<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarter period ended March 31, 1998 or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _________ to
________
Commission File Number: 0-27162
NATIONAL SURGERY CENTERS, INC.
Delaware 36-3549627
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 South Wacker Drive, Suite 2302, Chicago, Illinois 60606
(Address of principal executive offices) (Zip Code)
(312) 655-1400
Registrants telephone number, including area code
- ----------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common stock, par value $.01; 18,612,424 shares outstanding at
May 1, 1998.
<PAGE>
NATIONAL SURGERY CENTERS, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION PAGE
---------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997....................................... 3
Consolidated Statements of Income for the Three Month
Periods Ended March 31, 1998 and 1997................... 4
Consolidated Statements of Cash Flows for the
Three Month Periods Ended March 31, 1998 and 1997....... 5
Notes to Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 9
PART II OTHER INFORMATION
-----------------
Item 1. Legal Proceedings....................................... None
Item 2. Changes in Securities................................... None
Item 3. Defaults Upon Senior Securities......................... None
Item 4. Submission of Matters to a Vote of Security Holders..... None
Item 5. Exhibits and Reports on Form 8-K........................ 12
SIGNATURES................................................................ 13
Page 2
<PAGE>
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,199 $ 14,919
Short-term investments 7,700 17,700
Accounts receivable (less allowance for uncollectible accounts
of $4,707 and $4,027) 21,083 19,341
Inventories 4,014 3,838
Prepaid expenses 988 1,165
Other current assets 882 527
-------- --------
51,866 57,490
-------- --------
Property and equipment 60,389 55,392
Less accumulated depreciation and amortization (17,535) (16,047)
-------- --------
42,854 39,345
-------- --------
Other assets:
Excess of purchase price over net assets acquired (less accumulated
amortization of $3,930 and $3,424) 80,100 69,618
Other long-term assets 2,444 3,498
-------- --------
82,544 73,116
-------- --------
$177,264 $169,951
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Current installments of long-term debt $ 2,593 $ 2,671
Accounts payable and accrued expenses 10,260 8,653
-------- --------
12,853 11,324
-------- --------
Long-term debt, less current installments:
Long-term debt 10,425 10,374
Convertible notes 92 92
-------- --------
10,517 10,466
-------- --------
Other long-term liabilities 1,244 686
Minority interests 11,662 10,680
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; no shares issued and outstanding - -
Common stock, $.01 par value; authorized 40,000,000 shares;
issued and outstanding 18,567,453 shares in 1998 and
18,502,915 shares in 1997 186 185
Additional paid-in-capital 157,349 156,923
Accumulated deficit (16,547) (20,313)
-------- --------
140,988 136,795
-------- --------
$177,264 $169,951
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Net revenue $ 31,034 $ 22,116
Costs and expenses:
Operating expenses 18,706 14,249
General and administrative expenses 1,395 1,047
Depreciation and amortization expense 2,079 1,605
--------- ---------
Total costs and expenses 22,180 16,901
--------- ---------
Operating income 8,854 5,215
Other (income) and expenses:
Interest expense 314 153
Interest income (320) (391)
Minority interests 2,820 1,343
Other, net (83) (51)
--------- ---------
Total other expenses 2,731 1,054
--------- ---------
Income before income taxes 6,123 4,161
Provision for income taxes 2,357 1,550
--------- ---------
Net income $ 3,766 $ 2,611
========= =========
Per common share:
Basic $ 0.20 $ 0.15
Diluted $ 0.20 $ 0.14
Weighted average number of common and common
equivalent shares outstanding:
Basic 18,553 17,930
Diluted 19,132 18,692
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 3,766 $ 2,611
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense 2,079 1,605
Minority interests 2,820 1,343
Deferred income taxes 511 305
Change in assets and liabilities, net of entities acquired:
Accounts receivable (899) 321
Inventories (46) 23
Prepaid expenses 202 1,385
Other current assets (355) 159
Other long-term assets (101) (186)
Accounts payable and accrued expenses 1,300 (1,034)
Other 12 (2)
-------- --------
Net cash provided by operating activities 9,289 6,530
-------- --------
Investing activities:
Payments for entities acquired, net of cash acquired (11,271) (5,751)
Purchases of property and equipment (3,723) (1,127)
Proceeds from sale of short-term investments 10,000 6,504
Proceeds from sale of property and equipment 20 3
-------- --------
Net cash used in investing activities (4,974) (371)
-------- --------
Financing activities:
Proceeds from issuance of long-term debt 484 -
Payments on long-term debt (557) (1,513)
Proceeds from issuance of common stock - 87
Proceeds from issuance of warrants and options 427 19
Distributions to minority interests (2,376) (1,070)
Proceeds from sale and payments for purchase of partnership
interests, net (13) 69
-------- --------
Net cash used in financing activities (2,035) (2,408)
-------- --------
Net increase in cash and cash equivalents 2,280 3,751
Cash and cash equivalents, beginning of period 14,919 9,721
-------- --------
Cash and cash equivalents, end of period $ 17,199 $ 13,472
======== ========
NON-CASH TRANSACTIONS:
Common stock issued upon conversion of convertible debt $ - $ 334
Liabilities assumed in acquisitions 1,080 435
Capital lease obligations 30 28
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 102 $ 180
Income taxes paid 318 208
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Summary Accounting Policies
Description of Business - 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.
Interim Financial Statements - The accompanying unaudited interim financial
statements of the Company have been prepared in accordance with generally
accepted accounting principles for interim financial information. In the opinion
of management, all adjustments (consisting only of normal recurring adjustments)
have been made which are necessary for a fair presentation of the financial
position, results of operations, and cash flows for the interim periods
presented. The interim statements presented herein do not include all
disclosures normally provided in annual financial statements.
Principles of Consolidation - The consolidated financial statements include
all accounts of the Company and its wholly owned subsidiaries and majority owned
partnerships or limited liability companies. 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.
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.
Revenue Recognition - 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") and Long-Lived
Assets - 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. 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 40
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 external factors indicate that
the carrying value of goodwill may not be recoverable, the Company performs 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
Statement of Financial Accounting Standards ("SFAS") 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 - Basic income per common share and income per common and
common equivalent share assuming dilution are computed using the weighted
average number of shares outstanding. On a diluted basis, both income and the
weighted average number of shares outstanding are adjusted for the incremental
shares
Page 6
<PAGE>
attributed to outstanding options and warrants and the conversion of convertible
subordinated notes, when the effect of such items are dilutive.
Effective December 15, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share". Accordingly, all
references in these financial statements to earnings per share, diluted earnings
per share and related weighted average shares have been restated to reflect
adoption of SFAS No. 128. A reconciliation of the weighted average shares for
basic and diluted shares outstanding is as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Basic weighted average shares outstanding 18,553 17,930
Dilutive options and warrants 573 718
Dilutive convertible debt 6 44
-------- --------
Diluted weighted average shares outstanding 19,132 18,692
======== ========
</TABLE>
NOTE 2 - Acquisitions
Purchases - During February and March, 1998, the Company acquired one
single-specialty surgery center and one multi-specialty center. The total cost
was $11.3 million in cash which resulted in $9.9 million of the purchase price
being recorded as goodwill. During 1997, the Company acquired six surgery
centers and increased its ownership in one surgery center to a majority
ownership. The following unaudited results of operations give effect to the
operations of the entities acquired in the first quarter 1998 and during 1997 as
if these respective transactions had occurred as of the first day of 1997. The
pro forma results of operations do not purport to represent what the Company's
results would have been had the transactions in fact occurred at the beginning
of the periods presented or to project the Company's results of operations in
any future period.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1998 1997
--------- ---------
(in thousands, except per share amounts)
<S> <C> <C>
Net revenue $ 31,814 $ 30,009
Net income 3,790 3,802
Per common share:
Basic $ 0.20 $ 0.21
Diluted 0.20 0.20
</TABLE>
The above pro forma operating results include adjustments to conform
accounting policy of the acquired businesses for the amortization of certain
intangible assets, interest expense, minority interests and provision for income
taxes.
Subsequent Events
On May 5, 1998, the Company and HEALTHSOUTH Corporation, a Delaware
corporation whose common stock is traded on The New York Stock Exchange under
the symbol "HRC," ("HEALTHSOUTH"), together with Field Acquisition Corporation,
a wholly-owned subsidiary of HEALTHSOUTH ("Merger Sub"), entered into a Plan of
Merger and Agreement (the "Merger Agreement") pursuant to which the Merger Sub
will be merged with and into the Company (the "Merger"). The Merger Agreement
provides upon consummation of the Merger (i) each share of the Company's common
stock, $0.1 par value per share ("Company Common Stock"), will be converted into
the right to receive shares of HEALTHSOUTH common stock, $.10 par value per
share ("HEALTHSOUTH Common Stock"), valued at $30.50 per share of Company Common
Stock, but not less than 0.8714 of a share of HEALTHSOUTH Common Stock or more
than 1.1509 shares of HEALTHSOUTH common stock, and the Company will become a
wholly-owned subsidiary of HEALTHSOUTH and (ii) all outstanding options to
purchase the Company's Common Stock from the Company will be converted into
options to purchase HEALTHSOUTH Common Stock. As of May 5, 1998, HEALTHSOUTH
owned and operated or had rights to acquire approximately 210 ambulatory surgery
centers.
Page 7
<PAGE>
Consummation of the Merger is subject to (i) the approval of the Merger
Agreement by the stockholders of the Company, (ii) the ability to account for
the Merger as a pooling of interests, and (iii) other customary closing
conditions. The Merger Agreement may be terminated prior to its consummation by
any of the parties if the Merger is not consummated on or before November 30,
1998. The Merger Agreement also may be terminated prior to its consummation for
a number of other reasons, including the following: (i) by mutual written
consent of the Company and HEALTHSOUTH; (ii) by either the Company or
HEALTHSOUTH if the necessary stockholder approval is not received; or (iii) by
the Company if its Board of Directors determines in the exercise of its
fiduciary duties under applicable law (a) not to recommend the Merger to the
shareholders of Company Common Stock or shall have withdrawn such
recommendation, (b) approved, recommended, or endorsed any merger, acquisition,
or other business combination involving the Company or its subsidiaries, which
constitutes a significant part of the consolidated assets of the Company (an
"Acquisition Transaction"), other than the Merger, (c) resolved to do either of
the foregoing. If the Merger Agreement is terminated pursuant to clause (iii)
above and if an Acquisition Transaction occurs within one year thereafter, the
Company must pay HEALTHSOUTH a fee of $15.0 million.
Page 8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements set forth in this Form 10-Q, including trends in or
expectations regarding the Company's operations, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are based on currently available operating, financial
and competitive information, and are subject to risks and uncertainties. Actual
future results and trends may differ materially depending on a variety of
factors, including, but not limited to successful execution of internal
performance and expansion plans, the impact of competition, the availability of
financing, the volatility of interest rates and other risks detailed herein and
in the Company's Securities and Exchange Commission filings, including the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
Overview
The Company's consistent growth can be directly attributed to strong internal
growth combined with the benefits from the acquisition and development of
surgery centers. As of March 31, 1998, the Company operated a network of 40
surgery centers, including four centers in which the Company has a minority
ownership position.
During the first quarter of 1998, the Company continued to execute its
strategy for growth by acquiring one multi-specialty surgery center and one
single-specialty center.
During 1997, some of the key activities included:
- - Acquired six multi-specialty surgery centers and increased the Company's
ownership from a minority to a majority position in one multi-specialty
surgery center.
- - Declared a 3-for-2 stock split for all holders of record of its common
stock on August 15, 1997, which was effected as a stock dividend on
August 29, 1997.
- - Converted $1.3 million of its convertible notes into 110,229 shares of
common stock and redeemed $24,000 principal of such notes.
- - Prepaid $1.2 million in debt.
Because of the financial impact of the Company's recent acquisition and
development of surgery centers 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 number of patient procedures performed, the mix
of patient procedures and the rates of reimbursement among
Page 9
<PAGE>
payor categories. Generally, private insurance reimbursement is greater than
HMO/PPO and Blue Cross/Blue Shield reimbursement which, in turn, is greater than
Medicare and Medicaid reimbursement.
Medicare part B provides for payment of facility fee for services furnished
by Medicare certified ambulatory surgical centers in connection with designated
covered surgical procedures. Each Medicare covered surgical procedure is
assigned to a payment group. Currently, there are eight payment groups. The
Health Care Financing Administration ("HCFA") assigns a base payment rate to
each payment group, which rate remains until revised by HCFA. The Company
understands that the number of payment groups and the base payment rates are
currently under discussion and the Company is unable to predict the outcome of
these discussions or its effect on the Company. Depending upon the nature and
context of any regulatory action, if any, which is taken, the Company could
experience a decrease in revenues from Medicare, which could have a material
adverse change on the Company's business, financial condition, cash flows or
results of operations.
Results of Operations
The following table sets forth certain consolidated financial data as a
percentage of net revenue for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1998 1997
------ ------
(percentage of net revenue)
<S> <C> <C>
Net revenue 100.0% 100.0%
Costs and expenses:
Operating expenses 60.3 64.4
General and administrative expenses 4.5 4.7
Depreciation and amortization expense 6.7 7.3
------ ------
Total costs and expenses 71.5 76.4
------ ------
Operating income 28.5 23.6
------ ------
Other (income) and expenses:
Interest expense 1.0 0.7
Interest income (1.0) (1.8)
Minority interests 9.1 6.1
Other, net (0.3) (0.2)
------ ------
Total other expenses 8.8 4.8
------ ------
Income before income taxes 19.7 18.8
Provision for income taxes 7.6 7.0
------ ------
Net income 12.1% 11.8%
====== ======
</TABLE>
Three Months Ended March 31, 1998 and 1997
Net Revenue. Net revenue is net of provisions for contractual adjustments and
doubtful accounts. Net revenue increased 40.3% to $31.0 million in 1998 from
$22.1 million in 1997. Overall net revenue per case increased 11.3% to $1,011 in
1998 from $908 in 1997. Same center net revenue increased $1.6 million or 7.1%
due to a 7.5% increase in cases to 26,180. Separately, same center net revenue
per case for multi-specialty centers increased .6% to $1,025 and
single-specialty endoscopy net revenue per case increased 3.8% to $522.
Operating Expenses. Operating expenses include salaries and benefits, drugs
and medical supplies, utilities, marketing, maintenance costs and rent expense
of the centers. Operating expenses increased 31.3% to $18.7 million in 1998 from
$14.2 million in 1997 primarily as a result of the addition of multi-specialty
centers acquired since the first quarter of 1997. As a percentage of net
revenue, operating expenses decreased to 60.3% in 1998 from 64.4% in 1997 as a
result of continued expense efficiencies resulting from same-center growth and
effects of recently acquired surgery centers.
Page 10
<PAGE>
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 33.2% to
$1.4 million in 1998 from $1.0 million in 1997. As a percentage of net revenue,
general and administrative expenses decreased slightly to 4.5% in 1998 from 4.7%
in 1997.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased 29.5% to $2.1 million in 1998 from $1.6 million in 1997. The increase
in depreciation and amortization expense resulted primarily from the addition of
centers acquired since the first quarter of 1997.
Minority Interests. Minority interests include the limited partners'
ownership share in the earnings (losses) of the operating center. Minority
interests increased 110.0% to $2.8 million in 1998 from $1.3 million in 1997.
The increase in minority interests resulted primarily from improved operating
performance at existing surgery centers and the effects resulting from the
acquisition of centers since the first quarter of 1997, which are operated in
partnership with physicians.
Provision for Income Taxes. Provision for income taxes increased to $2.4
million in 1998 from $1.6 million in 1997. The effective tax rate increased to
38.5% in 1998 from 37.3% in 1997 due primarily to the effects of lower
tax-exempt interest earned during 1998 from cash, cash equivalents and
short-term investments.
Seasonality
The Company's business experiences some 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
1997, net revenue for the first, second, third and fourth quarters was 24.3%,
25.7%, 24.4% and 25.6% as a percentage of net revenue for the year.
Year 2000 Compliance
The "Year 2000 Issue" is the result of computer programs being written using
two digits rather than four to define the applicable year. Accordingly, such
programs may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, transfer funds electronically, or engage
in similar business activities. The Company has not developed any proprietary
computer programs or systems which it uses which will require modification to
avoid the Year 2000 Issue. However, the Company utilizes third party computer
programs and software. Based on its recent assessment, management of the Company
does not anticipate that any significant modification or replacement of the
Company's computer programs or systems will be necessary for its computer
systems to properly utilize dates beyond December 31, 1999 or that the Company
will incur significant operating expenses to make any such computer system
improvements. In addition, the Company continues to monitor the progress of the
licensors of its computer programs and systems to ensure that such programs and
systems will operate properly on and after January 1, 2000. The Company believes
that most of the costs necessary to make its computer programs and systems Year
2000 compliant will be incurred in 1998 and will not have a material impact on
the Company's operations or financial condition. The Company is not able to
determine, however, whether any of its suppliers, lenders, or service providers
will need to make any such computer program or system modifications or
replacements or whether the failure to make such corrections will have an
adverse effect on the Company's operations or financial conditions.
Page 11
<PAGE>
Liquidity and Capital Resources
The Company's cash flow from operations increased to $9.3 million for the
three months ended March 31, 1998 from $6.5 million in 1997. The Company's cash
flow from operations combined with proceeds of $10.0 million from the sale of
short-term investments were used primarily to finance acquisitions of $11.3
million, capital expenditures of $3.7 million and distributions to minority
interests of $2.4 million.
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 and purchases of property and equipment. The Company expects that
cash generated from operations and available credit borrowings will be adequate
to provide for the Company's cash requirements for at least the next twelve
months, unless the rate of acquisitions significantly increases beyond current
expectations. No assurances can be given that such proceeds, cash and borrowings
will be sufficient to provide for the Company's cash requirements beyond the
next twelve months. At March 31, 1998, the Company had working capital of $39.0
million including cash, cash equivalents and short-term investments of $24.9
million, as compared to working capital of $46.2 million including cash, cash
equivalents and short-term investments of $32.6 million at December 31, 1997.
The Company has a bank loan agreement which provides for revolving loans of
up to $60.0 million, to be used by the Company for funding acquisition or
development of surgical services and related businesses. As of March 31, 1998,
$60.0 million was available under the terms of the loan agreement. Borrowings
under the loan agreement mature on November 17, 2000. The loan agreement
provides for payment of interest only until maturity, at which time a balloon
payment of outstanding principal is due. Borrowings under the loan agreement are
denominated at the Company's option as either Eurodollar Tranches (loans bearing
interest at a rate 0.625% above the Eurodollar Rate) or Base Rate Tranches
(loans bearing interest at the lender prime rate or Federal Funds Rate plus
0.5%, whichever is greater), subject to adjustment in certain circumstances.
Additionally, the loan agreement prohibits the payment of dividends or other
distributions on the Company's common stock.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The exhibits to this report are listed in the Exhibit Index
set forth elsewhere herein.
b. Reports on Form 8-K
The registrant did not file a Form 8-K in the period.
Page 12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL SURGERY CENTERS, INC.
(REGISTRANT)
Date: May 14, 1998 /s/ E. Timothy Geary
----------------------------
E. Timothy Geary
President and Chief
Executive Officer
/s/ Bryan S. Fisher
----------------------------
Bryan S. Fisher
Senior Vice President of Finance,
Chief Financial Officer,
Treasurer and Secretary
Page 13
<PAGE>
EXHIBIT INDEX
Number and Description of Exhibit*
2 None
4 None
10 None
11 Computation of Income Per Common Share
12 None
15 None
18 None
19 None
22 None
23 None
24 None
27 Schedule of Summary Financial Information
99 None
- ---------------------------------------
* Exhibits not listed are inapplicable.
Page 14
<PAGE>
EXHIBIT 11
Computation of Income Per Common Share
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1998 1997
---------- ---------
<S> <C> <C>
BASIC INCOME PER SHARE
Average shares outstanding 18,553 17,930
========== =========
Net income $ 3,766 $ 2,611
========== =========
Per common share amount:
Net income $ 0.20 $ 0.15
========== =========
DILUTED INCOME PER SHARE
Average shares outstanding 18,553 17,930
Net effect of dilutive stock options and warrants-based on
the treasury stock method using the greater of average
market price or market closing price 573 718
Assumed conversion of certain convertible debt 6 44
---------- ---------
Diluted average shares outstanding 19,132 18,692
========== =========
Income:
Net income $ 3,766 $ 2,611
Add convertible debt interest, net of income tax effect 1 4
---------- ---------
Net income after convertible debt interest $ 3,767 $ 2,615
========== =========
Per common share amount:
Net income $ 0.20 $ 0.14
========== =========
</TABLE>
Note: All number of shares and per share amounts have been adjusted, when
applicable, to reflect the three-for-two stock split in the form of a 50%
stock dividend effected on August 29, 1997.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of National Surgery Centers for the three months
ended March 31, 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-10-1998
<PERIOD-END> MAR-31-1998
<CASH> 17,199,000
<SECURITIES> 7,700,000
<RECEIVABLES> 25,790,000
<ALLOWANCES> 4,707,000
<INVENTORY> 4,014,000
<CURRENT-ASSETS> 51,866,000
<PP&E> 60,389,000
<DEPRECIATION> 17,535,000
<TOTAL-ASSETS> 177,264,000
<CURRENT-LIABILITIES> 12,853,000
<BONDS> 10,517,000
0
0
<COMMON> 186,000
<OTHER-SE> 140,802,000
<TOTAL-LIABILITY-AND-EQUITY> 177,264,000
<SALES> 31,034,000
<TOTAL-REVENUES> 31,034,000
<CGS> 22,180,000
<TOTAL-COSTS> 22,180,000
<OTHER-EXPENSES> 2,471,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 314,000
<INCOME-PRETAX> 6,123,000
<INCOME-TAX> 2,357,000
<INCOME-CONTINUING> 3,766,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,766,000
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of National Surgery Centers for the periods ended
March 31, 1997, June 30, 1997 and September 30, 1997 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 13,472,000 12,730,000 13,995,000
<SECURITIES> 35,110,000 25,029,000 13,368,000
<RECEIVABLES> 15,343,000 18,563,000 22,715,000
<ALLOWANCES> 1,880,000 2,774,000 4,555,000
<INVENTORY> 2,614,000 3,130,000 3,577,000
<CURRENT-ASSETS> 66,222,000 58,546,000 51,364,000
<PP&E> 45,584,000 49,132,000 52,804,000
<DEPRECIATION> 12,012,000 13,303,000 14,720,000
<TOTAL-ASSETS> 142,867,000 151,144,000 165,329,000
<CURRENT-LIABILITIES> 7,386,000 9,369,000 10,447,000
<BONDS> 6,935,000 8,651,000 11,318,000
0 0 0
0 0 0
<COMMON> 120,000 121,000 183,000
<OTHER-SE> 120,600,000 124,424,000 132,206,000
<TOTAL-LIABILITY-AND-EQUITY> 142,867,000 151,144,000 165,329,000
<SALES> 22,116,000 46,362,000 73,295,000
<TOTAL-REVENUES> 22,116,000 46,362,000 73,295,000
<CGS> 16,901,000 34,622,000 54,455,000
<TOTAL-COSTS> 16,901,000 34,622,000 54,455,000
<OTHER-EXPENSES> 901,000 2,027,000 3,771,000
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 153,000 346,000 688,000
<INCOME-PRETAX> 4,161,000 9,367,000 14,381,000
<INCOME-TAX> 1,550,000 3,489,000 5,369,000
<INCOME-CONTINUING> 2,611,000 5,878,000 9,012,000
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 2,611,000 5,878,000 9,012,000
<EPS-PRIMARY> .15 .33 .50
<EPS-DILUTED> .14 .31 .48
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of National Surgery Centers for the periods ended
March 31, 1996, June 30, 1996 and September 30, 1996 and is qualified
in its entirety by reference to such financial statemtents.
</LEGEND>
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 13,360,000 8,308,000 9,167,000
<SECURITIES> 5,150,000 250,000 250,000
<RECEIVABLES> 12,377,000 14,921,000 13,835,000
<ALLOWANCES> 1,645,000 1,700,000 1,570,000
<INVENTORY> 2,253,000 2,529,000 2,441,000
<CURRENT-ASSETS> 32,816,000 26,184,000 25,837,000
<PP&E> 38,867,000 43,018,000 43,176,000
<DEPRECIATION> 7,635,000 8,781,000 9,838,000
<TOTAL-ASSETS> 89,981,000 94,669,000 95,163,000
<CURRENT-LIABILITIES> 13,376,000 16,540,000 18,232,000
<BONDS> 21,837,000 19,660,000 15,234,000
0 0 0
0 0 0
<COMMON> 56,000 88,000 91,000
<OTHER-SE> 49,487,000 51,512,000 54,833,000
<TOTAL-LIABILITY-AND-EQUITY> 89,981,000 94,669,000 95,163,000
<SALES> 16,159,000 35,911,000 56,012,000
<TOTAL-REVENUES> 16,159,000 35,911,000 56,012,000
<CGS> 12,907,000 28,068,000 43,939,000
<TOTAL-COSTS> 12,907,000 28,068,000 43,939,000
<OTHER-EXPENSES> 296,000 1,145,000 1,848,000
<LOSS-PROVISION> 553,000 1,265,000 0
<INTEREST-EXPENSE> 592,000 1,297,000 2,011,000
<INCOME-PRETAX> 2,364,000 5,401,000 8,214,000
<INCOME-TAX> 909,000 2,108,000 3,217,000
<INCOME-CONTINUING> 1,455,000 3,293,000 4,997,000
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1,455,000 3,293,000 4,997,000
<EPS-PRIMARY> .11 .26 .37
<EPS-DILUTED> .11 .24 .35
</TABLE>
