<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1995, commission file number 0-13364
SURGICAL CARE AFFILIATES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
62-1149229
(I. R. S. Employer Identification No.)
Registrant's telephone number, including area code (615) 385-3541
102 Woodmont Blvd, Suite 610, Nashville, TN 37205
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X
No
The condensed financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. All adjustments necessary to a fair
statement of the results of this period reported have been included.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. It is suggested
that these condensed financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's latest
annual report on Form 10-K.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the close of the period covered by this
report. Common stock, par value $.25 per share, shares outstanding
38,993,892 at September 30, 1995.
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SURGICAL CARE AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $39,046,955 $31,222,963
Marketable securities 294,639 294,639
Accounts receivable, less allowance
for doubtful accounts of
$4,543,380 in 1995 and $4,160,260
in 1994 30,763,766 34,801,079
Other receivables 586,482 701,965
Supplies 5,159,252 4,562,518
Prepaid expenses and other current assets 1,277,301 742,911
Deferred income taxes 9,260,259 9,260,259
----------- -----------
Total current assets 86,388,654 81,586,334
----------- -----------
Property & equipment, including leased properties:
Land & improvements 33,524,724 31,972,686
Building 71,424,899 66,289,162
Equipment, furniture and fixtures 116,851,338 106,690,800
Construction in progress 4,884,351 1,998,495
----------- -----------
226,685,312 206,951,143
Less: accumulated depreciation
and amortization (68,184,276) (57,969,075)
----------- -----------
Net property & equipment 158,501,036 148,982,068
Other assets:
Excess of cost over fair value of
net assets acquired 124,270,083 109,149,364
Other assets 2,262,218 625,828
----------- -----------
$371,421,991 $340,343,594
=========== ===========
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
<PAGE> 3
SURGICAL CARE AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------ -----------
<S> <C> <C>
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $4,441,146 $5,889,642
Accrued liabilities 10,529,175 15,658,612
Accrued loss on disposal of
surgery centers 741,203 5,629,000
Current portion of long-term obligations
and notes payable 728,944 10,119,162
Income taxes payable 20,381,893 14,737,873
Distributable to minority interests 7,000,000 4,500,000
----------- -----------
Total current liabilities 43,822,361 56,534,289
Long-term obligations:
Notes payable & other long-term debt 61,062,400 42,269,224
Capital lease obligations - related parties 4,056,891 7,447,761
----------- -----------
Total long-term obligations 65,119,291 49,716,985
----------- -----------
Deferred income taxes 3,845,939 3,845,939
----------- -----------
Minority interests 29,404,481 33,623,872
----------- -----------
Shareholders' equity:
Common stock, par value $.25, 100,000,000
shares authorized, 39,466,292 and 39,110,622
shares issued, and 38,993,892 and 38,638,222
shares outstanding in 1995 and 1994,
respectively 9,866,573 9,777,656
Treasury stock at cost,472,400 shares
in 1995 and 1994, respectively (6,051,243) (6,114,778)
Additional paid in capital 96,126,266 91,159,880
Retained earnings 129,288,323 101,799,751
----------- -----------
Total shareholders' equity 229,229,919 196,622,509
----------- -----------
$371,421,991 $340,343,594
=========== ===========
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
<PAGE 4>
SURGICAL CARE AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenue $65,469,990 $59,302,163 $196,258,237 $169,973,089
Operating costs:
Costs of providing healthcare services (34,754,319) (29,986,803) (102,383,545) (88,794,012)
Depreciation and amortization (3,972,284) (4,446,112) (12,639,940) (12,506,181)
Provision for doubtful accounts (704,207) (794,635) (2,381,398) (2,079,421)
------------ ------------ ------------ ------------
Operating income 26,039,180 24,074,613 78,853,354 66,593,475
General, administrative and development expenses (1,168,457) (1,376,797) (4,235,644) (4,060,867)
Interest and other expenses (1,108,596) (1,514,514) (3,413,039) (6,025,157)
Interest and other income 950,932 1,168,559 2,411,483 2,698,957
Gain on sale of MCA stock 0 1,720,058 0 6,881,869
------------ ------------ ------------ ------------
Income before minority interests and income taxes 24,713,059 24,071,919 73,616,154 66,088,277
Minority interests in (earnings) of partnerships (6,562,206) (5,491,805) (19,216,667) (15,144,364)
------------ ------------ ------------ ------------
Income before income taxes and cumulative effect
of change in accounting principle 18,150,853 18,580,114 54,399,487 50,943,913
Income tax provision (6,897,324) (7,432,046) (21,396,778) (22,083,565)
------------ ------------ ------------ ------------
Income before cumulative effect of change in
accounting principle 11,253,529 11,148,068 33,002,709 28,860,348
Cumulative effect of change in accounting principle 0 0 0 (2,105,155)
------------ ------------ ------------ ------------
Net income $11,253,529 $11,148,068 $33,002,709 $26,755,193
============ ============ ============ ============
Net Income Per Common & Common Equivalent Share
Before cumulative effect of change in
accounting principle $0.29 $0.29 $0.84 $0.74
Cumulative effect of change in accounting principle 0.00 0.00 0.00 (0.05)
------------ ------------ ------------ ------------
$0.29 $0.29 $0.84 $0.69
============ ============ ============ ============
Weighted average number of common and common
equivalent shares outstanding 39,251,597 38,758,751 39,189,129 38,858,864
============ ============ ============ ============
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
<PAGE> 5
SURGICAL CARE AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $33,002,709 $26,755,193
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Cumulative Effect of Change in Accounting Principle 0 2,105,155
Depreciation and Amortization 12,639,940 12,506,181
Provisions for Losses on Accounts Receivable 2,381,398 2,079,421
Minority Interests in Earnings of Partnerships 19,216,667 15,144,364
Deferred Income Taxes 0 858,127
Changes in Assets and Liabilities
Net of Effect of Acquisitions:
Decrease (Increase) in Accounts Receivable 3,817,873 (168,868)
Decrease in Other Receivables 276,537 3,927,226
Increase in Supplies (13,974) (143.331)
Decrease (Increase) in Prepaid Expenses and Other
Current Assets 78,058 (524,308)
Increase in Other Assets (1,636,390) (259,219)
Increase in Excess of Cost over Fair Value of
Net Assets Acquired (2,128,031) (4,446,279)
(Decrease) Increase in Accounts Payable - Trade (1,561.001) 515,943
Decrease in Accrued Liabilities (7,830,821) (668,556)
Decrease in Accrued Loss on Disposal of Surgery Centers(4,887,797) 0
Increase in Income Taxes Payable 5,644,020 5,702,657
------------ ------------
Net Cash Provided by Operating Activities 58,999,188 63,383,706
Cash Flows From Investing Activities:
Decrease in Temporary Investments 0 31,108
Decrease in Marketable Securities 0 12,277,975
Capital Expenditures (13,181,880) (24,628,654)
Acquisitions less Cash Acquired of $450,000 in 1995,
$550,213 in 1994 (16,981,251) (16,568,406)
------------ ------------
Net Cash Used in Investing Activities (30,163,131) (28,887,977)
------------ ------------
Cash Flows From Financing Activities:
Net Borrowings Under Line-of-Credit Agreement 59,398,986 (4,302,662)
Payments on Long-Term Obligations (54,606,753) (5,402,249)
Proceeds From Long-Term Obligations 0 5,446,163
Proceeds From Issuance of Common Stock 961,775 1,327,141
Dividends on (Acquisition of) Common Stock for the
Treasury 63,535 (6,134,753)
Dividends Paid (5,514,138) (4,674,014)
Distributions to Minority Interests (20,990,773) (14,183,515)
Increase (Decrease) in Distributable to Minority
Interests 2,500,000 (261,219)
Decrease in Minority Interests (2,824,697) (3,044,298)
------------ ------------
Net Cash Used in Financing Activities (21,012,065) (31,299,406)
------------ ------------
Net Increase in Cash & Cash Equivalents 7,823,992 3,266,323
Cash & Cash Equivalents at Beginning of Period 31,222,963 23,877,186
------------ ------------
Cash & Cash Equivalents at End of Period $39,046,955 $27,143,509
------------ ------------
For purposes of the statements of cash flows, the Company considers
all certificates of deposits and highly liquid marketable securities with a
maturity of three months or less to be cash equivalents.
Cash & Cash Equivalents at End of Period $39,046,955 $27,143,509
Temporary Investments 0 5,254,675
------------ ------------
Cash and Temporary Investments $39,046,955 $32,398,184
============ ============
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
<PAGE> 6
SURGICAL CARE AFFILIATES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Financial Statements
The accompanying unaudited consolidated financial statements
have been prepared in accordance with Rule 10-01 of Regulation S-X,
"Interim Financial Statements," and do not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial
statements have been prepared in conformity with accounting
principles and practices (including consolidation practices)
reflected in the Company's Annual Report on Form 10-K for the year
ended December 31, 1994, and in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments),
necessary for a fair presentation of the Company's financial
position as of September 30, 1995, and results of its operations
and cash flows for the three months and nine months ended September
30, 1995 and 1994. The results of operations for the nine months
ended September 30, 1995 are not necessarily indicative of the
results that can be expected for the year ending December 31, 1995.
All significant intercompany balances and transactions have been
eliminated in the consolidated financial statements. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1994.
Note 2 - Reclassifications
Reclassifications of certain amounts in the 1994 consolidated
financial statements have been made to conform to the 1995
presentation of accounts.
Note 3 - Subsequent Event
On October 9, 1995, the Company entered into a definitive
agreement to be acquired by HEALTHSOUTH Corporation in a stock-for-
stock exchange. Under the terms of the merger agreement, each
share of the Company's stock will be exchanged for 1.22 shares of
HEALTHSOUTH. If HEALTHSOUTH's stock price during a 20 trading day
period ending 2 days prior to closing rises above $28 or declines
to below $22, the exchange ratio is subject to change. The
transaction will be accounted for as a pooling of interests and is
expected to be tax-free to the Company's shareholders. The merger
is subject to approval by both Company's shareholders and certain
regulatory authorities and is expected to close in early 1996.
<PAGE> 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ITS FINANCIAL
CONDITION AND RESULTS OF OPERATIONS:
Surgical Care Affiliates, Inc. operates 67 outpatient surgery centers. The
Company began the year with 65 centers; two were closed at the end of the
first quarter, and four were purchased on June 1, 1995.
Results of Operations - Third Quarter
Revenue for the third quarter increased 10% to $65.5 million. Earnings per
share increased 12% to $.29 compared to $.26 in 1994. In 1994, the Company
also reported a gain of $.03 from the sale of stock, so reported earnings for
the third quarter of 1994 were $.29.
Same center revenue increased 6% in the third quarter. The Company
experienced a 3% increase in same center case volume and a 3% increase in
pricing and intensity. These results are consistent with the results achieved
over the past five quarters. Same center revenue increased 16% in the first
quarter, largely due to the low surgical volume experienced in the first
quarter of 1994. The results in 1994 were affected by poor weather which
closed several centers. Same center revenue increased 7% in the third quarter.
The cost of providing healthcare services increased 17%. The increase is due
to the net addition of 4 new centers since the third quarter of 1994, as well
as the 6% increase in same center revenues.
Depreciation and amortization decreased due to the closing of centers in the
first quarter and the write-off of certain intangible assets in 1994.
General and administrative expenses declined during the quarter. In previous
quarters, the Company increased its corporate staff to manage its growth.
Interest and other expenses decreased in the third quarter primarily due to
the refinancing of the Company's debt which occurred in the second quarter of
1995.
Interest and other income declined from the third quarter of 1994 because in
1994 the Company recognized more gains from joint venturing and development
fees from the opening of new centers.
During the third quarter of 1994, the Company sold shares of stock in Medical
Care America for a gain of $1.7 million. All of this stock was sold in 1994.
Minority interest expense increased in the third quarter and the first nine
months of 1995 compared to the same periods in 1994. During 1994 and 1995, the
Company executed joint ventures with hospitals to jointly own its surgery
centers. As a result, the Company's share of profits from these centers is
lower, and the minority interest is higher.
During the third quarter, the Company recorded a benefit of $1.1 million as
an offset to operating costs. In 1994, the Company established a reserve of
this amount to provide for the closing of a center in Indianapolis. In the
third quarter of 1995, the Company entered into an agreement to joint venture
this center with a third party, and the center will now remain open. The
reserve was accordingly reversed and returned to income.
<PAGE> 8
Results of Operations - Nine Months
Revenue for the nine months ended September 30, 1995, increased 15% compared
to the same period in 1994. The increase is due to a 10% increase in same
center revenue and the contributions from new centers. Earnings per share
increased 18% during the nine months.
The cost of providing health care services increased 16%, or roughly in line
with the increase in revenue.
Interest and other expenses decreased from $6.0 million to $3.4 million
primarily due to charges of $2.2 million in 1994 to provide for the relocation
of surgery centers and to write assets held for sale down to their net
realizable value.
In the nine month period of 1994, the Company realized a gain of $6.9 million
from the sale of stock of Medical Care America. No gains were reported in 1995
since all of the stock was sold in 1994.
Balance Sheet
The Company's working capital increased from $25 million at December 31,
1994, to $42.5 million at September 30, 1995. The increase is due to an $8
million increase in cash and a decline in the amount of debt payable in the
next twelve months. The Company refinanced its debt in the second quarter,
and no principal payments are due for a five year period.
Accounts receivable decreased since December 31, 1994, due to seasonal
fluctuations. The Company's receivables typically rise before year end due
to the high volume of surgery in the fourth quarter.
Property and equipment increased from $149 million to $159 million during the
period. The increase is due to funds spent to renovate and expand existing
centers, to construct new centers, and to acquire centers.
Excess of cost over fair value of net assets acquired (goodwill) increased
by $15 million primarily due to the acquisition of four centers in 1995.
Long-term obligations increased due to funds required to purchase four
centers in June, 1995.
Liquidity and Capital Resources
The Company's current ratio was approximately 2.0 to 1 at September 30, 1995,
and its debt to equity ratio was .28 to 1. The ratios are consistent with
management's philosophy to maintain a strong balance sheet and financial
position. The Company is actively looking to grow through the development of
new surgery centers and the acquisition of existing centers. The Company
expects to acquiretwo surgery centers in the fourth quarter for approximately
$15 million. The Company will use its cash balances or draw on its line of
credit to fund these acquisitions.
As in previous periods, the principal source of the Company's cash is
generated from its operations. The Company believes that it has ready access
to third party resources (primarily banks) to finance its growth to the extent
that the growth requirements exceed cash generated from operations.
<PAGE> 9
SURGICAL CARE AFFILIATES, INC. AND SUBSIDIARIES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995
Part II. Other Information
Item 1. Legal Proceedings. - None.
Item 2. Changes in Securities. - None.
Item 3. Defaults Upon Senior Securities. - None.
Item 4. Submission of Matters to a Vote of Security Holders. - None
Item 5. Other Information. - None.
Item 6. Exhibits and Reports on Form 8-K. - None
<PAGE> 10
SIGNATURE
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.
SURGICAL CARE AFFILIATES, INC.
(Registrant)
/s/ Tarpley B. Jones
Tarpley B. Jones
Senior Vice President and Chief
Financial Officer (Principal Financial
and Duly Authorized Officer)
On behalf of Registrant
Date: November 1, 1995
<PAGE>11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SURGICAL CARE AFFILIATES FOR THE QUARTER ENDED SEPT.
30, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000722692
<NAME> SURGICAL CARE AFFILIATES, INC
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 39,046,955
<SECURITIES> 294,639
<RECEIVABLES> 35,307,146
<ALLOWANCES> 4,543,380
<INVENTORY> 5,159,252
<CURRENT-ASSETS> 86,388,654
<PP&E> 226,685,312
<DEPRECIATION> 68,184,276
<TOTAL-ASSETS> 371,421,991
<CURRENT-LIABILITIES> 43,822,361
<BONDS> 65,119,291
<COMMON> 9,866,573
0
0
<OTHER-SE> 225,414,589
<TOTAL-LIABILITY-AND-EQUITY> 371,421,991
<SALES> 196,258,237
<TOTAL-REVENUES> 196,258,237
<CGS> 115,023,485
<TOTAL-COSTS> 115,023,485
<OTHER-EXPENSES> 4,235,644
<LOSS-PROVISION> 2,381,398
<INTEREST-EXPENSE> 3,413,039
<INCOME-PRETAX> 54,399,487
<INCOME-TAX> 21,396,778
<INCOME-CONTINUING> 33,002,709
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,002,709
<EPS-PRIMARY> .84
<EPS-DILUTED> .84
</TABLE>
