142,252,000
<SALES> 77,359,000
<TOTAL-REVENUES> 77,359,000
<CGS> 60,154,000
<TOTAL-COSTS> 60,154,000
<OTHER-EXPENSES> 2,596,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,616,000
<INCOME-PRETAX> 11,993,000
<INCOME-TAX> 4,616,000
<INCOME-CONTINUING> 7,377,000
<DISCONTINUED> 0
<EXTRAORDINARY> 463,000
<CHANGES> 0
<NET-INCOME> 6,914,000
<EPS-PRIMARY> .70
<EPS-DILUTED> .68
</TABLE>
