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EX-21 - EX-21 - SYMBION INC/TNa09-36186_1ex21.htm
EX-32.1 - EX-32.1 - SYMBION INC/TNa09-36186_1ex32d1.htm
EX-32.2 - EX-32.2 - SYMBION INC/TNa09-36186_1ex32d2.htm
EX-31.1 - EX-31.1 - SYMBION INC/TNa09-36186_1ex31d1.htm
EX-31.2 - EX-31.2 - SYMBION INC/TNa09-36186_1ex31d2.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2009

 

Commission file number:  000-50574

 

Symbion, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

62-1625480

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

40 Burton Hills Boulevard, Suite 500

Nashville, Tennessee 37215

(Address of principal executive offices and zip code)

 

(615) 234-5900

(Registrant’s telephone number, including area code)

 

Securities Registered Pursuant to Section 12(b) of the Act:  None

 

Securities Registered Pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes 
o  No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes  
x  No  o

 

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  o  No  x

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o  No  o

 

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.  x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No  x

 

None of the registrant’s common stock is held by non-affiliates.

 

As of March 31, 2010, 1,000 shares of the registrant’s common stock were outstanding.

 

 

 



 

Cautionary Note Regarding Forward-Looking Statements

 

This Annual Report on Form 10-K contains forward-looking statements based on our current expectations, estimates and assumptions about future events.  All statements other than statements of current or historical fact contained in this report, including statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements.  The words “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” “will” and similar expressions are generally intended to identify forward-looking statements.

 

These forward-looking statements involve various risks and uncertainties, some of which are beyond our control.  Any or all of our forward-looking statements in this report may turn out to be wrong.  We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.  They can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties and assumptions, including the risks, uncertainties and assumptions described in Item 1A. “Risk Factors.”

 

In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.  When you consider these forward-looking statements, you should keep in mind these risk factors and other cautionary statements in this report.

 

Our forward-looking statements speak only as of the date made.  Other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

PART I

 

Item 1.    Business

 

Overview

 

We own and operate a national network of short stay surgical facilities in 26 states.  Our surgical facilities, which include ambulatory surgery centers and surgical hospitals, primarily provide non-emergency surgical procedures across many specialties, including, among others, orthopedics, pain management, gastroenterology and ophthalmology.  We own our surgical facilities in partnership with physicians and in some cases health care systems in the markets and communities we serve.  We apply a market-based approach in structuring our partnerships with individual market dynamics driving the structure.  We believe this approach aligns our interests with those of our partners.

 

As of December 31, 2009, we owned and operated 59 surgical facilities, including 55 ambulatory surgery centers and four surgical hospitals.  We also managed eight additional ambulatory surgery centers.  We owned a majority interest in 36 of the 59 surgical facilities and consolidated 52 facilities for financial reporting purposes.  We are reporting one of the 59 surgical facilities as discontinued operations.  In addition to our surgical facilities, we also manage two physician networks, including one physician network in a market in which we operate an ambulatory surgery center.

 

We have benefited from both the growth in overall outpatient surgery cases as well as the migration of surgical procedures from the hospital to the surgical facility setting.  Advancements in medical technology, such as lasers, arthroscopy and enhanced endoscopic techniques, have reduced the trauma of surgery and the amount of recovery time required by patients following a surgical procedure.  Improvements in anesthesia also have shortened the recovery time for many patients and have reduced post-operative side effects such as pain, nausea and drowsiness.  These medical advancements have enabled more patients to undergo surgery in a surgical facility setting.

 

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On September 16, 2002, we reincorporated in Delaware after originally incorporating in Tennessee in January 1996.  On August 23, 2007, we were acquired by Symbion Holdings Corporation (“Holdings”), which is owned by Crestview Partners, L.P. (“Crestview”) and certain affiliated funds managed by Crestview and co-investors, in a merger transaction (the “Merger”).  As a result of the Merger, we no longer have publically traded equity securities.

 

In this Annual Report on Form 10-K, for the purposes of presenting a comparison of our 2008 results to our 2007 results, we have presented our 2007 results as the sum of our operating results from the predecessor period prior to the Merger (January 1, 2007 through August 23, 2007) and our operating results from the successor period following the Merger (August 24, 2007 through December 31, 2007).  We believe this presentation provides the most meaningful comparative information about our operating results.  This approach is not consistent with generally accepted accounting principles (“GAAP”), and may yield results that are not strictly comparable on a period-to-period basis.

 

Industry Overview

 

The outpatient ambulatory surgery market in the United States is a $15.5 billion industry that is characterized both by meaningful growth and fragmented competition according to the Medicare Payment Advisory Commission.

 

Ambulatory surgical providers such as Symbion have benefited from both the growth in overall outpatient surgery cases as well as the migration of surgical procedures from the hospital to the ambulatory surgery center setting.  We believe this creates an attractive operating environment for well capitalized surgical providers with scale and a national presence.  In addition, with approximately 5,200 Medicare certified ambulatory surgery centers operating in the United States as of 2009 according to the Centers for Medicare and Medicaid Services (“CMS”), we believe significant opportunities exist for consolidation in this industry.

 

We believe the following factors have contributed to the growth in surgical procedures in the ambulatory surgery center setting:

 

·                  Physician and Patient Preference for Surgical Facilities.  Physicians often prefer to operate in surgical facilities, as compared to acute care hospitals, because of the efficiency and convenience surgical facilities afford.  Procedures performed at surgical facilities are typically non-emergency, allowing physicians to schedule their time more efficiently and increase the number of procedures performed in a given period.  Surgical facilities also provide physicians with more consistent nurse staffing and faster turnaround time between cases, as compared to acute care hospitals.  Together with an opportunity to own an equity interest in the surgical facility, these attributes meaningfully increase a physician’s productivity and income potential.  Importantly, we also believe patients often prefer surgical facilities because of the comfort of a less institutional setting, the more convenient process for scheduling and registration available in surgical facilities and in many instances, a more convenient location than acute care hospitals.  As patients increasingly have more input into the delivery of their health care, we believe this preference will be a driver of the growth in ambulatory surgery center utilization.

 

·                  Lower Cost Alternative.  Based upon our management’s experience in the health care industry, we believe that surgeries performed in surgical facilities are generally less expensive than those performed in acute care hospitals because of lower facility development costs, the focus on non-emergency procedures and more efficient staffing and work flow processes.  According to a study conducted for the Ambulatory Surgery Center Association, the cost to the payor of a surgical procedure in an ambulatory surgery center setting in 2007 was approximately 35.0% less than the cost to the payor of performing the same procedure in a hospital outpatient department setting.  We believe payors are attracted to the lower costs available at surgical facilities, as compared to acute care hospitals.

 

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·                  Advanced Technology and Improved Anesthesia.  Advancements in medical technology such as lasers, arthroscopy, fiber optics and enhanced endoscopic techniques have reduced the trauma of surgery and the amount of recovery time required by patients following a surgical procedure.  Improvements in anesthesia also have shortened the recovery time for many patients and have reduced certain post-operative side effects.  These medical advancements have enabled more patients to undergo surgery not requiring an overnight stay and reduced the need for hospitalization following surgery.

 

·                  Expansion in Medicare Reimbursed Procedures.  On October 30, 2009, CMS finalized a rule that added an additional 26 surgical procedures to Medicare’s list of approved ambulatory surgery center procedures and six procedures subject to the lesser of the non-facility practice expense payment or ASC payment rate for the calendar year 2010.  This will have the effect of further expanding the market opportunity with respect to the Medicare population, which is expected to grow significantly as a greater proportion of the population reaches Medicare eligible age.

 

Our Strategy

 

We intend to expand our network of surgical facilities in attractive markets throughout the United States by acquiring established facilities and developing new facilities while enhancing the performance of our existing facilities.  We also seek to provide patients with high-quality surgical services across many specialties.  When attractive opportunities arise, we may acquire or develop other types of facilities.  The key components of our strategy are to:

 

·                  Identify, recruit and retain leading surgeons and other physicians for our surgical facilities.  We believe that establishing and maintaining strong relationships with surgeons and other physicians is a key factor to our success in acquiring, developing and operating surgical facilities.  We identify and partner with surgeons and other physicians that we believe have established reputations for clinical excellence in their communities.  We believe that we have had success in recruiting and retaining physicians because of the ownership structure of our surgical facilities and our staffing, scheduling and clinical systems that are designed to increase physician productivity, promote physicians’ professional success and enhance the quality of patient care.  We also believe that forming relationships with health care systems and other health care providers can enhance our ability to recruit physicians.  We currently have strategic relationships with six health care systems.

 

·                  Capitalize on our experienced management team to pursue multiple growth opportunities in the surgical facility market.  We believe that the experience and capabilities of our senior management team provide a strategic advantage in improving the operations of our surgical facilities, attracting physicians and identifying new development and acquisition opportunities.  Our senior management team has an average of over 29 years of experience in the health care industry having held senior management positions at public and private health care companies.  Our management’s broad industry experience has allowed us to establish strong relationships with participants throughout the health care industry.  These relationships are helpful in forming leads for acquisitions and in making decisions about expanding into new markets and services.  The experience and capabilities of our management team also enable us to pursue multiple growth strategies in the surgical facility market, including acquisitions of established surgical facilities, de novo developments in attractive markets, strategic relationships with prominent hospitals and other health care providers and turnaround opportunities in connection with underperforming facilities.  We have successfully executed each of these growth strategies, and intend to pursue each of them in the future.

 

·                  Pursue a disciplined strategy of acquiring and developing surgical facilities.  Between January 1999 and December 31, 2009, we acquired 51 surgical facilities and developed 24 surgical facilities, including 16 surgical facilities that we subsequently divested.  We anticipate acquiring one to three facilities and developing one to three facilities annually.  We seek to acquire and develop surgical hospitals and both single and multi-specialty ambulatory surgery centers that meet our criteria.  Our criteria includes prominence and quality of physician partners, specialty mix, opportunities for growth, level of competition in the local market, level of managed care penetration and our ability to access managed care organization contracts.  Our acquisition and development team conducts extensive due diligence and applies a financial model that targets a threshold return on invested capital over a period

 

4



 

of five years.  Once we acquire a surgical facility, our team establishes a strategic plan to improve the facility’s operating systems and physical plant, enhance physician recruitment, and capitalize on the facility’s competitive strengths.  We have historically targeted majority ownership in our facilities.  Majority ownership allows us to make and execute managerial decisions, which we believe provides greater opportunity for growth and higher returns.  We also believe that by starting with majority ownership of a facility, we can benefit by capturing a greater share of the value we create in managing and improving the facility.  We intend to continue to target majority ownership in our facilities.  However, when attractive opportunities arise, we may acquire minority interests in developed surgical facilities or surgical facilities that we may purchase.  In addition, we have, and will continue to acquire and develop facilities in which we have “buy-up” rights if the opportunity is attractive to us from a long-term perspective.  Buy-up rights enable us, at our option, to increase our ownership percentage after the initial acquisition.  When appropriate, we also may reduce our interest in majority owned surgical facilities.

 

·                  Increase revenues and profitability of existing surgical facilities through operational focus.  We seek to increase revenues, profitability and return on our invested capital at all of our surgical facilities by focusing on operations.  We have a dedicated team that is responsible for implementing best practices, cost controls and overall efficiencies at each of our surgical facilities.  Our facilities benefit from our network of facilities by sharing best practices and participating in group purchasing agreements designed to reduce the cost of supplies and equipment.  We intend to continue to recruit additional physicians and expand the range of services offered at our surgical facilities to increase the number and types of surgeries performed in our facilities, including a focus on higher acuity cases.  We also review our managed care contracts to ensure we are operating under the most favorable contracts available to us.  We are committed to enhancing programs and services for our physicians and patients by providing advanced technology, quality care, cost-effective service and convenience.

 

Operations

 

Surgical Facility Operations

 

As of December 31, 2009, we owned (with physician investors or healthcare systems) and operated 59 surgical facilities and managed eight additional surgical facilities.  Four of our surgical facilities are licensed as hospitals.  Our typical ambulatory surgery center is a freestanding facility with about 14,000 square feet of space and four fully equipped operating rooms, two treatment rooms and ancillary areas for preparation, recovery, reception and administration.

 

Our typical surgical hospital is larger than a typical ambulatory surgery center and includes inpatient hospital rooms and, in some cases, an emergency department.  Our surgical facilities primarily provide non-emergency surgical procedures across many specialties, including among others, orthopedics, gynecology, general surgery, ear, nose and throat, pain management, gastroenterology, plastic surgery and ophthalmology.  Our hospitals may also provide additional services such as diagnostic imaging, pharmacy, laboratory and obstetrical services.  In certain markets where we believe it is appropriate, we operate surgical facilities that focus on a single specialty.

 

Our surgical facilities are generally located in close proximity to physicians’ offices.  Each surgical facility typically employs a staff of about 30, depending on its size, the number of cases and the type of services provided.  Our staff at each surgical facility generally includes a facility administrator, a business manager, a medical director, registered nurses, operating room technicians and clerical workers.  At each of our surgical facilities, we have arrangements with anesthesiologists to provide anesthesiology services.  We also provide each of our surgical facilities with a full range of financial, marketing and operating services.  For example, our regional managed care directors assist the local management team at each of our surgical facilities in developing relationships with managed care providers and negotiating managed care contracts.

 

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The majority of our surgical facilities are Medicare certified.  To ensure that a high level of care is provided, we implement quality assurance procedures at each of our surgical facilities.  In addition, a majority of our surgical facilities are also independently accredited by either the Joint Commission or the Accreditation Association for Ambulatory Health Care.  Each of our surgical facilities is available for use only by licensed physicians who have met professional credentialing requirements established by the facility’s medical advisory committee.  In addition, each surgical facility’s medical director supervises and is responsible for the quality of medical care provided at the surgical facility.

 

Surgical Facility Ownership Structure

 

We own and operate our surgical facilities through partnerships or limited liability companies.  Local physicians or physician groups also own interests in most of our surgical facilities.  In some cases, a hospital system may own an interest in our surgical facility.  One of our wholly owned subsidiaries typically serves as the general partner or managing member of our surgical facilities.  We seek to own a majority interest in our surgical facilities, or otherwise have sufficient control over the facilities to be able to consolidate the financial results of operations of the facilities with ours.  In some instances, we will acquire ownership in a surgical facility with the prior owners retaining ownership, and, in some cases, we offer new ownership to other physicians or hospital partners.  We hold majority ownership in 36 of the 59 surgical facilities in which we own an interest.  We typically guarantee all of the debts of these partnerships and limited liability companies, even though we do not own all of the interests in the surgical facilities.  We also provide intercompany debt, which usually is secured by a pledge of assets of the partnership or limited liability company.  We also have a management agreement with each of the surgical facilities, under which we provide day-to-day management services for a management fee, which is typically equal to 4% to 6% of the revenues of the facility.

 

Each of the partnerships and limited liability companies through which we own and operate our surgical facilities is governed by a partnership or operating agreement.  These partnership and operating agreements typically provide, among other things, for voting rights and limited transfer of ownership.  The partnership and operating agreements also provide for the distribution of available cash to the owners.  In addition, the agreements typically restrict the physician owners from owning an interest in a competing surgical facility during the period in which the physician owns an interest in our surgical facility and for one year after that period.  The partnership and operating agreements for our surgical facilities typically provide that the facilities will purchase all of the physicians’ ownership if certain adverse regulatory events occur, such as it becoming illegal for the physicians to own an interest in a surgical facility, refer patients to a surgical facility or receive cash distributions from a surgical facility.  The purchase price that we would be required to pay for the ownership is based on pre-determined formulas, typically either a multiple of the surgical facility’s EBITDA, as defined in our partnership and operating agreements, or the fair market value of the ownership as determined by an independent third-party appraisal.  Some of these agreements require us to make a good faith effort to restructure our relationships with the physician investors in a manner that preserves the economic terms of the relationship prior to purchasing these interests.  See “Item 1A. Risk Factors” and “—Governmental Regulation.” In certain circumstances, we have the right to purchase a physician’s ownership, including upon a physician’s breach of the restriction on ownership provisions of a partnership or operating agreement.  In some cases, we have the right to require the physician owners to purchase our ownership in the event our management agreement with a surgical facility is terminated.  In one surgical facility, the physician owners have the right to purchase our ownership upon a change in our control.

 

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Surgical Facilities

 

The following table sets forth information regarding each of our surgical facilities as of December 31, 2009:

 

Surgical Facility

 

City

 

Number of
Operating
Rooms

 

Number of
Treatment
Rooms

 

Symbion
Percentage
Ownership

 

Alabama

 

 

 

 

 

 

 

 

 

Birmingham Surgery Center

 

Birmingham

 

6

 

2

 

59

%(1)

California

 

 

 

 

 

 

 

 

 

Specialty Surgical Center of Beverly Hills / Brighton Way

 

Beverly Hills

 

3

 

1

 

60

%(1)

Specialty Surgical Center of Beverly Hills / Wilshire Boulevard

 

Beverly Hills

 

4

 

2

 

61

%(1)

Specialty Surgical Center of Encino

 

Encino

 

4

 

2

 

61

%(1)

Specialty Surgical Center of Irvine

 

Irvine

 

5

 

1

 

51

%(1)

Specialty Surgical Center of Arcadia

 

Arcadia

 

3

 

1

 

22

%

Specialty Surgical Center of Westlake Village

 

Westlake Village

 

4

 

2

 

19

%

Colorado

 

 

 

 

 

 

 

 

 

Minimally Invasive Spine Institute

 

Boulder

 

2

 

1

 

44

%(1)

Animas Surgical Hospital(2)

 

Durango

 

4

 

1

 

56

%(1)

Florida

 

 

 

 

 

12 hospital rooms

 

 

 

West Bay Surgery Center

 

Largo

 

4

 

4

 

51

%(1)

Jacksonville Beach Surgery Center

 

Jacksonville

 

4

 

1

 

81

%(1)

Cape Coral Ambulatory Surgery Center

 

Cape Coral

 

5

 

6

 

65

%(1)

Lee Island Coast Surgery Center

 

Fort Myers

 

5

 

3

 

50

%(1)

Orlando Surgery Center

 

Orlando

 

5

 

2

 

66

%(1)

Tampa Bay Regional Surgery Center

 

Largo

 

1

 

2

 

51

%(1)

The Surgery Center of Ocala

 

Ocala

 

4

 

2

 

51

%(1)

Blue Springs Surgery Center

 

Orange City

 

3

 

2

 

29

%(1)

Georgia

 

 

 

 

 

 

 

 

 

Premier Surgery Center

 

Brunswick

 

3

 

 

58

%(1)

The Surgery Center

 

Columbus

 

4

 

2

 

63

%(1)

Hawaii

 

 

 

 

 

 

 

 

 

Honolulu Spine Center

 

Honolulu

 

2

 

 

50

%(1)

Illinois

 

 

 

 

 

 

 

 

 

Valley Ambulatory Surgery Center

 

St. Charles

 

6

 

1

 

40

%(1)

Indiana

 

 

 

 

 

 

 

 

 

Vincennes Surgery Center

 

Vincennes

 

3

 

1

 

52

%(1)

New Albany Outpatient Surgery

 

New Albany

 

3

 

1

 

79

%(1)

Kansas

 

 

 

 

 

 

 

 

 

Cypress Surgery Center

 

Wichita

 

6

 

5

 

54

%(1)

Kentucky

 

 

 

 

 

 

 

 

 

DuPont Surgery Center

 

Louisville

 

5

 

 

63

%(1)

Louisiana

 

 

 

 

 

 

 

 

 

Greater New Orleans Surgery Center

 

Metairie

 

2

 

 

30

%(1)

Physicians Medical Center(2)

 

Houma

 

5

 

3

 

53

%(1)

 

 

 

 

 

 

30 hospital rooms

 

 

 

St. Luke’s Surgery Center

 

Hammond

 

4

 

2

 

73

%(1)

Massachusetts

 

 

 

 

 

 

 

 

 

Worcester Surgery Center

 

Worcester

 

4

 

1

 

58

%(1)

Worcester ENT

 

Worcester

 

1

 

 

51

%(1)

Michigan

 

 

 

 

 

 

 

 

 

Novi Surgery Center

 

Novi

 

4

 

3

 

14

%

Missouri

 

 

 

 

 

 

 

 

 

Central Missouri Medical Park Surgical Center

 

Jefferson City

 

4

 

2

 

40

%(1)

Timberlake Surgery Center

 

Chesterfield

 

4

 

1

 

56

%(1)

St. Louis Spine and Orthopedic

 

Chesterfield

 

3

 

1

 

13

%

 

7



 

Surgical Facility

 

City

 

Number of
Operating
Rooms

 

Number of
Treatment
Rooms

 

Symbion
Percentage
Ownership

 

Mississippi

 

 

 

 

 

 

 

 

 

DeSoto Surgery Center

 

DeSoto

 

2

 

1

 

(3)

Physicians Outpatient Center

 

Oxford

 

4

 

2

 

(3)

New York

 

 

 

 

 

 

 

 

 

South Shore Ambulatory Surgery Center

 

Lynbrook

 

4

 

1

 

65

%(4)(1)

North Carolina

 

 

 

 

 

 

 

 

 

Orthopaedic Surgery Center of Asheville

 

Asheville

 

3

 

 

56

%(1)

Wilmington SurgCare

 

Wilmington

 

7

 

3

 

75

%(1)

Ohio

 

 

 

 

 

 

 

 

 

Physicians Ambulatory Surgery Center

 

Circleville

 

2

 

 

56

%(1)

Valley Surgical Center

 

Steubenville

 

3

 

1

 

56

%(1)

Oklahoma

 

 

 

 

 

 

 

 

 

Lakeside Women’s Hospital(2)

 

Oklahoma City

 

3

 

3

 

43

%

 

 

 

 

 

 

23 hospital rooms

 

 

 

Oregon

 

 

 

 

 

 

 

 

 

Gresham Station Surgery Center

 

Gresham

 

5

 

1

 

29

%

Pennsylvania

 

 

 

 

 

 

 

 

 

Village SurgiCenter

 

Erie

 

5

 

1

 

72

%(1)

Surgery Center of Pennsylvania

 

Havertown

 

5

 

1

 

49

%(1)

Rhode Island

 

 

 

 

 

 

 

 

 

Bayside Endoscopy Center

 

Providence

 

 

6

 

75

%(1)

East Greenwich Endoscopy Center

 

East Greenwich

 

4

 

2

 

45

%(1)

East Bay Endoscopy Center

 

Portsmouth

 

1

 

 

75

%(1)

South Carolina

 

 

 

 

 

 

 

 

 

The Center for Specialty Surgery

 

Greenville

 

2

 

 

78

%(1)

Tennessee

 

 

 

 

 

 

 

 

 

Baptist Germantown Surgery Center

 

Memphis

 

6

 

1

 

(3)

Cool Springs Surgery Center

 

Franklin

 

5

 

1

 

36

%

East Memphis Surgery Center

 

Memphis

 

6

 

2

 

(3)

Midtown Surgery Center

 

Memphis

 

4

 

 

(3)

Southwind GI

 

Memphis

 

2

 

 

100

%(1)

Union City Surgery Center

 

Union City

 

3

 

1

 

(3)

UroCenter

 

Memphis

 

3

 

 

(3)

Premier Orthopaedic Surgery Center

 

Nashville

 

2

 

 

20

%

Renaissance Surgery Center

 

Bristol

 

2

 

1

 

37

%(1)

Texas

 

 

 

 

 

 

 

 

 

Surgical Hospital of Austin(2)

 

Austin

 

6

 

1

 

47

%(1)

 

 

 

 

 

 

26 hospital rooms

 

 

 

Central Park Surgery Center

 

Austin

 

6

 

1

 

44

%(1)

Clear Fork Surgery Center

 

Fort Worth

 

4

 

1

 

34

%(1)

Village Specialty Surgical Center

 

San Antonio

 

4

 

4

 

57

%(1)

NorthStar Surgical Center

 

Lubbock

 

6

 

3

 

45

%(1)

Surgery Center of Duncanville

 

Duncanville

 

4

 

1

 

37

%(1)

Texarkana Surgery Center

 

Texarkana

 

4

 

3

 

62

%(1)

Washington

 

 

 

 

 

 

 

 

 

Bellingham Surgery Center

 

Bellingham

 

4

 

 

85

%(1)

Microsurgical Spine Center

 

Puyallup

 

1

 

1

 

50

%(1)

 


(1)          We consolidate this surgical facility for financial reporting purposes.

(2)          This surgical facility is licensed as a hospital.

(3)          We manage this surgical facility, but do not have ownership in the facility.

(4)          Due to regulatory restrictions in the State of New York, we cannot directly hold ownership in the surgical facility.  We hold 65% ownership in the limited liability company which provides administrative services to this surgical facility and consolidate the facility for financial reporting purposes.  Additionally, we manage this facility.

 

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Strategic Relationships

 

When attractive opportunities arise, we may develop, acquire or operate surgical facilities through strategic alliances with health care systems and other health care providers.  We believe that forming a relationship with a health care system can enhance our ability to attract physicians and access managed care contracts for our surgical facilities in that market.  We currently have strategic relationships with:

 

·                  Vanderbilt Health Services, Inc., with which we own and operate a surgical facility in Franklin, Tennessee;

·                  Vanguard Health Systems, Inc., with which we own and operate a surgical facility in San Antonio, Texas;

·                  Baptist Memorial Health Services, Inc. (“Baptist Memorial”), for which we manage seven surgical facilities in Memphis, Tennessee and surrounding areas;

·                  Harris Methodist Ft. Worth, with which we own and operate a surgical facility in Fort Worth, Texas; and

·                  Adventist Health System, with which we own and operate a surgical facility in Orange City, Florida.

 

The strategic relationships through which we own and operate surgical facilities are governed by partnership and operating agreements that are generally comparable to the partnership and operating agreements of the other surgical facilities in which we own an interest.  The primary difference between the structure of these strategic relationships and the other surgical facilities in which we hold ownership is that, in these strategic relationships, a health care system holds ownership in the surgical facility, in addition to physician investors.  For a general description of the terms of our partnership and operating agreements, see “—Operations—Surgical Facility Ownership Structure.” In each of these strategic relationships, we also have entered into a management agreement under which we provide day-to-day management services for a management fee equal to 4% to 6% of the revenues of the surgical facility.  The terms of those management agreements are comparable to the terms of our management agreements with other surgical facilities in which we own an interest.

 

We manage seven surgical facilities owned by Baptist Memorial under management agreements with Baptist Memorial in exchange for a management fee based on a percentage of the revenues of these surgical facilities.  The management agreements terminate in 2014 and may be terminated earlier by either party for material breach after notice and an opportunity to cure.

 

Acquisition and Development of Surgical Facilities

 

During 2009, our significant acquisitions were as follows:

 

·                  Acquired incremental ownership in our Westlake Village, California facility.

·                  Acquired ownership in a surgical hospital in Austin, Texas which we consolidate for financial reporting purposes.

·                  Acquired ownership in a surgical facility located in Gresham, Oregon which we account for under the equity method.

 

We continuously evaluate opportunities to expand our presence in the surgical facility market by making strategic acquisitions of existing surgical facilities and by developing new surgical facilities in cooperation with local physician partners and, when appropriate, with hospital systems and other strategic partners.  We have the flexibility to structure our partnerships as two-way arrangements where either we are a majority owner partnered with physicians or we are a minority owner with buy-up rights.  These buy-up rights give us the option to own a controlling interest at some point in the future.  Alternatively, we may choose to pursue a three-way arrangement with physicians and a health care system partner.

 

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Acquisition Program

 

We employ a dedicated acquisition team with experience in health care services.  Our team seeks to acquire surgical facilities that meet our criteria, including prominence and quality of physician partners, specialty mix, opportunities for growth, level of competition in the local market, level of managed care penetration and our ability to access managed care organization contracts.  Our team utilizes its extensive industry contacts, as well as referrals from current physician partners and other sources, to identify, contact and develop potential acquisition candidates.

 

We believe there are numerous acquisition opportunities that would pass our general screening criteria.  We carefully evaluate each of our acquisition opportunities through an extensive due diligence process to determine which facilities have the greatest potential for growth and profitability improvements under our operating structure.  In many cases, the acquisition team identifies specific opportunities to enhance a facility’s productivity post-acquisition.  For example, we may renovate or construct additional operating or treatment rooms in existing facilities to meet anticipated demand for procedures based on an analysis of local market characteristics.  Our team may also identify opportunities to attract additional physicians to increase the acquired facility’s revenues and profitability.  We have acquired 51 surgical facilities since January 1999 and anticipate acquiring about one to three surgical facilities annually during the next two to three years.

 

Development Program

 

We develop surgical facilities in markets in which we identify substantial interest by physicians and payors.  We have experience in developing both single and multi-specialty surgical facilities.  When we develop a new surgical facility, we generally provide all of the services necessary to complete the project.  We offer in-house capabilities for structuring partnerships and financing facilities and work with architects and construction firms in the design and development of surgical facilities.  Before and during the development phase of a new surgical facility, we analyze the competitive environment in the local market, review market data to identify appropriate services to provide, prepare and analyze financial forecasts, evaluate regulatory and licensing issues and assist in designing the surgical facility and identifying appropriate equipment to purchase or lease.  After the surgical facility is developed, we generally provide startup operational support, including information systems, equipment procurement and financing.  We have developed 24 surgical facilities since January 1999 and anticipate acquiring about one to three surgical facilities annually during the next two to three years.

 

Development of a typical ambulatory surgery center generally occurs over a 12 to 18 month period, depending on whether the facility is being constructed or available space improved.  Total development costs typically amount to $4.0 to $6.0 million.  Development costs include estimated costs of $1.5 million to $2.0 million typically for improving existing space and equipment plus other furnishing costs of $1.5 million to $2.5 million and working capital of approximately $1.0 million to $1.5 million that is generally required to sustain operations for the initial six to 12 months of operations.  Development of a hospital with the same operating capacity as a typical ambulatory surgery center would require additional capital to build and equip additional features, such as inpatient hospital rooms, and to provide other ancillary services, if required.  We typically fund about 80% of the development costs of a new surgical facility with a combination of corporate borrowings and cash from operations, and the remainder with equity contributed by us and the other owners of the facility.  For our consolidated surgical facilities, the indebtedness typically consists of intercompany loans that we provide, and for our non-consolidated surgical facilities, of third-party debt for which we provide a guarantee for only our pro rata share.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Other Services

 

Although our business is primarily focused on owning and operating surgical facilities, we also provide other services that complement our core surgical facility business.  Throughout 2009, we managed two physician practices in Memphis and Johnson City, Tennessee.  Each of these physician practices has entered into an agreement with us, which provides, among other things, that we will provide billing, financial services and other business management services in exchange for a management fee.  Our agreement with the physician practice in Johnson City, Tennessee expired January 1, 2010.

 

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Information Systems and Controls

 

Each of our surgical facilities uses a financial reporting system that provides information to our corporate office to track financial performance on a timely basis.  In addition, each of our surgical facilities uses an operating system to manage its business that provides critical support in areas such as scheduling, billing and collection, accounts receivable management, purchasing and other essential operational functions.  We have implemented systems to support all of our surgical facilities and to enable us to more easily access information about our surgical facilities on a timely basis.

 

We calculate net revenues through a combination of manual and system-generated processes.  Our operating systems include insurance modules that allow us to establish profiles of insurance plans and their respective payment rates.  The systems then match the charges with the insurance plan rates and compute a contractual adjustment estimate for each patient account.  We then manually review the reasonableness of the systems’ contractual adjustment estimate using the insurance profiles.  This estimate is adjusted, if needed, when the insurance payment is received and posted to the account.  Net revenues are computed and reported by the systems as a result of this activity.

 

It is our policy to collect co-payments and deductibles prior to providing services.  It is also our policy to verify a patient’s insurance 72 hours prior to the patient’s procedure.  Because our services are primarily non-emergency, our surgical facilities have the ability to control these processes.  We do not track exceptions to these policies, but we believe that they occur infrequently and involve insignificant amounts.  When exceptions do occur, we require patients whose insurance coverage is not verified to assume full responsibility for the fees prior to services being rendered, and we seek prompt payment of co-payments and deductibles and verification of insurance following the procedure.

 

We manually input each patient’s account record and the associated billing codes.  Our operating systems then calculate the amount of fees for that patient and the amount of the contractual adjustments.  Claims are submitted electronically if the payor accepts electronic claims.  We use clearinghouses for electronic claims, which then forward the claims to the respective payors.  Payments are manually input to the respective patient accounts.

 

We have developed proprietary measurement tools to track key operating statistics at each of our surgical facilities by integrating data from our local operating systems and our financial reporting systems.  Management uses these tools to measure operating results against target thresholds and to identify, monitor and adjust areas such as specialty mix, staffing, operating costs, employee expenses and accounts receivable management.  Our corporate and facility-level management teams are compensated in part using performance-based incentives focused on revenue growth and improving operating income.

 

Marketing

 

We primarily direct our sales and marketing efforts at physicians who would use our surgical facilities.  Marketing activities directed at physicians and other health care providers are coordinated locally by the individual surgical facility and are supplemented by dedicated corporate personnel.  These activities generally emphasize the benefits offered by our surgical facilities compared to other facilities in the market, such as the proximity of our surgical facilities to physicians’ offices, the ability to schedule consecutive cases without preemption by inpatient or emergency procedures, the efficient turnaround time between cases, our advanced surgical equipment and our simplified administrative procedures.  Although the facility administrator is the primary point of contact, physicians who utilize our surgical facilities are important sources of recommendations to other physicians regarding the benefits of using our surgical facilities.  Each facility administrator develops a target list of physicians and we continually review these marketing lists and the facility administrator’s progress in contacting and successfully attracting additional local physicians.

 

We also market our surgical facilities directly to payors, such as health maintenance organizations, or HMOs, preferred provider organizations, or PPOs, and other managed care organizations and employers.  Payor marketing activities conducted by our corporate office management and facility administrators emphasize the high quality of care, cost advantages and convenience of our surgical facilities, and are focused on making each surgical facility an approved provider under local managed care plans.

 

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Competition

 

In each market in which we operate a surgical facility, we compete with hospitals and operators of other surgical facilities to attract physicians and patients.  We believe that the competitive factors that affect our surgical facilities’ ability to compete for physicians are convenience of location of the surgical facilities, access to capital and participation in managed care programs.  In addition, we believe the national prominence, scale and reputation of our company are instrumental in attracting physicians.  We believe that our surgical facilities attract patients based upon our quality of care, the specialties and reputations of the physicians who operate in our surgical facilities, participation in managed care programs, ease of access and convenient scheduling and registration procedures.

 

In developing or acquiring existing surgical facilities, we compete with other public and private surgical facility and hospital companies.  Several large national companies own and/or manage surgical facilities, including HCA Inc., Surgical Care Affiliates, Inc., AmSurg Corp. and United Surgical Partners International, Inc.  We also face competition from local hospitals, physician groups and other providers who may compete with us in the ownership and operation of surgical facilities, as well as the recent trend of physicians choosing to perform procedures in an office-based setting rather than in a surgical facility.

 

Employees

 

At December 31, 2009, we had approximately 3,100 employees, of which about 1,900 were full-time employees.  None of our employees are represented by a collective bargaining agreement.  We believe that we have a good relationship with our employees.

 

Environmental

 

We are subject to various federal, state and local laws and regulations relating to the protection of the environment and human health and safety, including those governing the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites and the maintenance of a safe workplace.  Our operations include the use, generation and disposal of hazardous materials.  We may, in the future, incur liability under environmental statutes and regulations with respect to contamination of sites we own or operate (including contamination caused by prior owners or operators of such sites, adjoining properties or other persons) and the off-site disposal of hazardous substances.  We believe that we have been and are in substantial compliance with the terms of all applicable environmental laws and regulations and that we have no liabilities under environmental requirements that we would expect to have a material adverse effect on our business, results of operations or financial condition.

 

Insurance

 

We maintain liability insurance in amounts that we believe are appropriate for our operations.  Currently, we maintain professional and general liability insurance that provides coverage on a claims-made basis of $1.0 million per occurrence and $3.0 million in annual aggregate coverage per surgical facility, including the facility and employed staff.  We also maintain business interruption insurance and property damage insurance, as well as an additional umbrella liability insurance policy in the aggregate amount of $20.0 million.  Coverage under certain of these policies is contingent upon the policy being in effect when a claim is made regardless of when the events which caused the claim occurred.  The cost and availability of such coverage has varied widely in recent years.  In addition, physicians who provide professional services in our surgical facilities are required to maintain separate malpractice coverage with similar minimum coverage limits.  While we believe that our insurance policies are adequate in amount and coverage for our anticipated operations, we cannot assure you that the insurance coverage is sufficient to cover all future claims or will continue to be available in adequate amounts or at a reasonable cost.

 

Reimbursement

 

We are dependent upon private and government third-party sources of payment for the services we provide.  The amounts that our surgical facilities and networks receive in payment for their services may be adversely affected by market and cost factors as well as other factors over which we have no control, including Medicare, Medicaid, and state regulations and the cost containment and utilization decisions and reduced reimbursement schedules of third-party payors.

 

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Health Care Reform

 

Health care reform has become the subject of much national attention and debate.  The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law by President Obama on March 23, 2010 and March 30, 2010, respectively, dramatically altering the U.S. health care system.  The Acts are intended to provide coverage and access to substantially all Americans, to increase the quality of care provided, and to reduce the rate of growth in healthcare expenditures.  The changes include, among other things, reducing payments to Medicare Advantage plans, expanding the Medicare program’s use of value-based purchasing programs, tying hospital payments to the satisfaction of certain quality criteria, bundling payments to hospitals and other providers, reducing Medicare and Medicaid payments, including disproportionate share payments, expanding Medicare and Medicaid eligibility, and expanding access to health insurance.  As part of the effort to control or reduce health care spending, the Acts will place a number of significant requirements and limitations on the Stark Law exception that allows physicians to have ownership interests in hospitals (the “Whole Hospital Exception”).  Among other things, the Acts prohibit hospitals from increasing the percentages of the total value of the ownership interests held in the hospital by physicians after March 23, 2010, as well as place severe restrictions on the ability of a hospital subject to the Whole Hospital Exception to add operating rooms, procedure rooms and beds.  The Acts could have an adverse effect on our financial condition and results of operations.

 

Medicare—Ambulatory Surgery Centers

 

Payments under the Medicare program to ambulatory surgery centers are made under a system whereby the Secretary of the Department of Health and Human Services (the “Secretary”) determines payment amounts prospectively for various categories of medical services performed in ambulatory surgery centers, subject to an inflation adjustment.  The payments are not based on a center’s costs or reasonable charges.  The various state Medicaid programs also pay us a fixed payment for our services, which amount varies from state to state.  About 21% and 23% of our patient service revenues during 2008 and 2009, respectively, were attributable to Medicare and Medicaid payments.

 

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “MMA”) limited increases in Medicare reimbursement rates for ambulatory surgery centers.  In addition, the MMA directed CMS to develop a new ambulatory surgery center payment system taking into account findings in a Congressionally mandated Government Accountability Office (“GAO”) study that would assess the appropriateness of basing the new ambulatory surgery center system on Medicare’s hospital outpatient department payment system.

 

A July 16, 2007 final rule implemented changes to the ambulatory surgery center payment system that were required under the MMA.  Effective January 1, 2008, ambulatory surgery center payment rates are now based on the ambulatory payment classifications (“APCs”) that are used to categorize procedures under the hospital outpatient prospective payment system.  Under the final rule, the ambulatory surgery center payment rate conversion factor will be updated by the rate of increase in the consumer price index for urban consumers beginning in 2010.

 

On October 30, 2009, CMS issued a final rule to update the Medicare program’s payment policies and rates for ASCs for 2010.  Among other things, the rule increases the ASC payment rate by 1.2%.  As a result of the change, ASC payment rates will be approximately 58% of the applicable hospital outpatient department rate.  The rule also adds 26 surgical procedures to the list of procedures for which Medicare will pay when performed in an ASC setting and six procedures to the list of procedures that are subject to the lesser of the non-facility practice expense payment or the ASC payment rate cap for the calendar year 2010.

 

While difficult to predict, the ultimate impact of the changes in reimbursement on our centers’ performance will depend upon a number of different factors, including, but not limited to, (i) the annual payment rates, which are subject to annual recalculation, and (ii) each center’s case mix and ability to realize increased volume as the list of approved ambulatory surgery center procedures is expanded.  If the annual payment recalculations result in a further decrease in ambulatory surgery center payment rates for procedures performed in our centers, our revenues and

 

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profitability could be materially adversely affected.  In addition, legislation has and likely will continue to be introduced in Congress to further adjust the ambulatory surgery center payment system and refine Medicare’s reimbursement policies.  We cannot predict the potential scope and impact of any future legislative or regulatory changes.

 

Medicare—Hospital Inpatient Services

 

Four of our surgical facilities are licensed as hospitals.  The Medicare program pays hospitals on a prospective payment system for acute inpatient services.  Under this prospective payment system, a hospital receives a fixed amount for inpatient hospital services based on each patient’s final assigned diagnosis related group (“DRG”).  These payments do not consider a specific hospital’s costs, but are national rates adjusted for area wage differentials and case-mix index.  For several years, the percentage increases to the prospective payment rates generally have been lower than the percentage increases in the costs of goods and services for hospitals.  On August 2, 2007, CMS issued a final rule that, beginning in fiscal year 2008, replaced the hospital Inpatient Prospective Payment System’s (“IPPS’s”) existing 538 DRGs with 745 Medicare Severity DRGs that were intended to better recognize each patient’s severity of illness.  The new Medicare Severity DRGs are expected to increase payments to hospitals that treat more severely ill and costlier patients and decrease payments to hospitals that generally treat less severely ill persons.  On July 31, 2008, CMS released the final 2009 IPPS rule.  In addition to providing for a 3.6% increase in reimbursement rates, the final rule revised the requirements relating to disclosure to patients of physician ownership and investment interests in hospitals and contained other revisions to the physician self-referral requirements with which the hospitals must comply.

 

On July 31, 2009, CMS issued the IPPS final rule for federal fiscal year 2010, beginning on October 1, 2009.  Among other things, the final rule provides for a market basket increase of 2.1% for hospitals that successfully report the 2010 quality measures included in the Reporting Hospital Quality Date for Annual Payment Update program and 0.1% for hospitals that do not.  CMS anticipates that, when combined with the various other adjustments, Medicare payments to hospitals for inpatient services will increase by 1.6% in federal fiscal year 2010.  In its proposed IPPS rule for federal fiscal year 2010, CMS had proposed to reduce inpatient payments to hospitals by 1.9% to account for the increase in Medicare spending attributable to the implementation of the MS-DRG system.  However, in the final rule, CMS stated that it would not impose any further reductions until all of the claims information for federal fiscal year 2009 was available.  CMS will consider phasing in future adjustments over an extended period of time beginning in federal fiscal year 2011 once the claims data for federal fiscal years 2008 and 2009 have been fully analyzed.

 

Medicare-Hospital Outpatient Services

 

Most outpatient services provided by hospitals are reimbursed by Medicare under the outpatient prospective payment system (“OPPS”).  Under the OPPS, hospital outpatient services are classified into groups called ambulatory payment classifications (“APCs”).  CMS establishes a payment rate for each APC, and, depending on the services provided, a hospital may be paid for more than one APC for each patient encounter.  On October 30, 2009, CMS issued a final rule to update payment rates and policies for calendar year 2010.  In addition to adding additional procedures pursuant to the rule, hospital outpatient department payments would receive a market basket increase of 2.1%.  CMS will reduce the update by 2.0% for hospitals that did not participate in quality data reporting for outpatient services or did not report the quality data successfully, resulting in a 0.1% update for those hospitals.  When combined with other adjustments, CMS projects that overall payments to hospitals under the OPPS in 2010 will increase by 1.9%.

 

Private Third-Party Payors

 

In addition to paying professional fees directly to the physicians performing medical services, most private third-party payors also pay a facility fee to ambulatory surgery centers for the use of the centers’ surgical facilities and reimburse hospitals for the charges associated with the facilities and services that are provided by the hospitals to the third-party payors’ beneficiaries.  Most third-party payors pay pursuant to a written contract with our surgical facilities.  These contracts generally require our hospitals and ambulatory surgery centers to offer discounts from their established charges.

 

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Some of our payments come from third-party payors with which our surgical facilities do not have written contracts.  In those situations, commonly known as “out-of-network” services, we generally charge the patients the same co-payment or other patient responsibility amounts that we would have charged had our center had a contract with the third-party payor.  We also submit a claim for the services to the third-party payor along with full disclosure that our surgical facility has charged the patient an in-network patient responsibility amount.  Historically, those third-party payors who do not have contracts with our surgical facilities have typically paid our claims at higher than comparable contracted rates.  However, there is a growing trend for third-party payors to adopt out-of-network fee schedules that are more comparable to our contracted rates, or to take other steps to discourage their enrollees from seeking treatment at out-of-network surgical facilities.  In these cases, we seek to enter into contracts with such payors.  Typically, we have seen a decrease in revenues per case and an increase in volume of cases in those instances, resulting in an overall decrease in revenues to the surgical facility where we transition from out-of-network to in-network billing.  We can provide no assurance that we will see a sufficient increase in volume of cases to compensate for the decrease in per case revenues where we transition from out-of-network to in-network billing.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Executive Overview — Operating Trends.”

 

Another recent trend is the consolidation of third-party payors.  As a result of payor consolidation in certain markets, typically low volume payors with which our surgical facilities have a written contract have allowed recently acquired payors to access their network.  As a result, payors with which we did not negotiate a written contract are now paying at contracted rates.  The contracted rates are typically lower than rates paid for out-of-network services.  During the fourth quarter of 2007, in an effort to address some of these payor issues, we cancelled contracts with certain third-party payors in California and Missouri, effective in the first quarter of 2008.  As a result of cancelling contracts, we have received payments on claims at rates higher than previously contracted rates.

 

Workers’ Compensation

 

Our surgical facilities also provide services to injured workers and receive payment from workers’ compensation payors pursuant to the various state workers’ compensation statutes.  Historically, workers’ compensation payors have paid surgical facilities a percentage of the surgical facilities’ charges.  However, workers’ compensation payment amounts are subject to legislative, regulatory, and other payment changes over which we have no control.  In recent years, there has been a trend for states to implement workers’ compensation fee schedules with rates generally lower than what our surgical facilities have historically been paid for the same services.  With the exception of Indiana and Missouri, all of the states in which our surgical facilities operate have adopted workers’ compensation fee schedules or other types of workers’ compensation payment reforms.  A reduction in workers’ compensation payment amounts could have a material adverse effect on the revenues of our surgical facilities.

 

Over the past several years, governmental and private purchasers of health care services have begun to actively monitor the growth in health care expenditures and have taken affirmative steps, such as the implementation of fee schedules and the modification of existing payment methodologies, to contain health care expenditures.  The governmental and private purchasers of health care services are likely to continue these activities in the future.  We cannot predict what further legislation may be enacted or what regulations or guidelines may be established concerning third-party reimbursement by state, federal or private programs.  In addition, market and cost factors affecting the fee structure, cost containment and utilization decisions of third-party payors and other payment factors over which we have no control could have a material adverse effect on the revenues of our surgical facilities.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Executive Overview — Operating Trends.”

 

Governmental Regulation

 

General

 

The health care industry is highly regulated, and we cannot provide any assurance that the regulatory environment in which we operate will not significantly change in the future or that we will be able to successfully address any such changes.  In addition to extensive, existing government health care regulation, there continue to be numerous and potentially far-reaching initiatives on the federal and state levels affecting the payment for and availability of health care services.  Some of the reform initiatives proposed, such as further reductions in Medicare

 

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and Medicaid payments and additional prohibitions on physician ownership of facilities to which they refer patients, could, if adopted, adversely affect us and our business.

 

Every state imposes licensing requirements on individual physicians and health care facilities.  In addition, federal and state laws regulate HMOs and other managed care organizations.  Many states require regulatory approval, including licensure, and in some cases certificates of need, before establishing certain types of health care facilities, including surgical hospitals and ambulatory surgery centers, offering certain services, including the services we offer, or making expenditures in excess of certain amounts for health care equipment, facilities or programs.  Our ability to operate profitably will depend in part upon all of our surgical facilities obtaining and maintaining all necessary licenses, certificates of need and other approvals and operating in compliance with applicable health care regulations.  Failure to do so could have a material adverse effect on our business.

 

The laws of many states prohibit physicians from splitting fees with non-physicians (i.e., sharing in a percentage of professional fees), prohibit non-physician entities (such as us) from practicing medicine and exercising control over or employing physicians and prohibit referrals to facilities in which physicians have a financial interest.  We believe our activities do not violate these state laws.  However, future interpretations of, or changes in, these laws might require structural and organizational modifications of our existing relationships with facilities and physician networks, and we cannot assure you that we would be able to appropriately modify such relationships.  In addition, statutes in some states could restrict our expansion into those states.

 

Our surgical facilities are subject to federal, state and local laws dealing with issues such as occupational safety, employment, medical leave, insurance regulations, civil rights, discrimination, building codes and medical waste and other environmental issues.  Federal, state and local governments are expanding the regulatory requirements on businesses.  The imposition of these regulatory requirements may have the effect of increasing operating costs and reducing the profitability of our operations.

 

We believe that hospital, outpatient surgery and diagnostic services will continue to be subject to intense regulation at the federal and state levels.  We are unable to predict what additional government regulations, if any, affecting our business may be enacted in the future or how existing or future laws and regulations might be interpreted.  If we, or any of our surgical facilities, fail to comply with applicable laws, it might have a material adverse effect on our business.

 

Certificates of Need and Licensure

 

Capital expenditures for the construction of new health care facilities, the addition of beds or new health care services or the acquisition of existing health care facilities may be reviewable by state regulators under statutory schemes that are sometimes referred to as certificate of need laws.  States with certificate of need laws place limits on the construction and acquisition of health care facilities and the expansion of existing facilities and services.  In these states, approvals, generally known as certificates of need, are required for capital expenditures exceeding certain pre-set monetary thresholds for the development, acquisition and/or expansion of certain facilities or services, including surgical facilities.  We have a concentration of surgical facilities in certificate of need states as we believe the regulations present a competitive advantage to existing operators.

 

State certificate of need laws generally provide that a designated state health planning agency must determine that a need exists prior to the construction of new health care facilities, the introduction of new health care services or the acquisition of any existing health care facility by a new owner.  Typically, to obtain a certificate of need, the provider of services submits an application to the appropriate agency with information concerning the area and population to be served, the anticipated demand for the facility or service to be provided, the amount of capital expenditure, the estimated annual operating costs, the relationship of the proposed facility or service to the overall state health plan and the cost per patient day for the type of care contemplated and in cases involving the proposed acquisition of an existing facility, the financial resources and operational experience of the proposed new owners of such facility.  The issuance of a certificate of need is based upon a finding of need by the agency in accordance with criteria set forth in certificate of need laws and state and regional health plans.  If the proposed facility, service or acquisition is found to be necessary and the applicant is found to be the appropriate provider, the agency will issue a certificate of need containing a maximum amount of expenditure and a specific time period for the holder of the certificate of need to implement the approved project.

 

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Our health care facilities are also subject to state licensing requirements for medical providers.  Our surgical facilities have licenses to operate as ambulatory surgery centers in the states in which they operate, except for (i) one surgical facility in Colorado, one surgical facility in Louisiana, one surgical facility in Oklahoma and one surgical facility in Texas that are licensed as hospitals, and (ii) one surgical facility in the State of Washington where such state does not issue licenses for ambulatory surgery centers.  Our surgical facilities that are licensed as ambulatory surgery centers must meet all applicable requirements for ambulatory surgery centers.  In addition, even though our surgical facilities that are licensed as hospitals primarily provide surgical services, they must meet all applicable requirements for general hospital licensure.  To assure continued compliance with these regulations, governmental and other authorities periodically inspect our surgical facilities.  The failure to comply with these regulations could result in the suspension or revocation of a facility’s license.  In addition, based on the specific operations of our surgical facilities, some of these facilities maintain a pharmacy license, a controlled substance registration, a clinical laboratory certification waiver, and environmental protection permits for biohazards and/or radioactive materials, as required by applicable law.

 

Medicare and Medicaid Participation

 

The majority of our revenues are expected to continue to be received through third-party reimbursement programs, including state and federal programs, such as Medicare and Medicaid, and private health insurance programs.  Medicare is a federally funded and administered health insurance program, primarily for individuals who are 65 or older, and entitled to social security benefits, who have end-stage renal disease or who are disabled.  Medicaid is a health insurance program jointly funded by state and federal governments that provides medical assistance to qualifying low income persons.  Each state Medicaid program covers in-patient hospital services and has the option to provide payment for ambulatory surgery center services.  The Medicaid programs of all of the states in which we currently operate cover ambulatory surgery center services.  However, these states may not continue to cover ambulatory surgery center services, and states into which we expand our operations may not cover or continue to cover ambulatory surgery center services.

 

To participate in the Medicare program and receive Medicare payment, our surgical facilities must comply with regulations promulgated by the U.S. Department of Health and Human Services, or HHS.  Among other things, these regulations, known as “conditions of coverage” or “conditions of participation,” impose numerous requirements on our facilities, their equipment, their personnel and their standards of medical care, as well as compliance with all applicable state and local laws and regulations.  On April 26, 2007, CMS issued a policy memorandum that reaffirmed its prior interpretation of its conditions of participation that all hospitals (other than Critical Access Hospitals) participating in the Medicare program are required to provide basic emergency care interventions regardless of whether or not the hospital maintains an emergency department.  Our four facilities licensed as hospitals are required to meet this requirement to maintain their participating provider status in the Medicare program.  One of our hospitals, which does not have an emergency room, maintains a protocol for the transfer of patients requiring emergency treatment, which protocol may be interpreted as inconsistent with a recent CMS policy memorandum.  Our surgical facilities must also satisfy the conditions of participation to be eligible to participate in the various state Medicaid programs.  The requirements for certification under Medicare and Medicaid are subject to change and, in order to remain qualified for these programs, we may have to make changes from time to time in our facilities, equipment, personnel or services.  Although we intend to continue to participate in these reimbursement programs, we cannot assure you that our surgical facilities will continue to qualify for participation.

 

In order to develop its strategic plan required by the Deficit Reduction Act (“DRA”), in its report to Congress on August 8, 2006, CMS disclosed that it planned to require specialty hospitals to provide certain information to CMS on a periodic basis concerning physician investment interests and to require all hospitals to disclose their compensation arrangements with physicians.  In connection with this strategic plan, CMS designed a form entitled “Disclosure of Financial Relationships Report (DFRR).”  CMS initially proposed requiring 500 hospitals to report on the DFRR.  On April 10, 2008, CMS withdrew its request for Office of Management and Budget approval of the DFRR after industry representatives asserted that CMS had severely underestimated the time it would take for a hospital to complete the form.  In the Final 2009 IPPS Rule, CMS announced that it is proceeding with its proposal to send the DFRR to 500 hospitals, which number subsequently was reduced to 400 pursuant to the Paperwork Reduction Act.  As currently proposed, hospitals will have 60 days to respond to the DFRR and will be subject to penalties for late submissions.  If CMS implements the DFRR, we intend for our four surgical facilities that are licensed as hospitals to comply with the DFRR requests to the extent they receive any such requests.

 

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In the Final 2009 IPPS Rule, CMS also finalized its proposal to require hospitals to disclose physician ownership to patients.  Under the final rule, in such cases a hospital is required to disclose in writing to patients that physicians and/or immediate family members of physicians hold ownership in the hospital and that a list of owners may be furnished upon request of the patient.  These disclosures must be made at the time the hospital provides information regarding scheduled preadmission testing and registration for a planned hospital admission for inpatient care or outpatient service.  A hospital’s provider agreement may be terminated if it fails to provide the notice.  In addition, a hospital that does not have a physician on site 24 hours per day and 7 days per week could have its provider agreement terminated if it fails to provide notice of this circumstance.

 

CMS also mandated that as a condition of continued membership on the hospital medical staff, each physician is required at the time of a referral to the hospital to disclose in writing to patients referred to the hospital that such physician or an immediate family member holds ownership in the hospital.

 

MMA required the Secretary of HHS to establish a Technical Advisory Group (“TAG”) to advise the Secretary on issues related to Emergency Medical Treatment and Labor Act (“EMTALA”) regulations and implementation of EMTALA.  In the Final 2009 IPPS Rule, CMS noted that the TAG submitted 55 recommendations to the Secretary, certain of which have been adopted and others of which are still under study.  Several of the recommendations concern how a hospital will satisfy its on-call list obligations.  The TAG recommended that each hospital and its medical staff have an annual plan to address on-call coverage.  Recognizing that certain hospitals have difficulty attracting on-call coverage, especially for specialties where a physician is on more than one medical staff, the TAG recommended that hospitals be permitted to participate in “community call,” which allows all the hospitals in a community to be covered by one on-call physician in a specialty.  In the Final 2009 IPPS Rule, CMS outlined the requirements for community call.  A hospital participating in community call is still required to provide an initial screening.

 

We do not know which of the remaining TAG recommendations will be implemented by CMS or whether any further EMTALA requirements would adversely affect our ability to qualify for participation in Medicare and Medicaid.

 

Federal Anti-Kickback Statute and Medicare Fraud and Abuse Laws

 

The Social Security Act includes provisions addressing false statements, illegal remuneration and other instances of fraud and abuse in the Medicare program.  These provisions are commonly referred to as the Medicare fraud and abuse laws, and include the statute commonly known as the federal anti-kickback statute (the “Anti-Kickback Statute”).  The Anti-Kickback Statute prohibits providers and others from, among other things, soliciting, receiving, offering or paying, directly or indirectly, any remuneration in return for either making a referral for, or ordering or arranging for, or recommending the order of, any item or service covered by a federal health care program, including, but not limited to, the Medicare program.  Violations of the Anti-Kickback Statute are criminal offenses punishable by imprisonment and fines of up to $25,000 for each violation.  Civil violations are punishable by fines of up to $50,000 for each violation, as well as damages of up to three times the total amount of remuneration received from the government for health care claims.

 

In addition, the Medicare Patient and Program Protection Act of 1987, as amended by the Health Insurance Portability and Accountability Act of 1996, (“HIPAA”), and the Balanced Budget Act of 1997, impose civil monetary penalties and exclusion from state and federal health care programs on providers who commit violations of the Medicare fraud and abuse laws.  Pursuant to the enactment of HIPAA, as of June 1, 1997, the Secretary may, and in some cases must, exclude individuals and entities that the Secretary determines have “committed an act” in violation of the Medicare fraud and abuse laws or improperly filed claims in violation of the Medicare fraud and abuse laws from participating in any federal health care program.  HIPAA also expanded the Secretary’s authority to exclude a person involved in fraudulent activity from participating in a program providing health benefits, whether directly or indirectly, in whole or in part, by the U.S. government.  Additionally, under HIPAA, individuals who hold a direct or indirect ownership or controlling interest in an entity that is found to violate the Medicare fraud and abuse laws may also be excluded from Medicare and Medicaid and other federal and state health care programs if the individual knew or should have known, or acted with deliberate ignorance or reckless disregard of, the truth or falsity of the information of the activity leading to the conviction or exclusion of the entity, or where the individual is an officer or managing employee of such entity.  This standard does not require that specific intent to defraud be

 

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proven by the Office of the Inspector General of the U.S. Department of Health and Human Services (the “OIG”).  Under HIPAA it is also a crime to defraud any commercial health care benefit program.

 

Because physician-investors in our surgical facilities are in a position to generate referrals to the facilities, the distribution of available cash to those investors could come under scrutiny under the Anti-Kickback Statute.  The U.S. Third Circuit Court of Appeals has held that the Anti-Kickback Statute is violated if one purpose (as opposed to a primary or sole purpose) of a payment to a provider is to induce referrals.  Other federal circuit courts have followed this decision.  Because none of these cases involved a joint venture such as those owning and operating our surgical facilities, it is not clear how a court would apply these holdings to our activities.  It is clear, however, that a physician’s investment income from a surgical facility may not vary with the number of his or her referrals to the surgical facility, and we comply with this prohibition.

 

In a case involving a physician-owned joint venture, the U.S. Ninth Circuit Court of Appeals held that the Anti-Kickback Statute is violated when a person or entity (1) knows that the statute prohibits offering or paying remuneration to induce referrals and (2) engages in prohibited conduct with the specific intent to violate the law.  In that case, the joint venture was determined to have violated the law because its agent solicited prospective limited partners by implying that eligibility to purchase shares in the limited partnership was dependent on an agreement to refer business to it, told prospective limited partners that the number of shares they would be permitted to purchase would depend on the volume of business they referred to the venture, and stated that partners who did not refer business would be pressured to leave the partnership.  The court also determined that the joint venture was vicariously liable for the actions of its agents, notwithstanding that the agent’s actions were contrary to the principal’s stated policy.

 

Under regulations issued by the OIG, certain categories of activities are deemed not to violate the Anti-Kickback Statute (commonly referred to as the safe harbors).  According to the preamble to these safe harbor regulations, the failure of a particular business arrangement to comply with the regulations does not determine whether the arrangement violates the Anti-Kickback Statute.  The safe harbor regulations do not make conduct illegal, but instead outline standards that, if complied with, protect conduct that might otherwise be deemed in violation of the Anti-Kickback Statute.  Failure to meet a safe harbor does not indicate that the arrangement violates the Anti-Kickback Statute.

 

We believe that the ownership and operations of our surgery centers and hospitals will not fit wholly within safe harbors, but we attempt to incorporate elements of a safe harbor in all of our facilities.  Our ASCs, for example, are structured to fit as closely as possible within the safe harbor designed to protect distributions to physician-investors in ambulatory surgery centers who directly refer patients to the ambulatory surgery center and personally perform the procedures at the center as an extension of their practice (the “ASC Safe Harbor”).  The ASC Safe Harbor protects four categories of investors, including facilities owned by (1) general surgeons, (2) single-specialty physicians, (3) multi-specialty physicians and (4) hospital/physician ventures, provided that certain requirements are satisfied.  These requirements include the following:

 

1.               The ambulatory surgery center must be an ambulatory surgery center certified to participate in the Medicare program, and its operating and recovery room space must be dedicated exclusively to the ambulatory surgery center and not a part of a hospital (although such space may be leased from a hospital if such lease meets the requirements of the safe harbor for space rental);

 

2.               Each investor must be either (a) a physician who derived at least one-third of his or her medical practice income for the previous fiscal year or 12-month period from performing procedures on the list of Medicare-covered procedures for ambulatory surgery centers, (b) a hospital, or (c) a person or entity not in a position to make or influence referrals to the center, nor to provide items or services to the ambulatory surgery center, nor employed by the ambulatory surgery center or any investor;

 

3.               Unless all physician-investors are members of a single specialty, each physician-investor must perform at least one-third of his or her procedures at the ambulatory surgery center each year.  (This requirement is in addition to the requirement that the physician-investor has derived at least one-third of his or her medical practice income for the past year from performing procedures.);

 

4.               Physician-investors must have fully informed their referred patients of the physician’s investment;

 

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5.     The terms on which an investment interest is offered to an investor are not related to the previous or expected volume of referrals, services furnished or the amount of business otherwise generated from that investor to the entity;

 

6.     Neither the ambulatory surgery center nor any other investor nor any person acting on their behalf may loan funds to or guarantee a loan for an investor if the investor uses any part of such loan to obtain the investment interest’

 

7.     The amount of payment to an investor in return for the investment interest is directly proportional to the amount of the capital investment (including the fair market value of any pre-operational services rendered) of that investor;

 

8.     All physician-investors, any hospital-investor and the center agree to treat patients receiving benefits or assistance under a federal health care program in a non-discriminatory manner;

 

9.     All ancillary services performed at the ambulatory surgery center for beneficiaries of federal health care programs must be directly and integrally related to primary procedures performed at the ambulatory surgery center and may not be billed separately;

 

10.   No hospital-investor may include on its cost report or any claim for payment from a federal health care program any costs associated with the ambulatory surgery center;

 

11.   The ambulatory surgery center may not use equipment owned by or services provided by a hospital-investor unless such equipment is leased in accordance with a lease that complies with the Anti-Kickback statute equipment rental safe harbor and such services are provided in accordance with a contract that complies with the Anti-Kickback Statute personal services and management contracts safe harbor; and

 

12.   No hospital-investor may be in a position to make or influence referrals directly or indirectly to any other investor or the ambulatory surgery center.

 

We believe that the ownership and operations of our surgical facilities will not satisfy this ASC Safe Harbor for investment interests in ambulatory surgery centers because, among other things, we or one of our subsidiaries will generally be an investor in and provide management services to each ambulatory surgery center.  We cannot assure you that the OIG would view our activities favorably even though we strive to achieve compliance with the remaining elements of this safe harbor.

 

In addition, although we expect each physician-investor to utilize the ambulatory surgery center as an extension of his or her practice, we cannot assure you that all physician-investors will derive at least one-third of their medical practice income from performing Medicare-covered ambulatory surgery center procedures, perform one-third of their procedures at the ambulatory surgery center or inform their referred patients of their investment interests.  Interests in our ambulatory surgery center joint ventures are purchased at fair market value.  Investors who purchase at a later time generally pay more for a given percentage interest than founding investors.  The result is that while all investors are paid distributions in accordance with their ownership interests, for ambulatory surgery centers where there are later purchases we cannot meet the safe harbor requirement that return on investment is directly proportional to the amount of capital investment.  Nonetheless, we believe our fair market value purchase requirements and distribution policies comply with the Anti-Kickback Statute.  In Advisory Opinion No 01-21 (November 16, 2001), the OIG approved an arrangement where a hospital made a later fair market value purchase of interests in an ambulatory surgery center where some of the existing physicians had purchased at a later time for a higher per unit investment.  In Advisory Opinion No. 07-05 (June 12, 2007), however, the OIG refused to provide protection to a proposed sale of certain interests owned by certain founding physician investors to a would-be hospital investor.  The OIG raised three concerns: (1) the hospital was purchasing its interests from physician investors, thus the ambulatory surgery center would not receive an infusion of capital, rather the physicians would realize gain on their investment, (2) the hospital was purchasing from only certain of the investor physicians raising the possibility that the hospital’s purchase was to reward or influence the selling physicians’ referrals to the surgery center or the hospital, and (3) for each investor, return on investment would not be directly proportional to the

 

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amount of capital invested.  The OIG admitted that none of the factors alone or together necessarily indicates an Anti-Kickback Statute violation.  Given the results in Advisory Opinion No. 01-21 and that negative OIG Advisory Opinions are unusual, it appears to us that the OIG’s conclusions as stated in Advisory Opinion No. 07-05 may be limited to the facts of the arrangement in the Advisory Opinion request.

 

We hold ownership in one ambulatory surgery center in which a physician group that includes primary care physicians who do not use the ambulatory surgery center also holds ownership.  In OIG Advisory Opinion No. 03-5 (February 6, 2003), the OIG declined to grant a favorable opinion to a proposed ambulatory surgery center structure that would have been jointly owned by a hospital and a multi-specialty group practice that was composed of a substantial number of primary care physicians who would not personally use the ambulatory surgery center.  In the opinion, the OIG stated that because interests in the ambulatory surgery center would be indirectly owned by physicians who would not personally practice at the ambulatory surgery center, the proposed structure could potentially generate prohibited remuneration under the Anti-Kickback Statute and that as a result, the OIG was precluded from determining that the proposed arrangement posed a minimal risk of fraud and abuse.  We believe that the ownership of our ambulatory surgery center complies with the Anti-Kickback Statute because we understand that the physician group that owns an interest in our ambulatory surgery center is structured to fit within the definition of a unified group practice under the federal law prohibiting physician self-referrals, commonly known as the Stark Law, and the income distributions of the group practice comply with the Stark Law’s acceptable methods of income distribution.  Although these provisions directly apply only to liability under the Stark Law, we believe that the same principles are relevant to an analysis under the Anti-Kickback Statute.  We believe that no physician in the group practice receives an income distribution that is based directly on his or her referrals to the ambulatory surgery center, and we believe that the group’s ownership of the ambulatory surgery center is no different than its ownership of other ancillary services common in physician practices.  Nevertheless, there can be no assurance that the proposed arrangement will not be determined to be in violation of the law.

 

In OIG Advisory Opinion No. 09-09 (July 29, 2009), the OIG concluded that an arrangement involving an ASC joint venture between a hospital and physicians involving the combination of their two ASCs into a single, larger ASC presented minimal risk of fraud or abuse, despite the fact that it did not fit within any applicable anti-kickback safe harbors.  In the proposed arrangement, the physicians would not invest in the joint venture directly, but rather indirectly through the physician entity that was a party to the joint venture.  In the past, the OIG has expressed concern that intermediate investment entities “could be used to redirect revenues to reward referrals.”  The OIG determined, however, that the use of a “pass-through” entity in this case did not substantially increase the risk of fraud and abuse based on several safeguards the hospital and physicians had implemented.  Additionally, the OIG stated that fair market value should be determined based only on the tangible assets of each ASC since the physician investors are referral sources for the ASC.  The OIG stated that a cash flow-based valuation of the business contributed by the physician investors potentially would include the value of the physician investors’ referrals over the time that their ASC was in existence prior to the merger with the hospital’s ASC.  The OIG went on to note that a valuation involving intangible assets would not necessarily result in a violation of the Anti-Kickback Statute, but would require a review of all the facts and circumstances.  It is not clear whether the OIG is concerned about using a cash flow-based valuation in most healthcare transactions involving referral sources, or just transactions, like this one, where the parties’ contributions would be valued differently for contributing the same assets if only one party’s contribution is valued as a going concern based on cash flow.  Also, the OIG appears to be focused on historical cash flow rather than a projected, discounted cash flow, which is a commonly used valuation methodology.  What is clear is that for the first time, the OIG addressed valuation methodologies, which could lead to increased scrutiny of all transactions involving physicians.

 

Our hospitals comply as closely as possible to the safe harbor for investments in small entities.  Our hospital investments do not fit wholly within the safe harbor because more than 40% of the investment interests are held by investors who are either in a position to refer to the hospital or who provide services to the hospital and more than 40% of the hospital’s gross revenues last year were derived from referrals generated by investors.  However, we believe we comply with the remaining elements of the safe harbor.

 

In addition to the physician ownership in our surgical facilities, other financial relationships of ours with potential referral sources could potentially be scrutinized under the Anti-Kickback Statute.  We have entered into management agreements to manage many of our surgical facilities, as well as two physician networks.  Most of these agreements call for our subsidiary to be paid a percentage-based management fee.  Although there is a safe harbor for personal services and management contracts (the “Personal Services and Management Safe Harbor”), the

 

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Personal Services and Management Safe Harbor requires, among other things, that the amount of the aggregate compensation paid to the manager over the term of the agreement be set in advance.  Because our management fees are generally based on a percentage of revenues, our management agreements do not typically meet this requirement.  We do, however, believe that our management arrangements satisfy the other requirements of the Personal Services and Management Safe Harbor for personal services and management contracts.  The OIG has taken the position that percentage-based management agreements are not protected by a safe harbor, and consequently, may violate the Anti-Kickback Statute.  On April 15, 1998, the OIG issued Advisory Opinion No. 98-4 which reiterates this proposition.  The opinion focused on areas the OIG considers to be problematic in a physician practice management context, including financial incentives to increase patient referrals, no safeguards against overutilization and incentives to increase the risk of abusive billing.  The opinion also reiterated that proof of intent to violate the Anti-Kickback Statute is the central focus of the OIG.  We have implemented formal compliance programs designed to safeguard against overbilling and believe that our management agreements comply with the requirements of the Anti-Kickback Statute.  However, we cannot assure you that the OIG would find our compliance programs to be adequate or that our management agreements would be found to comply with the Anti-Kickback Statute.

 

We also typically guarantee a surgical facility’s third-party debt financing and certain lease obligations as part of our obligations under a management agreement.  Physician investors are generally not required to enter into similar guarantees.  The OIG might take the position that the failure of the physician investors to enter into similar guarantees represents a special benefit to the physician investors given to induce patient referrals and that such failure constitutes a violation of the Anti-Kickback Statute.  We believe that the management fees (and in some cases guarantee fees) are adequate compensation to us for the credit risk associated with the guarantees and that the failure of the physician investors to enter into similar guarantees does not create a material risk of violating the Anti-Kickback Statute.  However, the OIG has not issued any guidance in this regard.

 

The OIG is authorized to issue advisory opinions regarding the interpretation and applicability of the Anti-Kickback Statute, including whether an activity constitutes grounds for the imposition of civil or criminal sanctions.  We have not, however, sought such an opinion regarding any of our arrangements.  If it were determined that our activities, or those of our surgical facilities, violate the Anti-Kickback Statute, we, our subsidiaries, our officers, our directors and each surgical facility investor could be subject, individually, to substantial monetary liability, prison sentences and/or exclusion from participation in any health care program funded in whole or in part by the U.S. government, including Medicare, TRICARE or state health care programs.

 

Evolving interpretations of current, or the adoption of new, federal or state laws or regulations could affect many of our arrangements.  Law enforcement authorities, including the OIG, the courts and Congress, are increasing their scrutiny of arrangements between healthcare providers and potential referral sources to ensure that the arrangements are not designed as a mechanism to exchange remuneration for patient care referrals or opportunities.  Investigators have also demonstrated a willingness to look behind the formalities of a business transaction to determine the underlying purposes of payments between healthcare providers and potential referral sources.

 

Federal Physician Self-Referral Law

 

Congress has enacted the federal physician self-referral law (“Stark Law”) that prohibits certain self-referrals for health care services.  As currently enacted, the Stark Law prohibits a practitioner, including a physician, dentist or podiatrist, from referring patients to an entity with which the practitioner or a member of his or her immediate family has a “financial relationship” for the provision of certain “designated health services” that are paid for in whole or in part by Medicare or Medicaid unless an exception applies.  The term “financial relationship” is broadly defined and includes most types of ownership and compensation relationships.  The Stark Law also prohibits the entity from seeking payment from Medicare or Medicaid for services that are rendered through a prohibited referral.  If an entity is paid for services provided through a prohibited referral, it may be required to refund the payments.  Violations of the Stark Law may also result in the imposition of damages equal to three times the amount improperly claimed and civil monetary penalties of up to $15,000 per prohibited claim and $100,000 per prohibited circumvention scheme and exclusion from participation in the Medicare and Medicaid programs.  For the purposes of the Stark Law, the term “designated health services” is defined to include:

 

·                  clinical laboratory services;

·                  physical therapy services;

 

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·                  occupational therapy services;

·                  radiology services, including magnetic resonance imaging, computerized axial tomography scan and ultrasound services;

·                  radiation therapy services and supplies;

·                  durable medical equipment and supplies;

·                  parenteral and enteral nutrients, equipment and supplies;

·                  prosthetics, orthotics and prosthetic devices and supplies;

·                  home health services;

·                  outpatient prescription drugs; and

·                  inpatient and outpatient hospital services.

 

The list of designated health services does not, however, include surgical services that are provided in an ambulatory surgery center.  Furthermore, in final Stark Law regulations published by HHS on January 4, 2001, the term “designated health services” was specifically defined to not include services that are reimbursed by Medicare as part of a composite rate, such as services that are provided in an ambulatory surgery center.  However, if designated health services are provided by an ambulatory surgery center and separately billed, referrals to the ambulatory surgery center by a physician-investor would be prohibited by the Stark Law.  Because our facilities that are licensed as ambulatory surgery centers do not have independent laboratories and do not provide designated health services apart from surgical services, we do not believe referrals to these facilities by physician-investors are prohibited.  If legislation or regulations are implemented that prohibit physicians from referring patients to surgical facilities in which the physician has a beneficial interest, our business and financial results would be materially adversely affected.

 

Four of our facilities are licensed as hospitals.  The Stark Law currently includes the Whole Hospital Exception, which applies to physician ownership of a hospital, provided such ownership is in the whole hospital and the physician is authorized to perform services at the hospital.  Physician investment in our facilities licensed as hospitals meet this requirement.  However, changes to the Whole Hospital Exception have been the subject of recent regulatory action and legislation.  See “Reimbursement — Health Care Reform.”  Changes in the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act provide:

 

·      A prohibition on hospitals from having any physician ownership unless the hospital already had physician ownership and a Medicare provider agreement in effect as of  August 1, 2010, with a proposed change to December 31, 2010 pending in the reconciliation bill;

·      A limitation on the percentage of total physician ownership or investment interests in the hospital or entity whose assets include the hospital to the percentage of physician ownership or investment as of March 23, 2010;

·      A requirement that return on investment be proportionate to the investment by each investor;

·      Restrictions on preferential treatment of physician versus nonphysician investors;

·      A requirement for written disclosures of physician ownership interests to the hospital’s patients and on the hospital’s website and in any advertising, along with annual reports to the government detailing such interests;

·      A prohibition on the hospital or other investors from providing financing to physician investors;

·      A requirement that any hospital that does not have 24/7 physician coverage inform patients of this fact and receive signed acknowledgement from the patients of the disclosure; and

·      A prohibition on “grandfathered” status for any physician owned hospital that converted from an ambulatory surgery center to a hospital on or after March 23, 2010.

 

We cannot predict whether other proposed amendments to the Whole Hospital Exception will be included in any future legislation or if Congress will adopt any similar provisions that would prohibit or otherwise restrict physicians from holding ownership interests in hospitals.  The Acts could have an adverse effect on our financial condition  and results of operations.

 

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Additionally, the physician networks we manage must comply with the “in-office ancillary services exception” of the Stark Law.  We believe that these physician networks operate in compliance with the applicable language of statutory exceptions to the Stark Law, including the exceptions for services provided by physicians within a group practice or in-office ancillary services.  There have been extensive discussions and proposed changes to these exceptions.  We cannot provide assurances that CMS may not propose and later adopt changes to the in-office ancillary services exception or whether if adopted any such changes would not adversely affect the physician practices that we manage, and thus that portion of our business.  If future revisions modify the provisions of the Stark Law regulations that are applicable to our business, our revenues and profitability could be materially adversely affected and could require us to modify our relationships with our physician and health care system partners.

 

False and Other Improper Claims

 

The U.S. government is authorized to impose criminal, civil and administrative penalties on any person or entity that files a false claim for payment from the Medicare or Medicaid programs or other federal and state health care programs.  Claims filed with private insurers can also lead to criminal and civil penalties, including, but not limited to, penalties relating to violations of federal mail and wire fraud statutes, as well as penalties under the anti-fraud provisions of HIPAA.  While the criminal statutes are generally reserved for instances of fraudulent intent, the U.S. government is applying its criminal, civil and administrative penalty statutes in an ever-expanding range of circumstances.  For example, the U.S. government has taken the position that a pattern of claiming reimbursement for unnecessary services violates these statutes if the claimant merely should have known the services were unnecessary, even if the government cannot demonstrate actual knowledge.  The U.S. government has also taken the position that claiming payment for low-quality services is a violation of these statutes if the claimant should have known that the care being provided was substandard.

 

Over the past several years, the U.S. government has accused an increasing number of health care providers of violating the federal False Claims Act.  The False Claims Act prohibits a person from knowingly presenting, or causing to be presented, a false or fraudulent claim to the U.S. government.  The statute defines “knowingly” to include not only actual knowledge of a claim’s falsity, but also reckless disregard for or intentional ignorance of the truth or falsity of a claim.  Because our surgical facilities perform hundreds of similar procedures a year for which they are paid by Medicare, and there is a relatively long statute of limitations, a billing error or cost reporting error could result in significant civil or criminal penalties.  In addition, some courts have held that a violation of the Anti-Kickback Statute or the Stark Law can result in liability under the federal False Claims Act.

 

Under the qui tam, or whistleblower, provisions of the False Claims Act, private parties may bring actions on behalf of the U.S. government.  These private parties, often referred to as relators, are entitled to share in any amounts recovered by the government through trial or settlement.  Both whistleblower lawsuits and direct enforcement activity by the government have increased significantly in recent years and have increased the risk that a health care company, like us, will have to defend a false claims action, pay fines or be excluded from the Medicare and Medicaid programs and other federal and state health care programs as a result of an investigation resulting from a whistleblower case.  Although we believe that our operations materially comply with both federal and state laws, they may nevertheless be the subject of a whistleblower lawsuit or may otherwise be challenged or scrutinized by governmental authorities.  A determination that we have violated these laws would have a material adverse effect on us.

 

Health Information Practices

 

Privacy and Security Requirements

 

We are subject to HIPAA and the Health Information Technology for Economic and Clinical Health Act (“HITECH Act”), which was enacted as part of the American Recovery and Reinvestment Act of 2009.  The HITECH Act strengthened the requirements and significantly increased the penalties for violations of the HIPAA privacy and security regulations.  In addition, a new breach notification requirement was established requiring reporting of certain unauthorized access, acquisition, or disclosure of unsecured protected health information that poses significant risk of financial, reputational or other harm to a patient.  On August 24, 2009, the Secretary of HHS issued regulations implementing certain of the requirements of the HITECH Act.  Although these regulations were effective September 23, 2009, HHS announced the imposition of penalties pursuant to these regulations would

 

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be delayed until February 2010.  We cannot quantify the financial impact of compliance with these new regulations, but could incur expenses associated with such compliance.

 

There are currently several laws at the state and federal levels addressing the privacy and security of patient health and other identifiable information.  The privacy regulations of HIPAA apply to all health plans, all health care clearinghouses and health care providers that transmit health information in an electronic form in connection with HIPAA standard transactions.  Our facilities are subject to the privacy regulations of HIPAA. The privacy standards apply to individually identifiable information held or disclosed by a covered entity in any form, whether communicated electronically, on paper or orally.  These standards impose extensive administrative requirements on us.  These standards require our compliance with rules governing the use and disclosure of this health information.  They create rights for patients in their health information, such as the right to amend their health information, and they require us to impose these rules, by contract, on any business associate to whom we disclose such information in order to perform functions on our behalf.  In addition, our surgical facilities will continue to remain subject to any state laws that are more restrictive than the privacy regulations issued under HIPAA.  These state laws vary by state and could impose additional penalties.

 

In addition, we also are subject to the security regulations of HIPAA designed to protect the confidentiality, availability and integrity of health information by health plans, health care clearinghouses and health care providers that receive, store, maintain or transmit health and related financial information in electronic form.  These security standards require us to establish and maintain reasonable and appropriate administrative, technical and physical safeguards to ensure the integrity, confidentiality and the availability of electronic health and related financial information.  The security standards were designed to protect electronic information against reasonably anticipated threats or hazards to the security or integrity of the information and to protect the information against unauthorized use or disclosure.  Although the security standards do not reference or advocate a specific technology, and covered health care providers, plans and clearinghouses have the flexibility to choose their own technical solutions, the security standards have required us to implement significant new systems, business procedures and training programs.  We believe that we are in material compliance with the privacy and security requirements of HIPAA.

 

The HITECH Act also creates a federal breach notification law to mirror protections that many states have passed in recent years.  This law requires us to notify patients of any unauthorized access, acquisition, or disclosure of their unsecured protected health information that poses significant risk of financial, reputational or other harm to a patient.  This law specifies how protected health information must be secured and acceptable methods of notice and information that must appear in the notification to the patient.  All such breaches must be reported to the Secretary of HHS.  If a breach affects 500 patients or more, it must immediately be reported to the Secretary of HHS, who, in turn, will post the name of the provider on its public website.  Finally, the law requires that breaches affecting 500 patients or more who reside in the same area be reported to local media.  On August 2009, the Secretary of HHS issued interim final regulations with request for comment which clarify several aspects of this law.

 

Violations of the HIPAA privacy and security regulations may result in civil and criminal penalties.  The HITECH Act strengthened the requirements of the HIPAA privacy and security regulations and significantly increased the penalties for violations by introducing a tiered penalty system, with penalties of up to $50,000 per violation with a maximum civil penalty of $1.5 million in a calendar year for violations of the same requirement.  Under the HITECH Act, HHS is required to conduct periodic compliance audits of covered entities and their business associates.  The HITECH Act also extends the application of certain provisions of the security and privacy regulations to business associates and subjects business associates to civil and criminal penalties for violation of the regulations.  The Secretary of HHS has issued an interim final rule conforming HIPAA’s enforcement regulations to the HITECH Act’s statutory revisions.  This interim final rule also sets forth guidance on, among other things, how the tiered penalty structure will reflect increasing levels of culpability and provides a prohibition on the imposition of penalties for any violation that is corrected within a 30-day time period, as long as the violation was not due to willful neglect.  This interim final rule became effective on November 30, 2009.

 

In addition, the HITECH Act authorizes State Attorneys General to bring civil actions seeking either an injunction or damages in response to violations of HIPAA privacy and security regulations or the new data breach law that affects the privacy of their state residents.  In January 2010, Connecticut’s Attorney General filed suit against Health Net of Connecticut, Inc. for failing to secure member information and for failure to notify members

 

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of a data breach in a timely fashion.  We expect vigorous enforcement of the HITECH Act’s requirements by HHS and State Attorneys General.

 

Our facilities remain subject to any state laws that relate to privacy or the reporting of data breaches that are more restrictive than the regulations issued under HIPAA and the requirements of the HITECH Act.  For example, various state laws and regulations may require us to notify affected individuals in the event of a data breach involving certain personal information, such as social security numbers, dates of birth and credit card information.

 

In addition, the Federal Trade Commission (“FTC”) issued a final rule, known as the Red Flags Rule, in October 2007 requiring financial institutions and businesses which maintain accounts that permit multiple payments for primarily individual purposes, which may include ASCs and other healthcare providers, to implement written identity theft prevention programs.  These identity theft programs must be designed to detect, prevent, and mitigate identity theft in connection with these accounts.  At the request of members of Congress, the FTC is delaying enforcement of the Red Flags Rule until June 1, 2010.  The FTC may seek penalties for violating the Red Flags Rules of up to $3,500 per violation, for certain violations.  Additionally, states may enforce the action on behalf of their citizens either through seeking direct damages or up to $1,000 per independent violation, plus recovering attorney’s fees from the violator.  Finally, individuals may file civil suits, in which they may seek actual damages, plus recovering attorney’s fees from the violator, for negligent violations.  Individuals may seek actual damages of up to $1,000, plus punitive damages and attorney’s fees from the violator, for willful noncompliance.

 

Compliance with these standards requires significant commitment and action by us.  We have appointed members of our management team to direct our compliance with these standards.  We have also appointed a privacy officer, prepared privacy policies, trained our workforce on these policies and entered into business associate agreements with the appropriate vendors.  Continued compliance with these regulations will require us to continue these activities on an ongoing basis and may require us to make additional expenditures in the future.

 

HIPAA Administrative Simplification Requirements.

 

The HIPAA transaction regulations were issued to encourage electronic commerce in the health care industry.  These regulations include standards that healthcare providers must follow when electronically transmitting certain healthcare transactions, such as healthcare claims.  We believe that we are in compliance with these regulations.

 

In January 2009, CMS published a final rule adopting modifications to the International Classification of Diseases (“ICD”), 10th Revision, or ICD-10, code sets for certain diagnoses and inpatient hospital procedures, as well as related changes to certain formats for electronic transactions.  While use of these updated code sets will not be mandatory until October 1, 2013, preparation for compliance with these standards may require significant administrative changes to our payment systems and procedures.  We do not believe costs of compliance with these administrative simplification requirements will have a material adverse effect on our business, financial position or results of operations.

 

State Regulation

 

Many of the states in which our surgical facilities operate have adopted statutes and/or regulations that prohibit the payment of kickbacks or any type of remuneration in exchange for patient referrals and that prohibit health care providers from, in certain circumstances, referring a patient to a health care facility in which the provider has an ownership or investment interest.  While these statutes generally mirror the federal Anti-Kickback Statute and Stark Law, they vary widely in their scope and application.  Some are specifically limited to health care services that are paid for in whole or in part by the Medicaid program, others apply to all health care services regardless of payor, while others apply only to state-defined designated services which may differ from the designated health services under the Stark Law.  In addition, many states have adopted statutes that mirror the False Claims Act and that prohibit the filing of a false or fraudulent claim with a state governmental agency.  We intend to comply with all applicable state health care laws, rules and regulations.  However, these laws, rules and regulations have typically been the subject of limited judicial and regulatory interpretation.  As a result, we cannot assure you that our surgical facilities will not be investigated or scrutinized by the governmental authorities empowered to do so or, if challenged, that their activities would be found to be lawful.  A determination of non-compliance with the applicable

 

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state health care laws, rules, and regulations could subject our surgical facilities to civil and criminal penalties and could have a material adverse effect on our operations.

 

Many states in which our surgical facilities are located or may be located in the future, do not permit business corporations to practice medicine, exercise control over or employ physicians, or engage in various business practices, such as fee-splitting with physicians (i.e. the sharing in a percentage of professional fees).  The existence, interpretation and enforcement of these laws vary significantly from state to state.  A determination of non-compliance with these laws could result in fines and or require us to restructure some of our existing relationships with our physicians.  We are also subject to various state insurance statutes and regulations that prohibit us from submitting inaccurate, incorrect or misleading claims.  Many state insurance laws and regulations are broadly worded and could be implicated, for example, if our surgical facilities were to waive an out-of-network co-payment or other patient responsibility amounts without fully disclosing the waiver on the claim submitted to the payor.  While some of our surgical facilities waive the out-of-network portion of patient co-payment amounts when providing services to patients whose health insurance is covered by a payor with which the surgical facilities are not contracted, our surgical facilities fully disclose waivers in the claims submitted to the payors.  We believe that our surgical facilities are in compliance with all applicable state insurance laws and regulations regarding the submission of claims.  We cannot assure you, however, that none of our surgical facilities’ insurance claims will ever be challenged.  If we were found to be in violation of a state’s insurance laws or regulations, we could be forced to discontinue the violative practice, which could have an adverse effect on our financial position and results of operations, and we could be subject to fines and criminal penalties.

 

Recovery Audit Contractors

 

CMS has expanded the pilot recovery audit contractor (“RAC”) program to a permanent nationwide program.  RACs are private contractors contracting with CMS to identify overpayment and underpayments for services through post-payment reviews of Medicare providers and suppliers.  We cannot quantify the financial impact of potential RAC audits, but could incur expenses associated with responding to and challenging any audit, as well as costs of repayment of alleged overpayments.

 

Health Care Regulations Affecting Our New York Operations

 

We own an interest in a limited liability company which provides administrative services to a surgery center located in New York.  Laws in the State of New York require that corporations have natural persons as stockholders to be approved by the New York Department of Health as a licensed health care facility.  Accordingly, we are not able to own interests in a limited partnership or limited liability company that owns an interest in a health care facility located in New York.  Laws in the State of New York also prohibit the delegation of certain management functions by a licensed health care facility, including but not limited to the authority to appoint and discharge senior management, independently control the books and records of the facility, dispose of assets of the facility outside of day-to-day operations and adopt policies affecting the delivery of health care services.  The law does permit a licensed facility to lease premises and obtain various services from non-licensed entities.  However, it is not clear what types of delegation constitute a violation.  Although we believe that our operations and relationships in New York are in compliance with these laws, if New York regulatory authorities or a third-party asserts a contrary position, we may be unable to continue or expand our operations in New York.

 

Available Information

 

Our website is www.symbion.com. We make available free of charge on this website under “Investors — SEC Filings” links to our periodic and other reports and amendments to those reports filed with or furnished to the Securities and Exchange Commission (“SEC”) as soon as reasonably practicable after we electronically file or furnish such materials.

 

Item 1A. Risk Factors

 

The following are some of the risks and uncertainties that could cause our actual financial condition, results of operations, business and prospects to differ materially from those contemplated by the forward-looking statements contained in this report or our other filings with the SEC.  If any of the following risks actually occurred, our business, financial condition and operating results could suffer.

 

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Risks Related to Our Business and Industry

 

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under debt instruments.

 

We incurred a significant amount of indebtedness in connection with the Merger.  As of December 31, 2009, we had (a) total indebtedness of approximately $465.2 million and (b) approximately $100.0 million of revolving credit borrowings available under our senior secured credit facility, subject to customary conditions.  In addition, subject to the restrictions in our senior secured credit facility and the indenture governing our 11.00%/11.75% Senior PIK toggle notes due 2015 (the “Toggle Notes”), we may incur significant additional indebtedness, which may be secured, from time to time.

 

The level of our indebtedness could have important consequences, including:

 

·                  making it more difficult for us to make payments on the Toggle Notes;

·                  limiting cash flow available for general corporate purposes, including capital expenditures and acquisitions, because a substantial portion of our cash flow from operations must be dedicated to servicing our debt;

·                  limiting our ability to obtain additional debt financing in the future for working capital, capital expenditures or acquisitions;

·                  limiting our flexibility in reacting to competitive and other changes in our industry and economic conditions generally; and

·                  exposing us to risks inherent in interest rate fluctuations because some of our borrowings will be at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates.

 

Our ability to pay or to refinance our indebtedness will depend upon our future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control.

 

We cannot assure you that our business will generate sufficient cash flow from operations, that currently anticipated revenue growth and operating improvements will be realized or that future borrowings will be available to us under our senior secured credit facility in amounts sufficient to enable us to pay our indebtedness or to fund our other liquidity needs.  We expect we will need to incur additional debt to fund development activities.  In 2008 and 2009, in order to preserve cash to fund potential buy-ups, developments and acquisitions, we elected to pay interest on our bridge loan and the Toggle Notes in kind.  We may also choose to do so in the future with respect to the Toggle Notes.  If we are unable to meet our debt service obligations or fund our other liquidity needs, we could attempt to restructure or refinance our indebtedness or seek additional equity capital.  We cannot assure you that we will be able to accomplish those actions on satisfactory terms, if at all.

 

Restrictive covenants in our debt instruments may adversely affect us.

 

The indenture governing our Toggle Notes contains various covenants that limit, among other things, our ability and the ability of our subsidiaries to:

 

·                  incur additional indebtedness;

·                  make certain distributions, investments and other restricted payments;

·                  dispose of our assets;

·                  grant liens on our assets;

·                  limit the ability of restricted subsidiaries to make payments to us;

·                  engage in transactions with affiliates; and

·                  merge or consolidate or transfer substantially all of our assets.

 

In addition, our senior secured credit facility contains other and more restrictive covenants, including requiring us to maintain specified financial ratios when we have outstanding revolver balances and to satisfy other financial condition tests.  Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will continue to meet those tests.  A breach of any of these covenants

 

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could result in a default under our senior secured credit facility and/or the indenture governing our Toggle Notes.  Upon the occurrence of an event of default under our senior secured credit facility, the lenders could elect to declare all amounts outstanding under our senior secured credit facility to be immediately due and payable and terminate all commitments to extend further credit.  If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure that indebtedness.  We have pledged substantially all of our assets, other than assets of our non-guarantor subsidiaries, as security under our senior secured credit facility.  If the lenders under our senior secured credit facility accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay our senior secured credit facility and our other indebtedness, including the Toggle Notes.

 

The current state of the economy and future economic conditions may adversely impact our business.

 

The United States economy continues to experience difficult conditions.  Burdened by economic constraints, patients may delay or cancel non-emergency surgical procedures.  It is difficult to predict the degree to which our business will be impacted by such conditions or the course of the economy in the coming year.

 

We depend on payments from third-party payors, including government health care programs and managed care organizations.  If these payments are reduced or eliminated, our revenues and profitability could be adversely affected.

 

We are dependent upon private and governmental third-party sources of payment for the services provided to patients in our surgical facilities and the physician networks we manage.  The amounts that our surgical facilities and physician networks receive in payment for their services may be adversely affected by market and cost factors as well as other factors over which we have no control, including Medicare, Medicaid and state regulations and the cost containment and utilization decisions and reduced reimbursement schedules of third-party payors, Congressional changes and refinements to the Medicare ambulatory surgery center payment system and CMS refinements to Medicare’s reimbursement policies.  See Item 1. “Business — Reimbursement.”

 

If we are unable to negotiate contracts or maintain satisfactory relationships with private third-party payors, our revenues and operating income will decrease.

 

Payments from private third-party payors (including state workers’ compensation programs) represented about 78% and 77% of our patient service revenues for the years ended December 31, 2008 and 2009, respectively.  Most of these payments came from third-party payors with which our centers have contracts.  Managed care companies such as HMOs and PPOs, which offer prepaid and discounted medical service packages, represent a growing segment of private third-party payors.  If we fail to enter into favorable contracts and to maintain satisfactory relationships with managed care organizations, our revenues may decrease.  Cost containment measures, such as fixed fee schedules, capitation payment arrangements, reductions in reimbursement schedules by third-party payors and closed provider networks, could also cause a reduction of our revenues in the future.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Overview—Operating Trends.”

 

Some of our payments from third-party payors in the past year came from third-party payors with which our surgical facilities did not have a contract.  In those cases, commonly known as “out-of-network” services, we generally charge the patients the same co-payment or other patient responsibility amounts that we would have charged had our center had a contract with the payor.  We also submit a claim for the services to the payor along with full disclosure that our surgical facility has charged the patient an in-network patient responsibility amount.  Historically, those third-party payors who do not have contracts with our surgical facilities typically have paid our claims at higher than comparable contracted rates.  However, there is a growing trend for third-party payors to adopt out-of-network fee schedules that are more comparable to our contracted rates or to take other steps to discourage their enrollees from seeking treatment at out-of-network surgical facilities.  In these cases, we seek to enter into contracts with the payors.  In certain situations, we have seen an increase in the volume of cases in those instances where we transition from out-of-network to in-network billing, although we may experience an overall decrease in revenues to the surgical facility.  We can provide no assurance that we will see a sufficient increase in volume of cases to compensate for the decrease in per case revenues where we transition from out-of-network to in-network billing.

 

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Payments from workers’ compensation payors represented approximately 12% and 10% of our patient service revenues for the years ended December 31, 2008 and 2009, respectively.  Several states have recently considered or implemented workers’ compensation provider fee schedules.  In some cases, the fee schedule rates contain lower rates than the rates our surgical facilities have historically been paid for the same services.  If the trend of states adopting lower workers’ compensation fee schedules continues, it could have a material adverse effect on our surgical facilities’ financial condition and results of operations.

 

Our growth strategy depends in part on our ability to acquire and develop additional surgical facilities on favorable terms.  If we are unable to do so, our future growth could be limited and our operating results could be adversely affected.

 

Our strategy is to increase our revenues and earnings by continuing to focus on existing surgical facilities and continuing to acquire and develop additional surgical facilities.  Between January 1999 and December 31, 2009, we acquired 51 surgical facilities and developed 24 surgical facilities, including 16 surgical facilities that we subsequently divested.  We may be unable to identify suitable acquisition and development opportunities and to negotiate and complete acquisitions and new projects on favorable terms.  In addition, our acquisition and development program requires substantial capital resources, and we may need to obtain additional capital or financing, from time to time, to fund these activities.  As a result, we may take actions that could have a materially adverse effect on our financial condition and results of operations, including incurring substantial debt.  Sufficient financing may not be available to us on satisfactory terms, if at all.

 

We may encounter numerous business risks in acquiring and developing additional surgical facilities, and may have difficulty operating and integrating those surgical facilities.

 

If we acquire or develop additional surgical facilities, we may be unable to successfully operate the surgical facilities, and we may experience difficulty in integrating their operations and personnel.  For example, in some acquisitions, we have experienced delays in implementing standard operating procedures and systems and improving existing managed care agreements and the mix of specialties offered at the surgical facilities.  Following the acquisition of a surgical facility, key physicians may cease to use the facility or we may be unable to retain key management personnel.  If we acquire the assets of a surgical facility rather than ownership in the entity that owns the surgical facility, we may be unable to assume the surgical facility’s existing managed care contracts and may have to renegotiate, or risk losing, one or more of the surgical facility managed care contracts.  We may also be unable to collect the accounts receivable of an acquired surgical facility.  We may also experience negative effects on our reported results of operations because of acquisition-related charges and potential impairment of goodwill and other intangibles.

 

In addition, we may acquire surgical facilities with unknown or contingent liabilities, including liabilities for failure to comply with health care laws and regulations.  Although we maintain professional and general liability insurance, we do not maintain insurance specifically covering any unknown or contingent liabilities that may have occurred prior to the acquisition of companies and surgical facilities.  In some cases, our right to indemnification for these liabilities may be subject to negotiated limits.

 

In developing new surgical facilities, we may be unable to attract physicians to use our facilities or contract with third-party payors.  In addition, our newly developed surgical facilities typically incur net losses during the initial periods of operation and, unless and until their case loads grow, they generally experience lower total revenues and operating margins than established surgical facilities.  Integrating a new surgical facility could be expensive and time consuming and could disrupt our ongoing business and distract our management and other key personnel.  If we are unable to timely and efficiently integrate an acquired or newly developed facility, our business could suffer.

 

Efforts to regulate the construction, acquisition or expansion of health care facilities could prevent us from acquiring additional surgical facilities, renovating our existing facilities or expanding the breadth of services we offer.

 

Some states require prior approval for the construction, acquisition or expansion of health care facilities or expansion of the services the facilities offer.  In giving approval, these states consider the need for additional or expanded health care facilities or services, as well as the financial resources and operational experience of the

 

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potential new owners of existing health care facilities.  In many of the states in which we currently operate, certificates of need must be obtained for capital expenditures exceeding a prescribed amount, changes in capacity or services offered and various other matters.  The remaining states in which we now or may in the future operate may adopt similar legislation.  Our costs of obtaining a certificate of need could be significant, and we cannot assure you that we will be able to obtain the certificates of need or other required approvals for additional or expanded surgical facilities or services in the future.  In addition, at the time we acquire a surgical facility, we may agree to replace or expand the acquired facility.  If we are unable to obtain required approvals, we may not be able to acquire additional surgical facilities, expand health care services we provide at these facilities or replace or expand acquired facilities.

 

If we fail to maintain good relationships with the physicians who use our surgical facilities, our revenues and profitability could be adversely affected.

 

Our business depends upon the efforts and success of the physicians who provide medical services at our surgical facilities and the strength of our relationships with these physicians.  These physicians are not employees of our surgical facilities and are not contractually required to use our facilities.  We generally do not enter into contracts with physicians who use our surgical facilities, other than partnership and operating agreements with physicians who own interests in our surgical facilities, provider agreements with anesthesiology groups that provide anesthesiology services in our surgical facilities, medical director agreements and pain clinic agreements.  Physicians who use our surgical facilities also use other facilities or hospitals and may choose to perform procedures in an office-based setting that might otherwise be performed at our surgical facilities.  In recent years, pain management and gastrointestinal procedures have been performed increasingly in an office-based setting.  Although physicians who own interests in our surgical facilities are subject to agreements restricting ownership of competing facilities, these agreements may not restrict procedures performed in a physician office or in other unrelated facilities.  Also, these agreements restricting ownership of competing facilities are difficult to enforce, and we may be unsuccessful in preventing physicians who own interests in our surgical facilities from acquiring interests in competing facilities.

 

In addition, the physicians who use our surgical facilities may choose not to accept patients who pay for services through certain third-party payors, which could reduce our revenues.  From time to time, we may have disputes with physicians who use our surgical facilities and/or own interests in our surgical facilities or our company.  Our revenues and profitability could be significantly reduced if we lost our relationship with one or more key physicians or groups of physicians, or if such physicians or groups reduce their use of our surgical facilities.  In addition, any damage to the reputation of a key physician or group of physicians or the failure of these physicians to provide quality medical care or adhere to professional guidelines at our surgical facilities could damage our reputation, subject us to liability and significantly reduce our revenues.

 

If we fail to comply with legislative and regulatory rules relating to privacy and security of patient health information and standards for electronic transactions, we may experience delays in payment of claims and increased costs and be subject to substantial fines.

 

HIPAA mandates the adoption of privacy, security and integrity standards related to patient information.  HIPAA also standardizes the method for identifying providers, employers, health plans and patients.  We believe that we are in compliance with the HIPAA regulations.  However, if we fail to comply with the requirements of HIPAA, we could be subject to significant penalties under a tiered penalty system with penalties of up to $50,000 per violation with a maximum civil penalty of $1.5 million in a calendar year for violations of the same requirement.

 

If we fail to comply with laws and regulations relating to the operation of our surgical facilities, we could suffer penalties or be required to make significant changes to our operations.

 

We are subject to many laws and regulations at the federal, state and local government levels in which we operate.  These laws and regulations require that our surgical facilities meet various licensing, certification and other requirements.

 

If we fail or have failed to comply with applicable laws and regulations, we could suffer civil or criminal penalties, including becoming the subject of cease and desist orders, the loss of our licenses to operate and disqualification from Medicare, Medicaid and other government-sponsored health care programs.

 

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In pursuing our growth strategy, we may seek to expand our presence into new geographic markets.  In new geographic markets, we may encounter laws and regulations that differ from those applicable to our current operations.  If we are unable to comply with these legal requirements in a cost-effective manner, we may be unable to expand geographically.

 

Our surgical facilities do not satisfy all of the requirements for any of the safe harbors under the federal Anti-Kickback Statute.  If we fail to comply with the federal Anti-Kickback Statute, we could be subject to criminal and civil penalties, loss of licenses and exclusion from the Medicare and Medicaid programs, which may result in a substantial loss of revenues.

 

The Anti-Kickback Statute, prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for referring, ordering, leasing, furnishing, purchasing or arranging for or recommending or inducing the ordering, purchasing or leasing of items or services payable by Medicare, Medicaid, or any other federally funded health care program.  The Anti-Kickback Statute is very broad in scope, and many of its provisions have not been uniformly or definitively interpreted by existing case law or regulations.  Violations of the Anti-Kickback Statute may result in substantial civil or criminal penalties, including criminal fines of up to $25,000 and civil penalties of up to $50,000 for each violation, plus three times the remuneration involved or the amount claimed and exclusion from participation in the Medicare and Medicaid programs.  The exclusion, if applied to our surgical facilities, could result in significant reductions in our revenues and could have a material adverse effect on our financial condition and results of operations.  In addition, many of the states in which we operate have also adopted laws, similar to the Anti-Kickback Statute, that prohibit payments to physicians in exchange for referrals, some of which apply regardless of the source of payment for care.  These statutes typically impose criminal and civil penalties as well as loss of licenses.  No state or federal regulatory actions have been taken against our surgical facilities under anti-kickback statutes during the time we have owned or managed the facilities.  Management is not aware of any such actions prior to our acquisition or management of these surgical facilities.

 

As discussed in Item 1. “Business — Governmental Regulations,” regulations implement various “safe harbors” to the Anti-Kickback Statute.  Business arrangements that meet the requirements of the safe harbors are deemed to be in compliance with the Anti-Kickback Statute.  Business arrangements that do not meet the safe harbor requirements do not necessarily violate the Anti-Kickback Statute, but may be subject to scrutiny by the federal government to determine compliance.  However, the structure of the partnerships and limited liability companies operating our surgical facilities, as well as our business arrangements involving physician networks, do not satisfy all of the requirements of the safe harbor and, therefore, are not immune from government review or prosecution.

 

If we fail to comply with physician self-referral laws as they are currently interpreted or may be interpreted in the future, or if other legislative restrictions are issued, we could incur a significant loss of reimbursement revenues.

 

The federal physician self-referral law, commonly referred to as the Stark Law, prohibits a physician from making a Medicare or Medicaid reimbursed referral for a “designated health service” to an entity if the physician or a member of the physician’s immediate family has a “financial relationship” with the entity.  The list of “designated health services” under the Stark Law does not include ambulatory surgery services, but it does include services such as clinical laboratory services, and certain imaging services that may be provided by an ambulatory surgery center.  Under the current Stark Law and related regulations, services provided at an ambulatory surgery center are not covered by the statute, even if those services include imaging, laboratory services or other Stark designated health services, provided that (i) the ambulatory surgery center does not bill for these services separately, or (ii) if the center is permitted to bill separately for these services, they are specifically exempted from Stark Law prohibitions.  These are generally radiology and other imaging services integral to performance of surgical procedures that meet certain requirements and certain outpatient prescription drugs.  Services provided at our facilities licensed as hospitals are covered by the Stark Law, but referrals for such services are exempt from the Stark Law under its “whole hospital exception.”  Certain services provided by our managed physician networks are covered by the Stark Law, but referrals for those services are exempt from the Stark Law under its “in-office ancillary services exception,” among others.

 

The Stark Law and similar state statutes are subject to different interpretations with respect to many important provisions.  Violations of these self-referral laws may result in substantial civil or criminal penalties, including treble damages for amounts improperly claimed, civil monetary penalties of up to $15,000 per prohibited service billed, up to $100,000 per prohibited circumvention scheme and exclusion from participation in the

 

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Medicare and Medicaid and other federal and state health care programs.  Exclusion of our ambulatory surgery centers or hospitals from these programs through future judicial or agency interpretation of existing laws or additional legislative restrictions on physician ownership or investments in health care entities could result in a significant loss of reimbursement revenues.  We cannot provide assurances that CMS will not undertake other rulemaking to address additional revisions to the Stark Law regulations.  If future rules modify the provisions of the Stark Law regulations that are applicable to our business, our revenues and profitability could be materially adversely affected and could require us to modify our relationships with our physician and health care system partners.

 

Physician ownership of hospitals has been the subject of legislation, and future statutory and regulatory changes could limit or impair our ability to own and operate our hospitals.

 

Four of our owned surgical facilities are licensed as hospitals.  The Stark Law currently includes an exception relating to physician ownership of a hospital, provided that the physician’s ownership interest is in the whole hospital and the physician is authorized to perform services at the hospital (the “Whole Hospital Exception”).  Physician investment in our facilities licensed as hospitals meets this requirement.

 

For the past several years, the Whole Hospital Exception has been the subject of regulatory action and legislation, and was addressed in the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 enacted into law on March 23, 2010 and March 30, 2010, respectively.  See Item 1. “Business — Governmental Regulations.”  The Acts could have an adverse effect on our financial condition and results of operations.   If future legislation prohibiting physician referrals to hospitals in which the physicians own an interest were enacted by Congress our financial condition and results of operations could be materially adversely affected.

 

We may be subject to actions for false and other improper claims.

 

As discussed in Item 1. “Business — Governmental Regulations,” federal and state government agencies, as well as private payors, have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of the cost reporting and billing practices of health care organizations and their quality of care and financial relationships with referral sources.  In addition, the Office of the Inspector General of the U.S. Department of Health and Human Services, or OIG, and the U.S. Department of Justice have, from time to time, undertaken national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse.

 

The U.S. government is authorized to impose criminal, civil and administrative penalties on any person or entity that files a false claim for payment from the Medicare or Medicaid programs and other federal and state health care programs.  Claims filed with private insurers can also lead to criminal and civil penalties, including, but not limited to, penalties relating to violations of federal mail and wire fraud statutes, as well as penalties under the anti-fraud provisions of HIPAA.  While the criminal statutes are generally reserved for instances of fraudulent intent, the U.S. government is applying its criminal, civil and administrative penalty statutes in an ever-expanding range of circumstances.  For example, the government has taken the position that a pattern of claiming reimbursement for unnecessary services violates these statutes if the claimant merely should have known the services were unnecessary, even if the government cannot demonstrate actual knowledge.  The government has also taken the position that claiming payment for low-quality services is a violation of these statutes if the claimant should have known that the care was substandard.

 

We are also subject to various state insurance statutes and regulations that prohibit us from submitting inaccurate, incorrect or misleading claims.  Although we believe that our operations comply with both federal and state laws, they may nevertheless be the subject of a whistleblower lawsuit or may otherwise be challenged or scrutinized by governmental authorities.  A determination that we have violated these laws could have a material adverse effect on our financial condition or results of operations.

 

33



 

If a federal or state agency asserts a different position or enacts new laws or regulations regarding illegal remuneration under the Medicare, Medicaid or other governmental programs, we may be subject to civil and criminal penalties, experience a significant reduction in our revenues or be excluded from participation in the Medicare, Medicaid or other governmental programs.

 

Any change in interpretations or enforcement of existing or new laws and regulations could subject our current practices to allegations of impropriety or illegality, or could require us to make changes in our surgical facilities, equipment, personnel, services, pricing, capital expenditure programs and operating expenses, which could have a material adverse effect on our financial condition and results of operations.

 

Additionally, new federal or state laws may be enacted that would cause our relationships with physician investors to become illegal or result in the imposition of penalties against us or our surgical facilities.  If any of our business arrangements with physician investors were deemed to violate the Anti-Kickback Statute, the Stark Law or similar laws, or if new federal or state laws were enacted rendering these arrangements illegal, our financial condition and results of operations would be materially adversely affected.

 

If laws governing the corporate practice of medicine or fee-splitting change, we may be required to restructure some of our relationships, which may result in a significant loss of revenues and divert other resources.

 

The laws of various states in which we operate or may operate in the future do not permit business corporations to practice medicine, to exercise control over or employ physicians who practice medicine or to engage in various business practices, such as fee-splitting with physicians (i.e., sharing in a percentage of professional fees).  The interpretation and enforcement of these laws vary significantly from state to state.  We provide management services to two physician networks.  If our arrangements with these networks were deemed to violate state corporate practice of medicine, fee-splitting or similar laws, or if new laws are enacted rendering our arrangements illegal, we may be required to restructure these arrangements, which may result in a significant loss of revenues and divert other resources.

 

We make significant loans to, and are generally liable for debts and other obligations of, the partnerships and limited liability companies that own and operate some of our surgical facilities.

 

We own and operate our surgical facilities through 21 limited partnerships and 38 limited liability companies.  Local physicians, physician groups and health systems also own an interest in all but one of these partnerships and limited liability companies.  In the partnerships in which we are the general partner, we are liable for 100% of the debts and other obligations of the partnership, even if we do not own all of the partnership interests.  For the majority of our surgical facilities, indebtedness at the partnership level is funded through intercompany loans that we provide.  Through most of these loans, which totaled approximately $41.2 million as of December 31, 2009, we have a secured interest in the partnership’s assets.  However, our financial condition and results of operations would be materially adversely affected if our surgical facilities are unable to repay these intercompany loans.

 

We also guarantee the debts and other obligations of many of the partnerships and limited liability companies in which we own an interest.  In some instances, the partnerships or limited liability companies in which we are a minority interest holder seek financing from a third-party and the physicians and/or physician groups guarantee their pro-rata share of the indebtedness to secure the financing.  As of December 31, 2009, we had approximately $2.2 million of off-balance sheet guarantees of non-consolidated third-party debt in connection with these surgical facilities.

 

Our senior secured credit facility and the indenture governing our senior notes allow us to borrow funds that we can lend to the partnerships and limited liability companies in which we own an interest.  Although most of our intercompany loans are secured by the assets of the partnership, the physicians and physician groups that own an interest in these partnerships and limited liability companies generally do not guarantee a pro rata amount of this debt or the other obligations of these partnerships and limited liability companies.

 

34



 

If our operations in New York are found not to be in compliance with New York law, we may be unable to continue or expand our operations in New York.

 

We own an interest in a limited liability company which provides administrative services to an ambulatory surgery center located in New York.  Laws in the State of New York require that corporations have natural persons as stockholders to be approved by the New York Department of Health as a licensed health care facility.  Accordingly, we are not able to own interests in a limited partnership or limited liability company that owns an interest in a health care facility located in New York.  Laws in the State of New York also prohibit the delegation of certain management functions by a licensed health care facility.  The law does permit a licensed facility to lease premises and obtain various services from non-licensed entities.  However, it is not clear what types of delegation constitute a violation.  Although we believe that our operations and relationships in New York are in compliance with applicable laws, if New York regulatory authorities or a third-party asserts a contrary position, we may be unable to continue or expand our operations in New York.

 

If regulations change, we may be obligated to purchase some or all of the ownership of our physician partners or renegotiate some of our partnership and operating agreements with our physician partners and management agreements with surgical facilities.

 

Upon the occurrence of various fundamental regulatory changes or changes in the interpretation of existing regulations, we may be obligated to purchase all of the ownership of the physician investors in most of the partnerships or limited liability companies that own and operate our surgical facilities.  The purchase price that we would be required to pay for the ownership is typically based on either a multiple of the surgical facility’s EBITDA, as defined in our partnership and operating agreements with these surgical facilities, or the fair market value of the ownership as determined by a third-party appraisal.  The physician investors in some of our surgical facilities can require us to purchase their interests in exchange for cash or shares of our common stock if these regulatory changes occur.  In addition, some of our partnership agreements with our physician partners and management agreements with surgical facilities require us to attempt to renegotiate the agreements upon the occurrence of various fundamental regulatory changes or changes in the interpretation of existing regulations and provide for termination of the agreements if renegotiations are not successful.

 

Regulatory changes that could create purchase or renegotiation obligations include changes that:

 

·                  make illegal the referral of Medicare or other patients to our surgical facilities by physician investors;

·                  create a substantial likelihood that cash distributions to physician investors from the partnerships or limited liability companies through which we operate our surgical facilities would be illegal;

·                  make illegal the ownership by the physician investors of interests in the partnerships or limited liability companies through which we own and operate our surgical facilities; or

·                  require us to reduce the aggregate percentage of physician investor ownership in our hospitals.

 

We do not control whether or when any of these regulatory events might occur.  In the event we are required to purchase all of the physicians’ ownership, our existing capital resources would not be sufficient for us to meet this obligation.  These obligations and the possible termination of our partnership and management agreements would have a material adverse effect on our financial condition and results of operations.

 

If we become subject to large malpractice and related legal claims, we could be required to pay significant damages, which may not be covered by insurance.

 

In recent years, physicians, hospitals and other health care providers have become subject to an increasing number of legal actions alleging malpractice, product liability or related legal theories.  Many of these actions involve large monetary claims and significant defense costs.  We maintain liability insurance in amounts that we believe are appropriate for our operations.  Currently, we maintain professional and general liability insurance that provides coverage on a claims made basis of $1.0 million per occurrence and $3.0 million in annual aggregate coverage per surgical facility.  In addition, physicians who provide professional services in our surgical facilities are required to maintain separate malpractice coverage with similar minimum coverage limits.  We also maintain business interruption insurance and property damage insurance, as well as an additional umbrella liability insurance policy in the aggregate amount of $20.0 million.  However, this insurance coverage may not cover all claims against us.  Insurance coverage may not continue to be available at a cost allowing us to maintain adequate levels of

 

35



 

insurance.  If one or more successful claims against us were not covered by or exceeded the coverage of our insurance, our financial condition and results of operations could be adversely affected.

 

We face intense competition for physicians, strategic relationships, acquisitions and managed care contracts, which may result in a decline in our revenues, profitability and market share.

 

The health care business is highly competitive.  We compete with other health care providers, primarily hospitals and other surgical facilities, in attracting physicians to utilize our surgical facilities and in contracting with managed care payors in each of our markets.  There are unaffiliated hospitals in each market in which we operate.  These hospitals have established relationships with physicians and payors.  In addition, other companies either are currently in the same or similar business of developing, acquiring and operating surgical facilities or may decide to enter our business.  Many of these companies have greater resources than we do, including financial, marketing, staff and capital resources.  We may also compete with some of these companies for entry into strategic relationships with health care systems and health care professionals.  In addition, many physician groups develop surgical facilities without a corporate partner, utilizing consultants who perform services for a fee and do not take an equity interest in the ongoing operations of the facility.  In recent years, more physicians are choosing to perform procedures, including pain management and gastrointestinal procedures, in an office-based setting rather than in a surgical facility.  If we are unable to compete effectively with any of these entities or groups, we may be unable to implement our business strategies successfully and our financial position and results of operations could be adversely affected.

 

Our surgical facilities are sensitive to regulatory, economic and other conditions of the states where they are located.  In addition, three of our surgical facilities account for a significant portion of our patient service revenues.

 

Our revenues are particularly sensitive to regulatory, economic and other conditions in the states of Texas and Florida.  As of December 31, 2009, we owned (with physician investors or healthcare systems) and operated seven surgical facilities in Texas and eight surgical facilities in Florida.  The surgical facilities in Texas represented about 17% of our patient service revenues during 2009 and 13% during 2008, and the surgical facilities in Florida represented about 12% of our patient service revenues during 2009 and 13% during 2008.

 

In addition, our facilities in Houma, Louisiana; Durango, Colorado; and Chesterfield, Missouri (Timberlake Surgery Center) generated approximately 6%, 6%, and 5%, respectively, of our patient service revenues during 2008, and 6%, 5%, and 5%, respectively, during 2009.  If these facilities are adversely affected by regulatory, economic and other conditions, or if these facilities do not perform effectively, our financial condition and results of operations will be adversely affected.  None of our remaining surgical facilities accounted for more than 5% of our revenues during 2008 or 2009.

 

We depend on our senior management and we may be adversely affected if we lose any member of our senior management.

 

We are highly dependent on our senior management, including Richard E. Francis, Jr., our chairman of the board and chief executive officer, and Clifford G. Adlerz, our president and chief operating officer.  We have entered into employment agreements with Messrs. Francis and Adlerz that became effective upon the closing of the Merger.  The initial term of each of these agreements is three years from August 23, 2007, which automatically will extend so that the term is three years until terminated.  We may terminate each employment agreement for cause.  In addition, either party may terminate the employment agreement at any time by giving prior written notice to the other party.  We do not maintain “key man” life insurance policies on any of our officers.  Because our senior management has contributed greatly to our growth since inception, the loss of key management personnel or our inability to attract, retain and motivate sufficient numbers of qualified management personnel could have a material adverse effect on our financial condition and results of operations.

 

If we are unable to integrate and manage our information systems effectively, our operations could be disrupted.

 

Our operations significantly depend on effective information systems.  Our information systems and applications require continual maintenance, upgrading and enhancement to meet our operational needs.  Moreover, our acquisition activity requires frequent transitions from, and the integration of, various information systems.  If we

 

36



 

experience difficulties with the transition from information systems or are unable to properly maintain or expand our information systems, we could suffer, among other things, operational disruptions and increases in administrative expenses.

 

Risks Related to Our Corporate Structure

 

We may have a special legal responsibility to the holders of ownership interests in the entities through which we own our surgical facilities, which may conflict with the interests of our noteholders and prevent us from acting solely in our own best interests or the interests of our noteholders.

 

We generally hold our ownership interests in surgical facilities through limited partnerships or limited liability companies in which we maintain ownership along with physicians or physician practice groups.  As general partner or manager of these entities, we may have a special responsibility, known as a fiduciary duty, to manage these entities in the best interests of the other interest holders.  As a result, we may encounter conflicts between our responsibility to the other interest holders and our responsibility to enhance the value of our company.  For example, we have entered into management agreements to provide management services to our surgical facilities in exchange for a fee.  Disputes may arise as to the nature of the services to be provided or the amount of the fee to be paid.  In these cases, we are obligated to exercise reasonable, good faith judgment to resolve the disputes and may not be free to act solely in our own best interests or the interests of the noteholders.  Disputes may also arise between us and our physician investors with respect to a particular business decision or regarding the interpretation of the provisions of the applicable limited partnership agreement or operating agreement.  We seek to avoid these disputes but have not implemented any measures to resolve these conflicts if they arise.  If we are unable to resolve a dispute on terms favorable or satisfactory to us, our financial condition and results of operations may be adversely affected.

 

We are a holding company with no operations of our own.

 

We are a holding company and our ability to service our debt is dependent upon the earnings from the business conducted by our subsidiaries and joint ventures.  The effect of this structure is that we will depend on the earnings of our subsidiaries and joint ventures, and the distribution or payment to us of a portion of these earnings to meet our obligations, including those under our senior secured credit facility, the senior notes and any of our other debt obligations.  The distributions of those earnings or advances or other distributions of funds by these entities to us, all of which are contingent upon the subsidiaries’ earnings, are subject to various business considerations.  In addition, distributions by our subsidiaries could be subject to statutory restrictions, including state laws requiring that such subsidiaries be solvent, or contractual restrictions.  Some of our subsidiaries and joint ventures may become subject to agreements that restrict the sale of assets and significantly restrict or prohibit the payment of dividends or the making of distributions, loans or other payments to stockholders, partners or members.  The indenture governing the senior notes permits our subsidiaries to enter into agreements with similar prohibitions and restrictions in the future, subject to certain limitations.

 

We do not have exclusive control over the distribution of cash from our operating entities and may be unable to cause all or a portion of the cash of these entities to be distributed.

 

All of the surgical facilities in which we have ownership are held through partnerships or limited liability companies.  We typically own, directly or indirectly, the general partnership or majority member interests in these entities.  The partnership and operating agreements for these entities provide for distribution of available cash, in some cases on a quarterly basis subject in certain cases to requirements that we obtain approval of other equity holders.  Many of these agreements also impose limits on the ability of these entities to make loans or transfer assets to us.  If we are unable to cause sufficient cash to be distributed from one or more of these entities, our relationships with the physicians who also own an interest in these entities may be damaged and we could be adversely affected, as could our ability to make debt service payments.  We may not be able to resolve favorably any dispute regarding cash distribution or other matters with a health care system with which we share control of the distributions made by these entities.  Further, the failure to resolve a dispute with these health care systems could cause an entity in which we own an interest to be dissolved.

 

37



 

We are controlled by principal stockholders whose interests may differ from your interests.

 

Circumstances may occur in which the interests of our principal stockholders could be in conflict with your interests.  In addition, these stockholders may have an interest in pursuing transactions that, in their judgment, enhance the value of their equity investment in our company, even though those transactions may involve risks to other interest holders.

 

A majority of the outstanding shares of common stock of our parent company are held by the Crestview funds.  As a result of their stock ownership, the Crestview funds control us and have the power to elect a majority of our directors, appoint new management and approve any action requiring the approval of the holders of common stock, including adopting amendments to our certificate of incorporation and approving acquisitions or sales of all or substantially all of our assets.  The directors elected by the Crestview funds have the ability to control decisions affecting our capital structure, including the issuance of additional capital stock, the implementation of stock repurchase programs and the declaration of dividends.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2.  Properties

 

Our corporate headquarters are located in Nashville, Tennessee in approximately 44,000 square feet of leased office space, under a ten-year lease that commenced on November 1, 2002.  Upon expiration of the initial ten-year term, the lease may be renewed for two additional five-year periods.  To exercise the renewal option, we must give notice at least nine months prior to the expiration of the lease term in question.

 

Our surgical facilities typically are located on real estate leased by the partnership or limited liability company that operates the facility.  These leases generally have initial terms of ten years, but range from two to 15 years.  Most of the leases contain options to extend the lease period for up to ten additional years.  The surgical facilities are generally responsible for property taxes, property and casualty insurance and routine maintenance expenses.  Two of our surgical facilities are located on real estate owned by the limited partnership or limited liability company that owns the surgical facility.  We generally guarantee the lease obligations of the partnerships and limited liability companies that own our surgical facilities.

 

Additional information about our surgical facilities and our other properties can be found in Item 1 of this report under the caption, “Business — Operations.”

 

Item 3.  Legal Proceedings

 

We are, from time to time, subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, breach of management contracts and employment related claims.  In certain of these actions, plaintiffs request payment for damages, including punitive damages, that may not be covered by insurance.

 

PART II

 

Item 4.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

We are wholly owned by Symbion Holdings Corporation which is owned by Crestview and certain affiliated funds managed by Crestview and co-investors.  There is no public trading market for our equity securities or those of Holdings.  As of March 31, 2010, there were 10 holders of Holdings common stock.

 

38



 

Item 5.  Selected Financial Data

 

The following selected consolidated financial and other data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 6 and our audited consolidated financial statements and the related notes included elsewhere in this report. The selected consolidated statement of operations data set forth below for the years ended December 31, 2009, 2008 and 2007, and the selected consolidated balance sheet data set forth below at December 31, 2009 and 2008, are derived from our audited consolidated financial statements that are included elsewhere in this report.  The selected consolidated statement of operations data set forth below for the years ended December 31, 2006 and 2005, and the selected consolidated balance sheet data set forth below at December 31, 2007, 2006 and 2005, are derived from our audited consolidated financial statements that are not included in this report.

 

The historical results presented below are not necessarily indicative of the results to be expected for any future period.

 

 

 

Year Ended December 31,

 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 

(in thousands)

 

Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

346,984

 

$

331,900

 

$

304,305

 

$

285,387

 

$

241,877

 

Cost of revenues

 

248,584

 

225,444

 

206,652

 

181,950

 

148,214

 

General and administrative expense

 

21,448

 

23,923

 

31,873

 

24,407

 

21,993

 

Depreciation and amortization

 

17,314

 

15,175

 

12,652

 

11,913

 

11,575

 

Provision for doubtful accounts

 

3,354

 

3,861

 

4,449

 

3,952

 

3,827

 

Income on equity investments

 

(2,318

)

(1,504

)

(16

)

(2,423

)

(1,273

)

Impairment and loss on disposal of long-lived assets

 

3,505

 

1,899

 

372

 

1,162

 

1,541

 

Gain on sale of long-lived assets

 

(250

)

(975

)

(915

)

(1,808

)

(1,785

)

Proceeds from insurance settlements, net

 

(430

)

 

(161

)

(410

)

 

Litigation settlements, net

 

 

893

 

 

(588

)

 

Merger transaction expenses

 

 

 

7,522

 

 

 

Total operating expenses

 

291,207

 

268,716

 

262,428

 

218,155

 

184,092

 

Operating income

 

55,777

 

63,184

 

41,877

 

67,232

 

57,785

 

Interest expense, net

 

(44,981

)

(43,426

)

(19,991

)

(7,108

)

(4,884

)

Income before income taxes and discontinued operations

 

10,796

 

19,758

 

21,886

 

60,124

 

52,901

 

Provision for income taxes

 

7,766

 

13,256

 

3,240

 

12,254

 

10,428

 

Income from continuing operations

 

3,030

 

6,502

 

18,646

 

47,870

 

42,473

 

(Loss) income from discontinued operations, net of taxes

 

(6,097

)

(3,643

)

(707

)

(783

)

1,534

 

Net (loss) income

 

(3,067

)

2,859

 

17,939

 

47,087

 

44,007

 

Less: Net income attributable to noncontrolling interests

 

(19,387

)

(23,657

)

(23,341

)

(28,294

)

(24,952

)

Net (loss) income attributable to Symbion, Inc.

 

$

(22,454

)

$

(20,798

)

$

(5,402

)

$

18,793

 

$

19,055

 

Cash Flow Data — continuing operations:

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

61,439

 

$

62,266

 

$

53,624

 

$

57,914

 

$

61,636

 

Net cash used in investing activities

 

(11,405

)

(32,848

)

(38,848

)

(64,486

)

(68,592

)

Net cash (used in) provided by financing activities

 

(42,870

)

(31,690

)

2,467

 

6,966

 

8,984

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

EBITDA(1)

 

$

57,826

 

$

57,740

 

$

48,913

 

$

54,070

 

$

44,164

 

EBITDA as a % of revenues

 

16.7

%

17.4

%

16.1

%

18.9

%

18.3

%

Number of surgical facilities operated as of the end of period(2)

 

67

 

66

 

58

 

56

 

56

 

 

 

 

As of December 31,

 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 

(in thousands)

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

40,781

 

$

52,272

 

$

70,617

 

$

56,643

 

$

48,784

 

Total assets

 

790,726

 

783,564

 

768,813

 

503,806

 

436,378

 

Total long-term debt, less current maturities

 

445,008

 

440,612

 

428,925

 

136,553

 

101,909

 

Total Symbion, Inc. stockholders’ equity

 

193,413

 

211,206

 

233,286

 

285,279

 

260,058

 

 


(1)

When we use the term “EBITDA,” we are referring to net (loss) income plus (a) income (loss) from discontinued operations, net of taxes (b) income tax expense (benefit), (c) net interest expense, (d) depreciation and amortization, (e) net income attributable to noncontrolling interests, (f) non-cash (losses) gains, and (g) non-cash stock option compensation. Noncontrolling interest represents the interest of third parties, such as physicians and in some cases, health care systems that own an interest in surgical facilities that we consolidate for financial reporting purposes. Our operating strategy is to apply a market-based approach in structuring our partnerships with individual market dynamics driving the structure. We believe that it is helpful to investors to present EBITDA as defined above because it excludes the portion of net income attributable to these third-party interests and clarifies for investors our portion of EBITDA generated by our surgical facilities and other operations.

(2)

Includes surgical facilities that we manage but in which we do not have an ownership interest.

 

39



 

We use EBITDA as a measure of liquidity.  We have included it because we believe that it provides investors with additional information about our ability to incur and service debt and make capital expenditures.  We also use EBITDA, with some variation in the calculation, to determine compliance with some of the covenants under the senior secured credit facility, as well as to determine the interest rate and commitment fee payable under the senior secured credit facility.

 

EBITDA is not a measurement of financial performance or liquidity under GAAP.  It should not be considered in isolation or as a substitute for net income, operating income, cash flows from operating, investing or financing activities, or any other measure calculated in accordance with generally accepted accounting principles.  The items excluded from EBITDA are significant components in understanding and evaluating financial performance and liquidity.  Our calculation of EBITDA may not be comparable to similarly titled measures reported by other companies.

 

The following table reconciles EBITDA to net cash provided by operating activities — continuing operations:

 

 

 

Year Ended December 31,

 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 

(in thousands)

 

EBITDA

 

$

57,826

 

$

57,740

 

$

48,913

 

$

54,070

 

$

44,164

 

Depreciation and amortization

 

(17,314

)

(15,175

)

(12,652

)

(11,913

)

(11,575

)

Non-cash (losses) gains

 

(2,825

)

(924

)

543

 

646

 

244

 

Non-cash stock option compensation expense

 

(1,297

)

(2,114

)

(10,746

)

(3,865

)

 

Interest expense, net

 

(44,981

)

(43,426

)

(19,991

)

(7,108

)

(4,884

)

Provision for income taxes

 

(7,766

)

(13,256

)

(3,240

)

(12,254

)

(10,428

)

Merger transaction expenses

 

 

 

(7,522

)

 

 

Net income attributable to noncontrolling interests

 

19,387

 

23,657

 

23,341

 

28,294

 

24,952

 

(Loss) gain on discontinued operations, net of taxes

 

(6,097

)

(3,643

)

(707

)

(783

)

1,534

 

Net (loss) income

 

(3,067

)

2,859

 

17,939

 

47,087

 

44,007

 

Loss (income) from discontinued operations

 

6,097

 

3,643

 

707

 

783

 

(1,534

)

Depreciation and amortization

 

17,314

 

15,175

 

12,652

 

11,913

 

11,575

 

Amortization of deferred financing costs

 

2,004

 

4,477

 

2,194

 

506

 

671

 

Non-cash payment-in-kind interest option

 

23,263

 

17,616

 

 

 

 

Non-cash recognition of other comprehensive loss into earnings

 

2,853

 

 

 

 

 

Non-cash credit risk adjustment of financial instruments

 

1,629

 

 

 

 

 

Non-cash stock option compensation expense

 

1,297

 

2,114

 

10,746

 

3,865

 

 

Non-cash losses (gains)

 

2,825

 

924

 

(274

)

(646

)

(244

)

Deferred income taxes

 

8,682

 

13,718

 

15,854

 

(1,556

)

2,836

 

Equity in earnings of unconsolidated affiliates, net of distributions received

 

(207

)

333

 

(16

)

(2,423

)

(1,273

)

Provision for doubtful accounts

 

3,354

 

3,861

 

4,449

 

3,952

 

3,827

 

Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(4,142

)

(3,536

)

(256

)

(2,955

)

(5,353

)

Other assets and liabilities

 

(463

)

1,082

 

(10,371

)

(3,395

)

6,453

 

Net cash provided by operating activities — continuing operations

 

$

61,439

 

$

62,266

 

$

53,624

 

$

57,131

 

$

60,965

 

 

40



 

Item 6.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 5. “Selected Financial Data” and our audited consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties.  For additional information regarding some of the risks and uncertainties that affect our business and the industry in which we operate, please read Item 1A. “Risk Factors” found elsewhere in this report.  Our actual results may differ materially from those estimated or projected in any of these forward-looking statements.

 

Executive Overview

 

We own and operate a national network of short stay surgical facilities in 26 states.  Our surgical facilities, which include ambulatory surgery centers and surgical hospitals, primarily provide non-emergency surgical procedures across many specialties, including, among others, orthopedics, pain management, gastroenterology and ophthalmology.  We own our surgical facilities in partnership with physicians and in some cases health care systems in the markets and communities we serve.  We apply a market-based approach in structuring our partnerships with individual market dynamics driving the structure.  We believe this approach aligns our interests with those of our partners.  As of December 31, 2009, we owned and operated 59 surgical facilities, including 55 ambulatory surgery centers and four surgical hospitals.  We also managed eight additional ambulatory surgery centers.  We owned a majority interest in 36 of the 59 surgical facilities and consolidated 52 of these facilities for financial reporting purposes.  We are reporting one of the 59 surgical facilities as discontinued operations.  In addition to our surgical facilities, we also managed two physician networks throughout 2009, including one physician network in a market in which we operate an ambulatory surgery center.  Each of these physician networks has entered into an agreement with us, which provides, among other things, that we will provide billing, financial services and other business management services in exchange for a management fee.  Our agreement with one of these physician networks expired January 1, 2010.

 

We have benefited from both the growth in overall outpatient surgery cases as well as the migration of surgical procedures from the hospital to the surgical facility setting.  Advancements in medical technology, such as lasers, arthroscopy and enhanced endoscopic techniques, have reduced the trauma of surgery and the amount of recovery time required by patients following a surgical procedure.  Improvements in anesthesia also have shortened the recovery time for many patients and have reduced post-operative side effects such as pain, nausea and drowsiness.  These medical advancements have enabled more patients to undergo surgery in a surgical facility setting.

 

We continue to focus on improving the performance of our same store facilities and acquiring facilities that we believe have favorable growth potential.  During the year ended December 31, 2009, we acquired an ownership interest in a surgical facility located in Gresham, Oregon.  We account for this facility as an equity investment.  Also, we acquired an ownership interest in a surgical hospital in Austin, Texas, an existing market for the Company.  This acquisition provides us with the opportunity to expand our market presence.  In addition, favorable growth potential exists if we are successful in leveraging our physician relationships at our existing ambulatory surgery center.  The surgical facility we acquired in Austin, Texas has historically experienced financial difficulties and represents an opportunity for the Company to improve the financial position of this facility through operational efficiencies.

 

Revenues

 

Our revenues consist of patient service revenues, physician service revenues and other service revenues.  Our patient service revenues relate to fees charged for surgical or diagnostic procedures performed at surgical facilities that we consolidate for financial reporting purposes.  Physician service revenues are revenues from physician networks consisting of reimbursed expenses, plus participation in the excess of revenues over expenses of the physician networks, as provided for in our service agreements with our physician networks.  Other service revenues consist of management and administrative service fees derived from the non-consolidated facilities that we account for under the equity method, management of surgical facilities in which we do not own an interest, and management services we provide to physician networks for which we are not required to provide capital or additional assets.

 

41



 

The following tables summarize our revenues by service type as a percentage of total revenues for the periods indicated:

 

 

 

Year Ended December 31,

 

 

 

2009

 

2008

 

2007

 

Patient service revenues

 

96

%

95

%

95

%

Physician service revenues

 

2

 

2

 

2

 

Other service revenues

 

2

 

3

 

3

 

Total

 

100

%

100

%

100

%

 

Payor Mix

 

Approximately 96% of our revenues are patient service revenues.  The following table sets forth by type of payor the percentage of our patient service revenues generated in the periods indicated:

 

 

 

Year Ended December 31,

 

 

 

2009

 

2008

 

2007

 

Private Insurance

 

71

%

72

%

73

%

Government

 

24

 

22

 

21

 

Self-pay

 

4

 

4

 

4

 

Other

 

1

 

2

 

2

 

Total

 

100

%

100

%

100

%

 

Case Mix

 

We primarily operate multi-specialty facilities where physicians perform a variety of procedures in specialties, including orthopedics, pain management, gastroenterology and ophthalmology, among others.  We believe this diversification helps to protect us from any adverse pricing and utilization trends in any individual procedure type and results in greater consistency in our case volume.

 

The following table sets forth the percentage of cases in each specialty performed at surgical facilities which we consolidate for financial reporting purposes for the periods indicated:

 

 

 

Year Ended December 31,

 

 

 

2009

 

2008

 

2007

 

Ear, nose and throat

 

5.8

%

6.4

%

7.3

%

Gastrointestinal

 

28.1

 

28.1

 

26.7

 

General surgery

 

4.6

 

4.2

 

5.0

 

Obstetrics/gynecology

 

2.9

 

3.1

 

3.6

 

Ophthalmology

 

16.6

 

15.1

 

14.0

 

Orthopedic

 

16.2

 

16.1

 

16.5

 

Pain management

 

15.3

 

15.8

 

15.4

 

Plastic surgery

 

2.7

 

2.9

 

3.2

 

Other

 

7.8

 

8.3

 

8.3

 

Total

 

100.0

%

100.0

%

100.0

%

 

Case Growth

 

Same Store Information

 

We define same store facilities as those facilities that were operating throughout the respective years ended December 31, 2009 and 2008.  For the comparison of same store facilities provided below, we have also included the results of one developed surgical facility within a market served by another surgical facility in which we previously owned an interest.  This surgical facility is consolidated for financial reporting purposes.  Management believes that it is appropriate to include the results of this surgical facility in the same store facility information below based on the following considerations: (1) the migration of cases from the previously owned surgical facility

 

42



 

to the new surgical facility; (2) the waiver of the restriction on ownership applicable to the owners of the previously owned facility that allows certain owners of the previously owned facility to own an interest in the new surgical facility; and (3) the resulting enhancement of our market position by leveraging management services and capacity.

 

The following same store facility table includes both consolidated surgical facilities included in continuing operations that are included in our revenue and non-consolidated surgical facilities that are not reported in our revenue, as we account for these surgical facilities using the equity method.  This same store facilities table is presented to allow comparability to other companies in our industry for the periods indicated:

 

 

 

Year Ended December 31,

 

 

 

2009

 

2008

 

Cases

 

247,566

 

247,986

 

Case growth

 

(0.2

)%

N/A

 

Net patient service revenue per case

 

$

1,450

 

$

1,434

 

Net patient service revenue per case growth

 

1.1

%

N/A

 

Number of same store surgical facilities

 

49

 

N/A

 

 

The following same store facility table is presented for purposes of explaining changes in our condensed consolidated financial results and accordingly excludes non-consolidated surgical facilities that are not reported in our revenue.  For the comparison of same store facilities provided below, the results for the periods presented include the results of a developed surgical facility within a market served by another surgical facility in which we previously owned an interest.  This surgical facility is consolidated for financial reporting purposes.  Management believes it is appropriate to present the results of this facility in the same store information based on the following considerations: (1) the migration of cases from the previously owned surgical facility to the new surgical facility; (2) the waiver of the restriction on ownership applicable to the owners of the previously owned facility that allows certain owners of the previously owned facility to own an interest in the new surgical facility; and (3) the resulting enhancement of our market position by leveraging management services and capacity:

 

 

 

Year Ended December 31,

 

 

 

2009

 

2008

 

Cases

 

225,630

 

226,776

 

Case growth

 

(0.5

)%

N/A

 

Net patient service revenue per case

 

$

1,324

 

$

1,327

 

Net patient service revenue per case growth

 

(0.2

)%

N/A

 

Number of same store surgical facilities

 

44

 

N/A

 

 

Consolidated Information

 

The following table sets forth information for all surgical facilities included in continuing operations that we consolidate for financial reporting purposes for the periods indicated.  Accordingly, the table includes surgical facilities that we have acquired, developed or disposed of since January 1, 2008.

 

 

 

Year Ended December 31,

 

 

 

2009

 

2008

 

Cases

 

240,153

 

235,244

 

Case growth

 

2.1

%

N/A

 

Net patient service revenue per case

 

$

1,386

 

$

1,343

 

Net patient service revenue per case growth

 

3.2

%

N/A

 

Number of surgical facilities operated as of end of the period(1)

 

66

 

66

 

Number of consolidated surgical facilities

 

51

 

49

 

 


(1)          Includes surgical facilities that we manage but in which we have no ownership.

 

43



 

Operating Trends

 

We are dependent upon private and government third-party sources of payment for the services we provide.  The amounts that our surgical facilities and networks receive in payment for their services may be adversely affected by market and cost factors as well as other factors over which we have no control, including Medicare, Medicaid, and state regulations and the cost containment and utilization decisions and reduced reimbursement schedules of third-party payors.  See Item 1. “Business — Reimbursement”.

 

Our operating income margin for the year ended December 31, 2009 decreased to 16.1% from 19.0% during the year ended December 31, 2008.  The margin in 2009 reflects, among other things, $2.4 million of impairment charge related to our equity method investment located in Arcadia, California.  Excluding the impairment charge, our operating income margin decreased to 16.9% for 2009.  The acquisition of the surgical hospital in Austin, Texas negatively impacted our operating income margins by 1.3% during the year ended December 31, 2009.  The surgical hospital has historically experienced financial difficulties and represents an opportunity for the Company to improve the financial position of this facility through operational efficiencies.  In addition, same store cost of revenues increased 1.7% as a percentage of same store revenue primarily as a result of an increase in supplies expense related to an increase in ophthalmology cases which are predominantly reimbursed by Medicare and involve higher cost lenses.

 

Acquisitions and Developments

 

2009 Activities

 

Effective February 28, 2009, we acquired an incremental ownership of 18.0% in our surgical facility located in Westlake Village, California, for a purchase price of $416,000, financed with cash from operations.  We account for this investment under the equity method.  Prior to the acquisition, we owned 1.0% of this facility.

 

Effective May 1, 2009, we acquired a 91.8% ownership interest in a surgical hospital in Austin, Texas for $350,000 plus the assumption of $2.6 million of debt.  Subsequently, we reduced our ownership in this facility to 47.0%.  Austin, Texas is an existing market for the Company and this acquisition provides the opportunity to expand our market presence.  In addition, favorable growth potential exists if we are successful in leveraging our physician relationships at the existing ambulatory surgery center.  The surgical hospital has historically experienced financial difficulties and represents an opportunity for us to improve the financial position of this facility. The purchase price was financed with cash from operations.  We consolidate this surgical facility for financial reporting purposes.  We also entered into a management agreement with this facility.

 

Effective September 1, 2009, we acquired an ownership of 28.8% in a surgical facility located in Gresham, Oregon for $525,000.  The purchase price was financed with cash from operations.  We account for this investment under the equity method.  We also entered into a management agreement with this facility.

 

Also during the first quarter of 2009, we opened one surgical facility that was under development as of December 31, 2008.  We consolidate this surgical facility for financial reporting purposes.

 

2008 Activities

 

Effective January 1, 2008, we acquired incremental ownership in three of our existing surgical facilities located in California.  We acquired incremental ownership of 10.7% in each of our two surgical facilities located in Beverly Hills, California for an aggregate of $2.5 million and 6.4% incremental ownership in our surgical facility located in Encino, California for $2.0 million.  Prior to the acquisition, we owned 55.1% and 57.0% of the two Beverly Hills, California surgical facilities and 55.5% of the Encino, California surgical facility.  The aggregate purchase price was financed with cash from operations.

 

44



 

Effective February 21, 2008, we acquired ownership in five surgical facilities specializing in spine, orthopedic and pain management procedures located in Boulder, Colorado; Honolulu, Hawaii; Bristol and Nashville, Tennessee; and Seattle, Washington for an aggregate of $5.8 million plus the assumption of $4.7 million in debt.  We acquired ownership ranging from 20.0% to 50.0% in these surgical facilities.  One of the five facilities that we acquired in 2008 was a newly developed surgical facility that opened in the fourth quarter of 2007.  Four of these surgical facilities are consolidated for financial reporting purposes.  The aggregate purchase price was financed with cash from operations.  We also entered into management agreements with each of these surgical facilities.

 

Effective May 31, 2008, we acquired additional management rights and an incremental ownership in two of our existing surgical facilities located in California for an aggregate purchase price of $3.4 million, financed with cash from operations.  We acquired an incremental ownership of 18.0% in our surgical facility located in Arcadia, California for $304,000 and an incremental ownership of 16.7% in our surgical facility located in Irvine, California for an aggregate of $3.1 million.  The aggregate purchase price was financed with cash from operations.

 

Effective August 1, 2008, we acquired an incremental ownership of 18.5% in our surgical facility located in Irvine, California for a purchase price of $5.1 million, financed with cash from operations.  Through this acquisition we obtained a controlling interest in this facility, and we began consolidating the facility for financial reporting purposes during the third quarter of 2008.

 

During 2008, we opened four of the five surgical facilities that were under development as of December 31, 2007.  We consolidate one of these surgical facilities for financial reporting purposes and account for three as investments under the equity method.

 

2007 Activities

 

On June 30, 2007, we acquired 55.0% incremental ownership in a multi-specialty surgical facility located in Cape Coral, Florida, in which we already owned 10.0%.  The purchase price was $17.0 million, including $1.7 million of assumed debt, and was financed with additional debt under our former senior credit facility.

 

On August 24, 2007, we acquired a 52.6% ownership in a multi-specialty surgical facility in Havertown, Pennsylvania for $4.1 million.  On December 19, 2007, we acquired a 71.5% interest in a multi-specialty surgical facility in Columbus, Georgia for $141,000 and merged the operations of this surgical facility into an existing surgical facility in the same market.  The aggregate purchase price was financed with proceeds from the Merger financing.  We have a majority interest in and consolidate for financial reporting purposes these two surgical facilities.  We also entered into management agreements with each of these surgical facilities.

 

On December 27, 2007, we acquired additional management rights at three of our existing surgical facilities located in California for an aggregate of $4.8 million.  The additional management rights entitle us to retain a larger percentage of the fee for management services provided to these surgical facilities.  The purchase price was financed with proceeds from the Merger financing.

 

We began development of one surgical facility during 2007 and opened three of the surgical facilities that we began developing in 2006 during the last four months of the year.  Our investment related to these surgical facilities opened was approximately $4.2 million.  We financed these investments using cash from operations and funds available under our former senior credit facility.  We own a majority interest in one of these three surgical facilities opened in 2007, and we consolidate it for financial reporting purposes.  We also entered into management agreements with each of these surgical facilities.  As of December 31, 2007, we had five surgical facilities under development, four of which opened in 2008 and one in early 2009.

 

Discontinued Operations and Divestitures

 

In February 2009, we ceased operations at our surgical facility located in Englewood, Colorado.  We recorded a loss on the disposal of $5.9 million, which includes an accrual of $4.6 million for future contractual obligations under a facility operating lease. As of December 31, 2009, this lease liability was $3.9 million.  As of December 31, 2009, we owned one surgical facility that is classified as discontinued operations.  This facility’s assets, liabilities, revenues, expenses and cash flows have been reclassified as discontinued operations for all periods presented.

 

45



 

Revenues, (loss) gain on operations before income taxes, the income tax provision (benefit), the (loss) gain on the sale from discontinued operations, net of taxes, and the income (loss) from discontinued operations, net of taxes, for the following periods indicated, were as follows (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

Revenues

 

$

4,508

 

$

7,463

 

$

9,803

 

$

19,128

 

$

23,867

 

(Loss) gain on operations before income taxes

 

(240

)

(792

)

(1,522

)

(1,094

)

2,496

 

Income tax provision (benefit)

 

17

 

(676

)

(580

)

(420

)

962

 

(Loss) gain on sale, net of taxes

 

(5,840

)

(3,527

)

235

 

(109

)

 

(Loss) income from discontinued operations, net of taxes

 

$

(6,097

)

$

(3,643

)

$

(707

)

$

(783

)

$

1,534

 

 

Effective February 1, 2010, we disposed of our ownership interest in our surgical facility located in Arcadia, California.  We recorded an impairment charge related to this equity method investment of $2.4 million in 2009.  Effective July 10, 2009, we disposed of our ownership interest in our surgical facility located in Temple, Texas.  A loss of $273,000 was recorded in the quarter ended June 30, 2009.

 

Because both of these investments were accounted for under the equity method, the results of operations for these facilities are not reported as discontinued operations.  The loss on disposal of these facilities is included in impairment and loss on disposal of long-lived assets.

 

Critical Accounting Policies

 

Our significant accounting policies and practices are described in Note 3 of our consolidated financial statements included elsewhere in this report.  In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States, our management must make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Certain accounting estimates are particularly sensitive because of their complexity and the possibility that future events affecting them may differ materially from our current judgments and estimates.  Our actual results could differ from those estimates.  We believe that the following critical accounting policies are important to the portrayal of our financial condition and results of operations and require our management’s subjective or complex judgment because of the sensitivity of the methods, assumptions and estimates used.  This listing of critical accounting policies is not intended to be a comprehensive list of all of our accounting policies.  In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles in the United States, with no need for management’s judgment regarding accounting policy.

 

Consolidation and Control

 

Our consolidated financial statements include our accounts and those of our wholly owned subsidiaries, as well as our interests in surgical facilities that we control through our ownership of a majority voting interest or other rights granted to us by contract as the sole general partner or manager to manage and control the business.  The rights of the limited partners or minority members in these surgical facilities are generally limited to those that protect their ownership, including the right to approve of the issuance of new ownership interests, and those that protect their financial interests, including the right to approve the acquisition or divestiture of significant assets or the incurrence of debt that physician limited partners or members are required to guarantee on a pro rata basis based upon their respective ownership, or that exceeds 20.0% of the fair market value of the surgical facility’s assets.  All significant intercompany balances and transactions, including management fees from consolidated surgical facilities, are eliminated in consolidation.

 

We also hold non-controlling interests in some surgical facilities over which we exercise significant influence.  Significant influence includes financial interests, duties, rights and responsibilities for the day-to-day management of the surgical facility.  These non-controlling interests are accounted for under the equity method.

 

46



 

We also consider the relevant sections of the Financial Accounting Standards Board’s Accounting Standards Codification, Topic 810, Consolidation, to determine if we are the primary beneficiary of (and therefore should consolidate) any entity whose operations we do not control with voting rights.  At December 31, 2009, we consolidate two entities because we are the primary beneficiary.

 

Revenue Recognition

 

Our revenues are comprised of patient service revenues, physician service revenues and other service revenues.  Our patient service revenues relate to fees charged for surgical or diagnostic procedures performed at surgical facilities that we consolidate for financial reporting purposes.  These fees are billed either to the patient or a third-party payor.  Our fees vary depending on the procedure, but usually include all charges for usage of an operating room, a recovery room, special equipment, supplies, nursing staff and medications.  Also, in a very limited number of our surgical facilities, we charge for anesthesia services.  Our fees normally do not include professional fees charged by the patient’s surgeon, anesthesiologist or other attending physician, which are billed directly by the physicians to the patient or third-party payor.  We recognize patient service revenues on the date of service, net of estimated contractual adjustments and discounts for third-party payors, including Medicare and Medicaid.  Changes in estimated contractual adjustments and discounts are recorded in the period of change.

 

Physician service revenues are revenues from physician networks consisting of reimbursed expenses, plus participation in the excess of revenues over expenses of the physician networks, as provided for in our service agreements with our physician networks.  Reimbursed expenses include the costs of personnel, supplies and other expenses incurred to provide the management services to the physician networks.  We recognize physician service revenues in the period in which reimbursable expenses are incurred and in the period in which we have the right to receive a percentage of the amount by which a physician network’s revenues exceed its expenses.  Physician service revenues are based on net billings with any changes in estimated contractual adjustments reflected in service revenues in the subsequent period.

 

Our other service revenues consist of management and administrative service fees derived from non-consolidated surgical facilities that we account for under the equity method, management of surgical facilities in which we do not own an interest and management services we provide to physician networks for which we are not required to provide capital or additional assets.  The fees we derive from these management arrangements are based on a pre-determined percentage of the revenues of each surgical facility and physician network.  We recognize other service revenues in the period in which services are rendered.

 

Allowance for Contractual Adjustments and Doubtful Accounts

 

Our patient service revenues and receivables from third-party payors are recorded net of estimated contractual adjustments and allowances from third-party payors, which we estimate based on the historical trend of our surgical facilities’ cash collections and contractual write-offs, accounts receivable agings, established fee schedules, relationships with payors and procedure statistics.  While changes in estimated reimbursement from third-party payors remain a possibility, we expect that any such changes would be minimal and, therefore, would not have a material effect on our financial condition or results of operations.

 

We estimate our allowances for bad debts using similar information and analysis.  While we believe that our allowances for contractual adjustments and bad debts are adequate, if the actual write-offs are significantly different from our estimates, it could have a material adverse effect on our financial condition and results of operations.  Because we have the ability to verify a patient’s insurance coverage before services are rendered and because we have entered into contracts with third-party payors which account for a majority of our total revenues, the out-of-period contractual adjustments have been minimal.  Our net accounts receivable reflected allowances for doubtful accounts of $9.9 million, $12.0 million and $15.6 million, at December 31, 2009, 2008 and 2007, respectively.

 

47



 

The following table summarizes our day’s sales outstanding for the periods indicated:

 

 

 

Year Ended December 31,

 

 

 

2009

 

2008

 

2007

 

Day’s sales outstanding

 

38

 

38

 

40

 

 

Our collection policies and procedures are based on the type of payor, size of claim and estimated collection percentage for each patient account.  The operating systems used to manage our patient accounts provide for an aging schedule in 30-day increments, by payor, physician and patient.  Each surgical facility is responsible for analyzing accounts receivable to ensure the proper collection and aged category.  The operating systems generate reports that assist in the collection efforts by prioritizing patient accounts.  Collection efforts include direct contact with insurance carriers or patients, written correspondence and the use of legal or collection agency assistance, as required.

 

At a consolidated level, we review the standard aging schedule, by facility, to determine the appropriate provision for doubtful accounts by monitoring changes in our consolidated accounts receivable by aged schedule, day’s sales outstanding and bad debt expense as a percentage of revenues.  At a consolidated level, we do not review a consolidated aging by payor.  Regional and local employees review each surgical facility’s aged accounts receivable by payor schedule.  These employees have a closer relationship with the payors and have a more thorough understanding of the collection process for that particular surgical facility.  Furthermore, this review is supported by an analysis of the actual net revenues, contractual adjustments and cash collections received.  If our internal collection efforts are unsuccessful, we further review patient accounts with balances of $25 or more.  We then classify the accounts based on any external collection efforts we deem appropriate.  An account is written-off only after we have pursued collection with legal or collection agency assistance or otherwise deemed an account to be uncollectible.  Typically, accounts will be outstanding a minimum of 120 days before being written-off.

 

The following table summarizes our accounts receivable aging, net of contractual adjustments but before our allowance for doubtful accounts and certain other allowances, for consolidated surgical facilities as of the periods indicated (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2009

 

2008

 

 

 

Amount

 

% of Total

 

Amount

 

% of Total

 

Current

 

$

20,627

 

41

%

$

18,155

 

35

%

31 to 60 days

 

9,188

 

18

 

9,926

 

19

 

61 to 90 days

 

4,170

 

8

 

5,265

 

10

 

91 to 120 days

 

2,589

 

5

 

3,413

 

7

 

121 to 150 days

 

1,787

 

4

 

2,475

 

5

 

Over 150 days

 

11,950

 

24

 

12,235

 

24

 

Total

 

$

50,311

 

100

%

$

51,469

 

100

%

 

We recognize that final reimbursement of outstanding accounts receivable is subject to final approval by each third-party payor.  However, because we have contracts with our third-party payors and we verify the insurance coverage of the patient before services are rendered, the amounts that are pending approval from third-party payors are minimal.  Amounts are classified outside of self-pay if we have an agreement with the third-party payor or we have verified a patient’s coverage prior to services rendered.  It is our policy to collect co-payments and deductibles prior to providing services.  It is also our policy to verify a patient’s insurance 72 hours prior to the patient’s procedure.  Because our services are primarily non-emergency, our surgical facilities have the ability to control these procedures.  Our patient service revenues from self-pay as a percentage of total revenues for the years ended December 31, 2009, 2008 and 2007 were approximately 4% in each respective period.

 

Income Taxes

 

We use the asset and liability method to account for income taxes.  Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those

 

48



 

temporary differences are expected to be recovered or settled.  If a net operating loss carryforward exists, we make a determination as to whether that net operating loss carryforward will be utilized in the future.  A valuation allowance will be established for certain net operating loss carryforwards where their recoverability is deemed to be uncertain.  The carrying value of the net deferred tax assets assumes that we will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions.  If these estimates and related assumptions change in the future, we will be required to adjust our deferred tax valuation allowances.

 

Long-Lived Assets, Goodwill and Intangible Assets

 

Long-lived assets, including property, plant and equipment comprise a significant portion of our total assets.  We evaluate the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist. When events, circumstances or operating results indicate that the carrying values of certain long-lived assets and the related identifiable intangible assets might be impaired, we assess whether the carrying value of the assets will be recovered through undiscounted future cash flows expected to be generated from the use of the assets and their eventual disposition.  If the assessment indicates that the recorded carrying value will not be recoverable, that cost will be reduced to estimated fair value.  Estimated fair value will be determined based on a discounted future cash flow analysis.

 

Goodwill represents our single largest asset, and is a significant portion of our total assets.  We review goodwill and indefinite lived intangible assets annually, as of December 31, or more frequently if certain indicators arise.  We review goodwill at the reporting unit level, which we have determined to be the consolidated results of Symbion, Inc.  We compare the carrying value of the net assets of the reporting unit to the net present value of the estimated discounted future cash flows of the reporting unit.  If the carrying value exceeds the net present value of the estimated discounted future cash flows, an impairment indicator exists and an estimate of the impairment loss is calculated.  The fair value calculation includes multiple assumptions and estimates, including the projected cash flows and discount rates applied.  Changes in these assumptions and estimates could result in goodwill impairment that could materially adversely impact our financial position and results of operations.

 

As previously discussed, the Company was acquired in a leveraged buy-out transaction on August 23, 2007.  We accounted for the Merger using the purchase method of accounting.  As a result, we recorded goodwill of $509.8 million.

 

We performed our annual goodwill impairment assessment by developing a fair value estimate of the business enterprise as of December 31, 2009 using a discounted cash flows approach.  We corroborated the results of our fair value estimate using a market-based approach.  As we do not have publicly traded equity from which to derive a market value, an assessment of peer-company trading data was performed, whereby management selected comparable peers based on growth and leverage ratios, as well as industry specific characteristics.  Based on the comparable peer market trading data, management identified a reasonable estimate for the market trading price of the Company as of December 31, 2009.  This market-based approach was then used to assess the reasonableness of the discounted cash flows approach.  The result of our annual goodwill impairment test at December 31, 2009 indicated no potential impairment.

 

Due to the sensitivity of the business enterprise value model, and the potential for further deterioration in the market, more specifically the surgical facility and healthcare industries, we will continually monitor the trading market of our peers, as well as our discrete future cash flow forecast.  While we do not anticipate such a change, if projected future cash flows become less favorable than those projected by management, an assessment of possible impairments may become necessary that could have a material non-cash impact on our financial position and results of operations.

 

Results of Operations

 

Year Ended December 31, 2009 Compared To Year Ended December 31, 2008

 

The following table summarizes certain statements of operations items for each of the three years ended December 31, 2009, 2008 and 2007.  The December 31, 2007 information in the table below includes, on a combined basis, the statement of operations for the predecessor period prior to the Merger (January 1, 2007 to August 23, 2007) and the statement of operations for the successor period following the Merger (August 24, 2007 to

 

49



 

December 31, 2007.) The predecessor and successor periods have different bases of accounting and, accordingly, the presentation of the combined statement of operations of the predecessor and successor is not in accordance with generally accepted accounting principles.  We have presented this information on a combined basis to assist in the comparability of our financial statements and to facilitate an understating of our results of operations.  The table also shows the percentage relationship to revenues for the periods indicated:

 

 

 

2009

 

2008

 

2007

 

 

 

Amount

 

% of
Revenues

 

Amount

 

% of
Revenues

 

Amount

 

% of
Revenues

 

 

 

(in thousands)

 

Revenues

 

$

346,984

 

100.0

%

$

331,900

 

100.0

%

$

304,305

 

100.0

%

Cost of revenues

 

248,584

 

71.6

 

225,444

 

67.9

 

206,652

 

67.9

 

General and administrative expense

 

21,448

 

6.2

 

23,923

 

7.2

 

31,873

 

10.5

 

Depreciation and amortization

 

17,314

 

5.0

 

15,175

 

4.6

 

12,652

 

4.1

 

Provision for doubtful accounts

 

3,354

 

1.0

 

3,861

 

1.2

 

4,449

 

1.5

 

Income on equity investments

 

(2,318

)

(0.7

)

(1,504

)

(0.5

)

(16

)

 

Impairment and loss on disposal of long-lived assets

 

3,505

 

1.0

 

1,899

 

0.6

 

372

 

0.1

 

Gain on sale of long-lived assets

 

(250

)

(0.1

)

(975

)

(0.3

)

(915

)

(0.3

)

Proceeds from insurance settlements, net

 

(430

)

(0.1

)

 

 

(161

)

(0.1

)

Litigation settlements, net

 

 

 

893

 

0.3

 

 

 

Merger transaction expenses

 

 

 

 

 

7,522

 

2.5

 

Total operating expenses

 

291,207

 

83.9

 

268,716

 

81.0

 

262,428

 

86.2

 

Operating income

 

55,777

 

16.1

 

63,184

 

19.0

 

41,877

 

13.8

 

Interest expense, net

 

(44,981

)

(13.0

)

(43,426

)

(13.1

)

(19,991

)

(6.6

)

Income before income taxes and discontinued operations

 

10,796

 

3.1

 

19,758

 

5.9

 

21,886

 

7.2

 

Provision for income taxes

 

7,766

 

2.2

 

13,256

 

4.0

 

3,240

 

1.1

 

Income from continuing operations

 

3,030

 

0.9

 

6,502

 

1.9

 

18,646

 

6.1

 

Loss from discontinued operations, net of taxes

 

(6,097

)

(1.8

)

(3,643

)

(1.1

)

(707

)

(0.2

)

Net (loss) income

 

(3,067

)

(0.9

)

2,859

 

0.8

 

17,939

 

5.9

 

Less: Net income attributable to noncontrolling interests

 

(19,387

)

(5.5

)

(23,657

)

(7.1

)

(23,341

)

(7.7

)

Net loss attributable to Symbion, Inc.

 

$

(22,454

)

(6.4

)%

$

(20,798

)

(6.3

)%

$

(5,402

)

(1.8

)%

 

Overview.  In 2009, our revenues increased 4.5% to $347.0 million from $331.9 million for 2008.  We incurred a net loss attributable to Symbion, Inc. for the year ended December 31, 2009 of $(22.5 million) compared to $(20.8 million) for the year ended December 31, 2008.  Our financial results for 2009 compared to 2008 reflect the addition of one surgical facility which we consolidate for financial reporting purposes and one surgical facility we account for using the equity method.  Additionally, we disposed of two surgical facilities which we accounted for using the equity method and one facility reported as discontinued operations as of December 31, 2008.  The acquisition of the surgical hospital in Austin, Texas negatively impacted our operating margins by 1.3%.  The surgical hospital has historically experienced financial difficulties and represents an opportunity for us to improve the financial position of this facility through operational efficiencies.

 

We define same store facilities as those facilities that were operating throughout the respective periods listed below.  For the comparison of same store facilities provided below, we have also included the results of one developed surgical facility within a market served by another surgical facility in which we previously owned an interest. This surgical facility is consolidated for financial reporting purposes. Management believes it is appropriate to present the results of this facility in the same store information based on the following considerations: (1) the migration of cases from the previously owned surgical facility to the new surgical facility; (2) the waiver of the restriction on ownership applicable to the owners of the previously owned facility that allows certain owners of the previously owned facility to own an interest in the new surgical facility; and (3) the resulting enhancement of our market position by leveraging management services and capacity.

 

50



 

Revenues.  Revenues for the year ended December 31, 2009 compared to December 31, 2008 were as follows (in thousands):

 

 

 

2009

 

2008

 

Dollar
Variance

 

Percent
Variance

 

Patient service revenues:

 

 

 

 

 

 

 

 

 

Same store revenues

 

$

298,720

 

$

300,875

 

$

(2,155

)

(0.7

)%

Revenues from other surgical facilities

 

34,107

 

14,994

 

19,113

 

 

Total patient service revenues

 

332,827

 

315,869

 

16,958

 

5.4

 

Physician service revenues

 

6,464

 

6,547

 

(83

)

(1.3

)

Other service revenues

 

7,693

 

9,484

 

(1,791

)

(1.9

)

Total revenues

 

$

346,984

 

$

331,900

 

$

15,084

 

4.5

%

 

Patient service revenues at same store facilities decreased 0.7% for the year ended December 31, 2009 compared to 2008, primarily as a result of a 0.5% decrease in cases combined with a 0.2% decrease in net revenue per case.  The decrease in other service revenues results from a scheduled reduction in management fees from one of our physician networks.

 

Cost of Revenues.  Cost of revenues for the year ended December 31, 2009 compared to 2008 were as follows (in thousands):

 

 

 

2009

 

2008

 

Dollar
Variance

 

Percent
Variance

 

Same store cost of revenues

 

$

218,529

 

$

215,248

 

$

3,281

 

1.5

%

Cost of revenues from other surgical facilities

 

30,055

 

10,196

 

19,859

 

 

Total cost of revenues

 

$

248,584

 

$

225,444

 

$

23,140

 

10.3

%

 

As a percentage of same store revenues, same store cost of revenues increased to 73.2% for the year ended December 31, 2009 compared to 71.5% for the year ended December 31, 2008. This increase is primarily the result of an increase in supplies expense related to an increase in ophthalmology cases which are predominantly reimbursed by Medicare and involve higher cost lenses.

 

Cost of revenues from other surgical facilities increased by $19.9 million.  This increase is primarily attributable to surgical facilities acquired or developed since January 1, 2008.  The acquisition of the surgical hospital in Austin, Texas negatively impacted our operating margins by 1.3%.  The surgical hospital has historically experienced financial difficulties and represents an opportunity for the Company to improve the financial position of this facility through operational efficiencies.  As a percentage of revenues, total cost of revenues increased to 71.6% for 2009 compared to 67.9% for 2008.

 

General and Administrative Expense.  General and administrative expense decreased to $21.4 million for the year ended December 31, 2009 from $23.9 million for the year ended December 31, 2008.  As a percentage of revenues, general and administrative expenses were 6.2% for 2009 and 7.2% for 2008.  This decrease is attributable to a reduction in incentive compensation and other employee benefits.

 

Depreciation and Amortization.  Depreciation and amortization expense for the year ended December 31, 2009 was $17.3 million compared to $15.2 million for the year ended December 31, 2008.  This increase is primarily attributable to depreciation expense at facilities acquired or developed since January 1, 2008.  As a percentage of revenues, depreciation and amortization expense increased to 5.0% for 2009 from 4.6% for 2008.  Same store depreciation and amortization expense increased to $14.7 million for 2009 from $13.5 million in 2008, primarily as a result of asset additions at certain facilities.

 

Provision for Doubtful Accounts.  Provision for doubtful accounts decreased 12.8% to $3.4 million for the year ended December 31, 2009 from $3.9 million for the year ended December 31, 2008.  As a percentage of revenues, the provision for doubtful accounts decreased to 1.0% for 2009 from 1.2% for 2008.  On a same store basis, the provision for doubtful accounts decreased to 0.9% of revenue for 2009 compared to 1.2% for 2008.

 

51



 

Income on Equity Investments.  Income on equity investments represents the net income of certain investments we have in surgical facilities.  These surgical facilities are not consolidated for financial reporting purposes.  Income on equity investments increased to $2.3 million for the year ended December 31, 2009 from $1.5 million for the year ended December 31, 2008.  The increase in income on equity investments for 2009 compared to 2008 is primarily attributable to facilities acquired and developed since January 1, 2008.

 

Impairment and Loss on Disposal of Long-Lived Assets.  During the third quarter of 2009, we recorded an impairment charge of $2.4 million related to our equity method investment located in Arcadia, California.  Also included in 2009 is a loss of $273,000 related to the disposal of our ownership interest in our surgical facility located in Temple, Texas.  The remaining loss is attributable to asset disposals at various facilities.

 

Gain on Sale of Long-Lived Assets.  We recognized a gain on the sale of long-lived assets for the year ended December 31, 2009 of $250,000.  For the year ended December 31, 2008, our gain of $975,000 primarily represented the gain we recognized on the sale of a portion of our ownership in certain surgical facilities to physician investors.  In accordance with the guidance of ASC 810, Consolidation, these gains and losses are no longer reflected in the statement of operations but are considered equity transactions.  During 2009, we recorded $511,000 in additional paid-in-capital as a result of the sale of a portion of our ownership in certain consolidated surgical facilities to physician investors.

 

Operating Income.  Operating income decreased to $55.8 million for the year ended December 31, 2009 from $63.2 million for the year ended December 31, 2008.  This decrease is partially attributable to a $2.4 million impairment charge related to our equity method investment located in Arcadia, California.  Excluding the impairment charge, operating income decreased to 16.8% for the 2009 period from 19.0% for the 2008 period.  This decrease is also attributable to a negative operating margin impact of 1.3% related to the acquisition of the surgical hospital in Austin, Texas.  In addition, same store cost of revenues increased 1.7% as a percentage of same store revenue primarily as a result of an increase in supplies expense related to an increase in ophthalmology cases which are predominantly reimbursed by Medicare and involve higher cost lenses.

 

Interest Expense, Net of Interest Income.  Interest expense, net of interest income, increased to $45.0 million for the year ended December 31, 2009 from $43.4 million for the year ended December 31, 2008.  Included in interest expense for the year ended December 31, 2009 is $1.9 million of net additional interest as a result of discontinuing hedge accounting treatment related to our interest rate swap in January 2009 and the mark-to-market adjustment of the interest rate swap instrument to fair market value.  Interest expense also increased as a result of our election of the PIK option related to the Toggle Notes, whereby the outstanding principal amount of debt has increased $22.3 million since December 31, 2008.  The increase in interest expense is offset by a reduction in amortization of deferred financing costs of $2.5 million in 2009 compared to 2008, which was a result of the accelerated amortization of costs as a result of the bridge facility repayment.

 

Provision for Income Taxes.  The provision for income taxes decreased to $7.7 million for the year ended December 31, 2009 from $13.3 million for the year ended December 31, 2008.  Tax expense in 2009 is primarily due to the recording of non-cash deferred income tax expense related to our partnership investments.

 

Loss from Discontinued Operations, Net of Taxes.  Loss from discontinued operations for the year ended December 31, 2009 of $6.1 million includes a loss on the disposal of the Englewood, Colorado facility of $5.9 million.  Included in this loss is $4.6 million accrued for future contractual obligations under a facility operating lease.

 

Income Attributable to Noncontrolling Interests.  Net income attributable to noncontrolling interests decreased to $19.4 million for the year ended December 31, 2009 compared to $23.7 million for the year ended December 31, 2008.  As a percentage of revenues, net income attributable to noncontrolling interests decreased to 5.5% for 2009 from 7.1% for 2008.  A decrease of $1.4 million is attributable to our acquisition of the surgical facility in Austin, Texas.  The remaining decrease is attributable to our overall decrease in operating income.

 

52



 

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

 

Overview.  In 2008, our revenues increased 9.1% to $331.9 million from $304.3 million for 2007.  We incurred a net loss for the year ended December 31, 2008 of $(20.8 million) compared to $(5.4 million) for the year ended December 31, 2007.  Included in the loss for 2008 is a valuation allowance of $12.9 million against certain deferred tax assets.  Also included in the net loss for 2008 is an additional $14.2 million, net of tax, of interest and amortization of deferred financing costs, primarily due to our new capital structure following the Merger.  Our financial results for the year ended December 31, 2008 compared to 2007 reflect the addition of five surgical facilities that we consolidate for financial reporting purposes and four surgical facilities that we do not consolidate for financial reporting purposes.  The surgical facilities that we do not consolidate for financial reporting purposes are accounted for as equity investments.  For purposes of this management’s discussion of our consolidated financial results, we consider same store facilities as those surgical facilities that we consolidate for financial reporting purposes and were operating throughout the years ended December 31, 2008 and 2007.

 

For the comparison of same store facilities provided below, the results of the periods presented include the consolidation of an existing surgical facility that was previously accounted for using the equity method.  We have also included the results of two developed surgical facilities within markets served by other surgical facilities in which we own an interest.  Both of these recently opened surgical facilities are consolidated for financial reporting purposes.  Management believes that it is appropriate to include the results of these surgical facilities in the same store facility information below based on the following considerations: (1) the migration of cases from the existing surgical facilities to the new surgical facilities, (2) the waiver of the restriction on ownership applicable to the owners of the existing facilities that allows certain owners of the existing facilities to own an interest in the new surgical facilities and (3) the resulting enhancement of our market position by leveraging management services and capacity.

 

Revenues.  Revenues for the year ended December 31, 2008 compared to December 31, 2007 were as follows (in thousands):

 

 

 

2008

 

2007

 

Dollar
Variance

 

Percent
Variance

 

Patient service revenues:

 

 

 

 

 

 

 

 

 

Same store revenues

 

$

295,207

 

$

283,019

 

$

12,188

 

4.3

%

Revenues from other surgical facilities

 

20,662

 

6,252

 

14,410

 

 

Total patient service revenues

 

315,869

 

289,271

 

26,598

 

9.2

 

Physician service revenues

 

6,547

 

5,623

 

924

 

16.4

 

Other service revenues

 

9,484

 

9,411

 

73

 

0.1

 

Total revenues

 

$

331,900

 

$

304,305

 

$

27,595

 

9.1

%

 

Patient service revenues at same store facilities increased 4.3% for the year ended December 31, 2008 compared to 2007, primarily as a result of our 0.9% increase in cases combined with a 3.4% increase in net revenue per case.  Our same store volume increased as a result of our continued focus on physician recruitment for both existing and new specialties as well as our efforts to develop and acquire surgical facilities within markets served by other surgical facilities in which we own an interest, thereby enhancing our overall market position.

 

The increase in net revenue per case is related to normal inflationary adjustments from payors with contracted rates and the cancellation of certain payor contracts in California and Missouri.  In addition, the initial phase of Medicare reimbursement increases became effective January 1, 2008 for specific cases performed in ambulatory surgery centers.  The remaining increase in total revenues is related to surgical facilities acquired or developed since January 1, 2007, partially offset by surgical facilities divested in 2007 and 2008.

 

53



 

Cost of Revenues.  Cost of revenues for the year ended December 31, 2008 compared to 2007 were as follows (in thousands):

 

 

 

2008

 

2007

 

Dollar
Variance

 

Percent
Variance

 

Same store cost of revenues

 

$

211,340

 

$

201,245

 

$

10,095

 

5.0

%

Cost of revenues from other surgical facilities

 

14,104

 

5,407

 

8,697

 

 

Total cost of revenues

 

$

225,444

 

$

206,652

 

$

18,792

 

9.1

%

 

As a percentage of same store revenues, same store cost of revenues increased to 71.6% for the year ended December 31, 2008 compared to 71.1% for December 31, 2007.  On a per case basis, same store cost of revenues increased 4.1% to $962 in 2008 from $924 in 2007, primarily as a result of inflationary adjustments and the impact of facilities under development.  Cost of revenues from other surgical facilities increased by $8.7 million.  This increase is primarily attributable to surgical facilities acquired or developed since January 1, 2007, partially offset by surgical facilities divested in 2007 and 2008.  As a percentage of revenues, total cost of revenues remained consistent, at 67.9% for both 2008 and 2007.

 

General and Administrative Expense.  General and administrative expense increased to $23.9 million for the year ended December 31, 2008 from $23.7 million for the year ended December 31, 2007, excluding expenses related primarily to the accelerated vesting of stock options, restricted stock, and related payroll expense as a result of the Merger.  As a percentage of revenues, general and administrative expenses were 7.2% for 2008 and 10.5% for 2007, or 7.8% excluding expenses related primarily to the accelerated vesting of stock options, restricted stock, and related payroll expense as a result of the Merger.

 

Depreciation and Amortization.  Depreciation and amortization expense for the year ended December 31, 2008 was $15.2 million compared to $12.7 million for the year ended December 31, 2007.  This increase is primarily attributable to depreciation expense at facilities acquired or developed since January 1, 2007.  As a percentage of revenues, depreciation and amortization expense increased to 4.6% for 2008 from 4.1% for 2007.  Same store depreciation and amortization expense increased to $13.6 million for 2008 from $12.3 million in 2007, primarily as a result of asset additions at certain facilities.

 

Provision for Doubtful Accounts.  Provision for doubtful accounts decreased 11.4% to $3.9 million for the year ended December 31, 2008 from $4.4 million for the year ended December 31, 2007.  As a percentage of revenues, the provision for doubtful accounts decreased to 1.2% for 2008 from 1.5% for 2007.  This decrease is primarily attributed to improved collection efforts at several of our larger facilities.  On a same store basis, the provision for doubtful accounts decreased to 1.2% of revenue for 2008 compared to 1.5% for 2007.

 

Income on Equity Investments.  Income on equity investments represents the net income of certain investments we have in surgical facilities.  These surgical facilities are not consolidated for financial reporting purposes.  Income on equity investments increased to $1.5 million for the year ended December 31, 2008 from $16,000 for the year ended December 31, 2007.  The increase in income on equity investments for 2008 compared to 2007 is primarily attributable to acquired facilities and developed facilities opened during 2008.

 

Impairment and Loss on Disposal of Long-Lived Assets.  During 2008, we recorded a loss of $550,000 related to the sale of assets at the Deland, Florida facility.  The remainder of the impairment represents the loss related to the sale of a portion of our ownership interest in certain surgical facilities to physician investors and a health care system.

 

Gain on Sale of Long-Lived Assets.  Gain on sale of long-lived assets for the year ended December 31, 2008 of $975,000 and for the year ended December 31, 2007 of $915,000 primarily represents the gain we recognized on the sale of a portion of our ownership in certain surgical facilities to physician investors.

 

54



 

Litigation Settlements, net.  In 2007 and 2008, the Office of the New York State Comptroller conducted a series of audits of claims submitted to the New York State Health Insurance Program Empire Plan for services provided on an out-of-network basis to plan members at various ambulatory surgery centers, including the surgical facility to which we provide administrative services in Lynbrook, New York.  We have reached a tentative settlement on the matter and have recorded an estimated expense of $820,000 for the year ended December 31, 2008.

 

Merger Transaction Expenses.  During the year ended December 31, 2007, we incurred $7.5 million of costs directly attributable to the Merger.  These costs were primarily legal and accounting fees that were expensed in the period incurred.

 

Operating Income.  Operating income increased to $63.2 million for the year ended December 31, 2008 from $58.3 million, excluding costs related to the Merger, for the year ended December 31, 2007.  As a percentage of revenues, operating income remained consistent at 19.1% for 2008 and 2007, excluding costs related to the Merger.  Operating margins on same store facilities increased to 18.8% for 2008 from 17.4% for 2007.  This increase is primarily a result of cancelling certain payor contracts in California and Missouri.

 

Interest Expense, Net of Interest Income.  Interest expense, net of interest income, increased to $43.4 million for the year ended December 31, 2008 from $20.0 million for the year ended December 31, 2007.  Included in interest expense in 2008 is an additional $2.3 million of amortization expense related to deferred financing costs.  The increase in interest expense in 2008 was primarily due to our new capital structure following the Merger.

 

Provision for Income Taxes.  The provision for income taxes increased to $13.3 million for the year ended December 31, 2008 from $3.2 million for the year ended December 31, 2007.  Tax expense in 2008 is primarily the result of a valuation allowance of approximately $12.9 million recorded against certain federal and state net operating losses, capital losses, and other deferred tax assets.  We expect to fully utilize the net operating losses within the 20-year carry-forward period.  However, because ASC 740 generally does not allow a company to consider more than two to three years of future taxable income when evaluating the ability to utilize net operating losses, it is unlikely that we will be able to utilize these net operating loss carry-forwards or realize the deferred tax assets within this two to three year period, we have established a valuation allowance against them.

 

Income from Continuing Operations.  Income from continuing operations was $6.5 million for the year ended December 31, 2008 compared to $18.6 million for the year ended December 31, 2007.  The 2008 period includes a valuation allowance on certain deferred tax assets of $12.9 million, and additional interest expense and amortization of deferred financing costs totaling approximately $14.2 million, net of tax.

 

Net Income Attributable to Noncontrolling Interests.  Noncontrolling interests in income of consolidated subsidiaries increased to $23.7 million for the year ended December 31, 2008 compared to $23.3 million for the year ended December 31, 2007.  As a percentage of revenues, noncontrolling interests in income of consolidated subsidiaries decreased to 7.1% for 2008 from 7.7% for 2007.

 

55



 

Quarterly Results of Operations

 

The following tables present a summary of our unaudited quarterly consolidated results of operations for each of the four quarters in 2009 and 2008.  The unaudited financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of such information when read in conjunction with our audited consolidated financial statements and related notes.  Our quarterly operating results have varied in the past, may continue to do so and are not necessarily indicative of results for any future period.

 

 

 

2009

 

 

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

 

 

(in thousands)
(unaudited)

 

Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

84,171

 

$

88,461

 

$

86,766

 

$

87,586

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

23,026

 

23,974

 

25,167

 

24,677

 

Supplies

 

16,924

 

19,349

 

19,275

 

19,357

 

Professional and medical fees

 

4,831

 

6,481

 

5,790

 

6,060

 

Rent and lease expense

 

5,896

 

6,260

 

6,484

 

6,963

 

Other operating expenses

 

6,739

 

6,692

 

7,434

 

7,205

 

Cost of revenues

 

57,416

 

62,756

 

64,150

 

64,262

 

General and administrative expense

 

5,876

 

5,469

 

4,698

 

5,405

 

Depreciation and amortization

 

4,352

 

4,226

 

4,362

 

4,374

 

Provision for doubtful accounts

 

935

 

1,047

 

1,168

 

204

 

Income on equity investments

 

(186

)

(466

)

(712

)

(954

)

Impairment and loss on disposal of long-lived assets

 

52

 

388

 

2,593

 

472

 

Gain on sale of long-lived assets

 

(297

)

(380

)

(30

)

457

 

Proceeds from insurance settlements, net

 

(88

)

(178

)

(150

)

(14

)

Total operating expenses

 

68,060

 

72,862

 

76,079

 

74,206

 

Operating income

 

16,111

 

15,599

 

10,687

 

13,380

 

Interest expense, net

 

(11,046

)

(10,896

)

(11,958

)

(11,081

)

Income (loss) before income taxes

 

5,065

 

4,703

 

(1,271

)

2,299

 

Provision for income taxes

 

1,327

 

1,393

 

1,936

 

3,110

 

Income (loss) from continuing operations

 

3,738

 

3,310

 

(3,207

)

(811

)

(Loss) income on discontinued operations, net of taxes

 

(6,232

)

97

 

177

 

(139

)

Net (loss) income

 

(2,494

)

3,407

 

(3,030

)

(950

)

Less: Net income attributable to noncontrolling interests

 

(6,519

)

(5,305

)

(4,013

)

(3,550

)

Net loss attributable to Symbion, Inc.

 

$

(9,013

)

$

(1,898

)

$

(7,043

)

$

(4,500

)

 

56



 

The following table reconciles EBITDA to net cash provided by operating activities — continuing operations:

 

 

 

2009

 

 

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

 

 

(in thousands)
(unaudited)

 

EBITDA

 

$

14,023

 

$

14,853

 

$

13,347

 

$

15,603

 

Depreciation and amortization

 

(4,352

)

(4,226

)

(4,362

)

(4,374

)

Non-cash gains (losses)

 

245

 

(9

)

(2,562

)

(499

)

Non-cash stock option compensation expense

 

(324

)

(324

)

(326

)

(323

)

Interest expense, net

 

(11,046

)

(10,896

)

(11,381

)

(11,658

)

Provision for income taxes

 

(1,327

)

(1,393

)

(1,936

)

(3,110

)

Net income attributable to noncontrolling interests

 

6,519

 

5,305

 

4,013

 

3,550

 

(Income) loss on discontinued operations, net of taxes

 

(6,232

)

97

 

177

 

(139

)

Net (loss) income

 

(2,494

)

3,407

 

(3,030

)

(950

)

Income (loss) from discontinued operations

 

6,232

 

(97

)

(177

)

139

 

Depreciation and amortization

 

4,352

 

4,226

 

4,362

 

4,374

 

Amortization of deferred financing costs

 

499

 

501

 

501

 

503

 

Non-cash payment-in-kind interest option

 

5,556

 

5,743

 

5,884

 

6,080

 

Non-cash stock option compensation expense

 

324

 

324

 

326

 

323

 

Non-cash recognition of other comprehensive loss into earnings

 

732

 

650

 

484

 

987

 

Non-cash credit risk adjustment of financial instruments

 

 

709

 

812

 

108

 

Non-cash (gains) losses

 

(245

)

9

 

2,562

 

499

 

Deferred income taxes

 

1,876

 

1,643

 

2,107

 

3,056

 

Equity in earnings of unconsolidated affiliates, net of distributions received

 

125

 

(167

)

(175

)

10

 

Provision for doubtful accounts

 

935

 

1,047

 

1,168

 

204

 

Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(998

)

(78

)

(794

)

(2,272

)

Other assets and liabilities

 

1,639

 

1,387

 

(2,020

)

(1,469

)

Net cash provided by operating activities — continuing operations

 

$

18,533

 

$

19,304

 

$

12,010

 

$

11,592

 

 

 

 

 

 

 

 

 

 

 

Other Data:

 

 

 

 

 

 

 

 

 

Number of surgical facilities included in continuing operations, as of the end of period(1)

 

65

 

66

 

66

 

66

 

 

57



 

 

 

2008

 

 

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

 

 

(in thousands)
(unaudited)

 

Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

79,253

 

$

84,361

 

$

83,570

 

$

84,716

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

21,876

 

22,558

 

23,389

 

22,687

 

Supplies

 

16,153

 

16,850

 

16,919

 

17,640

 

Professional and medical fees

 

4,616

 

4,525

 

4,908

 

4,972

 

Rent and lease expense

 

5,435

 

5,608

 

5,573

 

5,691

 

Other operating expenses

 

6,300

 

6,470

 

6,750

 

6,524

 

Cost of revenues

 

54,380

 

56,011

 

57,539

 

57,514

 

General and administrative expense

 

6,701

 

5,940

 

6,175

 

5,107

 

Depreciation and amortization

 

3,516

 

3,706

 

3,947

 

4,006

 

Provision for doubtful accounts

 

127

 

1,049

 

1,403

 

1,282

 

Income on equity investments

 

(185

)

(517

)

(450

)

(352

)

Impairment and loss on disposal of long-lived assets

 

194

 

279

 

675

 

751

 

Gain on sale of long-lived assets

 

(158

)

(510

)

(42

)

(265

)

Litigation settlements, net

 

 

 

 

893

 

Total operating expenses

 

64,575

 

65,958

 

69,247

 

68,936

 

Operating income

 

14,678

 

18,403

 

14,323

 

15,780

 

Interest expense, net

 

(10,084

)

(11,120

)

(11,293

)

(10,929

)

Income before income taxes

 

4,594

 

7,283

 

3,030

 

4,851

 

(Benefit) provision for income taxes

 

(428

)

529

 

(1,053

)

14,208

 

Income (loss) from continuing operations

 

5,022

 

6,754

 

4,083

 

(9,357

)

Loss on discontinued operations, net of taxes

 

(214

)

(1,809

)

(468

)

(1,152

)

Net income (loss)

 

4,808

 

4,945

 

3,615

 

(10,509

)

Less: Net income attributable to noncontrolling interests

 

(5,889

)

(6,956

)

(5,444

)

(5,368

)

Net loss attributable to Symbion, Inc.

 

$

(1,081

)

$

(2,011

)

$

(1,829

)

$

(15,877

)

 

58



 

The following table reconciles EBITDA to net cash provided by operating activities — continuing operations:

 

 

 

2008

 

 

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

 

 

(in thousands)
(unaudited)

 

EBITDA

 

$

13,485

 

$

15,265

 

$

13,349

 

$

15,641

 

Depreciation and amortization

 

(3,516

)

(3,706

)

(3,947

)

(4,006

)

Non-cash (losses) gains

 

(36

)

211

 

(200

)

(899

)

Non-cash stock option compensation expense

 

(1,144

)

(323

)

(323

)

(324

)

Interest expense, net

 

(10,084

)

(11,120

)

(11,293

)

(10,929

)

Provision for income taxes

 

428

 

(529

)

1,053

 

(14,208

)

Net income attributable to noncontrolling interests

 

5,889

 

6,956

 

5,444

 

5,368

 

Loss on discontinued operations, net of taxes

 

(214

)

(1,809

)

(468

)

(1,152

)

Net income (loss)

 

4,808

 

4,945

 

3,615

 

(10,509

)

Income from discontinued operations

 

214

 

1,809

 

468

 

1,152

 

Depreciation and amortization

 

3,516

 

3,706

 

3,947

 

4,006

 

Amortization of deferred financing costs

 

1,313

 

2,153

 

519

 

492

 

Non-cash payment-in-kind interest option

 

2,535

 

2,402

 

4,816

 

7,863

 

Non-cash stock option compensation expense

 

1,144

 

323

 

323

 

324

 

Non-cash losses (gains)

 

36

 

(211

)

200

 

899

 

Deferred income taxes

 

(2,629

)

300

 

(541

)

16,588

 

Equity in earnings of unconsolidated affiliates, net of distributions received

 

(185

)

434

 

(12

)

96

 

Provision for doubtful accounts

 

127

 

1,049

 

1,403

 

1,282

 

Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

595

 

(2,920

)

(170

)

(1,041

)

Other assets and liabilities

 

767

 

7,917

 

(2,245

)

(5,357

)

Net cash provided by operating activities — continuing operations

 

$

12,241

 

$

21,907

 

$

12,323

 

$

15,795

 

 

 

 

 

 

 

 

 

 

 

Other Data:

 

 

 

 

 

 

 

 

 

Number of consolidated surgical facilities included in continuing operations, as of the end of period (1)

 

64

 

65

 

65

 

66

 

 


(1)          Includes surgical facilities that we manage but in which have no ownership.

 

Liquidity and Capital Resources

 

Operating Activities

 

The principal source of our operating cash flows is the collection of patient receivables.  Collection efforts for patient receivables are conducted by our personnel at each facility or in centralized service offices for areas in which there are multiple facilities.  Each of our surgical facilities bill for services as performed, usually within several days following the procedure.  Bad debt reserves are established in increasing percentages by aging category based on historical collection experience.  Generally, the entire balance of all accounts remaining uncollected 180 days after the date of service are written off as bad debt and sent to an outside collection agency.  Net amounts received from collection agencies are recorded as recoveries of bad debts.  Our operating cash flows, including changes in accounts payable and other current liabilities, are impacted by the timing of payments to our vendors.  In 2009, 2008 and 2007, we did not make any significant changes to the timing of our payments to vendors.

 

During the year ended December 31, 2009, we generated operating cash flow from continuing operations of $61.4 million compared to $62.3 million for the year ended December 31, 2008.  The $61.4 million of operating cash generated in the year ended December 31, 2009 includes approximately $2.2 million of tax refunds, compared

 

59



 

to $4.0 million of tax refunds in 2008.  During 2007, we generated operating cash flow from continuing operations of $53.6 million.

 

At December 31, 2009, we had working capital of $40.8 million compared to $52.3 million at December 31, 2008.  This decrease is primarily related to an increase in the current portion of our senior secured credit facility.  Our available cash, along with our expected future operating cash flows, is sufficient to service our current obligations.

 

Investing Activities

 

Net cash used in investing activities from continuing operations during the year ended December 31, 2009 was $11.4 million, including $9.9 million related to purchases of property and equipment.  During 2009, we acquired $224,000 of cash through acquisitions which were consolidated for financial reporting purposes.  Cash used in investing activities in 2009 was funded primarily from cash from operations.

 

Net cash used in investing activities from continuing operations during the year ended December 31, 2008 was $32.8 million, including $15.7 million of payments related to acquisitions and $15.6 million related to purchases of property and equipment.  The $15.6 million of property and equipment purchases includes $8.2 million for expansion and development related projects.  During 2008, we acquired $1.6 million of cash through acquisitions which were consolidated for financial reporting purposes.  Cash used in investing activities in 2008 was funded primarily from cash from operations.  Certain expansion and development related projects were funded using facility level third-party debt.

 

Net cash used in investing activities from continuing operations during the year ended December 31, 2007 was $38.8 million, including $24.8 million of payments related to acquisitions and $14.6 million related to purchases of property and equipment.  The $14.6 million of property and equipment purchases includes construction projects at several of our surgical facilities.  Cash used in investing activities in 2007 was funded primarily from cash from operations and proceeds from the Merger financing.

 

Financing Activities

 

Net cash used in financing activities from continuing operations during the year ended December 31, 2009 was $42.9 million.  During 2009, we made scheduled principal payments on our senior secured credit facility totaling $3.8 million.  Also during 2009, we elected to exercise the PIK option by increasing the principal amount in lieu of making scheduled interest payments of $23.3 million on our Toggle Notes.  We also made distributions to noncontrolling interest holders of $25.0 million during 2009.

 

Net cash used in financing activities from continuing operations during the year ended December 31, 2008 was $31.7 million.  During 2008, we made scheduled principal payments on our senior secured credit facility totaling $2.5 million and voluntary principal payments of $11.0 million.  Also during 2008, we elected to exercise the PIK option by increasing the principal amount in lieu of making scheduled interest payments of $4.9 million on our Toggle Notes, as well as $4.9 million on our retired bridge facility.  Additionally, we incurred $4.7 million of deferred finance cost related to the issuance of the Toggle Notes.  We also made distributions to noncontrolling interest holders of $23.4 million during the year ended December 31, 2008.

 

Our net cash provided by financing activities from continuing operations during the year ended December 31, 2007 was $2.5 million.  On August 23, 2007, we completed the Merger and Holdings received net proceeds on the issuance of common stock totaling $239.1 million and $425.0 million in proceeds from borrowings under our new senior secured credit and bridge loan credit facilities.  We paid a sponsor fee of $7.0 million upon completion of the Merger on August 23, 2007 to Crestview and The Northwestern Mutual Life Insurance Company.  This payment is presented in the statement of cash flows as a reduction to the net proceeds received from the sale of common stock.  We paid $490.5 million to our stockholders to retire all of the outstanding stock and options and repaid $129.0 million representing the outstanding principal balance as of August 23, 2007 of our former credit facility.  We also paid approximately $7.5 million in Merger transaction expenses.  During 2007, we made principal payments on debt totaling $163.0 million and received proceeds from debt totaling $458.6 million.

 

60



 

Long-Term Debt

 

The Company’s long-term debt is summarized as follows (in thousands):

 

 

 

2009

 

2008

 

Senior secured credit facility

 

$

232,125

 

$

235,875

 

Senior PIK toggle notes

 

206,967

 

184,635

 

Notes payable to banks

 

14,433

 

17,636

 

Secured term loans

 

2,628

 

3,213

 

Capital lease obligations

 

9,067

 

11,458

 

 

 

465,220

 

452,817

 

Less current maturities

 

(20,212

)

(12,205

)

 

 

$

445,008

 

$

440,612

 

 

Senior Secured Credit Facility

 

On August 23, 2007, in conjunction with the Merger, we entered into a new $350.0 million senior secured credit facility with a syndicate of banks.  The senior secured credit facility extends credit in the form of two term loans of $125.0 million each (the first, the “Tranche A Term Loan” and the second, the “Tranche B Term Loan”) and a $100.0 million revolving, swingline and letter of credit facility (the “Revolving Facility”).  The swingline facility is limited to $10.0 million and the swingline loans are available on a same-day basis.  The letter of credit facility is limited to $10.0 million.  We are the borrower under the senior secured credit facility, and all of our wholly owned subsidiaries are guarantors.  Under the terms of the senior secured credit facility, entities that become wholly owned subsidiaries must also guarantee the debt.

 

The Tranche A Term Loan matures on August 23, 2013, the Tranche B Term Loan matures on August 23, 2014 and the Revolving Facility matures on August 23, 2013.  The Tranche A Term Loan requires quarterly principal payments of $1.6 million through September 30, 2010, quarterly payments of $4.7 million from December 31, 2010 through September 30, 2011, quarterly payments of $6.3 million from December 31, 2011 through September 30, 2012, quarterly payments of $18.1 million from December 31, 2012 through June 30, 2013 and a balloon payment of $12.6 million on August 23, 2013.  The Tranche B Term Loan requires quarterly principal payments of $312,500 through June 30, 2014 and a balloon payment of $111.1 million on August 23, 2014.

 

At our option, the term loans bear interest at the lender’s alternate base rate in effect on the applicable borrowing date plus an applicable alternate base rate margin, or Eurodollar rate in effect on the applicable borrowing date, plus an applicable Eurodollar rate margin.  Both the applicable alternate base rate margin and applicable Eurodollar rate margin will vary depending upon the ratio of our total indebtedness to consolidated EBITDA.

 

The senior secured credit facility permits us to declare and pay dividends only in additional shares of stock, except for the following exceptions.  Restricted subsidiaries, as defined in the credit agreement, may declare and pay dividends ratably with respect to their capital stock.  We may declare and pay cash dividends or make other distributions to Holdings provided the proceeds are used by Holdings to (i) purchase or redeem equity interest of Holdings acquired by former or current employees, consultants or directors of Holdings, the Company or any restricted subsidiary or (ii) pay principal or interest on promissory notes that were issued in lieu of cash payments for the repurchase or redemption of such equity instruments, provided that the aggregate amount of such dividends or other distributions shall not exceed $3.0 million in any fiscal year.  Any unused amounts that are permitted to be paid under this provision are available to be carried over to subsequent fiscal years provided that certain conditions are met.  We may also make payments to Holdings to pay franchise taxes and other fees required to maintain its corporate existence provided such payments do not exceed $3.0 million in any calendar year and also make payments in the amount necessary to enable Holdings to pay income taxes directly attributable to the operations of the Company and to make $1.0 million in annual advisory and management agreement payments.  We may also make additional payments to Holdings in the aggregate amount of $5.0 million throughout the term of the senior secured credit facility.

 

61



 

As of December 31, 2009, the amount outstanding under the senior secured credit facility was $232.1 million with an interest rate on the borrowings of 3.5%.  The $100.0 million Revolving Facility includes a non-use fee of 0.5% of the portion of the facility not used.  We pay this fee quarterly.  As of December 31, 2009, the amount available under the Revolving Facility was $100.0 million.

 

Interest Rate Swap

 

In October 2007, we entered into an interest rate swap agreement to protect against certain interest rate fluctuations of the LIBOR rate on $150.0 million of our variable rate debt under the senior secured credit facility.  The effective date of the interest rate swap was October 31, 2007, and it is scheduled to expire on October 31, 2010.  The interest rate swap effectively fixes our LIBOR interest rate on the $150.0 million of variable debt at a rate of 4.7%.  We have recognized the fair value of the interest rate swap as a current liability of approximately $5.0 million at December 31, 2009.  Due to the dramatic decrease in LIBOR rates, we elected an interest term for the January 2009 interest election period under the terms of the debt agreement which differs from that of the swap instrument.  As a result, we discontinued hedge accounting treatment for our interest rate swap in 2009.  In January 2009, we began recognizing a ratable portion of the $7.0 million in accumulated other comprehensive income as additional interest expense over the remaining life of the swap instrument.  Also beginning in January 2009, we began recording into earnings the mark-to-market adjustment to reflect the fair value of the hedging instrument.  Our mark to market adjustment for 2009 resulted in a reduction of interest expense of $3.6 million.  We recognized $3.8 million of interest expense related to the ratable reduction of the balance in accumulated other comprehensive income during 2009.

 

Senior PIK Toggle Notes

 

On June 3, 2008, we completed a private offering of $179.9 million aggregate principal amount of the Toggle Notes.  The notes issued in the private offering were subsequently exchanged for Toggle Notes registered under the Securities Act of 1933, as amended, in an exchange offer.  Interest on the Toggle Notes is due on February 23 and August 23 of each year.  The Toggle Notes will mature on August 23, 2015.  For any interest period through August 23, 2011, we may elect to pay interest on the Toggle Notes (i) in cash, (ii) in kind, by increasing the principal amount of the notes or issuing new notes (referred to as “PIK interest”) for the entire amount of the interest payment or (iii) by paying interest on 50% of the principal amount of the Toggle Notes in cash and 50% in PIK interest.  Cash interest on the Toggle Notes accrues at the rate of 11.0% per annum.  PIK interest on the Toggle Notes accrues at the rate of 11.75% per annum.  We elect to pay cash interest or to exercise the PIK option in advance of the interest period.

 

Upon issuance of the Toggle Notes, we elected to exercise the PIK option by increasing the principal amount of the Toggle Notes in lieu of making scheduled interest payments of $4.7 million for the interest period through August 23, 2008.  On August 23, 2008, we elected the PIK option of the Toggle Notes in lieu of making scheduled interest payments for the interest period from August 23, 2008 to February 23, 2009.  This election increased the principal due on the Toggle Notes by $10.8 million in the first quarter of 2009.  On February 23, 2009, we elected the PIK option of the Toggle Notes in lieu of making scheduled interest payments for the interest period from February 23, 2009 to August 23, 2009.  This election increased the principal due on the Toggle Notes by $11.5 million in the third quarter of 2009.  On August 23, 2009, we elected the PIK option of the Toggle Notes in lieu of making scheduled interest payments for the interest period from August 23, 2009 to February 23, 2010.  We have accrued $8.6 million in interest in other accrued expenses as of December 31, 2009 and will reclassify the total accrued interest to the principal balance of the Toggle Notes on February 23, 2010.

 

The Toggle Notes are unsecured senior obligations and rank equally with other existing and future senior indebtedness, senior to all future subordinated indebtedness and effectively junior to all secured indebtedness to the extent of the value of the collateral securing such indebtedness.  Certain existing subsidiaries have guaranteed the Toggle Notes on a senior basis, as required by the indenture.  The indenture also requires that certain of our future subsidiaries guarantee the Toggle Notes on a senior basis.  Each guarantee is unsecured and ranks equally with senior indebtedness of the guarantor, senior to all of the guarantor’s subordinated indebtedness and effectively junior to its secured indebtedness to the extent of the value of the collateral securing such indebtedness.

 

62



 

The indenture governing the Toggle Notes contains various restrictive covenants, including financial covenants that limit our ability and the ability of the subsidiaries to borrow money or guarantee other indebtedness, grant liens, make investments, sell assets, pay dividends or engage in transactions with affiliates.

 

At December 31, 2009, we were in compliance with all material covenants required by each of the senior secured credit facility and the Toggle Notes.

 

Notes Payable to Banks

 

Certain of our subsidiaries have outstanding bank indebtedness, which is collateralized by the real estate and equipment owned by the surgical facilities to which the loans were made.  The outstanding balance of this indebtedness as of December 31, 2009 and December 31, 2008 was $14.4 million and $24.0 million, respectively.  The various bank indebtedness agreements contain covenants to maintain certain financial ratios and also restrict encumbrance of assets, creation of indebtedness, investing activities and payment of distributions.  We have guaranteed $9.4 million of this debt.

 

Capital Lease Obligations

 

We are liable to various vendors for several equipment leases.  The outstanding balance related to these capital leases at December 31, 2009 and December 31, 2008 was $9.1 million and $5.1 million, respectively.

 

Summary

 

We believe we have sufficient liquidity in the next 12 to 18 months as described above. Nevertheless, we continue to monitor the state of the financial and credit markets and our current and expected liquidity and capital resource needs, and intend to continue to explore various financing alternatives to improve our capital structure, including by reducing debt, extending maturities or relaxing financial covenants.  These may include new equity or debt financings or exchange offers with our existing security holders (including exchanges of debt for debt or equity) and other transactions involving our outstanding securities, given their secondary market trading prices.  We cannot assure you, if we pursue any of these transactions, that we will be successful in completing a transaction on attractive terms, or at all.

 

Contractual Obligations and Commercial Commitments

 

The following table summarizes our contractual obligations by period as of December 31, 2009 on a historical basis (in thousands):

 

 

 

Payments Due by Period

 

 

 

Total

 

Less Than
1 Year

 

1-3 Years

 

4-5 Years

 

After 5
Years

 

Contractual Obligations:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

456,153

 

$

16,036

 

$

65,823

 

$

166,564

 

$

207,730

 

Capital lease obligations

 

9,067

 

4,176

 

4,029

 

676

 

186

 

Operating lease obligations

 

147,514

 

23,498

 

44,330

 

31,384

 

48,302

 

Total

 

$

612,734

 

$

43,710

 

$

114,182

 

$

198,624

 

$

256,218

 

 

Inflation

 

For the past three years, inflation and changing prices have not significantly affected our operating results or the markets in which we operate.

 

63



 

Recently Adopted and Recently Issued Accounting Guidelines

 

Adopted

 

On September 30, 2009, we adopted changes issued by the Financial Accounting Standards Board (“FASB”) to the authoritative hierarchy of generally accepted accounting principles (“GAAP”).  These changes establish the FASB Accounting Standards CodificationTM (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP.  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates.  Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification.  These changes and the Codification itself do not change GAAP.  Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on the financial statements.

 

On January 1, 2009, we adopted changes issued by the FASB to noncontrolling interests in consolidated financial statements.  These changes require, among other items, that a noncontrolling interest be included within equity separate from the parent’s equity; consolidated net income be reported at amounts inclusive of both the parent’s and noncontrolling interest’s shares; and, separately, the amounts of consolidated net income attributable to the parent and noncontrolling interest all be reported on the consolidated statement of operations.  The implementation of these changes also results in the cash flow impact of certain transactions with noncontrolling interests being classified within financing activities.  Those changes to the statement of cash flows include: a) distributions to noncontrolling interest partners were previously recorded as an operating activity and are now included in the financing activities section; and b) acquisitions or sales of equity interests in consolidated subsidiaries in which there were no changes of control were previously recorded in the investing section and are now presented as financing activities.

 

We could be obligated, under the terms of the partnership and operating agreements governing many of our joint ventures, upon the occurrence of various fundamental regulatory changes, to purchase some or all of the noncontrolling interests related to our consolidated subsidiaries.  These repurchase requirements are limited to the portions of our facilities that are owned by physicians who perform surgery at our facilities and would be triggered by regulatory changes making the existing ownership structure illegal.  While we are not aware of events that would make the occurrence of such a change probable, regulatory changes are outside of our control.  Accordingly, the noncontrolling interests subject to these repurchase provisions, and the income attributable to those interests, have been classified outside of equity on our consolidated balance sheets.

 

Effective January 1, 2009, we adopted changes issued by the FASB to accounting for business combinations.  These changes retain the purchase method of accounting for acquisitions, but require a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting as well as requiring the expensing of acquisition-related costs as incurred.  Furthermore, these changes provide guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  We have applied these changes to the acquisitions completed during the year ended December 31, 2009.

 

Effective January 1, 2009, we adopted changes issued by the FASB to the method of determination of the useful life of intangible assets.  This guidance amends the factors that should be considered in determining the useful life of a recognized intangible asset.  The intent of this guidance is to improve consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset.  The adoption of this guidance did not have a material impact on our consolidated results of operations or financial position.

 

Effective January 1, 2009, we adopted changes issued by the FASB to equity method investment accounting.  These changes clarify the accounting for certain transactions and impairment considerations involving equity method investments.  The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations, or cash flows.

 

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Effective January 1, 2009, we adopted changes issued by the FASB to disclosures about derivative instruments and hedging activities.  This guidance requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting.  The objective of the guidance is to provide users of the financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  We are adhering to the enhanced disclosure requirements regarding derivative instruments and hedging activities.

 

In April 2009, we adopted changes issued by the FASB to interim disclosures about fair value of financial instruments, which require an entity to provide interim disclosures about the fair value of all financial instruments within the scope of the guidance, and to include disclosures related to the methods and significant assumptions used in estimating those instruments.  Other than the required disclosures, these changes had no impact on the financial statements.

 

On June 30, 2009, we adopted changes issued by the FASB to subsequent eventsThis guidance establishes general standards of accounting and disclosures of events that occur after the balance sheet date but before the financial statements are issued.  We evaluated all subsequent events that occurred after the balance sheet date through the date the Form 10-K is issued.

 

Issued

 

In June 2009, the FASB issued changes to the accounting for variable interest entities.  These changes require an enterprise: (i) to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity; (ii) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity; (iii) to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity; (iv) to add an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance; and (v) to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity.  These changes become effective for us on January 1, 2010.  Management is currently evaluating the potential impact of these changes on the financial statements.

 

Item 6A. Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to market risk related to changes in prevailing interest rates.  Historically, we have not held or issued derivative financial instruments other than the use of a variable-to-fixed interest rate swap for a portion of our senior credit facility.  We do not use derivative instruments for speculative purposes.  Our outstanding debt to commercial lenders is generally based on a predetermined percentage above LIBOR or the lenders’ prime rate.  At December 31, 2009, $232.1 million of our total long-term debt was subject to variable rates of interest, while the remaining $233.1 million of our total long-term debt was subject to fixed rates of interest.  A hypothetical 100 basis point increase in market interest rates would result in additional annual interest expense of approximately $1.6 million.  The fair value of our total long-term debt, based on quoted market prices as of December 31, 2009, is approximately $363.6 million.

 

Item 7.  Financial Statements and Supplementary Data

 

Information with respect to this item is contained in our consolidated financial statements beginning with the Index on page F-1 of this report.

 

Item 8.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

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Item 8A(T). Controls and Procedures

 

(a)          Evaluation of Disclosure Controls and Procedures.  We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Exchange Act Rule 13a-15.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us (included in our consolidated subsidiaries) in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported in a timely basis.

 

(b)         Management’s Report on Internal Control over Financial Reporting.  Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f).  Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.

 

Management has assessed the effectiveness of our internal control over financial reporting using the criteria set forth in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Based on management’s assessment and those criteria, management concluded that our internal control over financial reporting was effective as of December 31, 2009.

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financing reporting.  Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

 

(c)      Changes in Internal Control Over Financial Reporting.  There has been no change in our internal control over financial reporting that occurred during the fourth quarter of 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on the Effectiveness of Controls

 

Our management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of controls.  For these reasons, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Item 8B.  Other Information

 

None.

 

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PART III

 

Item 9.  Directors, Executive Officers and Corporate Governance

 

Directors and Executive Officers

 

MANAGEMENT

 

The following list identifies the name, age and position(s) of our executive officers, key employees and directors:

 

Name

 

Age

 

Position

Richard E. Francis, Jr.

 

56

 

Chairman of the Board, Chief Executive Officer and Director

Clifford G. Adlerz

 

56

 

President, Chief Operating Officer and Director

Teresa F. Sparks

 

41

 

Senior Vice President of Finance, Chief Financial Officer

Kenneth C. Mitchell

 

60

 

Senior Vice President of Mergers and Acquisitions

R. Dale Kennedy

 

62

 

Senior Vice President of Management Services and Secretary

Thomas S. Murphy, Jr.

 

50

 

Director

Robert V. Delaney

 

52

 

Director

Quentin Chu

 

33

 

Director

Kurt E. Bolin

 

51

 

Director

Craig R. Callen

 

54

 

Director

 

Each director shall hold office until a successor is elected or until the directors death or resignation.

 

Richard E. Francis, Jr. has served as the Chairman of the Board since May 2002 and as Chief Executive Officer and a director since 1996.  Mr. Francis also served as President from 1996 to May 2002.  Mr. Francis served from 1992 to 1995 as Senior Vice President, Development of HealthTrust, Inc. From 1990 to 1992, Mr. Francis served as Regional Vice President, Southern Region for HealthTrust, where he oversaw operations of 11 hospitals.  Mr. Francis’ experience in the health care industry as well as his leadership of the Company and his role as a director since its founding in 1996 provides the Board with a unique and deeper insight into our business, challenges and opportunities.

 

Clifford G. Adlerz has served as President since May 2002 and as Chief Operating Officer and a director since 1996.  Mr. Adlerz also served as Secretary from 1996 to May 2002.  Mr. Adlerz served as Regional Vice President, Midsouth Region for HealthTrust, Inc. from 1992 until its merger with HCA Inc. in May 1995, at which time he became Division Vice President of HCA and served in that position until September 1995.  Mr. Adlerz served as Chief Executive Officer of South Bay Hospital in Sun City, Florida from 1987 to 1992.  Mr. Adlerz’s experience in the health care industry as well as his leadership of the Company and his role as a director since its founding in 1996 provides the Board with a unique and deeper insight into our business, challenges and opportunities.

 

Teresa F. Sparks has served as Chief Financial Officer and Senior Vice President of Finance since August 2007.  Ms. Sparks served as Corporate Controller from the Company’s inception in 1996 to August 2007 and was named Vice President in December 2002.  Previously, she served as Assistant Controller for HealthWise of America, Inc., a managed care organization.  Prior to joining HealthWise of America, Ms. Sparks was a senior healthcare auditor for Deloitte & Touche LLP, Nashville, Tennessee.

 

Kenneth C. Mitchell has served as Senior Vice President of Mergers and Acquisitions since August 2007.  Mr. Mitchell served as Vice President of Finance from 1996 to December 2002 and as Chief Financial Officer from May 2002 to August 2007.  Mr. Mitchell served as Chief Financial Officer of American HealthMark, Inc. from 1989 to 1995 and as Vice President—Controller for HCA Management Company Inc. from 1988 to 1989.  Prior to that time, Mr. Mitchell served as Assistant Vice President-Development and Regional Controller for HCA Management Company Inc.

 

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R. Dale Kennedy has served as Secretary since May 2002 and Senior Vice President of Management Services since December 2002.  Mr. Kennedy served as Vice President of Management Services from 1996 to December 2002.  Mr. Kennedy served as Chief Operations Officer for IPN Network, LLC, a company that managed the business office functions of health care entities, from 1991 until 1995.  Prior to that time, Mr. Kennedy served in regional financial roles for HealthTrust, Inc. and HCA Inc.

 

Thomas S. Murphy, Jr. co-founded Crestview Partners in 2004 and has served as a director of the Company since August 2007.  He retired from Goldman, Sachs & Co. in 2003 where he was a Partner/Managing Director.  Mr. Murphy spent sixteen years in the Investment Banking Division of Goldman, Sachs & Co.  Mr. Murphy brings to the board his extensive experience with acquisitions, divestitures, recapitalizations, initial public offerings, bank and high yield financings and private equity investments.  In addition to his charitable activities, Mr. Murphy serves on the Board of Directors of FBR Capital Markets Co. and Key Safety Systems, Inc.

 

Robert V. Delaney joined Crestview as a partner in 2007 and has served as a director of the Company since October 2007.  He retired from Goldman, Sachs & Co. in 2003 where he served in a variety of leadership positions including head of the Principal Investment Area in Asia, head of the Principal Investment Area in Japan and head of the Leveraged Finance Group.  Mr. Delaney brings to the board his extensive experience in high yield debt, leveraged loans, restructuring, mergers and acquisitions and principal investing.

 

Quentin Chu is a Principal at Crestview Partners and has been with the firm since July 2005, after graduating from Harvard Business School.  Mr. Chu has served as a director of the Company since August 2007.  Prior to attending business school, Mr. Chu was an associate at The Carlyle Group, where he evaluated and executed transactions in the health care industry, including pharmaceuticals, medical devices, facility-based providers, managed care and outsourcing.  Prior to joining Carlyle, Mr. Chu was an analyst in the health care investment banking team at Goldman, Sachs & Co., where he completed a range of mergers and acquisitions and financing assignments for both early stage and Fortune 500 companies. Mr. Chu’s experience in health care transactions and finance provides the Board greater insight into the health care industry and financial strategy.

 

Kurt E. Bolin is a Principal of Stone Point Capital LLC and has been with the firm since 1997.  Mr. Bolin has served as a director of the Company since August 2007.  Prior to joining Stone Point Capital, Mr. Bolin was with GE Capital, Inc., where he held various private equity positions from 1986 to 1997, most recently as Managing Director of the Equity Capital Group.  In addition to private equity investing, Mr. Bolin’s activities at GE Capital, Inc. included leading the acquisitions of various insurance companies.  Mr. Bolin is also a director of Edgewood Partners Holdings, LLC, GENEX Services, Inc. and Wilton Re Holdings Limited.  The Board benefits from Mr. Bolin’s experience as a private equity investor and the knowledge he has gained as a board member of various companies.

 

Craig R. Callen has been a Senior Advisor at Crestview since October 2009 and became a director of the Company in March 2010.  From 2004 to 2007, Mr. Callen served as Senior Vice President of Strategic Planning and Business Development and a member of the Executive Committee for Aetna, Inc., responsible for oversight and development of Aetna’s corporate strategy, including mergers and acquisitions.  Prior to joining Aetna in 2004, Mr. Callen was a Managing Director and Head of U.S. healthcare investment banking at Credit Suisse First Boston and co-head of health care investment banking at Donaldson Lufkin & Jenrette prior to its acquisition by Credit Suisse First Boston.  During his 20 year career as an investment banker in the healthcare practice, Mr. Callen successfully completed over 100 transactions for clients and contributed as an advisor to the board of directors and managements of many leading healthcare companies in the United States.  Currently, Mr. Callen serves on the Board of Directors of Kinetic Concepts, Inc., and previously served on the Board of Directors of Sunrise Senior Living, Inc.  Mr. Callen, through his lengthy and broad focus on the healthcare industry, offers the Board greater insight into industry dynamics as well as investment and acquisitions strategies.

 

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Board Structure and Compensation

 

Our board is currently composed of 7 members.  We do not currently pay our directors any fees.

 

Audit Committee Financial Expert

 

Our Audit and Compliance Committee is composed of Quentin Chu and Kurt Bolin.  In light of our status as a closely held company and the absence of a public trading market for our common stock, our Board has not designated any member of the Audit and Compliance Committee as an “audit committee financial expert.”

 

Code of Business Conduct and Ethics

 

We have adopted a Code of Business Conduct and Ethics.  Copies of the Code of Business Conduct and Ethics may be obtained, free of charge, by writing to the Secretary of the Company at: Symbion, Inc., 40 Burton Hills Boulevard, Suite 500, Nashville, Tennessee 37215.

 

Item 10.  Executive Compensation

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Symbion is a wholly-owned subsidiary of Symbion Holdings Corporation. The same individuals serve on both Holding’s Board of Directors and our Board of Directors. Senior management is employed by us but has acquired and is eligible to receive equity awards in Holdings.

 

The Compensation Committee of our Board of Directors is responsible for establishing and administering executive compensation policies and programs within the framework of the committee’s compensation philosophy. Our current Compensation Committee was established by Holdings in February 2008.  Our board served as the compensation committee between the consummation of the Merger on August 23, 2007 and the appointment of the committee in February 2008.

 

Our executive compensation policies are designed to complement and contribute to the achievement of our business objectives. The Compensation Committee’s general philosophy is that executive compensation should:

 

·                  Link compensation paid to executives to corporate and individual performance;

·                  Provide incentive opportunities that will motivate executives to achieve our long-term objectives;

·                  Be competitive within our industry and community and responsive to the needs of our executives;

·                  Attract, retain, motivate and reward individuals of the highest quality in the industry with the experience, skills and integrity necessary to promote our success; and

·                  Comply with all applicable laws, and be appropriate in light of reasonable and sensible standards of good corporate governance.

 

The elements of our executive compensation program include (i) base salary, (ii) annual cash bonus or non-equity incentive compensation, (iii) equity-based compensation, and (iv) other benefits such as participation in our 401(k) plan and the Supplemental Executive Retirement Plan (the “SERP”). Executive officers also receive benefits that our other employees receive including medical, life and disability insurance.

 

Compensation Process

 

The Compensation Committee approves salaries and other compensation for our executive officers. The Compensation Committee also reviews and approves, in advance, employment and similar arrangements or payments to be made to any executive officer.  For purposes of this discussion, the Named Executive Officers, or NEOs, are the individuals included in the Summary Compensation Table on page72 of this filing.  Salaries and other compensation for all other officers and employees are determined by management in accordance with our compensation policies and plans.

 

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Prior to the Merger, our compensation procedures were similar to those of other similarly situated companies. Our former Compensation Committee retained an independent compensation consultant for advice with respect to specific compensation decisions.  Currently, our Compensation Committee is appointed by Holdings’ Board of Directors, which is controlled by Crestview. Accordingly, our Compensation Committee represents the interests of our shareholders and makes decisions independent from our executive officers. During 2008 and 2009, our current Compensation Committee generally continued the levels of compensation that were in place at the time of the Merger with cost of living adjustments it has deemed appropriate. Our Compensation Committee has not otherwise utilized the services of a consulting firm in connection with compensation decisions it has made after the Merger.

 

The Compensation Committee may delegate to the Chief Executive Officer the authority to make, within the framework of the Compensation Committee’s philosophy or objectives that it has adopted from time to time, compensation decisions with respect to our non-executive employees.

 

Components of Executive Compensation

 

Base Salaries

 

The Compensation Committee reviews the base salaries of our executive officers on an annual basis. Salaries are determined based on a subjective assessment of the nature and responsibilities of the position involved, our performance and the performance of the particular officer, and the officer’s experience and tenure with us. The base salaries for 2009 for our Named Executive Officers were as follows: $463,500 for Mr. Francis, $334,750 for Mr. Adlerz, $219,078 for Ms. Sparks, $219,078 for Mr. Mitchell, and $207,930 for Mr. KennedyMessrs. Francis and Adlerz were entitled to increases in salary effective January 1, 2008, to $525,000 and $375,000, respectively, under the terms of their employment agreements but elected to delay implementing this increase to their base salary for 2008 and 2009.  Messrs. Francis and Adlerz received the 3% cost of living salary increase that all other employees received in 2008 and received no salary increase for 2009.

 

Non-Equity Incentive Compensation

 

Non-equity incentive compensation is intended to motivate executive officers to achieve pre-determined financial or other goals appropriate to each executive officer’s area of responsibility set by the Compensation Committee, consistent with our overall business strategies.

 

In February 2009, the Compensation Committee established the 2009 Corporate Key Management Incentive Plan for key management employees, including our executive officers.  The 2009 plan provides for a cash bonus equal to a percentage of base salary upon achievement of financial indicators selected by our Compensation Committee, including achievement of applicable budgeted EBITDA, development and division performance targets. The amount paid under the plan depends on the level of achievement. The 2009 plan also provides for an additional cash bonus in the event that 2009 EBITDA for the Company exceeded a target that is materially higher than budgeted EBITDA.  The potential additional bonus payments for 2009 range from 38% to 152% of base salary if the EBITDA target is met or exceeded.

 

For Messrs. Francis and Adlerz, the target bonus was 100% of base salary upon achievement of applicable budgeted EBITDA for the Company.  For our other Named Executive Officers, the potential bonus payments for 2009 ranged from 45% to 50% of base salary upon achievement of applicable budgeted EBITDA for the Company.  A portion of Mr. Kennedy’s potential bonus payment was contingent upon achievement of applicable divisional budgeted EBITDA of $19.3 million. Based on 2009 performance, no bonuses were paid to Messrs. Francis, Adlerz or Mitchell or to Ms. Sparks.  Mr. Kennedy was paid a bonus of $20,592.   The bonus paid to Mr. Kennedy was based on the achievement of applicable divisional budgeted EBITDA.  See “Executive Compensation — Grants of Plan-Based Awards” for additional information on these awards.

 

In March 2010, the Compensation Committee established the 2010 Corporate Key Management Incentive Plan for key management employees, including our executive officers.  The 2010 plan provides for a  bonus in cash or equity securities with a value equal to a percentage of base salary upon achievement of financial indicators selected by our Compensation Committee, including achievement of applicable budgeted EBITDA, development and division performance targets.  The amount of the award under the plan depends on the level of achievement. 

 

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For Messrs. Francis and Adlerz, the target bonus is 100% of base salary upon achievement of applicable budgeted EBITDA for the Company.  For our other Named Executive Officers, the potential bonus payments for 2010 range from 45% to 50% of base salary.

 

Equity-Based Compensation

 

Equity-based compensation is intended to align the financial interests of our executive officers’ interests with those of our stockholders. The Compensation Committee believes that equity awards give our executives a stake in our long-term performance and align senior management with our achievement of longer-term financial objectives that enhance stockholder value.  The Compensation Committee considers the number of available shares, but has no fixed formula for determining the awards to be granted.

 

Holdings maintains the 2007 Equity Incentive Plan, which permits grants of stock options and other equity-based awards.  On August 31, 2007, the Compensation Committee made an initial award of options to purchase Holdings common stock under this plan to our executive officers and certain other employees.  The exercise price of the options equaled the fair market value of Holdings common stock on the date of the grant.  The options contain both time and performance based vesting components.  Vesting of the time vesting portion of the award is accelerated in the event of a change in control. Vesting of performance vesting options is accelerated if certain conditions are satisfied in connection with a liquidity event.  See “Executive Compensation — Potential Payments Upon Termination or Change in Control — Other Effects of Termination of Employment or Change in Control.”

 

In 2009, options to purchase 42,933 shares of Holdings common stock were granted to employees under the 2007 Equity Incentive Plan.  No options or other equity-based awards, however, were granted to our Named Executive Officers in 2009.

 

Other Benefits

 

In January 2005, our former Compensation Committee adopted the SERP. The SERP is a nonqualified deferred compensation program for officers and other key employees designated by the Compensation Committee. The SERP is designed and administered in accordance with the requirements of the Internal Revenue Code to defer the taxation on compensation earned by participating employees. Participating employees can elect to defer up to 25% of their base salary and up to 50% of their year-end bonus. For employees who defer at least 2% of their base salary, we will contribute 2% of the employee’s base salary to the SERP. The Compensation Committee in its discretion may make additional contributions based on achievement of performance goals or other company objectives. Employee contributions pursuant to the SERP are 100% vested at all times. Company contributions vest one year after contribution, and immediately upon death, disability or change in control of the Company. Participating employees direct the investment of their accounts in mutual funds or other appropriate investment media that we select. Assets invested pursuant to the SERP are designated for paying SERP benefits but are the property of Symbion and are subject to the claims of our creditors.

 

The Named Executive Officers are also eligible to participate in our 401(k) plan. The 401(k) plan allows employees to contribute up to the limits imposed by the Internal Revenue Code. Pursuant to the 401(k) plan, we can make a discretionary matching contribution to the plan on behalf of each employee. Typically, our match of employee contributions has been equal to 25% of the first 6% of an employee’s base salary contributed to the plan.

 

Perquisites

 

We provide our executive officers with perquisites that we believe are reasonable, competitive and consistent with our overall executive compensation program and that are generally available to our other employees. These perquisites include medical, life and disability insurance.

 

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EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following table sets forth certain information concerning compensation paid or accrued for the last three years with respect to our Named Executive Officers — the Chief Executive Officer, the Chief Financial Officer and our three other most highly compensated executive officers:

 

Name and Principal Position

 

Year

 

Salary

 

Bonus

 

Stock
Awards(1)

 

Option
Awards(1)

 

Non-Equity
Incentive Plan
Compensation(2)

 

All Other
Compensation(3)

 

Total

 

Richard E. Francis, Jr.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chairman of the Board

 

2009

 

$

463,500

 

$

 

$

 

$

 

$

 

$

13,405

 

$

476,905

 

and Chief Executive

 

2008

 

463,500

 

 

 

 

231,750

 

14,193

 

709,443

 

Officer

 

2007

 

450,000

 

 

307,355

 

4,689,655

 

 

14,131

 

5,461,141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clifford G. Adlerz

President and Chief Operating Officer

 

2009

2008

2007

 

334,750

334,750

325,000

 



 

221,012

 

3,194,763

 

167,375

 

10,664

11,414

11,228

 

345,414

513,539

3,752,003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Teresa F. Sparks (4)

Senior Vice President of Finance and Chief Financial Officer

 

2009

2008

2007

 

219,078

219,078

195,674

 



 

43,437

 

706,000

 

54,769

 

7,755

8,325

7,666

 

226,833

282,172

952,777

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Kenneth C. Mitchell
Senior Vice President of Mergers and Acquisitions

 

2009

2008

2007

 

219,078

219,078

212,697

 


28,017

 

69,066

 

731,636

 

 

7,771

8,636

8,599

 

226,849

255,731

1,021,998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

R. Dale Kennedy
Senior Vice President of Management Services and Secretary

 

2009

2008

2007

 

207,930

207,930

201,874

 



 

65,622

 

728,181

 

20,592

64,978

 

7,385

8,368

8,330

 

235,907

281,276

1,004,007

 

 


(1)          We account for the cost of stock-based compensation awarded under the Symbion Long Term Incentive Plan and the Holdings 2007 Equity Incentive Plan in accordance with accounting guidance for stock-based compensation, under which the cost of equity awards to employees is measured by the fair value of the awards on their grant date, whether or not the awards had any intrinsic value. Amounts shown in the table above reflect the fair value measured on their grant date of awards under the Long Term Incentive Plan and the 2007 Equity Incentive Plan calculated in accordance with accounting guidance for stock-based compensation.  The value of all Long Term Incentive Plan awards was based on the determined market price of our common stock on the date of grant using general valuation principles. The 2007 Equity Incentive Plan awards were based on the value of $10 per share, the same as the value on the date of the Merger, which was determined to be the market value of our common stock based on general valuation principles.  No forfeitures occurred with respect to our Named Executive Officers during 2007, 2008 or 2009. See note 10 to the consolidated financial statements for further information regarding significant assumptions used to determine stock-based compensation expense.  In addition to the time-vesting stock options reflected in the table above, performance-vesting stock options were granted to the Named Executive Officers in 2007, However the Company has not assigned any value to the performance-vesting stock option awards because it is considered unlikely that the performance requirements will be met given current and foreseeable market conditions.  In the event such performance requirements are met, the maximum grant date fair value of such performance-vesting stock option awards would increase the amounts set forth in the table above by an additional $2.7 million for Mr. Francis, $1.6 million for Mr. Adlerz, $410,000 for Ms. Sparks, $410,000 for Mr. Mitchell and $410,000 for Mr. Kennedy.

(2)          Represents awards under the 2008 and 2009 Corporate Key Management Incentive Plans.  See “Grants of Plan-Based Awards” below for additional information on the 2009 awards.

(3)          Represents:

(a)          Company contributions to the Supplemental Executive Retirement Plan for Mr. Francis of $9,001 for 2007, and $9,270 for each of 2008 and 2009, Mr. Adlerz of $6,500 for 2007 and $6,695 for each of 2008 and 2009; Ms. Sparks of $3,914 for 2007 and $4,382 for each of 2008 and 2009; Mr. Mitchell of $4,255 for 2007 and $4,382 for each of 2008 and 2009; and Mr. Kennedy of $4,038 for 2007 and $4,159 for each of 2008 and 2009.

(b)         Company contributions to the 401(k) plan for Mr. Francis of $3,375 for 2007, $3,375 for 2008 and $2,587 for 2009; Mr. Adlerz of $3,375 for 2007, $3,375 for 2008 and $2,587 for 2009; Ms. Sparks of $3,034 for 2007, $3,064 for 2008 and $2,469 for 2009; Mr. Mitchell of $3,375 for 2007, $3,375 for 2008 and $2,485 for 2009; and Mr. Kennedy of $3,375 for 2007, $3,375 for 2008 and $2,368 for 2009.

(c)          Premiums we paid for term life insurance on behalf of each Named Executive Officer of $1,755 for 2007 and $1,548 for each of 2008 and 2009, for Mr. Francis; $1,353 for 2007, $1,344 for 2008 and $1,382 for 2009 for Mr. Adlerz; $718 for 2007, $879 for 2008 and $904 for 2009 for Ms. Sparks; $969 for 2007, $879 for 2008 and $904 for 2009 for Mr. Mitchell; and $917 for 2007, $834 for 2008 and $858 for 2009 for Mr. Kennedy.

 

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(4)          Ms. Sparks was appointed Senior Vice President and Chief Financial Officer effective August 23, 2007.  She replaced Mr. Mitchell on that date.

 

Grants of Plan-Based Awards

 

The following table provides information regarding non-equity incentive awards granted during 2009 to our Named Executive Officers under the 2009 Corporate Key Management Incentive Plan, conditioned on achievement of applicable performance targets:

 

 

 

Estimated Payouts Under Non-Equity
Incentive Plan Awards(3)

 

 

 

Threshold(1)

 

Target(2)

 

Maximum

 

Richard E. Francis, Jr.(4)

 

$

76,385

 

$

381,924

 

$

1,203,274

 

Clifford G. Adlerz(4)

 

55,167

 

275,834

 

869,032

 

Teresa F. Sparks(4)

 

18,052

 

90,260

 

284,370

 

Kenneth C. Mitchell(4)

 

16,247

 

81,234

 

269,899

 

R. Dale Kennedy

 

11,479

 

85,667

 

255,933

 

 


(1)   Threshold is based upon minimum level of bonus payout assuming base level of performance is achieved. If base level is not reached, no bonus would be paid under the plan.

(2)   Target is based upon the expectation of the potential payout of non-equity incentive awards when the incentive plan was established.

(3)   Actual awards made under the plan for performance in 2009 are included in the Summary Compensation Table under “Non-Equity Incentive Plan Compensation”.

(4)   The base level of performance was not achieved for Messrs. Francis, Adlerz or Mitchell or Ms. Sparks.

 

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Outstanding Equity Awards at Fiscal Year-End

 

The following table provides certain information with respect to the Named Executive Officers regarding outstanding equity awards as of December 31, 2009:

 

 

 

Option Awards

 

Name

 

Number of
Securities
Underlying
Unexercised Options
(#) (Exercisable)

 

Number of
Securities
Underlying
Unexercised Options
(#) (Unexercisable)

 

Option Exercise
Price ($)

 

Option Expiration
Date

 

Richard E. Francis, Jr.

 

135,162

(1)

 

$

1.50

 

5/16/12

 

 

 

76,119

(1)

 

$

1.50

 

12/10/13

 

 

 

24,941

(1)

 

$

1.50

 

12/10/14

 

 

 

29,082

(1)

 

$

1.50

 

1/05/15

 

 

 

21,098

(1)

 

$

1.50

 

1/18/14

 

 

 

258,181

(2)

634,316

(2)

$

10.00

 

8/31/17

 

 

 

 

 

 

 

 

 

 

 

Clifford G. Adlerz

 

108,128

(1)

 

$

1.50

 

5/16/12

 

 

 

60,505

(1)

 

$

1.50

 

12/10/13

 

 

 

15,588

(1)

 

$

1.50

 

12/10/14

 

 

 

18,176

(1)

 

$

1.50

 

1/05/15

 

 

 

15,171

(1)

 

$

1.50

 

1/18/14

 

 

 

172,121

(3)

433,509

(3)

$

10.00

 

8/31/17

 

 

 

 

 

 

 

 

 

 

 

Teresa F. Sparks

 

1,729

(1)

 

$

1.50

 

12/10/13

 

 

 

6,361

(1)

 

$

1.50

 

1/05/15

 

 

 

2,982

(1)

 

$

1.50

 

1/18/14

 

 

 

30,913

(4)

104,023

(4)

$

10.00

 

8/31/17

 

 

 

 

 

 

 

 

 

 

 

Kenneth C. Mitchell

 

9,352

(1)

 

$

1.50

 

12/10/14

 

 

 

10,905

(1)

 

$

1.50

 

1/05/15

 

 

 

4,741

(1)

 

$

1.50

 

1/18/14

 

 

 

30,913

(4)

104,023

(4)

$

10.00

 

8/31/17

 

 

 

 

 

 

 

 

 

 

 

R. Dale Kennedy

 

9,066

(1)

 

$

1.50

 

5/16/12

 

 

 

30,913

(4)

104,023

(4)

$

10.00

 

8/31/17

 

 


(1)          Options to purchase Holdings common stock that were received by the Named Executive Officers in exchange for Symbion options that were rolled over in connection with the Merger.

(2)          Effective August 31, 2007, Mr. Francis received a grant of options to purchase 892,497 shares of Holdings common stock, including 430,302 time vesting options and 462,195 performance vesting options. The time vesting options vest 20% per year on December 31 beginning December 31, 2007. Performance vesting options vest upon a liquidity event based on the extent to which an internal rate of return (“IRR”) is achieved by Crestview.

(3)          Effective August 31, 2007, Mr. Adlerz received a grant of options to purchase 605,630 shares of Holdings common stock, including 286,868 time vesting options and 318,762 performance vesting options. The time vesting options vest 20% per year on December 31 beginning December 31, 2007. Performance vesting options vest upon a liquidity event based on the extent to which an indicated IRR is achieved by Crestview.

(4)          Effective August 31, 2007, the Named Executive Officer received a grant of options to purchase 134,936 shares of Holdings common stock, including 51,521 time vesting options and 83,415 performance vesting options. The time vesting options vest 20% per year on December 31 beginning December 31, 2007.  Performance vesting options vest upon a liquidity event based on the extent to which an indicated IRR is achieved by Crestview.

 

Option Exercises and Stock Vested

 

During 2009, the Named Executive Officers did not exercise any stock options.  In addition, no restricted stock or similar awards were outstanding during 2009.

 

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Nonqualified Deferred Compensation

 

The following table shows the activity during 2009 and the aggregate balances held by each of the Named Executive Officers at December 31, 2009 under our SERP:

 

Name

 

Executive Contributions
in Last Fiscal Year

 

Registrant Contributions
in Last Fiscal Year(1)

 

Aggregate Earnings
(Losses) in Last Fiscal
Year

 

Aggregate Balance at
Last Fiscal Year End

 

Richard E. Francis, Jr.

 

$

9,270

 

$

9,270

 

$

34,152

 

$

139,460

 

Clifford G. Adlerz

 

6,695

 

6,695

 

16,959

 

81,515

 

Teresa F. Sparks

 

17,526

 

17,526

 

22,899

 

94,817

 

Kenneth C. Mitchell

 

4,381

 

4,382

 

14,310

 

60,504

 

R. Dale Kennedy

 

8,317

 

8,317

 

15,973

 

58,837

 

 


(1)          Amounts in this column are also reported in the “All Other Compensation” column of the Summary Compensation Table.

 

See “Compensation Discussion and Analysis — Components of Executive Compensation — Other Benefits” for additional information about the SERP.

 

Potential Payments Upon Termination or Change in Control

 

Employment Agreements. Messrs. Francis and Adlerz entered into new employment agreements with us which became effective on August 23, 2007 upon the consummation of the Merger. The initial term of each of the employment agreements is three years, which is automatically extended so that the term will be three years until terminated. We are able to terminate each employment agreement for cause, including (but not limited to) the executive’s conviction of a felony or gross negligence or internal misconduct in the performance of the executive’s duties to the extent it causes demonstrable harm to us. In addition, either party is able to terminate the employment agreement at any time by giving prior written notice to the other party. However, we would be obligated to pay the executive a severance benefit if we terminated the executive’s employment without cause or if the executive terminated his employment upon the occurrence of certain events specified in the agreement, including (but not limited to) a change in control or our material breach of the agreement which is not cured promptly. The severance benefit is generally equal to three times the executive’s highest base salary and the incentive bonus amount that would be paid for the current year as if the incentive bonus performance goals were fully achieved. Upon a termination of employment as a result of the executive’s disability, we will pay the executive contractual disability benefits. If the executive receives severance payments following a change in control of Symbion that are subject to tax under Section 4999 of the Internal Revenue Code, we will pay additional amounts to offset the effect of such taxes on the executive. Each of the employment agreements also includes a covenant not to compete in which the executive agrees that, during the term of the employment agreement and for a period of one year thereafter, he will not own or work for any other company that is predominantly engaged in the ownership and management of surgery centers.

 

Severance Plan. We adopted an Executive Change in Control Severance Plan in December 1997, which currently provides for severance benefits for certain senior level employees, including three of the Named Executive Officers, Teresa F. Sparks, Kenneth C. Mitchell and R. Dale Kennedy. Eligible individuals are those identified in the severance plan and whose employment is terminated in connection with a change in the control of the Company, as defined in the severance plan, and who are not offered employment by us or a successor employer that is substantially equivalent to or better than the position held with us immediately prior to the change in control or such position is not maintained for at least 12 months thereafter. The benefits provided to our eligible Named Executive Officers are cash compensation equal to base pay and bonus for 12 months and participation in medical, life, disability and similar benefit plans that are offered to our active employees or those of its successor for a period of 12 months. Cash benefits are paid in a single lump sum within 30 days following termination.

 

Other Effects of Termination of Employment or Change in Control. In addition to payments pursuant to the employment agreements and the Executive Change in Control Severance Plan described above, upon a termination of employment or change in control:

 

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Supplemental Executive Retirement Plan — Under the SERP, deferrals made by an executive officer are fully vested and nonforfeitable at all times. If the executive officer’s employment ends due to disability, death, retirement or a change in control, the executive officer’s entire account, including earnings, will be fully vested. If the executive officer’s employment ends due to some event other than disability, death, retirement or change in control, the executive officer forfeits all Company contributions that were made less than one year prior to the date of termination.

 

401(k) Plan — Under our 401(k) plan, contributions made by an executive officer are fully vested and nonforfeitable at all times. Matching contributions that we make for the benefit of an executive officer vest based on the years of service of the executive officer. Each of our current executive officers has been an employee for at least five years and, therefore, all company contributions under our 401(k) plan on behalf of such officers is fully vested and nonforfeitable. There is no provision for additional benefits on a change in control.

 

Stock Option Awards — Options may be subject to forfeiture depending on the nature of the terminating event.  In no event shall an option be exercisable after the expiration date of the option. Upon a change in control or liquidity event, Named Executive Officers have special exercise and vesting rights. These special rights also apply to other option holders.

 

Death or Disability.  In the event of death or disability of a Named Executive Officer, the executive officer has 12 months to exercise any vested options.

 

Termination With Cause.  If a Named Executive Officer’s employment is terminated with cause, then all options held by such officer shall immediately be forfeited and cancelled without any payment or consideration being payable to such officer.

 

Other Termination by the Company or Resignation. Except in the event of death or disability, an executive officer will have the right to exercise all options for three months following resignation or termination of employment by the Company that is not for cause. The right to exercise is limited to the options that have become vested as of the date of termination.

 

Change in Control and Liquidity Events. As described above under “Compensation Discussion and Analysis — Components of Executive Compensation — Equity-Based Compensation,” the Company has awarded stock options to executive officers that become vested over a period of time provided that the executive officer continues to be employed by us and stock options that become vested upon achievement of performance goals. The effect of a change in control varies for time vesting options and options that vest upon performance.

 

Time Vesting Options.  In the event of a Change in Control (as defined below) that occurs prior to termination of employment, whether or not the vesting requirements set forth in any form of time vesting option agreement have been satisfied, all such time vesting options that are outstanding at the time of the Change in Control shall become fully vested and exercisable immediately prior to the Change in Control event.

 

A “Change in Control” is deemed to have occurred (i) in the event that any person, entity or group other than Crestview and its related funds holds (other than pursuant to a registered initial public offering) Holdings stock representing at least 50% of the combined voting power of all outstanding voting equity securities and (ii) in the event of an asset sale by or liquidation or dissolution of Holdings.

 

Performance Options. Options that vest upon performance become vested only upon a liquidity event that occurs prior to termination of employment. Executive officers have been awarded both “standard” performance vesting options and additional “alternative” performance vesting options.

 

Change in Control or Liquidity Event Rights on Termination of Employment. Termination of an executive officer’s employment by the Company without cause or upon a resignation for Good Reason will result in the right to exercise options as follows: (i) if termination occurs within 12 months following a Change in Control, the executive officer will be able to fully exercise the time vesting options and, to the extent that the performance conditions are satisfied, performance vesting options for three months following the date of the event; and (ii) if termination occurs within 12 months prior to the execution of an agreement that results in a liquidity event, the

 

76



 

executive officer will be able to exercise the time vesting options to the extent that they were vested as of the termination of employment and, to the extent that the performance conditions are satisfied, performance vesting options for three months following the date of a liquidity event; provided, however, that the number of shares that can be acquired on exercise of the performance vesting option will be reduced by one-half if termination of employment is more than six months prior to execution of such agreement.

 

As it relates to Messrs. Francis and Adlerz, a termination of employment by the executive officer for “Good Reason” occurs following (a) any material breach by the Company of any material provision of the employment agreement; (b) a reduction in base salary or target bonus opportunity; (c) a material diminution in title or level of responsibility, or change in office or reporting relationship; (d) a transfer of the executive’s primary workplace by more than 35 miles; (e) the failure of the executive to be elected or the executive ceases be a member of our board or the board of Symbion (except for cause); or (g) the executive’s resignation for any reason within 120 days following a Change in Control.

 

For all other Named Executive Officers, “Good Reason” means, during the 12 months following a Change in Control, (a) a reduction in base salary or target bonus opportunity in effect immediately prior to the Change in Control; (b) a material diminution in level of responsibility or, with respect to Ms. Sparks, a material diminution in title in effect immediately prior to the Change in Control; (c) a material reduction in the aggregate value of deferred compensation and health and welfare benefits that were provided immediately prior to the Change in Control; or (d) a transfer of the executive officer’s primary workplace by more than 50 miles.

 

Potential Payments. The following table shows the amounts that each Named Executive Officer would have received if the Named Executive Officer’s employment had been terminated for the reasons indicated effective December 31, 2009:

 

77



 

Name

 

Cash
Compensation

 

Accelerated
Vesting of
Stock Options

 

Benefits

 

Total

 

Richard E. Francis, Jr.

 

 

 

 

 

 

 

 

 

Termination for cause, voluntary termination or retirement

 

$

 

$

 

$

35,654

(1)

$

35,654

 

Death

 

 

 

35,654

(1)

35,654

 

Disability

 

208,575

(2)

 

43,033

(3)

251,608

 

Termination by the Company without cause or by the NEO for Good Reason

 

2,781,000

(4)

 

43,033

(3)

2,824,033

 

Change in Control

 

3,431,794

(5)

(6)

43,033

(3)

3,474,827

 

 

 

 

 

 

 

 

 

 

 

Clifford G. Adlerz

 

 

 

 

 

 

 

 

 

Termination for cause, voluntary termination or retirement

 

 

 

25,750

(1)

25,750

 

Death

 

 

 

25,750

(1)

25,750

 

Disability

 

150,649

(2)

 

32,963

(3)

183,612

 

Termination by the Company without cause or by the NEO for Good Reason

 

2,008,500

(4)

 

32,963

(3)

2,041,463

 

Change in Control

 

2,452,473

(5)

(6)

32,963

(3)

2,485,436

 

 

 

 

 

 

 

 

 

 

 

Teresa F. Sparks

 

 

 

 

 

 

 

 

 

Termination for cause, voluntary termination or retirement

 

 

 

16,853

(1)

16,853

 

Death

 

 

 

16,853

(1)

16,853

 

Disability

 

(2)

 

16,853

(1)

16,853

 

Termination by the Company without cause or by the NEO for Good Reason

 

 

 

16,853

(1)

16,853

 

Change in Control

 

328,617

(7)

(6)

23,588

(3)

352,205

 

 

 

 

 

 

 

 

 

 

 

Kenneth C. Mitchell

 

 

 

 

 

 

 

 

 

Termination for cause, voluntary termination or retirement

 

 

 

16,853

(1)

16,853

 

Death

 

 

 

16,853

(1)

16,853

 

Disability

 

(2)

 

16,853

(1)

16,853

 

Termination by the Company without cause or by the NEO for Good Reason

 

 

 

16,853

(1)

16,853

 

Change in Control

 

317,663

(7)

(6)

23,588

(3)

341,251

 

 

 

 

 

 

 

 

 

 

 

R. Dale Kennedy

 

 

 

 

 

 

 

 

 

Termination for cause, voluntary termination or retirement

 

 

 

15,995

(1)

15,995

 

Death

 

 

 

15,995

(1)

15,995

 

Disability

 

(2)

 

15,995

(1)

15,995

 

Termination by the Company without cause or by the NEO for Good Reason

 

 

 

15,995

(1)

15,995

 

Change in Control

 

311,895

(7)

(6)

22,684

(3)

334,579

 

 


(1)          Represents accrued vacation only.

(2)          For Messrs. Francis and Adlerz, this represents a disability benefit annual payment equal to 75% of base salary for a maximum period of 36 months, less the amount that is provided under our disability plan that is generally available to all salaried employees. Our other Named Executive Officers are only eligible for disability benefits under our plan available to all salaried employees.

(3)          Includes accrued vacation and the premiums for medical, life and disability insurance benefits for the period of time the Named Executive Officer is eligible for continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) in accordance with the Named Executive Officer’s employment agreement or the Executive Change in Control Severance Plan, as applicable.

(4)          Represents a severance payment equal to (a) three times the Named Executive Officer’s base salary plus (b) three times the target cash bonus amount for 2009 in accordance with the Named Executive Officer’s employment agreement.

(5)          Includes the amount described in footnote 4 above plus a “gross up” payment of all excise taxes imposed under Section 4999 of the Code and any federal income and excise taxes that are payable as a result of any reimbursements for Section 4999 excise taxes in accordance with the Named Executive Officer’s employment agreement. The gross up amount is $877,200 for Mr. Francis and $620,721 for Mr. Adlerz.  This calculation assumes termination of employment.

(6)          As discussed above, all unvested time vesting options held by an executive officer vest upon a Change in Control. In addition, if specified internal rates of return are achieved upon a liquidity event, then performance vesting options held by executive officers would vest in connection. The fair market value of Holdings common stock on December 31, 2009, as determined under general valuation principles, was less than the exercise price of the unvested options. Therefore, for purposes of this table, no value would have been realized for accelerated vesting of options upon a Change in Control.

(7)          Represents payment under the Executive Change in Control Severance Plan of one year of annual pay, which includes base pay and targeted bonus of 50% of base pay for Ms. Sparks and Mr. Kennedy and 45% for Mr. Mitchell.

 

78



 

The table above does not include information about vesting of Company contributions under our 401(k) plan or the SERP. Information about such plans can be found under “Other Effects of Termination of Employment or Change in Control” and “Nonqualified Deferred Compensation.”

 

Director Compensation

 

None of our directors received compensation for service as a member of our (or Holdings) board or board committees for 2009. They are reimbursed for any expenses incurred in connection with their service.

 

Compensation Committee Interlocks and Insider Participation

 

Following the Merger, the Board of Directors of Holdings acted as our Compensation Committee.  Beginning in February 2008, the Board of Directors of Holdings appointed Robert V. Delaney and Thomas S. Murphy, Jr., Board representatives of Crestview, as the Compensation Committee.  None of the members of the Compensation Committee have at any time been our officer or employee nor have any of the members had any relationship with us requiring disclosure except for the transactions with Crestview described in Item 13. “Certain Relationships and Related Transactions, and Director Independence.”

 

Compensation Committee Report

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management.  Based on our review and discussion with management, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

 

 

Compensation Committee

 

 

 

Robert V. Delaney

 

Thomas S. Murphy, Jr.

 

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Item 11.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

All of our capital stock is owned by our parent company, Holdings.  The following table presents information with respect to the beneficial ownership of Holdings’ common stock as of March 31, 2010 by (a) any person or group who beneficially owns more than five percent of Holdings common stock, (b) each of our directors and Named Executive Officers and (c) all directors and executive officers as a group.  The percentage shares outstanding provided in the table are based on 24,816,623 shares of our common stock, par value $0.01 per share, outstanding as of March 31, 2010.

 

Name of Beneficial Holder

 

Number of
Shares(1)

 

Percent of
Class

 

Crestview Funds(2)

 

14,500,000

 

58.4

%

The Northwestern Mutual Life Insurance Company(3)

 

4,000,000

 

16.1

 

Trident IV, L.P.(4)

 

3,000,000

 

12.1

 

Banc of America Capital Investors V, L.P.(5)

 

2,500,000

 

10.1

 

Richard E. Francis, Jr.(6)(7)

 

771,140

 

3.0

 

Clifford G. Adlerz(6)(8)

 

479,755

 

1.9

 

Teresa F. Sparks(6)(9)

 

41,985

 

*

 

Kenneth C. Mitchell(6)(10)

 

55,911

 

*

 

R. Dale Kennedy(6)(11)

 

39,979

 

*

 

Thomas S. Murphy, Jr.(12)

 

0

 

*

 

Robert V. Delaney(12)

 

0

 

*

 

Quentin Chu(12)

 

0

 

*

 

Craig R. Callen(12)

 

0

 

*

 

Kurt E. Bolin(4)

 

0

 

*

 

All directors and executive officers as a group (10 persons) (13)

 

1,388,770

 

5.4

%

 


*           Less than one percent.

 

(1)   Beneficial ownership includes voting or investment power with respect to securities and includes the shares issuable pursuant to options that are exercisable within 60 days of March 31, 2010. Shares issuable pursuant to options are deemed outstanding in computing the percentage held by the person holding the options but are not deemed outstanding in computing the percentage held by any other person.

(2)   Consists of shares held directly by Crestview Partners, L.P. and certain related investors (the “Crestview Funds”).  The investment committee of Crestview Partners GP, L.P., the general partner of each fund, makes investment decisions on behalf of the investment funds and Barry S. Volpert serves as the chairman of the investment committee.  Mr. Volpert has the right to designate, in his discretion, additional persons to serve on the investment committee of Crestview Partners GP, L.P. and, therefore, could be deemed to have beneficial ownership of all the shares of common stock held by the Crestview Funds.  However, Mr. Volpert disclaims beneficial ownership of all such shares.  The composition of the investment committee of Crestview Partners GP, L.P. changes from time to time.  See “Certain Relationships and Related Party Transactions — Shareholder Agreement.”  The address of Crestview Partners GP, L.P. is 667 Madison Avenue, New York, New York 10021.

(3)   Includes shares held directly by The Northwestern Mutual Life Insurance Company and an affiliated fund.  The address of The Northwestern Mutual Life Insurance Company is 720 East Wisconsin Avenue, Milwaukee, WI 53202.

(4)   Includes shares held directly by Trident IV, L.P. and an affiliated fund (the “Trident IV Funds”).  Mr. Bolin is a principal of Stone Point Capital LLC, which serves as the investment manager of the Trident IV Funds.  Mr. Bolin disclaims beneficial ownership of all such shares, except to the extent of any pecuniary interest therein.  The principal address for the Trident IV Funds is c/o Walkers SPV Limited, at Walker House, 87 Mary Street, George Town, Grand Cayman KY1-9002, Cayman Islands.  The principal address for Stone Point Capital LLC is 20 Horseneck Lane, Greenwich, Connecticut 06830.

(5)   The address of Banc of America Capital Investors V, L.P. is 100 North Tyron Street, Charlotte, North Carolina, 28255.

(6)   The address of each of Messrs. Francis, Adlerz, Mitchell and Kennedy and Ms. Sparks is 40 Burton Hills Boulevard, Suite 500, Nashville, Tennessee 37215.

(7)   Includes options to purchase 544,583 shares which were exercisable as of March 31, 2010 or become exercisable within 60 days following March 31, 2010.

(8)   Includes options to purchase 389,689 shares which were exercisable as of March 31, 2010 or become exercisable within 60 days following March 31, 2010.

(9)   Represents options to purchase 41,985 shares which were exercisable as of March 31, 2010 or become exercisable within 60 days following March 31, 2010.

(10) Represents options to purchase 55,911 shares which were exercisable as of March 31, 2010 or become exercisable within 60 days following March 31, 2010.

(11) Represents options to purchase 39,979 shares which were exercisable as of March 31, 2010 or become exercisable within 60 days following March 31, 2010.

(12) The address of each of Messrs. Murphy, Delaney, Chu and Callen is 667 Madison Avenue, New York, New York 10021.

(13) Includes options to purchase 1,072,147 shares which were exercisable as of March 31, 2010 or become exercisable within 60 days following March 31, 2010.

 

80



 

Equity Compensation Plan Information

 

The following table provides information as of December 31, 2009 with respect to compensation plans (including individual compensation arrangements) under which shares of the common stock of Holdings are authorized for issuance.

 

Plan category

 

Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights

 

Weighted-average exercise
price of outstanding options,
warrants and rights

 

Number of securities
remaining available for future
issuance under equity
compensation plans

(excluding securities reflected
in second column)

 

Equity compensation plans approved by security holders (1)

 

3,372,586

 

$

7.98

 

183,817

 

Equity compensation plans not approved by security holders

 

 

 

 

Total

 

3,372,586

 

$

7.98

 

183,817

 

 


(1)          Represents stock options granted or issuable under the Holdings 2007 Equity Incentive Plan.  See additional disclosure at Item 7. “Financial Statements and Supplementary Data - Note 10. Stock Options”.

 

Item 12.  Certain Relationships and Related Transactions, and Director Independence

 

Financial Advisory Fees and Agreements

 

Holdings paid all fees and expenses of the Crestview Funds in connection with the Merger and the related financings.  The aggregate amount of all fees payable to the Crestview funds and their affiliates in connection with the Merger and the related financing is approximately $6.3 million, plus out-of-pocket expenses.  We have also agreed to pay an affiliate of the Crestview Funds an annual advisory fee of $1.0 million and will reimburse such affiliate for all related disbursements and out-of-pocket expenses pursuant to a management agreement.  The agreement also provides that we will pay an affiliate of the Crestview Funds a fee in connection with certain subsequent financing, acquisition, disposition and change of control transactions based on a percentage of the gross transaction value of any such transaction.  The management agreement includes customary exculpation and indemnification provisions in favor of the Crestview Funds and their affiliates.

 

Shareholders Agreement

 

Holdings, the Crestview Funds, the other co-investors and each of our management shareholders entered into a shareholders’ agreement at the closing of the Merger.

 

The shareholders agreement provides that Messrs. Francis and Adlerz have the right to be appointed as directors of Holdings (with Mr. Francis as chairman) so long as they are employed in their current positions.  Stone Point, which is one of the co-investors, is able to appoint one of our directors and the Crestview Funds have the right to select all of the remaining members of the board of directors of Holdings.  In addition, Holdings is required to obtain the consent of the Crestview Funds before taking certain significant actions.

 

The shareholders agreement restricts transfers of shares of Holdings common stock by the shareholders who are party to the agreement, except to permitted transferees and subject to various other exceptions, and also grants certain tag-along, drag-along and pre-emptive rights, as well as rights of first offer upon certain sales, to the shareholders.  The agreement also grants Holdings the right to purchase equity from management shareholders upon their departure from the company at the lesser of fair market value and cost, if the shareholder has been terminated for cause, or at fair market value in other cases.

 

Finally, the agreement provides customary demand and piggy-back registration rights to the shareholders.

 

81



 

Policies and Procedures with Respect to Related Party Transactions

 

The charter of the Audit and Compliance Committee requires that the Audit and Compliance Committee approve any proposed related-party transactions and review with management any disclosure relating to related party transactions and potential conflicts of interest.  “Related-party transactions” include, but are not limited to, those transactions described in Item 404(a) of Regulation S-K under the federal securities laws.

 

Director Independence

 

We do not have securities listed on a national securities exchange or in an automated inter-dealer quotation system of a national securities association and, as such, are not subject to the director independence requirements of such an exchange or association.  In addition, based on the listing standards of The NASDAQ Stock Market, the national securities exchange upon which our common stock was traded prior to the Merger, we would be a “controlled company” within the meaning of Rule 5615(c)(1) of the Nasdaq Listing rules because Crestview and its affiliates own a majority of the equity of Holdings, and Holdings owns all of our common stock.  As a controlled company, we would qualify for exemptions from certain NASDAQ corporate governance rules, including the requirement that the board of directors be composed of a majority of independent directors.

 

Item 13.  Principal Accountant Fees and Services

 

The following table presents fees for professional services rendered by Ernst & Young LLP for the audit of our annual financial statements for 2009 and 2008, and fees billed for other services rendered by Ernst & Young LLP for 2009 and 2008:

 

 

 

2009

 

2008

 

Audit Fees

 

$

780,642

 

$

1,056,523

 

Audit-Related Fees

 

 

28,500

 

Tax Fees

 

186,393

 

602,540

 

All Other Fees

 

 

 

Total

 

$

967,035

 

$

1,687,563

 

 

Audit Fees.  These fees were primarily for professional services rendered by Ernst & Young LLP in connection with the audit of our consolidated annual financial statements.  The fees also include services related to Securities and Exchange Commission filings.

 

Audit-Related FeesFor 2008, these fees were for services rendered by Ernst & Young LLP related to our Toggle Note offering and  a subscription to online accounting services.

 

Tax Fees.  These fees were for services rendered by Ernst & Young LLP for compliance regarding tax filings and for other tax planning and tax advice services.

 

All Other Fees.  For 2009 and 2008, Ernst & Young LLP did not render any other professional services or bill any fees for other services not included within Audit Fees or Tax Fees.

 

Pre-approval of Auditor Services

 

The charter of the Audit and Compliance Committee provides that the Audit and Compliance Committee must pre-approve all services to be provided by the independent auditors prior to the commencement of work.  Unless the specific service has been pre-approved with respect to that year, the Audit and Compliance Committee must approve the permitted service before the independent auditors are engaged to perform it.  For 2009, all services provided by Ernst & Young LLP were pre-approved by the Audit and Compliance Committee.

 

All non-audit services were reviewed with the Audit and Compliance Committee, which concluded that the provision of such services by Ernst & Young LLP was compatible with the maintenance of the accounting firm’s independence in the conduct of its auditing functions.

 

82



 

PART IV

 

Item 14.  Exhibits and Financial Statement Schedules

 

(a) The following documents are filed as part of this report:

 

(1)         Consolidated Financial Statements

 

The consolidated financial statements required to be included in Part II, Item 7. are indexed on Page F-1 and submitted as a separate section of this report.

 

(2)         Consolidated Financial Statement Schedules

 

All schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or notes in this report.

 

(3)         Exhibits:

 

No.

 

Description

2

 

Agreement and Plan of Merger, dated as of April 24, 2007, by and among Symbol Acquisition, L.L.C., Symbol Merger Sub, Inc. and Symbion, Inc. (a)

3.1

 

Amended Certificate of Incorporation of Symbion, Inc. (b)

3.2

 

Amended and Restated Bylaws of Symbion, Inc. (b)

4.1

 

Indenture, dated as of June 3, 2008, among Symbion, Inc., the Guarantors named therein and U.S. Bank National Association, as Trustee (b)

4.2

 

Form of Notes (included in Exhibit 4.1)

4.3

 

Registration Rights Agreement, dated as of June 3, 2007, among Symbion, Inc., the subsidiaries of Symbion, Inc. party thereto as guarantors, and Merrill, Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC and Greenwich Capital Markets, Inc. (b)

4.4

 

First Supplemental Indenture, dated as of September 18, 2008 among Symbion, Inc., the Guarantors named therein and U.S. Bank National Association, as Trustee (b)

10.1

 

Employment Agreement, dated August 23, 2007, between Symbion, Inc. and Richard E. Francis, Jr.(b) (g)

10.2

 

Employment Agreement, dated August 23, 2007, between Symbion, Inc. and Clifford G. Adlerz (b) (g)

10.3

 

Credit Agreement, dated as of August 23, 2007, among Symbol Holdings Corporation, Symbol Merger Sub, Inc., the Lenders party thereto from time to time, Merrill Lynch Capital Corporation as Administrative Agent and Collateral Agent, Bank of America, N.A. as Syndication Agent, The Royal Bank of Scotland PLC and Fifth Third Bank as Co-Documentation Agents, and Merrill Lynch & Co., Merrill, Lynch, Pierce, Fenner & Smith Incorporated and Banc of America Securities LLC as Joint Lead Arrangers and Joint Lead Bookrunners (c)

10.4

 

Lease Agreement, dated June 26, 2001, between Burton Hills IV Partners and Symbion, Inc. (d)

10.5

 

First Amendment to Lease Agreement, dated February 9, 2004, between Burton Hills IV Partners and Symbion, Inc. (e)

10.6

 

Symbion Holdings Corporation 2007 Equity Incentive Plan (b) (g)

10.7

 

Symbion, Inc. Executive Change in Control Severance Plan (b) (g)

10.8

 

Symbion Holdings Corporation Compensatory Equity Participation Plan (b) (g)

10.9

 

Shareholders Agreement, dated as of August 23, 2007, among Symbion Holdings Corporation and the stockholders of Symbion Holdings Corporation and other persons named therein (b)

10.10

 

Advisory Services and Monitoring Agreement, dated as of August 23, 2007, among Symbion, Inc., Symbion Holdings Corporation and Crestview Advisors, L.L.C. (b)

10.11

 

Form of Employee Contribution Agreement (b)

10.12

 

Symbion, Inc. Supplemental Executive Retirement Plan (f) (g)

10.13

 

Management Rights Purchase Agreement, dated as of July 27, 2005, by and among Parthenon Management Partners, LLC, Andrew A. Brooks, M.D., Randhir S. Tuli and SymbionARC Management Services, Inc. (c)

10.14

 

Interest Rate Swap Agreement, dated October 31, 2007, between Symbion, Inc and Merrill Lynch Capital Services, Inc. (c)

21

 

Subsidiaries of Registrant

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

 

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

 

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 


(a)

Incorporated by reference to exhibits filed with the Registrant’s Current Report on Form 8-K filed April 24, 2007 (File No. 000-50574)

(b)

Incorporated by reference to exhibits filed with the Registrant’s Registration Statement on Form S-4 (Registration No. 333-153678)

(c)

Incorporated by reference to exhibits filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, as amended (File No. 000-50574)

(d)

Incorporated by reference to exhibits filed with the Registrant’s Registration Statement on Form S-1 (Registration No. 333-89554)

(e)

Incorporated by reference to exhibits filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 000-50574)

(f)

Incorporated by reference to exhibits filed with the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 (File No. 000-50574)

(g)

Compensation plan or arrangement

 

83




 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors

Symbion, Inc.

 

We have audited the accompanying consolidated balance sheets of Symbion, Inc. as of December 31, 2009 and 2008 and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2009 and 2008 and the period from August 24, 2007 to December 31, 2007, and the period from January 1, 2007 to August 23, 2007 (Predecessor). 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Symbion, Inc. at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for the years ended December 31, 2009 and 2008 and the period from August 24, 2007 to December 31, 2007, and the period from January 1, 2007 to August 23, 2007 (Predecessor), in conformity with U.S. generally accepted accounting principles.

 

As discussed in Note 3 to the consolidated financial statements, the Company changed its accounting and disclosure for noncontrolling interests with the adoption of the guidance originally issued in FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements (codified in FASB ASC Topic 810, Consolidation) effective January 1, 2009.

 

/s/ Ernst & Young LLP

 

Nashville, Tennessee

March 31, 2010

 

F-2



 

SYMBION, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

 

 

 

December 31,
2009

 

December 31,
2008

(As Adjusted)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

47,920

 

$

41,833

 

Accounts receivable, less allowance for doubtful accounts of $9,859 and $11,993, respectively

 

36,636

 

34,707

 

Inventories

 

9,730

 

9,050

 

Prepaid expenses and other current assets

 

12,511

 

12,719

 

Deferred tax asset

 

432

 

825

 

Current assets of discontinued operations

 

530

 

1,104

 

Total current assets

 

107,759

 

100,238

 

Land

 

2,938

 

2,938

 

Buildings and improvements

 

53,726

 

53,847

 

Furniture and equipment

 

57,201

 

49,093

 

Computers and software

 

4,022

 

2,864

 

 

 

117,887

 

108,742

 

Less accumulated depreciation

 

(28,628

)

(14,057

)

Property and equipment, net

 

89,259

 

94,685

 

Intangible assets

 

19,480

 

19,570

 

Goodwill

 

545,238

 

541,831

 

Investments in and advances to affiliates

 

17,652

 

14,532

 

Other assets

 

10,687

 

11,875

 

Long-term assets of discontinued operations

 

651

 

833

 

Total assets

 

$

790,726

 

$

783,564

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

8,306

 

$

5,392

 

Accrued payroll and benefits

 

5,922

 

7,500

 

Other accrued expenses

 

31,352

 

22,240

 

Current maturities of long-term debt

 

20,212

 

12,205

 

Current liabilities of discontinued operations

 

1,186

 

629

 

Total current liabilities

 

66,978

 

47,966

 

Long-term debt, less current maturities

 

445,008

 

440,612

 

Deferred income tax payable

 

40,776

 

33,008

 

Other liabilities

 

6,279

 

12,526

 

Long-term liabilities of discontinued operations

 

3,330

 

236

 

 

 

 

 

 

 

Noncontrolling interests — redeemable

 

31,546

 

32,645

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, 1,000 shares, $0.01 par value, authorized, issued and outstanding at December 31, 2009 and December 31, 2008

 

 

 

Additional paid-in-capital

 

242,623

 

240,815

 

Accumulated other comprehensive loss

 

(2,731

)

(5,584

)

Retained deficit

 

(46,479

)

(24,025

)

Total Symbion, Inc. stockholders’ equity

 

193,413

 

211,206

 

Noncontrolling interests — non-redeemable

 

3,396

 

5,365

 

Total equity

 

196,809

 

216,571

 

Total liabilities and stockholders’ equity

 

$

790,726

 

$

783,564

 

 

See Notes to Consolidated Financial Statements.

 

F-3



 

SYMBION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

 

 

 

Year
Ended
December 31,
2009

 

Year
Ended
December 31,
2008
(As Adjusted)

 

August 24,
2007 to
December 31,
2007
(As Adjusted)

 

January 1,
2007 to
August 23,
2007
(Predecessor,
As Adjusted)

 

Year
Ended
December 31,
2007
(Combined,
As Adjusted)

 

Revenues

 

$

346,984

 

$

331,900

 

$

106,640

 

$

197,665

 

$

304,305

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

96,844

 

90,510

 

29,763

 

54,048

 

83,811

 

Supplies

 

74,905

 

67,562

 

21,932

 

39,103

 

61,035

 

Professional and medical fees

 

23,162

 

19,021

 

6,468

 

12,120

 

18,588

 

Rent and lease expense

 

25,603

 

22,307

 

7,038

 

12,297

 

19,335

 

Other operating expenses

 

28,070

 

26,044

 

8,610

 

15,273

 

23,883

 

Cost of revenues

 

248,584

 

225,444

 

73,811

 

132,841

 

206,652

 

General and administrative expense

 

21,448

 

23,923

 

7,912

 

23,961

 

31,873

 

Depreciation and amortization

 

17,314

 

15,175

 

4,732

 

7,920

 

12,652

 

Provision for doubtful accounts

 

3,354

 

3,861

 

1,758

 

2,691

 

4,449

 

(Income) loss on equity investments

 

(2,318

)

(1,504

)

(21

)

5

 

(16

)

Impairment and loss on disposal of long-lived assets

 

3,505

 

1,899

 

53

 

319

 

372

 

Gain on sale of long-lived assets

 

(250

)

(975

)

(319

)

(596

)

(915

)

Proceeds from insurance settlements, net

 

(430

)

 

 

(161

)

(161

)

Litigation settlements, net

 

 

893

 

 

 

 

Merger transaction expenses

 

 

 

 

7,522

 

7,522

 

Total operating expenses

 

291,207

 

268,716

 

87,926

 

174,502

 

262,428

 

Operating income

 

55,777

 

63,184

 

18,714

 

23,163

 

41,877

 

Interest expense, net

 

(44,981

)

(43,426

)

(14,763

)

(5,228

)

(19,991

)

Income before income taxes and discontinued operations

 

10,796

 

19,758

 

3,951

 

17,935

 

21,886

 

Provision (benefit) for income taxes

 

7,766

 

13,256

 

(776

)

4,016

 

3,240

 

Income from continuing operations

 

3,030

 

6,502

 

4,727

 

13,919

 

18,646

 

Loss from discontinued operations, net of taxes

 

(6,097

)

(3,643

)

(269

)

(438

)

(707

)

Net (loss) income

 

(3,067

)

2,859

 

4,458

 

13,481

 

17,939

 

Less: Net income attributable to noncontrolling interests

 

(19,387

)

(23,657

)

(7,685

)

(15,656

)

(23,341

)

Net loss attributable to Symbion, Inc.

 

$

(22,454

)

$

(20,798

)

$

(3,227

)

$

(2,175

)

$

(5,402

)

 

See Notes to Consolidated Financial Statements.

 

F-4



 

SYMBION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

 

 

 

Symbion, Inc.
Common Stock

 

Additional

 

Accumulated
Other
Comprehensive

 

Retained
Earnings

 

Noncontrolling
Interests-Non-

 

Total
Shareholders’

 

 

 

Shares

 

Amount

 

Paid-in Capital

 

Income (Loss)

 

(Deficit)

 

redeemable

 

Equity

 

Balance at December 31, 2006 (Predecessor, as audited)

 

21,643,291

 

$

216

 

$

212,452

 

$

485

 

$

72,126

 

$

5,244

 

$

290,523

 

Issuance of warrants and common stock, net of repurchases, and other

 

89,367

 

1

 

959

 

 

 

 

960

 

Amortized compensation expense related to stock options and restricted stock

 

 

 

10,337

 

 

 

 

10,337

 

Unrealized gain on interest rate swap, net of taxes

 

 

 

 

(485

)

 

 

(485

)

Retirement of common stock in connection with Merger

 

(21,590,992

)

(216

)

(223,747

)

 

 

 

(223,963

)

Common stock rolled over

 

(141,666

)

(1

)

(1

)

 

 

 

(2

)

Net loss, January 1, 2007, through August 23, 2007

 

 

 

 

 

(2,175

)

849

 

(1,326

)

Distributions to noncontrolling interest holders

 

 

 

 

 

 

(870

)

(870

)

Acquisitions and disposal of shares of noncontrolling interests

 

 

 

 

 

 

712

 

712

 

Other

 

 

 

 

 

 

(277

)

(277

)

Elimination of retained earnings as of merger date

 

 

 

 

 

(69,951

)

 

(69,951

)

Balance at August 23, 2007 (Predecessor, as adjusted)

 

 

$

 

$

 

$

 

$

 

$

5,658

 

$

5,658

 

Issuance of common stock, net of issuance costs of $60

 

1,000

 

 

244,942

 

 

 

 

244,942

 

Payment of sponsor fee

 

 

 

(6,650

)

 

 

 

(6,650

)

Amortized compensation expense related to stock options

 

 

 

409

 

 

 

 

409

 

Unrealized loss on interest rate swap, net of taxes

 

 

 

 

(2,188

)

 

 

(2,188

)

Distributions to noncontrolling interest holders

 

 

 

 

 

 

(2,164

)

(2,164

)

Acquisitions and disposal of shares of noncontrolling interests

 

 

 

 

 

 

715

 

715

 

Other

 

 

 

 

 

 

279

 

279

 

Net loss, August 24, 2007 to December 31, 2007 (as adjusted)

 

 

 

 

 

(3,227

)

1,447

 

(1,780

)

Balance at December 31, 2007 (as adjusted)

 

1,000

 

$

 

$

238,701

 

$

(2,188

)

$

(3,227

)

$

5,935

 

$

239,221

 

Amortized compensation expense related to stock options

 

 

 

2,114

 

 

 

 

2,114

 

Unrealized loss on interest rate swap, net of taxes

 

 

 

 

(3,396

)

 

 

(3,396

)

Distributions to noncontrolling interest holders

 

 

 

 

 

 

(3,555

)

(3,555

)

Acquisitions and disposal of shares of noncontrolling interests

 

 

 

 

 

 

(356

)

(356

)

Other

 

 

 

 

 

 

160

 

160

 

Net loss

 

 

 

 

 

(20,798

)

3,181

 

(17,617

)

Balance at December 31, 2008 (as adjusted)

 

1,000

 

$

 

$

240,815

 

$

(5,584

)

$

(24,025

)

$

5,365

 

$

216,571

 

Amortized compensation expense related to stock options

 

 

 

1,297

 

 

 

 

1,297

 

Unrealized loss on interest rate swap, net of taxes

 

 

 

 

2,853

 

 

 

2,853

 

Distributions to noncontrolling interest holders

 

 

 

 

 

 

(2,966

)

(2,966

)

Acquisitions and disposal of shares of noncontrolling interests

 

 

 

511

 

 

 

220

 

731

 

Net loss

 

 

 

 

 

(22,454

)

777

 

(21,677

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2009

 

1,000

 

$

 

$

242,623

 

$

(2,731

)

$

(46,479

)

$

3,396

 

$

196,809

 

 

See Notes to Consolidated Financial Statements.

 

F-5



 

SYMBION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Year
Ended
December 31,
2009

 

Year
Ended
December 31,
2008

(As Adjusted)

 

August 24,
2007 to
December 31,
2007

(As Adjusted)

 

January 1,
2007 to
August 23,
2007
(Predecessor,
As Adjusted)

 

Year
Ended
December 31,
2007
(
Combined, As
Adjusted
)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(3,067

)

$

2,859

 

$

4,458

 

$

13,481

 

$

17,939

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

6,097

 

3,643

 

269

 

438

 

707

 

Depreciation and amortization

 

17,314

 

15,175

 

4,732

 

7,920

 

12,652

 

Amortization of deferred financing costs

 

2,004

 

4,477

 

1,872

 

322

 

2,194

 

Non-cash payment-in-kind interest option

 

23,263

 

17,616

 

 

 

 

Non-cash stock option compensation expense

 

1,297

 

2,114

 

409

 

10,337

 

10,746

 

Non–cash recognition of other comprehensive loss into earnings

 

2,853

 

 

 

 

 

Non–cash credit risk adjustment of financial instruments

 

1,629

 

 

 

 

 

Non–cash losses (gains)

 

2,825

 

924

 

31

 

(305

)

(274

)

Deferred income taxes

 

8,682

 

13,718

 

2,217

 

13,637

 

15,854

 

Equity in earnings of unconsolidated affiliates, net of distributions received

 

(207

)

333

 

(21

)

5

 

(16

)

Provision for doubtful accounts

 

3,354

 

3,861

 

1,758

 

2,691

 

4,449

 

Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(4,142

)

(3,536

)

(90

)

(166

)

(256

)

Income taxes payable

 

1,762

 

1,959

 

6,096

 

(10,402

)

(11,899

)

Other assets and liabilities

 

(2,225

)

(877

)

(979

)

(5,086

)

1,528

 

Net cash provided by operating activities — continuing operations

 

61,439

 

62,266

 

20,752

 

32,872

 

53,624

 

Net cash (used in) provided by operating activities — discontinued operations

 

(1,021

)

(43

)

580

 

24

 

604

 

Net cash provided by operating activities

 

60,418

 

62,223

 

21,332

 

32,896

 

54,228

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Payments for acquisitions, net of cash acquired

 

(126

)

(15,695

)

(9,815

)

(14,981

)

(24,796

)

Purchases of property and equipment, net

 

(9,861

)

(15,649

)

(6,948

)

(7,664

)

(14,612

)

Payments from unit activity of unconsolidated facilities

 

(724

)

 

 

 

 

Change in other assets

 

(694

)

(1,504

)

(841

)

1,401

 

560

 

Net cash used in investing activities — continuing operations

 

(11,405

)

(32,848

)

(17,604

)

(21,244

)

(38,848

)

Net cash used in investing activities — discontinued operations

 

(40

)

(358

)

(24

)

(36

)

(60

)

Net cash used in investing activities

 

(11,445

)

(33,206

)

(17,628

)

(21,280

)

(38,908

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Principal payments on long-term debt

 

(13,741

)

(18,675

)

(1,492

)

(161,555

)

(163,047

)

Repayment of bridge facility

 

 

(179,937

)

 

 

 

Proceeds from debt issuances

 

678

 

13,491

 

50

 

458,597

 

458,647

 

Proceeds from issuance of Toggle Notes

 

 

179,937

 

 

 

 

Payment of debt issuance costs

 

(203

)

(4,739

)

 

(12,544

)

(12,544

)

Distributions to noncontrolling interests

 

(24,971

)

(23,423

)

(7,301

)

(17,185

)

(24,486

)

Proceeds from unit activity of consolidated facilities

 

307

 

219

 

756

 

2,241

 

2,997

 

Payment of merger costs incurred by Symbion Holdings Corporation

 

 

 

(445

)

(6,528

)

(6,973

)

Cash paid to shareholders

 

 

 

 

(490,510

)

(490,510

)

Proceeds from issuance of common stock, net of issuance costs

 

 

 

 

239,085

 

239,085

 

Other financing activities

 

(4,940

)

1,437

 

(952

)

250

 

(702

)

Net cash (used in) provided by financing activities — continuing operations

 

(42,870

)

(31,690

)

(9,384

)

11,851

 

2,467

 

Net cash used in financing activities — discontinued operations

 

(16

)

(150

)

(11

)

(29

)

(40

)

Net cash (used in) provided by financing activities

 

(42,886

)

(31,840

)

(9,395

)

11,822

 

2,427

 

Net increase (decrease) in cash and cash equivalents

 

6,087

 

(2,823

)

(5,691

)

23,438

 

17,747

 

Cash and cash equivalents at beginning of period

 

41,833

 

44,656

 

50,347

 

26,909

 

26,909

 

Cash and cash equivalents at end of period

 

$

47,920

 

$

41,833

 

$

44,656

 

$

50,347

 

$

44,656

 

 

See Notes to Consolidated Financial Statements.

 

F-6



 

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009

 

1.  Organization

 

Symbion, Inc. (the “Company”), through its wholly owned subsidiaries, owns interests in partnerships and limited liability companies and operates a national network of short stay surgical facilities in joint ownership with physicians and physician groups, hospitals and hospital systems.  As of December 31, 2009, the Company owned and operated 59 surgical facilities, including 55 ambulatory surgery centers and four surgical hospitals, and managed eight additional ambulatory surgery centers and two physician networks.  The Company owns a majority ownership interest in 36 of the 59 surgical facilities and consolidates 52 of these surgical facilities for financial reporting purposes, of which 51 are included in continuing operations.

 

On August 23, 2007, the Company was acquired by an investment group led by an affiliate of Crestview Partners, L.P. (“Crestview”).  As a result of this merger (the “Merger”), the Company no longer has publicly traded equity securities.  The Company is a wholly owned subsidiary of Symbion Holdings Corporation (“Holdings”), which is owned by an investor group that includes affiliates of Crestview, members of the Company’s management and other investors.  The Company’s financial position and the results of operations prior to the Merger are presented separately in the consolidated financial statements as “Predecessor” financial statements.  Symbion, Inc. is referred to as the “Predecessor” for all periods and dates through August 23, 2007 and Symbion, Inc. is referred to as the “Company” for all periods and dates subsequent to August 23, 2007.  References made herein to the “Company,” unless indicated otherwise or the context requires, include the Predecessor.  As a result of the Merger, which substantially increased the Company’s debt and interest expense, and the revaluation of assets and liabilities as a result of purchase accounting associated with the Merger, the combined 2007 financial statements are for comparison purposes only as they represent the combination of different bases of accounting.

 

2.  Merger Transaction

 

In the Merger, the stockholders and option holders of the Predecessor (as defined above) received an aggregate of $490.5 million in cash.  In order to consummate the Merger, Crestview formed Symbol Acquisition, L.L.C. (“Parent”) and Symbol Merger Sub, Inc., a wholly-owned subsidiary of Parent.  Symbol Merger Sub, Inc. merged with and into the Company with the Company being the surviving corporation.  Parent was converted into Holdings, which became the parent holding company of the Company by virtue of the Merger.

 

Holdings was capitalized with a $245.0 million cash contribution by Crestview and its affiliated funds and co-investors.  In addition, certain members of Symbion’s management made a rollover equity contribution of Symbion shares and options to purchase common stock valued at the predecessor basis of $2,000.  These rollover shares were exchanged for shares and options to purchase shares of common stock of Holdings.  Following the Merger, Crestview and its affiliated funds and co-investors owned 96.7% of Holdings and members of management owned 3.3% of Holdings.

 

The Company accounted for the Merger as a purchase under the guidance set forth in Emerging Issues Task Force No. 88-16, “Basis in Leveraged Buyout Transactions” (“EITF 88-16”).  Under EITF 88-16, the transaction was deemed to be a purchase by new controlling investors for which equity interests were valued using a partial change in accounting basis.  In effect, the common stock owned by members of management was valued using the predecessor basis, while the common stock owned by Crestview, its affiliated funds and co-investors were recorded at fair value.

 

The following equity capitalization and financing transactions occurred in connection with the Merger:

 

·                  $145.0 million cash equity contribution by Crestview Symbion Holdings, L.L.C.;

·                  $40.0 million cash equity contribution by The Northwestern Mutual Life Insurance Company;

·                  $60.0 million cash equity contribution by other co-investors;

·                  $2,000 rollover equity contribution by certain members of management of the Company (representing a fair value of $8.4 million);

 

F-7



 

·                  Senior secured credit facility totaling $350.0 million, of which $250.0 million was drawn at the closing of the Merger; and

·                  $175.0 million bridge loan credit facility that was drawn at the closing of the Merger.

 

The proceeds from the equity capitalization and financing transactions were used to:

 

·                  Pay stockholders of the Company for shares of common stock not rolled over under the terms of the merger agreement;

·                  Pay option holders of the Company for outstanding options not rolled over, whether vested or unvested, the difference between $22.35 per share and the per share exercise price of the option;

·                  Pay holders of restricted stock of the Company for shares of restricted stock, whether vested or unvested, at $22.35 per share;

·                  Pay warrant holders of the Company for outstanding warrants, whether vested or unvested, the difference between $22.35 per share and the per share exercise price of the warrant;

·                  Repay all outstanding debt (totaling $129.0 million) under the former senior secured credit agreement for which the maturity date accelerated as a result of the Merger; and

·                  Pay the fees and expenses related to the Merger and the financing transactions.

 

As a result of the Merger, the vesting of stock options and restricted stock was accelerated, which resulted in $8.0 million in stock compensation expense, of which $710,000 is included in cost of revenues and $7.3 million is included in general and administrative expenses in 2007, following the Merger.  The Company capitalized $12.1 million of fees and expenses related to the execution of the new credit facilities on the closing date of the Merger.  As a result of the Merger, the Company recorded goodwill of $509.8 million.

 

The accompanying consolidated financial statements as of the dates and for all periods prior to August 24, 2007, reflect the financial position, results of operations and cash flows of the Predecessor.  The consolidated financial statements as of the dates and for the periods on and after August 24, 2007, reflect the financial position, results of operations and cash flows of the Company.

 

The expenses incurred as a result of the Merger are classified as follows in the accompanying statements of operations (in thousands):

 

 

 

January 1,
2007 to
August 23,

2007
(Predecessor)

 

Year Ended
December 31,
2007
(Combined)

 

Cost of revenues

 

$

710

 

$

710

 

General and administrative expense

 

8,152

 

8,152

 

Merger transaction expenses

 

7,522

 

7,522

 

Net income attributable to noncontrolling interests

 

(329

)

(329

)

Total

 

$

16,055

 

$

16,055

 

 

Additionally, the Company paid $7.0 million in costs incurred by Crestview in connection with the Merger which were recorded as additional purchase price.

 

3.  Significant Accounting Policies and Practices

 

Basis of Presentation and Use of Estimates

 

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”).  The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and accompanying footnotes.  Examples include, but are not limited to, estimates of accounts receivable allowances, professional and general liabilities and the estimate of deferred tax assets or liabilities.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  All adjustments are of a normal, recurring nature.  Actual results could differ from those estimates.

 

F-8



 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, as well as interests in partnerships and limited liability companies controlled by the Company through ownership of a majority voting interest or other rights granted to the Company by contract to manage and control the affiliate’s business.  The physician limited partners and physician minority members of the entities that the Company controls are responsible for the supervision and delivery of medical services.  The governance rights of limited partners and minority members are restricted to those that protect their financial interests.  Under certain partnership and operating agreements governing these partnerships and limited liability companies, the Company could be removed as the sole general partner or managing member for certain events such as material breach of the partnership or operating agreement, gross negligence or bankruptcy.  These protective rights do not preclude consolidation of the respective partnerships and limited liability companies.  The consolidated financial statements include the accounts of variable interest entities in which the Company is the primary beneficiary, under the provisions of ASC Topic 810, Consolidation.  The variable interest entities are surgical facilities located in the states of Florida and New York.  With regard to the New York facility, the Company is the primary beneficiary due to the level of variability within the management service agreement, as well as the obligation and likelihood of absorbing the majority of expected gains and losses.   Regarding the Florida facility, the Company has fully guaranteed debt obligations.  The debt obligations are subordinated to such a level that the Company absorbs the majority of the expected gains and losses.  The accompanying consolidated balance sheets as of December 31, 2009 and December 31, 2008 include assets of $14.5 million and $17.6 million, respectively, and liabilities of $4.4 million and $8.3 million, respectively, related to the variable interest entities.  All significant intercompany balances and transactions are eliminated in consolidation.

 

Fair Value of Financial Instruments

 

The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. The Company uses fair value measurements based on quoted prices in active markets for identical assets or liabilities (Level 1), or inputs other than quoted prices in active markets that are either directly or indirectly observable (Level 2), or unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions (Level 3), depending on the Nature of the item being valued.

 

The carrying amounts reported in the accompanying consolidated balance sheets for cash, accounts receivable and accounts payable approximate fair value because of their short-term nature.

 

The carrying amount and fair value of the Company’s term loans under its senior secured credit facility and the Toggle Notes as of December 31, 2009 and 2008 were as follows:

 

 

 

Carrying Amount
December 31,

 

Fair Value
December 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

Tranche A, term loan

 

$

115,438

 

$

117,939

 

$

103,120

 

$

70,763

 

Tranche B, term loan

 

116,687

 

117,938

 

104,237

 

70,763

 

Senior PIK Toggle Notes

 

206,967

 

184,635

 

156,260

 

73,854

 

 

The fair value of the term loans and Toggle Notes were based on quoted prices at December 31, 2009 and 2008.  The Company’s long-term debt instruments are discussed further in Note 8.

 

The Company determines the fair value of its interest rate swap based on the amount at which it could be settled, which is considered to be the exit price.  This price is based upon observable market assumptions and appropriate valuation adjustments for credit risk.  The Company has categorized its interest rate swap as a Level 2 financial instrument.  See Note 8 for further discussion regarding the interest rate swap.

 

F-9



 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents.  The Company maintains its cash and cash equivalent balances at high credit quality financial institutions.

 

Accounts Receivable

 

Accounts receivable consist of receivables from federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies, employers and patients.  The Company recognizes that revenues and receivables from government agencies are significant to its operations, but it does not believe that there are significant credit risks associated with these government agencies.  Concentration of credit risk with respect to other payors is limited because of the large number of such payors.  Accounts receivable are recorded net of contractual adjustments and allowances for doubtful accounts to reflect accounts receivable at net realizable value.  The Company does not require collateral for private pay patients.  Accounts receivable at December 31, 2009 and December 31, 2008 were as follows (in thousands):

 

 

 

December 31,

 

 

 

2009

 

2008

 

Surgical facilities

 

$

36,039

 

$

34,053

 

Physician networks

 

597

 

654

 

Total

 

$

36,636

 

$

34,707

 

 

The following table sets forth by type of payor the percentage of the Company’s accounts receivable for consolidated surgical facilities as of December 31, 2009 and December 31, 2008:

 

 

 

December 31,

 

 

 

2009

 

2008

 

Private insurance

 

59

%

59

%

Government

 

15

 

15

 

Self-pay

 

13

 

15

 

Other

 

13

 

11

 

Total

 

100

%

100

%

 

Allowance for Doubtful Accounts

 

The Company’s policy is to review the standard aging schedule, by surgical facility, to determine the appropriate allowance for doubtful accounts.  Patient account balances are reviewed for delinquency based on contractual terms.  This review is supported by an analysis of the actual net revenues, contractual adjustments and cash collections received.  If the Company’s internal collection efforts are unsuccessful, the Company manually reviews the patient accounts.  An account is written off only after the Company has pursued collection with legal or collection agency assistance or otherwise deemed an account to be uncollectible.

 

Changes in the allowance for doubtful accounts and the amounts charged to revenues, costs and expenses were as follows (in thousands):

 

 

 

Allowance
Balance at
Beginning of
Period

 

Charged to
Revenues,

Costs and
Expenses

 

Charged to
Other
Accounts (1)

 

Other

 

Allowance
Balance
at End
of Period

 

Year ended December 31:

 

 

 

 

 

 

 

 

 

 

 

2007

 

$

24,576

 

$

4,449

 

$

938

 

$

(14,355

)

$

15,608

 

2008

 

15,608

 

3,861

 

152

 

(7,628

)

11,993

 

2009

 

11,993

 

3,354

 

 

(5,488

)

9,859

 

 


(1)          Relates to allowances for doubtful accounts recorded under the purchase method of accounting for acquired entities.

 

F-10



 

Inventories

 

Inventories, which consist primarily of medical and drug supplies, are stated at the lower of cost or market value.  Cost is determined using the first-in, first-out method.

 

Prepaid and Other Current Assets

 

A summary of prepaid and other current assets is as follows (in thousands):

 

 

 

2009

 

2008

 

Prepaid expenses

 

$

5,072

 

$

4,947

 

Other receivables

 

7,439

 

7,772

 

 

 

$

12,511

 

$

12,719

 

 

Property and Equipment

 

Property and equipment are stated at cost, or if obtained through acquisition, at fair value determined on the date of acquisition and depreciated on a straight-line basis over the useful lives of the assets, generally three to five years for computers and software and five to seven years for furniture and equipment.  Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease term or the estimated useful life of the assets.  Routine maintenance and repairs are charged to expenses as incurred, while expenditures that increase capacities or extend useful lives are capitalized.

 

Depreciation expense, including the amortization of assets under capital leases, was $17.3 million, $15.2 million and $12.7 million for the periods ended December 31, 2009, 2008 and 2007, respectively.

 

Impairment of Long-Lived Assets

 

When events or circumstances indicate that the carrying value of certain property and equipment might be impaired, the Company prepares an expected undiscounted cash flow projection.  If the projection indicates that the recorded amounts of the property and equipment are not expected to be recovered, these amounts are reduced to estimated fair value.  The cash flow estimates and discount rates incorporate management’s best estimates, using appropriate and customary assumptions and projections at the date of evaluation.  In 2009, the Company recorded an impairment of $2.4 million related to its equity method investment located in Arcadia, California.   This impairment charge is included in the impairment and loss on disposal of long-lived assets.  The Company recorded no impairment charges for 2008 and 2007.

 

Goodwill and Other Intangible Assets

 

Goodwill

 

Goodwill represents the excess of purchase price over the fair value of net tangible and identifiable intangible assets acquired.  The Company tests for impairment annually as of December 31, or more frequently if certain indicators are encountered.  See Note 6 for further discussion of our goodwill impairment valuation.

 

Other Intangible Assets

 

The Company recorded intangible assets of $19.5 million as a result of the purchase price allocation related to the certificates of need for certain of its facilities.  These indefinite lived assets are not amortized, but will be assessed for possible impairment as part of the Company’s annual impairment analysis.

 

Unfavorable leasehold rights arising from the Merger were $869,000.  Amortization of $83,468 and $110,835 was recorded in 2009 and 2008, respectively.  The unamortized balance at December 31, 2009 totaled $674,697.  The unfavorable leasehold rights are amortized on a straight-line basis over the life of the applicable lease and reflected as a component of cost of revenues from continuing operations.  Scheduled amortization expense for the five years ending December 31, 2010 to 2014 is $83,468 per year.

 

F-11



 

Noncontrolling Interests

 

The consolidated financial statements include all assets, liabilities, revenues and expenses of surgical facilities in which the Company has sufficient ownership and rights to allow the Company to consolidate the surgical facilities.  The Company has recorded noncontrolling interests in the earnings (losses) of such surgical facilities.

 

Investments in and Advances to Affiliates

 

As of December 31, 2009 and 2008, the Company held interests in eight and nine surgical facilities, respectively, in which it exercised significant influence. However, the Company does not consolidate these facilities because of a lack of control.  The Company accounts for such investments under the equity method.  As of both December 31, 2009 and 2008, the Company owned less than 20% of three of these surgical facilities, but exerted significant influence through board of director representation, as well as an agreement to manage the surgical facilities.

 

Other Assets (Liabilities)

 

Other assets at December 31, 2009 and 2008 included approximately $9.5 million and $11.3 million, respectively, related to deferred financing costs.  Deferred financing costs primarily relate to the Company’s senior secured credit facility and the issuance of the Toggle Notes. Deferred financing costs consist of prepaid interest, loan fees and other costs of financing that are amortized over the term of the related financing agreements.  The deferred financing costs are amortized as interest expense on the accompanying consolidated statements of operations.

 

Other liabilities at 2008 included approximately $7.0 million related to the fair value of the Company’s interest rate swap.  The Company’s interest rate swap agreement was entered into to reduce the interest rate risk associated with the interest rate on the Company’s senior secured credit facility.  In 2009, the interest rate swap liability is considered a current liability, as it expires in October 2010.  As such, the liability is included in other accrued expenses as of December 31, 2009.

 

Other Accrued Expenses

 

A summary of other accrued expenses is as follows (in thousands):

 

 

 

2009

 

2008

 

Interest payable

 

$

9,945

 

$

9,787

 

Current taxes payable

 

5,782

 

2,284

 

Self-insurance liabilities

 

2,651

 

2,325

 

Interest rate swap liability

 

5,045

 

 

Other accrued expenses

 

7,929

 

7,844

 

 

 

$

31,352

 

$

22,240

 

 

Comprehensive Income

 

The Company reports other comprehensive income as a measure of changes in stockholders’ equity that result from recognized transactions.  The Company entered into an interest rate swap agreement on October 31, 2007.  The value of the interest rate swap was recorded as a current liability of $5.0 million at December 31, 2009.  Prior to 2009, the change in the fair value of the interest rate swap was recorded to comprehensive income, net of taxes.  Effective in 2009, the Company records the current market value of the interest rate swap as an adjustment to interest expense in the accompanying consolidated statement of operations.

 

F-12



 

Revenues

 

Revenues by service type consist of the following for the periods indicated (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2009

 

2008

 

2007

 

Patient service revenues

 

$

332,708

 

$

315,869

 

$

289,271

 

Physician service revenues

 

6,464

 

6,548

 

5,623

 

Other service revenues

 

7,812

 

9,483

 

9,411

 

Total revenues

 

$

346,984

 

$

331,900

 

$

304,305

 

 

Patient Service Revenues

 

Approximately 96% of the Company’s revenues are patient service revenues.  Patient service revenues are revenues from surgical or diagnostic procedures performed in each of the facilities that the Company consolidates for financial reporting purposes.  The fee charged for a procedure varies depending on the procedure, but usually includes all charges for usage of an operating room, a recovery room, special equipment, supplies, nursing staff and medications.  Also, in a very limited number of surgical facilities, the Company charges for anesthesia services.  The fee does not normally include professional fees charged by the patient’s surgeon, anesthesiologist or other attending physician, which are billed directly by such physicians to the patient or third-party payor.  Patient service revenues are recognized on the date of service, net of estimated contractual adjustments and discounts for third-party payors, including Medicare and Medicaid.  Changes in estimated contractual adjustments and discounts are recorded in the period of change.

 

Physician Service Revenues

 

Physician service revenues are revenues from physician networks consisting of reimbursed expenses, plus participation in the excess of revenue over expenses of the physician networks, as provided for in the Company’s service agreements with the Company’s physician networks.  Reimbursed expenses include the costs of personnel, supplies and other expenses incurred to provide the management services to the physician networks.  The Company recognizes physician service revenues in the period in which reimbursable expenses are incurred and in the period in which the Company has the right to receive a percentage of the amount by which a physician network’s revenues exceed its expenses.  Physician service revenues are based on net billings with any changes in estimated contractual adjustments reflected in service revenues in the subsequent period.

 

Physician service revenues consist of the following for the periods indicated (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2009

 

2008

 

2007

 

Professional services revenues

 

$

18,736

 

$

18,623

 

$

16,243

 

Contractual adjustments

 

(9,414

)

(9,294

)

(7,685

)

Clinic revenue

 

9,322

 

9,329

 

8,558

 

Medical group retainage

 

(2,858

)

(2,781

)

(2,935

)

Physician service revenues

 

$

6,464

 

$

6,548

 

$

5,623

 

 

Other Service Revenues

 

Other service revenues consists of management and administrative service fees derived from the non-consolidated surgical facilities that the Company accounts for under the equity method, management of surgical facilities in which the Company does not own an interest and management services the Company provides to physician networks for which the Company is not required to provide capital or additional assets.  The fees the Company derives from these management arrangements are based on a pre-determined percentage of the revenues of each surgical facility and physician network.  The Company recognizes other service revenues in the period in which services are rendered.

 

F-13



 

The following table sets forth by type of payor the percentage of the Company’s patient service revenues generated for the periods indicated (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2009

 

2008

 

2007

 

Private Insurance

 

71

%

72

%

73

%

Government

 

24

 

22

 

21

 

Self-pay

 

4

 

4

 

4

 

Other

 

1

 

2

 

2

 

Total

 

100

%

100

%

100

%

 

Supplemental Cash Flow Information

 

The Company made cash income tax payments of $288,000, $409,000 and $8.3 million for the years ended December 31, 2009, 2008 and 2007, respectively.  The Company made interest payments of $18.2 million, $33.8 million and $17.0 million for the years ended December 31, 2009, 2008 and 2007 respectively.  The Company entered into capital leases for $408,000, $1.9 million and $908,000 of equipment for the years ended December 31, 2009, 2008 and 2007, respectively.

 

Recently Adopted Accounting Guidelines

 

On September 30, 2009, we adopted changes issued by the Financial Accounting Standards Board (“FASB”) to the authoritative hierarchy of GAAP.  These changes establish the FASB Accounting Standards CodificationTM (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP.  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates.  Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification.  These changes and the Codification itself do not change GAAP.  Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on the financial statements.

 

On January 1, 2009, we adopted changes issued by the FASB to noncontrolling interests in consolidated financial statements.  These changes require, among other items, that a noncontrolling interest be included within equity separate from the parent’s equity; consolidated net income be reported at amounts inclusive of both the parent’s and noncontrolling interest’s shares; and, separately, the amounts of consolidated net income attributable to the parent and noncontrolling interest all be reported on the consolidated statement of operations.  The implementation of these changes also results in the cash flow impact of certain transactions with noncontrolling interests being classified within financing activities.  Those changes to the statement of cash flows include: a) distributions to noncontrolling interest partners were previously recorded as an operating activity and are now included in the financing activities section; and b) acquisitions or sales of equity interests in consolidated subsidiaries in which there were no changes of control were previously recorded in the investing section and are now presented as financing activities.

 

We could be obligated, under the terms of the partnership and operating agreements governing our joint ventures, upon the occurrence of various fundamental regulatory changes, to purchase some or all of the noncontrolling interests related to our consolidated subsidiaries.  These repurchase requirements are limited to the portions of our facilities that are owned by physicians who perform surgery at our facilities and would be triggered by regulatory changes making the existing ownership structure illegal.  While we are not aware of events that would make the occurrence of such a change probable, regulatory changes are outside of our control.  Accordingly, the noncontrolling interests subject to these repurchase provisions, and the income attributable to those interests, have been classified outside of equity on our consolidated balance sheets.

 

F-14



 

Effective January 1, 2009, we adopted changes issued by the FASB to accounting for business combinations.  These changes retain the purchase method of accounting for acquisitions, but require a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting as well as requiring the expensing of acquisition-related costs as incurred.  Furthermore, these changes provide guidance for recognizing and measuring the goodwill acquired in the business combination and determining what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  We have applied these changes to the acquisitions completed during the year ended December 31, 2009.

 

Effective January 1, 2009, we adopted changes issued by the FASB to the method of determination of the useful life of intangible assets.  This guidance amends the factors that should be considered in determining the useful life of a recognized intangible asset.  The intent of this guidance is to improve consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset.  The adoption of this guidance did not have a material impact on our consolidated results of operations or financial position.

 

Effective January 1, 2009, we adopted changes issued by the FASB to equity method investment accounting.  These changes clarify the accounting for certain transactions and impairment considerations involving equity method investments.  The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations, or cash flows.

 

Effective January 1, 2009, we adopted changes issued by the FASB to disclosures about derivative instruments and hedging activities.  This guidance requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting.  The objective of the guidance is to provide users of the financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  We are adhering to the enhanced disclosure requirements regarding derivative instruments and hedging activities.

 

In April 2009, we adopted changes issued by the FASB to interim disclosures about fair value of financial instruments, which require an entity to provide interim disclosures about the fair value of all financial instruments within the scope of the guidance, and to include disclosures related to the methods and significant assumptions used in estimating those instruments.  Other than the required disclosures, these changes had no impact on the financial statements.

 

On June 30, 2009, we adopted changes issued by the FASB to subsequent eventsThis guidance establishes general standards of accounting and disclosures of events that occur after the balance sheet date but before the financial statements are issued.  We evaluated all subsequent events that occurred after the balance sheet date through the filing of this Annual Report on Form 10-K on March 31, 2010.

 

Reclassifications

 

Certain reclassifications have been made to the comparative periods’ financial statements to conform to the 2009 presentation.  The reclassifications primarily related to the presentation of discontinued operations and noncontrolling interests and had no impact on the Company’s financial position or results of operations.

 

4.  Acquisitions and Equity Method Investments

 

Effective May 1, 2009, the Company acquired a 49.8% ownership interest in a surgical hospital in Austin, Texas for $350,000 plus the assumption of $2.6 million of debt.  The acquisition included gross accounts receivable of $7.1 million.  The Company recorded the receivables at $1.8 million, which was deemed to be fair value of the receivables at the date of the acquisition.  This fair value estimate was assumed by the Company to be fully collectible as of the acquisition date.  The acquisition was financed with cash from operations.  The Company, as general partner, has the ability to direct the financial affairs of the facility, and as such, this facility is consolidated for financial reporting purposes.

 

F-15



 

Effective February 21, 2008, the Company acquired ownership in five surgical facilities specializing in spine, orthopedic and pain management procedures located in Boulder, Colorado; Honolulu, Hawaii; Bristol and Nashville, Tennessee; and Seattle, Washington for an aggregate of $5.8 million and the assumption of $4.7 million of debt.  The Company acquired an ownership ranging from 20.0% to 50.0% in these surgical facilities.  Four of these facilities are consolidated for financial reporting purposes.

 

These acquisitions were accounted for under the purchase method of accounting, and accordingly, the results of operations of the acquired consolidated businesses are included in the accompanying consolidated financial statements from their respective dates of acquisition.  These acquisitions placed the Company in new markets or expanded the Company’s presence in current markets.

 

The Company also engages in investing transactions that are not business combinations.  These transactions primarily consist of acquisitions and sales of non-controlling equity interests in surgical facilities and the investment of additional cash in surgical facilities under development.  During the first quarter of 2009, the Company acquired an incremental ownership of 18.0% in its surgical facility located in Westlake Village, California for $416,000.   Prior to the acquisition, the Company owned 1.0% of this facility.  The acquisition was financed with cash from operations.

 

Effective September 1, 2009, the Company acquired an ownership of 28.8% in a surgical facility located in Gresham, Oregon for $525,000.  The acquisition was financed with cash from operations.  The Company accounts for this investment under the equity method.

 

During 2008, the Company acquired an incremental ownership of 16.7% in its surgical facility located in Irvine, California for $3.1 million and an incremental ownership of 18.0% in its surgical facility located in Arcadia, California for $304,000.  Prior to the acquisitions, the Company owned 15.3% of the Irvine, California surgical facility and 19.2% of the Arcadia, California surgical facility.

 

Additionally during 2008, the Company acquired an incremental ownership of 18.5% in its surgical facility located in Irvine, California for $5.1 million.  Through this acquisition, the Company obtained a controlling interest in the facility.  The acquisition was treated as a business combination and the Company began consolidating the facility for financial reporting purposes in 2008.  The Company also acquired an incremental ownership in three other of its existing surgical facilities located in California.  The Company acquired an incremental ownership of 10.7% in two surgical facilities located in Beverly Hills, California for an aggregate of $2.5 million and a 6.4% incremental ownership in a surgical facility located in Encino, California for $2.0 million.  Prior to the acquisitions, the Company owned 55.1% and 57.0% of the two Beverly Hills, California surgical facilities and 55.5% of the Encino, California surgical facility.

 

5.  Discontinued Operations

 

In February 2009, the Company completed its shutdown of the Englewood, Colorado facility.  The Company recorded a loss on the disposal of $5.9 million, which includes an accrual of $4.6 million for future contractual obligations under a facility operating lease.  As of December 31, 2009, this lease liability was $3.9 million. As of December 31, 2009, the Company owned one surgical facility that is classified as discontinued operations.  The results of operations in these centers are presented net of income taxes in the accompanying consolidated financial statements as discontinued operations.  The accompanying consolidated financial statements have been reclassified to conform to this presentation for all periods presented.  These required reclassifications of prior period consolidated financial statements did not impact total assets, liabilities, stockholders’ equity, net loss or cash flows.

 

Revenues, the loss on operations before income taxes, income tax provision (benefit), loss (gain) on sale, net of tax and the loss from discontinued operations net of tax for the years ended December 31, 2009, 2008 and 2007 related to discontinued operations were as follows (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2009

 

2008

 

2007

 

Net revenues

 

$

4,508

 

$

7,463

 

$

9,803

 

Loss on operations, before tax

 

$

(240

)

$

(792

)

$

(1,522

)

Income tax provision (benefit)

 

$

17

 

$

(676

)

$

(580

)

(Loss) gain on sale, net of tax

 

$

(5,840

)

$

(3,527

)

$

235

 

Loss from discontinued operations, net of taxes

 

$

(6,097

)

$

(3,643

)

$

(707

)

 

6.  Goodwill and Intangible Assets

 

The Company tests its goodwill and intangible assets for impairment at least annually, or more frequently if certain indicators arise.  The Company tests goodwill at the reporting unit level, which the Company concludes is the consolidated results of Symbion, Inc.  The Company completed the required annual impairment testing as of December 31, 2009, 2008 and 2007.

 

During 2009, the Company performed its impairment test by developing a fair value estimate of the business enterprise as of December 31, 2009 using a discounted cash flow approach and corroborated this analysis using a market-based approach.  As the Company does not have publicly traded equity from which to derive a market value, an assessment of peer company data was performed whereby the Company selected comparable peers based on growth and leverage ratios, as well as industry specific characteristics.  Based on the comparable peer market trading data, the Company identified a reasonable estimate for the market trading price of the Company as of December 31, 2009.  This market-based approach was then used to corroborate the results of the discounted cash flows approach.  No impairment was indicated as of December 31, 2009.

 

Changes in the carrying amount of goodwill are as follows (in thousands):

 

Balance at December 31, 2008

 

$

541,831

 

Purchase price allocations

 

3,583

 

Disposals

 

(176

)

Balance at December 31, 2009

 

$

545,238

 

 

F-16



 

As a result of the acquisition of a surgical hospital in Austin, Texas during the second quarter of 2009, the Company recorded goodwill of $4.2 million.  The Company is in the process of performing a valuation of certain assets of the facility to determine the final purchase price allocation.  Disposals of goodwill relate to ceasing operations at the Englewood, Colorado surgical facility in February 2009.

 

The Company has intangible assets related to the certificates of need for certain of its facilities of $19.5 million.  These indefinite-lived assets are not amortized but are assessed for possible impairment as part of the Company’s impairment analysis.

 

7.  Operating Leases

 

The Company leases office space and equipment for its surgical facilities, including surgical facilities under development.  The lease agreements generally require the lessee to pay all maintenance, property taxes, utilities and insurance costs.  The Company accounts for operating lease obligations and sublease income on a straight-line basis.  Contingent obligations of the Company are recognized when specific contractual measures have been met, which is typically the result of an increase in the Consumer Price Index.  Lease obligations paid in advance are included in prepaid rent.  The difference between actual lease payments and straight-line lease expense over the original lease term, excluding optional renewal periods, is included in deferred rent.

 

The future minimum lease payments under non-cancelable operating leases at December 31, 2009 are as follows (in thousands):

 

2010

 

$

23,498

 

2011

 

22,575

 

2012

 

21,755

 

2013

 

18,287

 

2014

 

13,097

 

Thereafter

 

48,302

 

Total minimum lease payments

 

$

147,514

 

 

Total rent and lease expense was $25.6 million, $22.3 million and $19.3 million for the periods ended December 31, 2009, 2008 and 2007, respectively.  The Company incurred rental expense of $5.6 million, $4.6 million and $4.7 million under operating leases with physician investors and an entity that is an affiliate of one of the Company’s former directors for the periods ended December 31, 2009, 2008 and 2007, respectively.

 

8.  Long-Term Debt

 

The Company’s long-term debt is summarized as follows (in thousands):

 

 

 

December 31,

 

 

 

2009

 

2008

 

Senior secured credit facility

 

$

232,125

 

$

235,875

 

Senior PIK toggle notes

 

206,967

 

184,635

 

Notes payable to banks

 

14,433

 

17,636

 

Secured term loans

 

2,628

 

3,213

 

Capital lease obligations

 

9,067

 

11,458

 

 

 

465,220

 

452,817

 

Less current maturities

 

(20,212

)

(12,205

)

 

 

$

445,008

 

$

440,612

 

 

Senior Secured Credit Facility

 

On August 23, 2007, the Company entered into a new $350.0 million senior secured credit facility with a syndicate of banks.  The senior secured credit facility extends credit in the form of two term loans of $125.0 million each (the first, the “Tranche A Term Loan” and the second, the “Tranche B Term Loan”) and a $100.0 million revolving, swingline and letter of credit facility (the “Revolving Facility”).  The swingline facility is limited to $10.0 million and the swingline loans are available on a same-day basis.  The letter of credit facility is limited to $10.0

 

F-17



 

million.  The Company is the borrower under the senior secured credit facility, and all of its wholly owned subsidiaries are guarantors.  Under the terms of the senior secured credit facility, entities that become wholly owned subsidiaries must also guarantee the debt.

 

The Tranche A Term Loan matures on August 23, 2013, the Tranche B Term Loan matures on August 23, 2014 and the Revolving Facility matures on August 23, 2013.  The Tranche A Term Loan requires quarterly principal payments $1.6 million through September 30, 2010, quarterly payments of $4.7 million from December 31, 2010 through September 30, 2011, quarterly payments of $6.3 million from December 31, 2011 through September 30, 2012, quarterly payments of $18.1 million from December 31, 2012 through June 30, 2013 and a balloon payment of $12.6 million on August 23, 2013.  The Tranche B Term Loan requires quarterly principal payments of $312,500 through June 30, 2014 and a balloon payment of $111.1 million on August 23, 2014.

 

At the Company’s option, the term loans bear interest at the lender’s alternate base rate in effect on the applicable borrowing date plus an applicable alternate base rate margin, or Eurodollar rate in effect on the applicable borrowing date, plus an applicable Eurodollar rate margin.  Both the applicable alternate base rate margin and applicable Eurodollar rate margin will vary depending upon the ratio of the Company’s total indebtedness to consolidated EBITDA.

 

The senior secured credit facility permits the Company to declare and pay dividends only in additional shares of its stock except for the following exceptions.  Restricted Subsidiaries, as defined in the credit agreement, may declare and pay dividends ratably with respect to their capital stock.  The Company may declare and pay cash dividends or make other distributions to Holdings provided the proceeds are used by Holdings to (i) purchase or redeem equity interest of Holdings acquired by former or current employees, consultants or directors of Holdings, the Company or any Restricted Subsidiary or (ii) pay principal or interest on promissory notes that were issued in lieu of cash payments for the repurchase or redemption of such Equity Instruments, provided that the aggregate amount of such dividends or other distributions shall not exceed $3.0 million in any fiscal year.  Any unused amounts that are permitted to be paid under this provision are available to be carried over to subsequent fiscal years provided that certain conditions are met.  The Company may also make payments to Holdings to pay franchise taxes and other fees required to maintain its corporate existence provided such payments do not exceed $3.0 million in any calendar year and also make payments in the amount necessary to enable Holdings to pay income taxes directly attributable to the operations of the Company and to make $1.0 million in annual advisory and management agreement payments.  The Company may also make additional payments to Holdings in the aggregate amount of $5.0 million throughout the term of the senior secured credit facility.

 

As of December 31, 2009, the amount outstanding under the senior secured credit facility was $232.1 million with an interest rate on the borrowings of 3.5%.  The $100.0 million Revolving Facility includes a non-use fee of 0.5% of the portion of the facility not used.  The Company pays this fee quarterly.  As of December 31, 2009, the amount available under the Revolving Facility was $100.0 million.

 

Interest Rate Swap

 

In October 2007, the Company entered into an interest rate swap agreement to protect the Company against certain interest rate fluctuations of the LIBOR rate on $150.0 million of the Company’s variable rate debt under the senior secured credit facility, with Merrill Lynch Capital Service, Inc., as counterparty.  The effective date of the interest rate swap was October 31, 2007, and it is scheduled to expire on October 31, 2010.  The interest rate swap effectively fixes the Company’s LIBOR interest rate on the $150.0 million of variable debt at a rate of 4.7%.

 

The FASB established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

The Company determines the fair value of its interest rate swap based on the amount at which it could be settled, which is referred to as the exit price.  This price is based upon observable market assumptions and appropriate valuation adjustments for credit risk.  The Company has categorized its interest rate swap as Level 2.

 

F-18



 

The interest rate swap agreement exposes both parties of the swap instrument to credit risk in the event of non-performance by the counter-party.  As of December 31, 2009, the Company recorded a credit risk adjustment of $189,000 to reduce the carrying value of the swap liability, reflecting the liability at fair value.

 

The Company does not hold or issue derivative financial instruments for trading purposes.  The fair value of the Company’s interest rate swap at December 31, 2009 and December 31, 2008 reflected a liability of approximately $5.0 million and $7.0 million, respectively, and is included in other accrued expenses and other liabilities in the accompanying consolidated balance sheets as of December 31, 2009 and 2008, respectively.  The interest rate swap reflects a liability balance as of December 31, 2009 and 2008 because of decreases in market interest rates since inception.

 

At inception, the Company designated the interest rate swap as a cash flow hedge instrument.  The Company assesses the effectiveness of this cash flow hedge instrument on a quarterly basis.  Due to the significant decline in benchmark interest rates, the Company elected, as of January 28, 2009, an interest term under the provisions of the hedged term debt agreement, different than the terms of the hedging instrument.  The Company has determined that this benchmark interest rate swap would no longer result in effectiveness within an acceptable range under the authoritative guidance, on a prospective basis.  As of December 31, 2008, the Company determined the hedge instrument to be ineffective and discontinued hedge accounting treatment.  In January 2009, the Company began recognizing a ratable portion of the $7.0 million in accumulated other comprehensive income as additional interest expense, over the remaining life of the hedging instrument which expires October 31, 2010.  Also in January 2009, the Company began recording into earnings the mark-to-market adjustment to reflect the fair value of the hedging instrument.  During 2009, the Company recorded a mark-to-market adjustment of $3.6 million as a reduction of interest expense and additional interest expense of $3.8 million related to the amortization of the interest rate swap balance in accumulated other comprehensive income.

 

Senior PIK Toggle Notes

 

On June 3, 2008, the Company completed a private offering of $179.9 million aggregate principal amount of the 11.00%/11.75% Senior PIK Toggle Notes due 2015.  Interest on the Toggle Notes is due February 23 and August 23 of each year.  The Toggle Notes will mature on August 23, 2015.  For any interest period through August 23, 2011, the Company may elect to pay interest on the Toggle Notes (i) in cash, (ii) in kind, by increasing the principal amount of the notes or issuing new notes (referred to as “PIK interest”) for the entire amount of the interest payment or (iii) by paying interest on 50% of the principal amount of the Toggle Notes in cash and 50% in PIK interest.  Cash interest on the Toggle Notes will accrue at the rate of 11.0% per annum.  PIK interest on the Toggle Notes will accrue at the rate of 11.75% per annum.  The proceeds from the issuance of the Toggle Notes were used exclusively to repay the bridge facility.

 

Upon issuance of the Toggle Notes, the Company elected to exercise the PIK option by increasing the principal amount of the Toggle Notes in lieu of making scheduled interest payments of $4.7 million for the interest period through August 23, 2008.  On August 23, 2008, the Company elected the PIK option of the Toggle Notes in lieu of making scheduled interest payments for the interest period from August 23, 2008 to February 23, 2009.  This election increased the principal due on the Toggle Notes by $10.8 million in the first quarter of 2009.  On February 23, 2009, the Company elected the PIK option of the Toggle Notes in lieu of making scheduled interest payments for the interest period from February 23, 2009 to August 23, 2009.  This election increased the principal due on the Toggle Notes by $11.5 million in the third quarter of 2009.  On August 23, 2009, the Company elected the PIK option of the Toggle Notes in lieu of making scheduled interest payments for the interest period from August 23, 2009 to February 23, 2010.  The Company has accrued $8.6 million in interest in other accrued expenses as of December 31, 2009 and will reclassify the total accrued interest to the principal balance of the Toggle Notes on February 23, 2010.

 

The Toggle Notes are unsecured senior obligations and rank equally with other existing and future senior indebtedness, senior to all future subordinated indebtedness and effectively junior to all secured indebtedness to the extent of the value of the collateral securing such indebtedness.  Certain existing subsidiaries have guaranteed the Toggle Notes on a senior basis, as required by the indenture.  The indenture also requires that certain of the Company’s future subsidiaries guarantee the Toggle Notes on a senior basis.  Each guarantee is unsecured and ranks equally with senior indebtedness of the guarantor, senior to all of the guarantor’s subordinated indebtedness and effectively junior to its secured indebtedness to the extent of the value of the collateral securing such indebtedness.

 

F-19



 

The indenture governing the Toggle Notes contains various restrictive covenants, including financial covenants that limit the Company’s ability and the ability of the subsidiaries to borrow money or guarantee other indebtedness, grant liens, make investments, sell assets, pay dividends or engage in transactions with affiliates.

 

At December 31, 2009, the Company was in compliance with all material covenants required by each of the senior secured credit facility and the Toggle Notes.

 

Notes Payable to Banks

 

Certain subsidiaries of the Company have outstanding bank indebtedness of $14.4 million which is collateralized by the real estate and equipment owned by the surgical facilities to which the loans were made.  The various bank indebtedness agreements contain covenants to maintain certain financial ratios and also restrict encumbrance of assets, creation of indebtedness, investing activities and payment of distributions.  The Company has guaranteed $9.4 million of this debt.

 

Capital Lease Obligations

 

The Company is liable to various vendors for several equipment leases.  The outstanding balance related to these capital leases at December 31, 2009 and 2008 was $9.1 million and $11.5 million, respectively.  The carrying value of the assets was $5.9 million and $4.5 million as of December 31, 2009 and 2008, respectively.

 

Other Long-Term Debt Information

 

Scheduled maturities of obligations as of December 31, 2009 are as follows (in thousands):

 

 

 

Long-term
Debt

 

Capital Lease
Obligations

 

Total

 

2010

 

$

16,036

 

$

4,176

 

$

20,212

 

2011

 

24,047

 

2,441

 

26,488

 

2012

 

41,776

 

1,588

 

43,364

 

2013

 

54,174

 

624

 

54,798

 

2014

 

112,390

 

52

 

112,442

 

Thereafter

 

207,730

 

186

 

207,916

 

 

 

$

456,153

 

$

9,067

 

$

465,220

 

 

9.  Income Taxes

 

The Company and its subsidiaries file a consolidated federal income tax return.  The partnerships and limited liability companies file separate income tax returns.  The Company’s allocable portion of each partnership’s and limited liability company’s income or loss is included in the taxable income of the Company.  The remaining income or loss of each partnership and limited liability company is allocated to the other owners.  The Company made income tax payments of $288,000 and $409,000 for the periods ended December 31, 2009 and 2008, respectively.

 

Income tax (benefit) expense from continuing operations is comprised of the following (in thousands):

 

 

 

Year Ended
December 31,
2009

 

Year Ended December 31,
2008

 

August 24,
2007 to
December 31,
2007

 

January 1,
2007 to
August 23,
2007

(Predecessor)

 

January 1,
2007 to
December 31,
2007
(Combined)

 

Current:

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

(111

)

$

(1,756

)

$

(3,347

)

$

1,199

 

$

(2,148

)

State

 

673

 

453

 

354

 

348

 

702

 

Deferred

 

7,204

 

14,559

 

2,217

 

2,469

 

4,686

 

Income tax (benefit) expense

 

$

7,766

 

$

13,256

 

$

(776

)

$

4,016

 

$

3,240

 

 

F-20



 

A reconciliation of the provision for income taxes as reported and the amount computed by multiplying the income (loss) before taxes by the U.S. federal statutory rate of 35% was as follows (in thousands):

 

 

 

Year Ended
December 31,
2009

 

Year Ended
December 31,
2008

 

August 24,
2007 to
December 31,
2007

 

January 1,
2007 to
August 23,
2007

(Predecessor)

 

January 1,
2007 to
December 31,
2007
(Combined)

 

Tax at U.S. statutory rates

 

$

3,810

 

$

6,915

 

$

1,383

 

$

6,277

 

$

7,660

 

State income taxes, net of federal tax benefit

 

565

 

993

 

(171

)

90

 

(81

)

Change in valuation allowance

 

10,192

 

14,137

 

402

 

193

 

595

 

Non-deductible transaction costs

 

 

 

 

2,947

 

2,947

 

Net income attributable to noncontrolling interests

 

(6,786

)

(8,280

)

(2,690

)

(5,479

)

(8,169

)

Other

 

(15

)

(509

)

300

 

(12

)

288

 

 

 

$

7,766

 

$

13,256

 

$

(776

)

$

4,016

 

$

3,240

 

 

The components of temporary differences and the approximate tax effects that give rise to the Company’s net deferred tax liability are as follows at December 31 (in thousands):

 

 

 

2009

 

2008

 

Deferred tax assets:

 

 

 

 

 

Depreciation

 

$

 

$

 

Accrued vacation and bonus

 

296

 

798

 

Net operating loss carryforwards

 

26,116

 

14,801

 

Deferred project costs

 

84

 

317

 

Deferred rent

 

979

 

 

Interest rate swap

 

1,964

 

2,518

 

Capital loss carryforward

 

5,619

 

5,729

 

Stock option compensation

 

3,139

 

2,771

 

Other deferred assets

 

1,084

 

401

 

Total gross deferred tax assets

 

39,281

 

27,335

 

Less: Valuation allowance

 

(37,371

)

(24,481

)

Total deferred tax assets

 

1,910

 

2,854

 

Deferred tax liabilities:

 

 

 

 

 

Depreciation on property and equipment

 

(193

)

(723

)

Amortization of intangible assets

 

(2,241

)

(2,364

)

Basis differences of partnerships and joint ventures

 

(39,150

)

(31,350

)

Other liabilities

 

(670

)

(600

)

Total deferred tax liabilities

 

(42,254

)

(35,037

)

Net deferred tax liability

 

$

(40,344

)

$

(32,183

)

 

As of December 31, 2009, the Company has recorded current deferred tax assets and net non-current deferred tax liabilities of $432,000 and $40.8 million, respectively.  The Company had federal net operating loss carryforwards of $56.0 million as of December 31, 2009, which expire between 2027 and 2029.  The Company had state net operating loss carryforwards of $150.7 million as of December 31, 2009, which expire between 2009 and 2029.  The Company had capital loss carryforwards of $16.1 million as of December 31, 2009, which expire between 2009 and 2013.

 

The Company recorded a valuation allowance against deferred tax assets at December 31, 2009 and December 31, 2008 totaling $37.4 and $24.5 million, respectively, which represents an increase of approximately $12.9 million.  The valuation allowance has been provided for certain deferred tax assets, for which the Company believes it is more likely than not that the assets will not be realized.  During 2008, goodwill was reduced by approximately $122,000 as a result of the utilization of state net operating losses that relate to the predecessor and for which a valuation allowance was previously recorded.

 

F-21



 

The benefit for income taxes for the period ended August 23, 2007 includes approximately $8.1 million of transactions costs incurred related to the Merger that may not be deductible for tax purposes.  The treatment of these costs as non-deductible reduced the Company’s tax benefit and increased the tax expense for the period ended August 23, 2007.

 

For the year ended December 31, 2009, the Company recorded income tax expense of $16,961 related to discontinued operations.

 

A reconciliation of the beginning and ending liability for gross unrecognized tax benefits at December 31, 2009 and 2008 is as follows (in thousands).

 

 

 

2009

 

2008

 

Unrecognized tax benefits balance at January 1

 

$

44

 

$

86

 

Additions based on tax provisions related to the current year

 

3,094

 

 

Additions for tax positions of prior years

 

190

 

6

 

Reductions for settlements with taxing authorities

 

(13

)

(48

)

Unrecognized tax benefits balance at December 31

 

$

3,315

 

$

44

 

 

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.  As of December 31, 2009 and 2008, the Company had approximately $96,000 and $20,000 of accrued interest and penalties related to uncertain tax positions, respectively.

 

Total amount of accrued liabilities related to uncertain tax positions that would affect the Company’s effective tax rate if recognized is $3.3 million as of December 31, 2009 and $44,000 as of December 31, 2008.  The tax years 2006 through 2009 remain open to examination by major taxing jurisdictions to which the Company is subject.

 

10.  Stock Options

 

Overview

 

The Company recognizes in the financial statements the cost of employee services received in exchange for awards of equity instruments based on the fair value of those awards.

 

The Predecessor used the modified prospective method of adoption, and the Company uses the Black-Scholes option pricing model to value any options awarded subsequent to adoption of ASC 718, Compensation, Stock Compensation.  Under the modified prospective method, compensation cost is recognized for all share-based payments granted or modified after January 1, 2006 for all unvested awards granted prior to the effective date of ASC 718.  The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable.  All option pricing models require the input of highly subjective assumptions including the expected stock price volatility and the expected exercise patterns of the option holders.

 

The Company is a participant in the Symbion Holdings Corporation 2007 Equity Incentive Plan (the “2007 Plan”).  In connection with the Merger, certain members of Predecessor’s management rolled over 974,396 predecessor options into the 2007 Plan.  The rollover options were exchanged for 611,799 options under the 2007 Plan.  The conversion ratio was determined by the difference between $22.35, the share price paid to stockholders on the merger date, less the exercise price of each option, ignoring options with an exercise price greater than $22.35.  The aggregate sum of the difference for each option was divided by $8.50 to determine the number of rollover options.  The exercise price of each rollover option is $1.50 per share and the options expire on the expiration date of the original grants.

 

The Company’s stock option compensation expense estimate can vary in the future depending on many factors, including levels of options and awards granted in the future, forfeitures and when option or award holders exercise these awards and depending on whether performance targets are met and a liquidity event occurs.

 

F-22



 

On August 31, 2007, Holdings granted 1,302,317 time-vested options and 1,606,535 performance vested options to certain employees of the Company.  The maximum contractual term of the options is ten years, or earlier if the employee terminates employment before that time.  The time-vested options vest over a five-year period with 20% of the options vesting each year.  The Company’s policy is to recognize compensation expense over the straight line method.  The performance vested options shall vest and become exercisable upon a liquidity event and the obtainment of internal rate of return targets as defined in the 2007 Plan.  No expense has been recorded in the statement of operations for the performance based shares as the conditions for vesting are not probable.

 

During 2009, 94,417 options to purchase shares of common stock included in the August 31, 2007 grant, which were reserved for issuance for positions to be filled after the initial grant, were issued to certain employees of the Company.  During 2008, 87,386 options included in the August 31, 2007 grant were issued to certain employees of the Company.  The Company began expensing these options during the requisite service period.

 

The Predecessor’s stock options vested over the related requisite service period, which was generally four years.  The maximum contractual term of the Predecessor’s options was either seven or ten years depending on the grant, or earlier if the employee terminates employment before that time.  The Predecessor historically granted stock options with an exercise price equal to the fair market value of the Predecessor’s common stock on the date of grant.  As of August 23, 2007, all of the Predecessor options were either paid out as the result of the Merger or were rolled over and exchanged for new options of Holdings on August 23, 2007.  Additionally, all of the shares of restricted stock were paid out as the result of the Merger.

 

Valuation Methodology

 

The fair values of the options were derived using the Black-Scholes option pricing model.  In applying the Black-Scholes option pricing model, the Company used the following assumptions:

 

·                  Weighted average risk-free interest rate.  The risk-free interest rate is used as a component of the fair value of stock options to take into account the time value of money.  For the risk-free interest rate, the Company uses the implied yield on United States Treasury zero-coupon issues with a remaining term equal to the expected life, in years, of the options granted.

 

·                  Expected volatilityVolatility, for the purpose of stock-based compensation, is a measurement of the amount that a share price has fluctuated.  Expected volatility involves reviewing historical volatility and determining what, if any, change the share price will have in the future.  FASB recommended that companies such as Holdings, whose common stock is not publicly traded or had a limited public stock trading history, use average volatilities of similar entities.  As a result, the Company has used the average volatilities of some of its competitors as an estimate in determining stock option fair values.

 

·                  Expected life, in years.  A clear distinction is made between the expected life of the option and the contractual term of the option.  The expected life of the option is considered the amount of time, in years, that the option is expected to be outstanding before it is exercised.  Whereas, the contractual term of the stock option is the term the option is valid before it expires.

 

·                  Expected dividend yield.  Since issuing dividends will affect the fair value of a stock option, GAAP requires companies to estimate future dividend yields or payments.  The Company has not historically issued dividends and does not intend to issue dividends in the future.

 

·                  Expected forfeiture rate.  The Company uses an estimated forfeiture rate based on historical experience for the respective position held by the option holder.  The Company reviews the forfeiture estimate annually in comparison to the actual forfeiture rate experienced.

 

F-23



 

The following table summarizes the assumptions used by the Company in the valuation of the time-vested options for the various periods:

 

 

 

Weighted
average fair
value per
share

 

Weighted
average risk-
free interest
rate

 

Expected
volatility

 

Expected life,
in years

 

Expected
dividend
yield

 

Expected
forfeiture
rate

 

August 31, 2007

 

$

4.91

 

4.4

%

42.0

%

6.5

 

0.0

%

4.0

%

March 31, 2008

 

$

4.72

 

4.4

%

42.0

%

6.5

 

0.0

%

4.0

%

March 31, 2009

 

$

0.70

 

0.5

%

42.0

%

6.5

 

0.0

%

4.0

%

 

Pro Forma Net Income

 

The Company recorded non-cash compensation expense of $1.3 million for the year ended December 31, 2009 and $2.1 million for the year ended December 31, 2008.  Non-cash compensation expense of $409,000 was recorded for the Successor period of 2007 from August 24, 2007 to December 31, 2007.  After noncontrolling interests and the related tax benefit, the Company recorded a net impact of approximately $793,000 for 2009, $1.3 million for 2008 and $250,000 for the period August 24, 2007 to December 31, 2007.

 

Outstanding Option Information

 

The following is a summary of option transactions since the Merger on August 23, 2007:

 

Stock Options

 

Number of
Shares

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Fair Value

 

Total Fair
Value

 

Aggregate
Intrinsic
Value

 

Weighted
Average
Remaining
Contractual
term

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

(in years)

 

Outstanding as of August 23, 2007

 

 

$

 

$

 

$

 

$

 

 

Rolled over

 

611,799

 

1.50

 

8.81

 

5,390

 

7.31

 

6.1

 

Granted

 

2,908,852

 

10.00

 

4.91

 

14,282

 

 

9.6

 

Exercised

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

Outstanding as of December 31, 2007

 

3,520,651

 

8.52

 

5.59

 

19,672

 

 

8.5

 

Exercisable at December 31, 2007

 

872,262

 

4.04

 

7.65

 

6,669

 

3.61

 

7.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008 Activity

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

$

 

$

 

$

 

$

 

 

Exercised

 

 

 

 

 

 

 

Forfeited

 

78,527

 

 

 

 

 

 

Vested

 

275,213

 

10.00

 

4.90

 

1,349

 

 

8.6

 

Expired

 

 

 

 

 

 

 

Outstanding as of December 31, 2008

 

3,442,124

 

8.49

 

5.60

 

19,287

 

 

7.8

 

Exercisable at December 31, 2008

 

1,147,475

 

$

5.47

 

$

6.99

 

$

8,017

 

$

1.52

 

6.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009 Activity

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

$

 

$

 

$

 

$

 

 

Exercised

 

 

 

 

 

 

 

Forfeited

 

69,538

 

 

 

 

 

 

Vested

 

284,655

 

10.00

 

4.76

 

1,355

 

 

7.7

 

Expired

 

 

 

 

 

 

 

Outstanding as of December 31, 2009

 

3,372,586

 

8.46

 

5.62

 

18,945

 

 

6.5

 

Exercisable at December 31, 2009

 

1,432,129

 

$

6.37

 

$

6.54

 

$

9,372

 

$

0.18

 

6.1

 

 

As of December 31, 2009, the total compensation expense related to non-vested time-based awards not yet recognized was $2.7 million.  This expense will be recognized over 3 years.

 

F-24



 

The following table summarizes information regarding the options outstanding at December 31, 2009:

 

Options Outstanding

 

Options Exercisable

 

Exercise Prices

 

Outstanding
as of
December 31,
2009

 

Weighted-
Average
Remaining
Contractual
Life

 

Weighted-
Average
Exercise
Price

 

Exercisable
as of
December 31,
2009

 

Weighted-
Average
Exercise
Price

 

$

1.50

 

611,799

 

4.07

 

$

1.50

 

611,799

 

$

1.50

 

10.00

 

2,760,787

 

7.77

 

10.00

 

820,330

 

10.00

 

 

 

3,372,586

 

6.54

 

7.98

 

1,432,129

 

6.37

 

 

Total unvested share awards as of December 31, 2009 are summarized as follows:

 

Stock Options

 

Number of
Shares

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Fair Value

 

Total Fair
Value

 

Aggregate
Intrinsic
Value

 

Weighted
Average
Remaining
Contractual
term

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

(in years)

 

Unvested at January 1, 2009

 

2,294,649

 

$

10.00

 

$

4.73

 

$

10,858

 

 

8.7

 

Forfeited

 

69,538

 

 

 

 

 

 

Vested

 

284,655

 

10.00

 

4.76

 

1,355

 

 

7.8

 

Unvested at December 31, 2009

 

1,940,456

 

10.00

 

4.93

 

9,569

 

 

7.8

 

 

11.  Employee Benefit Plans

 

Symbion, Inc. 401(k) Plan

 

The Symbion, Inc. 401(k) Plan (the “401(k) Plan”) is a defined contribution plan whereby employees who have completed six months of service in which they have worked a minimum of 1,000 hours and are age 21 or older are eligible to participate.  Employees may enroll in the plan on either January 1 or July 1 of each year.  The 401(k) Plan allows eligible employees to make contributions of varying percentages of their annual compensation, up to the maximum allowed amounts by the Internal Revenue Service.  Eligible employees may or may not receive a match by the Company of their contributions.  The match varies depending on location and is determined prior to the start of each plan year.  Generally, employer contributions vest 20% after two years of service and continue vesting at 20% per year until fully vested.  The Company’s matching expense for the periods ended December 31, 2009, 2008 and 2007 was $326,000, $1.1 million and $892,000, respectively.

 

Supplemental Retirement Savings Plan
 

The Company adopted the supplemental retirement savings plan (the “SERP”) in May 2005.  The SERP provides supplemental retirement alternatives to eligible officers and key employees of the Company by allowing participants to defer portions of their compensation.  Under the SERP, eligible employees may enroll in the plan before December 31 to be entered in the plan the following year.  Eligible employees may defer into the SERP up to 25% of their normal period payroll and up to 50% of their annual bonus.  If the enrolled employee contributes a minimum of 2% of his or her base salary into the SERP, the Company will contribute 2% of the enrolled employee’s base salary to the plan and has the option of contributing additional amounts.  Periodically, the enrolled employee’s deferred amounts are transferred to a plan administrator.  The plan administrator maintains separate non-qualified accounts for each enrolled employee to track deferred amounts.  On May 1 of each year, the Company is required to make its contribution to each enrolled employee’s account.  Compensation expense recorded by the Company related to the Company’s contribution to the SERP was $53,000, $54,000 and $46,000, for years ended December 31, 2009, 2008 and 2007, respectively.

 

F-25



 

12.  Recently Issued Accounting Guidelines

 

In June 2009, the FASB issued Accounting Standards Update No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (ASU 2009-17). ASU 2009-17 changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar) interests should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities that most significantly impact the other entity’s economic performance. ASU 2009-17 requires a number of additional disclosures about an entity’s involvement with variable interest entities and any significant changes in risk exposure due to that involvement. ASU 2009-17 became applicable to the Company on January 1, 2010. The Company is in the process of evaluating the potential impact of these changes on the financial statements.

 

13.  Commitments and Contingencies

 

Debt and Lease Guaranty on Non-consolidated Entities

 

The Company has guaranteed $1.4 million of operating lease payments of certain surgical facilities.  These operating leases typically have 10 year terms, with optional renewal periods.  As of December 31, 2009, the Company has also guaranteed $2.2 million of debt of six non-consolidating surgical facilities.  In the event that the Company meets certain financial and debt service benchmarks, the guarantees at these surgical facilities will expire between 2010 and 2017.

 

Professional, General and Workers’ Compensation Liability Risks

 

The Company is subject to claims and legal actions in the ordinary course of business, including claims relating to patient treatment, employment practices and personal injuries.  To cover these claims, the Company maintains general liability and professional liability insurance in excess of self-insured retentions through a third party commercial insurance carrier in amounts that management believes is sufficient for the Company’s operations, although, potentially, some claims may exceed the scope of coverage in effect.  This insurance coverage is on a claims-made basis.  Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance.  The Company is not aware of any such proceedings that would have a material adverse effect on the Company’s business, financial condition or results of operations.  The Company expenses the costs under the self-insured retention exposure for general and professional liability claims which relate to (i) deductibles on claims made during the policy period, and (ii) an estimate of claims incurred but not yet reported that are expected to be reported after the policy period expires.  Reserves and provisions for professional liability are based upon actuarially determined estimates.  The reserves are estimated using individual case-basis valuations and actuarial analysis.  Based on historical results and data currently available, management does not believe a change in one or more of these assumptions will have a material impact on the Company’s consolidated financial position or results of operations.

 

Laws and Regulations

 

Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation.  Compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare, Medicaid and other federal health care programs.  From time to time, governmental regulatory agencies will conduct inquiries of the Company’s practices.  It is the Company’s current practice and future intent to cooperate fully with such inquiries.  The Company is not aware of any such inquiry that would have a material adverse effect on the Company’s consolidated financial position or results of operations.

 

F-26



 

Acquired Facilities

 

The Company, through its wholly owned subsidiaries or controlled partnerships and limited liability companies, has acquired and will continue to acquire surgical facilities with prior operating histories.  Such facilities may have unknown or contingent liabilities, including liabilities for failure to comply with health care laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws.  Although the Company attempts to assure itself that no such liabilities exist and obtains indemnification from prospective sellers covering such matters and institutes policies designed to conform centers to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for past activities that may later be asserted to be improper by private plaintiffs or government agencies.  There can be no assurance that any such matter will be covered by indemnification or, if covered, that the liability sustained will not exceed contractual limits or the financial capacity of the indemnifying party.

 

The Company cannot predict whether federal or state statutory or regulatory provisions will be enacted that would prohibit or otherwise regulate relationships which the Company has established or may establish with other health care providers or have materially adverse effects on its business or revenues arising from such future actions.  The Company believes, however, that it will be able to adjust its operations so as to be in compliance with any regulatory or statutory provision as may be applicable.

 

Potential Physician Investor Liability

 

A majority of the physician investors in the partnerships and limited liability companies which operate the Company’s surgical facilities carry general and professional liability insurance on a claims-made basis.  Each investee may, however, be liable for damages to persons or property arising from occurrences at the surgical facilities.  Although the various physician investors and other surgeons generally are required to obtain general and professional liability insurance with tail coverage, such individual may not be able to obtain coverage in amounts sufficient to cover all potential liability.  Since most insurance policies contain exclusions, the physician investor will not be insured against all possible occurrences.  In the event of an uninsured or underinsured loss, the value of an investment in the partnership interests or limited liability company membership units and the amount of distributions could be adversely affected.

 

14.  Related Party Transactions

 

In addition to related party transactions discussed elsewhere in the notes to the accompanying consolidated financial statements, the consolidated financial statements include the following related party transactions.  On August 23, 2007, the Company entered into a ten year advisory services and management agreement with Crestview Advisors, L.L.C.  The annual management fee is $1.0 million and is payable on August 23 of each year.  The Company has prepaid this annual management fee and, for the year ended December 31, 2009, has an asset of $643,845 that is included in prepaid expenses and other current assets.

 

As of December 31, 2009 and 2008, the Company has $545,000 and $560,000, respectively payable to physicians at one of our physician networks as a result of cash receipts in excess of expenditures for the related facilities.  These amounts are included in other accrued expenses.

 

F-27



 

15.  Selected Quarterly Financial Data (Unaudited)

 

The following is selected quarterly financial data for each of the four quarters in 2009 and 2008.  Quarterly results are not necessarily representative of operations for a full year.

 

 

 

2009

 

 

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

 

 

(unaudited and in thousands)

 

Revenues

 

$

84,171

 

$

88,461

 

$

86,766

 

$

87,586

 

Cost of revenues

 

57,416

 

62,756

 

64,150

 

64,262

 

Income (loss) from continuing operations

 

3,738

 

3,310

 

(3,207

)

(811

)

Net (loss) income

 

(2,494

)

3,407

 

(3,030

)

(950

)

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

 

 

(unaudited and in thousands)

 

Revenues

 

$

79,253

 

$

84,361

 

$

83,570

 

$

84,716

 

Cost of revenues

 

54,380

 

56,011

 

57,539

 

57,514

 

Income (loss) from continuing operations

 

5,022

 

6,754

 

4,083

 

(9,357

)

Net income (loss)

 

4,808

 

4,945

 

3,615

 

(10,509

)

 

F-28



 

16.  Financial Information for the Company and Its Subsidiaries

 

The Company conducts substantially all of its business through its subsidiaries.  Presented below is condensed consolidating financial information for the Company and its subsidiaries as required by regulations of the Securities and Exchange Commission (“SEC”) in connection with the Company’s Toggle Notes that have been registered with the SEC.  The information segregates the parent company issuer, the combined wholly-owned subsidiary guarantors, the combined non-guarantors, and consolidating adjustments.  The operating and investing activities of the separate legal entities are fully interdependent and integrated.  Accordingly, the results of the separate legal entities are not representative of what the operating results would be on a stand-alone basis.  All of the subsidiary guarantees are both full and unconditional and joint and several.

 

SYMBION, INC.

CONSOLIDATING BALANCE SHEET

December 31, 2009

 

 

 

Parent Issuer

 

Guarantor
Subsidiaries

 

Combined
Non-
Guarantors

 

Eliminations

 

Total
Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,272

 

$

14,992

 

$

21,656

 

$

 

$

47,920

 

Accounts receivable, net

 

 

586

 

36,050

 

 

36,636

 

Inventories

 

 

 

9,730

 

 

9,730

 

Prepaid expenses and other current assets

 

4,234

 

416

 

7,861

 

 

12,511

 

Due from related parties

 

106,061

 

 

 

(106,061

)

 

Deferred Tax Asset - Current

 

432

 

 

 

 

432

 

Current assets of discontinued operations

 

 

 

530

 

 

530

 

Total current assets

 

121,999

 

15,994

 

75,827

 

(106,061

)

107,759

 

Property and equipment, net

 

1,331

 

433

 

87,495

 

 

89,259

 

Goodwill and intangibles

 

564,718

 

 

 

 

564,718

 

Investments in and advances to affiliates

 

990

 

46,821

 

4,193

 

(34,352

)

17,652

 

Other assets

 

9,790

 

44

 

853

 

 

10,687

 

Long-term assets of discontinued operations

 

 

 

651

 

 

651

 

Total assets

 

$

698,828

 

$

63,292

 

$

169,019

 

$

(140,413

)

$

790,726

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

15

 

$

136

 

$

8,155

 

$

 

$

8,306

 

Accrued payroll and benefits

 

464

 

593

 

4,865

 

 

5,922

 

Due to related parties

 

 

61,080

 

44,981

 

(106,061

)

 

Other accrued expenses

 

17,296

 

390

 

13,666

 

 

31,352

 

Current maturities of long-term debt

 

10,865

 

 

9,347

 

 

20,212

 

Current liabilities of discontinued operations

 

 

 

1,186

 

 

1,186

 

Total current liabilities

 

28,640

 

62,199

 

82,200

 

(106,061

)

66,978

 

Long-term debt, less current maturities

 

428,655

 

 

16,353

 

 

445,008

 

Deferred income tax payable

 

40,424

 

 

352

 

 

40,776

 

Other liabilities

 

3,503

 

103

 

2,673

 

 

6,279

 

Long-term liabilities of discontinued operations

 

 

 

3,330

 

 

3,330

 

Noncontrolling interest - redeemable

 

 

 

31,546

 

 

31,546

 

Total Symbion, Inc. stockholders’ equity

 

197,606

 

990

 

29,169

 

(34,352

)

193,413

 

Noncontrolling interests - nonredeemable

 

 

 

3,396

 

 

3,396

 

Total equity

 

197,606

 

990

 

32,565

 

(34,352

)

196,809

 

Total liabilities and stockholders’ equity

 

$

698,828

 

$

63,292

 

$

169,019

 

$

(140,413

)

$

790,726

 

 

F-29



 

SYMBION, INC.

CONSOLIDATING BALANCE SHEET

December 31, 2008

 

 

 

Parent Issuer

 

Guarantor
Subsidiaries

 

Combined
Non-
Guarantors

 

Eliminations

 

Total
Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,369

 

$

9,801

 

$

27,663

 

$

 

$

41,833

 

Accounts receivable, net

 

 

654

 

34,053

 

 

34,707

 

Inventories

 

 

 

9,050

 

 

9,050

 

Prepaid expenses and other current assets

 

6,481

 

585

 

5,653

 

 

12,719

 

Due from related parties

 

78,735

 

 

 

(78,735

)

 

Deferred Tax Asset - Current

 

825

 

 

 

 

825

 

Current assets of discontinued operations

 

 

 

1,104

 

 

1,104

 

Total current assets

 

90,410

 

11,040

 

77,523

 

(78,735

)

100,238

 

Property and equipment, net

 

3,900

 

878

 

89,907

 

 

94,685

 

Goodwill and intangibles

 

561,401

 

 

 

 

561,401

 

Investments in and advances to affiliates

 

6,033

 

22,006

 

1,019

 

(14,526

)

14,532

 

Other assets

 

11,345

 

85

 

445

 

 

11,875

 

Long-term assets of discontinued operations

 

 

 

833

 

 

833

 

Total assets

 

$

673,089

 

$

34,009

 

$

169,727

 

$

(93,261

)

$

783,564

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

1

 

$

53

 

$

5,338

 

$

 

$

5,392

 

Accrued payroll and benefits

 

1,822

 

678

 

5,000

 

 

7,500

 

Due to related parties

 

 

27,030

 

51,705

 

(78,735

)

 

Other accrued expenses

 

15,373

 

77

 

6,790

 

 

22,240

 

Current maturities of long-term debt

 

3,998

 

17

 

8,190

 

 

12,205

 

Current liabilities of discontinued operations

 

 

 

629

 

 

629

 

Total current liabilities

 

21,194

 

27,855

 

77,652

 

(78,735

)

47,966

 

Long-term debt, less current maturities

 

417,217

 

 

23,395

 

 

440,612

 

Other liabilities

 

9,927

 

121

 

22,960

 

 

33,008

 

Deferred income tax payable

 

12,526

 

 

 

 

12,526

 

Long-term liabilities of discontinued operations

 

 

 

236

 

 

236

 

Noncontrolling interest - redeemable

 

 

 

32,645

 

 

32,645

 

Total Symbion, Inc. stockholders’ equity

 

212,225

 

6,033

 

7,474

 

(14,526

)

211,206

 

Noncontrolling interests - nonredeemable

 

 

 

5,365

 

 

5,365

 

Total equity

 

212,225

 

6,033

 

12,839

 

(14,526

)

216,571

 

Total liabilities and stockholders’ equity

 

$

673,089

 

$

34,009

 

$

169,727

 

$

(93,261

)

$

783,564

 

 

F-30



 

SYMBION, INC.

CONSOLIDATING STATEMENT OF OPERATIONS

For the year ended December 31, 2009

 

 

 

Parent
Issuer

 

Guarantor
Subsidiaries

 

Combined
Non-
Guarantors

 

Eliminations

 

Total
Consolidated

 

Revenues

 

$

35,064

 

$

9,299

 

$

317,997

 

$

(15,376

)

$

346,984

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

 

4,751

 

92,093

 

 

96,844

 

Supplies

 

 

698

 

74,207

 

 

74,905

 

Professional and medical fees

 

 

1,153

 

22,009

 

 

23,162

 

Rent and lease expense

 

 

772

 

24,831

 

 

25,603

 

Other operating expenses

 

 

507

 

27,563

 

 

28,070

 

Cost of revenues

 

 

7,881

 

240,703

 

 

248,584

 

General and administrative expense

 

21,448

 

 

 

 

21,448

 

Depreciation and amortization

 

696

 

270

 

16,348

 

 

 

17,314

 

Provision for doubtful accounts

 

 

198

 

3,156

 

 

3,354

 

Income on equity investments

 

 

(2,318

)

 

 

(2,318

)

Impairment and (gain) loss on disposal of long-lived assets

 

835

 

2,420

 

 

 

3,255

 

Proceeds from insurance settlements, net

 

 

(430

)

 

 

 

(430

)

Management fees

 

 

 

15,376

 

(15,376

)

 

Equity in earnings of affiliates

 

(23,814

)

(22,542

)

 

46,356

 

 

Total operating expenses

 

(835

)

(14,521

)

275,583

 

30,980

 

291,207

 

Operating income (loss)

 

35,899

 

23,820

 

42,414

 

(46,356

)

55,777

 

Interest (expense) income, net

 

(51,134

)

(6

)

6,159

 

 

(44,981

)

(Loss) income before taxes and discontinued operations

 

(15,235

)

23,814

 

48,573

 

(46,356

)

10,796

 

Provision for income taxes

 

7,219

 

 

547

 

 

7,766

 

(Loss) income from continuing operations

 

(22,454

)

23,814

 

48,026

 

(46,356

)

3,030

 

Loss from discontinued operations, net of taxes

 

 

 

(6,097

)

 

(6,097

)

Net (loss) income

 

(22,454

)

23,814

 

41,929

 

(46,356

)

(3,067

)

Net (loss) income attributable to noncontrolling interests

 

 

 

(19,387

)

 

(19,387

)

Net (loss) income attributable to Symbion, Inc.

 

$

(22,454

)

$

23,814

 

$

22,542

 

$

(46,356

)

$

(22,454

)

 

F-31



 

SYMBION, INC.

CONSOLIDATING STATEMENT OF OPERATIONS

For the year ended December 31, 2008

 

 

 

Parent
Issuer

 

Guarantor
Subsidiaries

 

Combined
Non-
Guarantors

 

Eliminations

 

Total
Consolidated

 

Revenues

 

$

35,122

 

$

10,685

 

$

301,767

 

$

(15,674

)

$

331,900

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

 

17,229

 

73,281

 

 

90,510

 

Supplies

 

 

923

 

66,639

 

 

67,562

 

Professional and medical fees

 

 

5,416

 

13,605

 

 

19,021

 

Rent and lease expense

 

 

2,032

 

20,275

 

 

22,307

 

Other operating expenses

 

 

3,658

 

22,386

 

 

26,044

 

Cost of revenues

 

 

29,258

 

196,186

 

 

225,444

 

General and administrative expense

 

23,923

 

 

 

 

23,923

 

Depreciation and amortization

 

280

 

492

 

14,403

 

 

15,175

 

Provision for doubtful accounts

 

 

262

 

3,599

 

 

3,861

 

Income on equity investments

 

 

(1,504

)

 

 

(1,504

)

Impairment and (gain) loss on disposal of long-lived assets

 

 

 

924

 

 

924

 

Litigation Settlements, net

 

 

 

893

 

 

893

 

Management fees

 

 

 

15,674

 

(15,674

)

 

Equity in earnings of affiliates

 

(22,312

)

(39,841

)

 

62,153

 

 

Total operating expenses

 

1,891

 

(11,333

)

231,679

 

46,479

 

268,716

 

Operating income (loss)

 

33,231

 

22,018

 

70,088

 

(62,153

)

63,184

 

Interest (expense) income, net

 

(41,977

)

294

 

(1,743

)

 

(43,426

)

(Loss) income before taxes and discontinued operations

 

(8,746

)

22,312

 

68,345

 

(62,153

)

19,758

 

Provision for income taxes

 

12,052

 

 

1,204

 

 

13,256

 

Income (loss) from continuing operations

 

(20,798

)

22,312

 

67,141

 

(62,153

)

6,502

 

Loss from discontinued operations, net of taxes

 

 

 

(3,643

)

 

(3,643

)

Net (loss) income

 

(20,798

)

22,312

 

63,498

 

(62,153

)

2,859

 

Net loss attributable to noncontrolling interests

 

 

 

(23,657

)

 

(23,657

)

Net (loss) income attributable to Symbion, Inc.

 

$

(20,798

)

$

22,312

 

$

39,841

 

$

(62,153

)

$

(20,798

)

 

F-32



 

SYMBION, INC.

CONSOLIDATING STATEMENT OF OPERATIONS

For the period August 24, 2007 to December 31, 2007

 

 

 

Parent
Issuer

 

Guarantor
Subsidiaries

 

Combined
Non-
Guarantors

 

Eliminations

 

Total
Consolidated

 

Revenues

 

$

5,932

 

$

3,590

 

$

101,941

 

$

(4,823

)

$

106,640

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

 

1,560

 

28,203

 

 

29,763

 

Supplies

 

 

299

 

21,633

 

 

21,932

 

Professional and medical fees

 

 

304

 

6,164

 

 

6,468

 

Rent and lease expense

 

 

215

 

6,823

 

 

7,038

 

Other operating expenses

 

 

143

 

8,467

 

 

8,610

 

Cost of revenues

 

 

2,521

 

71,290

 

 

73,811

 

General and administrative expense

 

7,912

 

 

 

 

7,912

 

Depreciation and amortization

 

184

 

360

 

4,188

 

 

4,732

 

Provision for doubtful accounts

 

 

63

 

1,695

 

 

1,758

 

Income on equity investments

 

 

(21

)

 

 

(21

)

Impairment and (gain) loss on disposal of long-lived assets

 

2

 

(275

)

7

 

 

(266

)

Management fees

 

 

 

4,823

 

(4,823

)

 

Equity in earnings of affiliates

 

(11,218

)

(8,790

)

 

20,008

 

 

Total operating expenses

 

(3,120

)

(6,142

)

82,003

 

15,185

 

87,926

 

Operating income (loss)

 

9,052

 

9,732

 

19,938

 

(20,008

)

18,714

 

Interest (expense) income, net

 

(14,006

)

1,486

 

(2,243

)

 

(14,763

)

(Loss) income before taxes and discontinued operations

 

(4,954

)

11,218

 

17,695

 

(20,008

)

3,951

 

Provision for income taxes

 

(1,727

)

 

951

 

 

(776

)

Income (loss) from continuing operations

 

(3,227

)

11,218

 

16,744

 

(20,008

)

4,727

 

Loss from discontinued operations, net of taxes

 

 

 

(269

)

 

(269

)

Net income (loss)

 

(3,227

)

11,218

 

16,475

 

(20,008

)

4,458

 

Net income attributable to noncontrolling interests

 

 

 

(7,685

)

 

(7,685

)

Net income (loss) attributable to Symbion, Inc.

 

$

(3,227

)

$

11,218

 

$

8,790

 

$

(20,008

)

$

(3,227

)

 

F-33



 

SYMBION, INC.

CONSOLIDATING STATEMENT OF OPERATIONS

For the period January 1, 2007 to August 23, 2007

 

 

 

PREDECESSOR

 

 

 

Parent
Issuer

 

Guarantor
Subsidiaries

 

Combined
Non-
Guarantors

 

Eliminations

 

Total
Consolidated

 

Revenues

 

$

10,984

 

$

6,673

 

$

188,874

 

$

(8,866

)

$

197,665

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

 

2,792

 

51,256

 

 

54,048

 

Supplies

 

 

411

 

38,692

 

 

39,103

 

Professional and medical fees

 

 

267

 

11,853

 

 

12,120

 

Rent and lease expense

 

 

347

 

11,950

 

 

12,297

 

Other operating expenses

 

 

245

 

15,028

 

 

15,273

 

Cost of revenues

 

 

4,062

 

128,779

 

 

132,841

 

General and administrative expense

 

23,961

 

 

 

 

23,961

 

Depreciation and amortization

 

396

 

211

 

7,313

 

 

7,920

 

Provision for doubtful accounts

 

 

98

 

2,593

 

 

2,691

 

Loss on equity investments

 

 

5

 

 

 

5

 

Impairment and (gain) loss on disposal of long-lived assets

 

(1,453

)

(113

)

1,289

 

 

(277

)

Management fees

 

 

 

8,866

 

(8,866

)

 

Equity in earnings of affiliates

 

(28,272

)

(23,273

)

 

51,545

 

 

Proceeds from insurance and litigation settlements, net

 

 

 

(161

)

 

(161

)

Merger transaction expenses

 

7,522

 

 

 

 

7,522

 

Total operating expenses

 

2,154

 

(19,010

)

148,679

 

42,679

 

174,502

 

Operating income (loss)

 

8,830

 

25,683

 

40,195

 

(51,545

)

23,163

 

Interest (expense) income, net

 

(6,322

)

2,589

 

(1,495

)

 

(5,228

)

(Loss) income before taxes and discontinued operations

 

2,508

 

28,272

 

38,700

 

(51,545

)

17,935

 

Provision (benefit) for income taxes

 

4,683

 

 

(667

)

 

4,016

 

Income (loss) from continuing operations

 

(2,175

)

28,272

 

39,367

 

(51,545

)

13,919

 

Loss from discontinued operations, net of taxes

 

 

 

(438

)

 

(438

)

Net (loss) income

 

(2,175

)

28,272

 

38,929

 

(51,545

)

13,481

 

Net loss attributable to noncontrolling interests

 

 

 

(15,656

)

 

(15,656

)

Net (loss) income attributable to Symbion, Inc.

 

$

(2,175

)

$

28,272

 

$

23,273

 

$

(51,545

)

$

(2,175

)

 

F-34



 

SYMBION, INC.

CONSOLIDATING STATEMENT OF CASH FLOWS

For the year ended December 31, 2009

 

 

 

Parent
Issuer

 

Guarantor
Subsidiaries

 

Combined
Non-
Guarantors

 

Eliminations

 

Total
Consolidated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(22,454

)

$

23,814

 

$

41,929

 

$

(46,356

)

$

(3,067

)

Adjustments to reconcile net (loss) income to net cash from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

 

 

6,097

 

 

6,097

 

Depreciation and amortization

 

696

 

270

 

16,348

 

 

17,314

 

Amortization of deferred financing costs

 

2,004

 

 

 

 

2,004

 

Non-cash payment-in-kind interest option

 

23,263

 

 

 

 

23,263

 

Non-cash stock option compensation expense

 

1,297

 

 

 

 

1,297

 

Non-cash recognition of other comprehensive loss into earnings

 

2,853

 

 

 

 

2,853

 

Non-cash credit risk adjustment of financial instruments

 

1,629

 

 

 

 

1,629

 

Non-cash losses

 

835

 

1,990

 

 

 

2,825

 

Deferred income taxes

 

8,682

 

 

 

 

8,682

 

Equity in earnings of consolidated affiliates

 

(23,814

)

(22,542

)

 

46,356

 

 

Equity in earnings of unconsolidated affiliates, net of distributions received

 

 

(207

)

 

 

(207

)

Provision for doubtful accounts

 

 

198

 

3,156

 

 

3,354

 

Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

(4,142

)

 

(4,142

)

Income taxes receivable

 

1,762

 

 

 

 

1,762

 

Other assets and liabilities

 

20,108

 

1,668

 

(24,001

)

 

(2,225

)

Net cash provided by operating activities — continuing operations

 

16,861

 

5,191

 

39,387

 

 

61,439

 

Net cash used in operating activities —discontinued operations

 

 

 

(1,021

)

 

(1,021

)

Net cash provided by operating activities

 

16,861

 

5,191

 

38,366

 

 

60,418

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Payments for acquisitions, net of cash acquired

 

(126

)

 

 

 

(126

)

Purchases of property and equipment, net

 

(226

)

 

(9,635

)

 

(9,861

)

Change in other assets

 

(724

)

 

(694

)

 

(1,418

)

Net cash used in investing activities — continuing operations

 

(1,076

)

 

(10,329

)

 

(11,405

)

Net cash used in investing activities — discontinued operations

 

 

 

(40

)

 

(40

)

Net cash used in investing activities

 

(1,076

)

 

(10,369

)

 

(11,445

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Principal payments on long-term debt

 

(4,046

)

 

(9,695

)

 

(13,741

)

Proceeds from debt issuances

 

 

 

678

 

 

678

 

Payment of debt issuance costs

 

(203

)

 

 

 

 

(203

)

Distributions to noncontrolling interests

 

 

 

(24,971

)

 

(24,971

)

Proceeds from unit activity of consolidated facilities

 

307

 

 

 

 

307

 

Change in other long-term liabilities

 

(4,940

)

 

 

 

(4,940

)

Net cash used in financing activities — continuing operations

 

(8,882

)

 

(33,988

)

 

(42,870

)

Net cash used in financing activities — discontinued operations

 

 

 

(16

)

 

(16

)

Net cash used in financing activities

 

(8,882

)

 

(34,004

)

 

(42,886

)

Net (decrease) increase in cash and cash equivalents

 

6,903

 

5,191

 

(6,007

)

 

6,087

 

Cash and cash equivalents at beginning of period

 

4,369

 

9,801

 

27,663

 

 

41,833

 

Cash and cash equivalents at end of period

 

$

11,272

 

$

14,992

 

$

21,656

 

$

 

$

47,920

 

 

F-35



 

SYMBION, INC.

CONSOLIDATING STATEMENT OF CASH FLOWS

For the year ended December 31, 2008

 

 

 

Parent
Issuer

 

Guarantor
Subsidiaries

 

Combined
Non-
Guarantors

 

Eliminations

 

Total
Consolidated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(20,798

)

$

22,312

 

$

63,498

 

$

(62,153

)

$

2,859

 

Adjustments to reconcile net (loss) income to net cash from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

 

 

3,643

 

 

3,643

 

Depreciation and amortization

 

280

 

492

 

14,403

 

 

15,175

 

Amortization of deferred financing costs

 

4,477

 

 

 

 

4,477

 

Non-cash payment-in-kind interest option

 

17,616

 

 

 

 

17,616

 

Non-cash stock option compensation expense

 

2,114

 

 

 

 

2,114

 

Non-cash losses

 

 

 

924

 

 

924

 

Deferred income taxes

 

13,718

 

 

 

 

13,718

 

Equity in earnings of consolidated affiliates

 

(22,312

)

(39,841

)

 

62,153

 

 

Equity in earnings of affiliates, net of distributions received

 

 

333

 

 

 

333

 

Provision for doubtful accounts

 

 

262

 

3,599

 

 

3,861

 

Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

(3,536

)

 

(3,536

)

Income taxes payable

 

1,959

 

 

 

 

1,959

 

Other assets and liabilities

 

24,203

 

19,180

 

(44,260

)

 

(877

)

Net cash provided by operating activities — continuing operations

 

21,257

 

2,738

 

38,271

 

 

62,266

 

Net cash used in operating activities —discontinued operations

 

 

 

(43

)

 

(43

)

Net cash provided by operating activities

 

21,257

 

2,738

 

38,228

 

 

62,223

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Payments for acquisitions, net of cash acquired

 

 

 

(15,695

)

 

(15,695

)

Purchases of property and equipment, net

 

(580

)

 

(15,069

)

 

(15,649

)

Change in other assets

 

(1,504

)

 

 

 

 

(1,504

)

Net cash used in investing activities — continuing operations

 

(2,084

)

 

(30,764

)

 

(32,848

)

Net cash used in investing activities — discontinued operations

 

 

 

(358

)

 

(358

)

Net cash used in investing activities

 

(2,084

)

 

 

(31,122

)

 

(33,206

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Principal payments on long-term debt

 

(13,513

)

 

(5,162

)

 

(18,675

)

Repayment of bridge facility

 

(179,937

)

 

 

 

 

(179,937

)

Proceeds from debt issuances

 

12,639

 

 

852

 

 

13,491

 

Proceeds from issuance of Toggle Notes

 

179,937

 

 

 

 

 

179,937

 

Payment of debt issuance costs

 

(4,739

)

 

 

 

 

(4,739

)

Distributions to noncontrolling interests

 

 

 

(23,423

)

 

(23,423

)

Proceeds from unit activity of consolidated facilities

 

219

 

 

 

 

219

 

Change in other long-term liabilities

 

(22,429

)

 

23,866

 

 

1,437

 

Net cash used in financing activities — continuing operations

 

(27,823

)

 

(3,867

)

 

(31,690

)

Net cash used in financing activities — discontinued operations

 

 

 

(150

)

 

(150

)

Net cash used in financing activities

 

(27,823

)

 

(4,017

)

 

(31,840

)

Net (decrease) increase in cash and cash equivalents

 

(8,650

)

2,738

 

3,089

 

 

(2,823

)

Cash and cash equivalents at beginning of period

 

13,019

 

7,063

 

24,574

 

 

44,656

 

Cash and cash equivalents at end of period

 

$

4,369

 

$

9,801

 

$

27,663

 

$

 

$

41,833

 

 

F-36



 

SYMBION, INC.

CONSOLIDATING STATEMENT OF CASH FLOWS

For the period from August 24, 2007 through December 31, 2007

 

 

 

Parent
Issuer

 

Guarantor
Subsidiaries

 

Combined
Non-
Guarantors

 

Eliminations

 

Total
Consolidated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(3,227

)

$

11,218

 

$

16,475

 

$

(20,008

)

$

4,458

 

Adjustments to reconcile net (loss) income to net cash from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

 

 

269

 

 

269

 

Depreciation and amortization

 

184

 

360

 

4,188

 

 

4,732

 

Non-cash stock option compensation expense

 

409

 

 

 

 

409

 

Amortization of deferred financing costs

 

1,872

 

 

 

 

1,872

 

Non-cash gains and losses

 

2

 

(275

)

304

 

 

31

 

Deferred income taxes

 

2,217

 

 

 

 

2,217

 

Equity in earnings of affiliates

 

(11,218

)

(8,790

)

 

20,008

 

 

Equity in earnings of unconsolidated affiliates, net of distributions received

 

 

(21

)

 

 

(21

)

Provision for doubtful accounts

 

 

63

 

1,695

 

 

1,758

 

Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

(90

)

 

(90

)

Income tax receivable

 

6,096

 

 

 

 

6,096

 

Other assets and liabilities

 

(5,421

)

1,808

 

2,634

 

 

(979

)

Net cash (used in) provided by operating activities — continuing operations

 

(9,086

)

4,363

 

25,475

 

 

20,752

 

Net cash provided by operating activities — discontinued operations

 

 

 

580

 

 

580

 

Net cash (used in) provided by operating activities

 

(9,086

)

4,363

 

26,055

 

 

21,332

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Payments for acquisitions, net of cash acquired

 

 

 

(9,815

)

 

(9,815

)

Purchases of property and equipment, net

 

(306

)

 

(6,642

)

 

(6,948

)

Change in other assets

 

 

(661

)

(180

)

 

(841

)

Net cash used in investing activities — continuing operations

 

(306

)

(661

)

(16,637

)

 

(17,604

)

Net cash used in investing activities — discontinued operations

 

 

 

(24

)

 

(24

)

Net cash used in investing activities

 

(306

)

(661

)

(16,661

)

 

(17,628

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Principal payments on long-term debt

 

(625

)

 

(867

)

 

(1,492

)

Proceeds from debt issuances

 

 

 

50

 

 

50

 

Distributions to noncontrolling interests

 

 

 

(7,301

)

 

(7,301

)

Proceeds from capital contributions by minority partners

 

 

 

756

 

 

756

 

Payment of merger costs incurred by Symbion Holdings, LLC

 

(445

)

 

 

 

(445

)

Change in other long-term liabilities

 

409

 

 

(1,361

)

 

(952

)

Net cash used in financing activities — continuing operations

 

(661

)

 

(8,723

)

 

(9,384

)

Net cash used in financing activities — discontinued operations

 

 

 

(11

)

 

(11

)

Net cash used in financing activities

 

(661

)

 

(8,734

)

 

(9,395

)

Net (decrease) increase in cash and cash equivalents

 

(10,053

)

3,702

 

660

 

 

(5,691

)

Cash and cash equivalents at beginning of period

 

23,072

 

3,361

 

23,914

 

 

50,347

 

Cash and cash equivalents at end of period

 

$

13,019

 

$

7,063

 

$

24,574

 

$

 

$

44,656

 

 

F-37



 

SYMBION, INC.

CONSOLIDATING STATEMENT OF CASH FLOWS

For the period from January 1 to August 23, 2007

 

 

 

Predecessor

 

 

 

Parent Issuer

 

Guarantor
Subsidiaries

 

Combined
Non-
Guarantors

 

Eliminations

 

Total
Consolidated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(2,175

)

$

28,272

 

$

38,929

 

$

(51,545

)

$

13,481

 

Adjustments to reconcile net (loss) income to net cash from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

 

 

438

 

 

438

 

Depreciation and amortization

 

396

 

211

 

7,313

 

 

7,920

 

Non-cash stock option compensation expense

 

9,367

 

 

970

 

 

10,337

 

Amortization of deferred financing costs

 

322

 

 

 

 

322

 

Non-cash gains and losses

 

(1,453

)

(6,008

)

7,156

 

 

(305

)

Deferred income taxes

 

13,637

 

 

 

 

13,637

 

Equity in earnings of consolidated affiliates

 

(28,272

)

(23,273

)

 

51,545

 

 

Equity in earnings of unconsolidated affiliates, net of distributions received

 

 

5

 

 

 

5

 

Provision for doubtful accounts

 

 

98

 

2,593

 

 

2,691

 

Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

(166

)

 

(166

)

Income tax receivable

 

(10,402

)

 

 

 

(10,402

)

Other assets and liabilities

 

(1,977

)

 

(3,109

)

 

(5,086

)

Net cash (used in) provided by operating activities — continuing operations

 

(20,557

)

(695

)

54,124

 

 

32,872

 

Net cash provided by operating activities — discontinued operations

 

 

 

24

 

 

24

 

Net cash (used in) provided by operating activities

 

(20,557

)

(695

)

54,148

 

 

32,896

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Payments for acquisitions, net of cash acquired

 

 

 

(14,981

)

 

(14,981

)

Purchases of property and equipment, net

 

 

 

(7,664

)

 

(7,664

)

Change in other assets

 

 

 

1,401

 

 

1,401

 

Net cash used in investing activities — continuing operations

 

 

 

(21,244

)

 

(21,244

)

Net cash used in investing activities — discontinued operations

 

 

 

(36

)

 

(36

)

Net cash used in investing activities

 

 

 

(21,280

)

 

(21,280

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Principal payments on long-term debt

 

(159,500

)

 

(2,055

)

 

(161,555

)

Proceeds from debt issuances

 

455,500

 

 

3,097

 

 

458,597

 

Payment of debt issuance costs

 

(12,544

)

 

 

 

(12,544

)

Distributions to noncontrolling interests

 

 

 

(17,185

)

 

(17,185

)

Proceeds from capital contributions by minority partners

 

 

 

2,241

 

 

2,241

 

Payment of merger costs incurred by Symbion Holdings, LLC

 

(6,528

)

 

 

 

(6,528

)

Cash paid to shareholders

 

(490,510

)

 

 

 

(490,510

)

Net proceeds from issuance of common stock

 

239,085

 

 

 

 

239,085

 

Change in other long-term liabilities

 

17,786

 

2,592

 

(20,128

)

 

250

 

Net cash provided by (used in) financing activities — continuing operations

 

43,289

 

2,592

 

(34,030

)

 

11,851

 

Net cash used in financing activities — discontinued operations

 

 

 

 

(29

)

 

(29

)

Net cash provided by (used in) financing activities

 

43,289

 

2,592

 

(34,059

)

 

11,822

 

Net increase (decrease) in cash and cash equivalents

 

22,732

 

1,897

 

(1,191

)

 

23,438

 

Cash and cash equivalents at beginning of period

 

340

 

1,464

 

25,105

 

 

26,909

 

Cash and cash equivalents at end of period

 

$

23,072

 

$

3,361

 

$

23,914

 

$

 

$

50,347

 

 

F-38



 

17.  Subsequent Events

 

The Company has evaluated subsequent events through the date that the Consolidated Financial Statements were issued, and concluded there are no material subsequent events.

 

F-39



 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

 

 

SYMBION, INC.

 

 

 

  March 31, 2010

By:

/s/ Richard E. Francis, Jr.

 

 

Richard E. Francis, Jr.

 

 

Chairman of the Board and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in capacities and on the dates indicated.

 

Signature

 

Title

 

Date

 

 

 

 

 

/s/ Richard E. Francis, Jr.

 

Chairman of the Board, Chief Executive Officer and Director

 

 

Richard E. Francis, Jr.

 

(Principal Executive Officer)

 

March 31, 2010

 

 

 

 

 

 

 

 

 

 

/s/ Teresa F. Sparks

 

Senior Vice President of Financial and Chief Financial Officer

 

 

Teresa F. Sparks

 

(Principal Financial and Accounting Officer)

 

March 31, 2010

 

 

 

 

 

 

 

 

 

 

/s/ Clifford G. Adlerz

 

 

 

 

Clifford G. Adlerz

 

President, Chief Operating Officer and Director

 

March 31, 2010

 

 

 

 

 

 

 

 

 

 

/s/ Thomas S. Murphy, Jr.

 

 

 

 

Thomas S. Murphy, Jr.

 

Director

 

March 31, 2010

 

 

 

 

 

 

 

 

 

 

/s/ Robert V. Delaney

 

 

 

 

Robert V. Delaney

 

Director

 

March 31, 2010

 

 

 

 

 

 

 

 

 

 

/s/ Quentin Chu

 

 

 

 

Quentin Chu

 

Director

 

March 31, 2010

 

 

 

 

 

 

 

 

 

 

/s/ Kurt E. Bolin

 

 

 

 

Kurt E. Bolin

 

Director

 

March 31, 2010

 

 

 

 

 

 

 

 

 

 

/s/ Craig R. Callen

 

 

 

 

Craig R. Callen

 

Director

 

March 31, 2010

 



 

Exhibit Index

 

No.

 

Description

2

 

Agreement and Plan of Merger, dated as of April 24, 2007, by and among Symbol Acquisition, L.L.C., Symbol Merger Sub, Inc. and Symbion, Inc. (a)

3.1

 

Amended Certificate of Incorporation of Symbion, Inc. (b)

3.2

 

Amended and Restated Bylaws of Symbion, Inc. (b)

4.1

 

Indenture, dated as of June 3, 2008, among Symbion, Inc., the Guarantors named therein and U.S. Bank National Association, as Trustee (b)

4.2

 

Form of Notes (included in Exhibit 4.1)

4.3

 

Registration Rights Agreement, dated as of June 3, 2007, among Symbion, Inc., the subsidiaries of Symbion, Inc. party thereto as guarantors, and Merrill, Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC and Greenwich Capital Markets, Inc. (b)

4.4

 

First Supplemental Indenture, dated as of September 18, 2008 among Symbion, Inc., the Guarantors named therein and U.S. Bank National Association, as Trustee (b)

10.1

 

Employment Agreement, dated August 23, 2007, between Symbion, Inc. and Richard E. Francis, Jr.(b) (g)

10.2

 

Employment Agreement, dated August 23, 2007, between Symbion, Inc. and Clifford G. Adlerz (b) (g)

10.3

 

Credit Agreement, dated as of August 23, 2007, among Symbol Holdings Corporation, Symbol Merger Sub, Inc., the Lenders party thereto from time to time, Merrill Lynch Capital Corporation as Administrative Agent and Collateral Agent, Bank of America, N.A. as Syndication Agent, The Royal Bank of Scotland PLC and Fifth Third Bank as Co-Documentation Agents, and Merrill Lynch & Co., Merrill, Lynch, Pierce, Fenner & Smith Incorporated and Banc of America Securities LLC as Joint Lead Arrangers and Joint Lead Bookrunners (c)

10.4

 

Lease Agreement, dated June 26, 2001, between Burton Hills IV Partners and Symbion, Inc. (d)

10.5

 

First Amendment to Lease Agreement, dated February 9, 2004, between Burton Hills IV Partners and Symbion, Inc. (e)

10.6

 

Symbion Holdings Corporation 2007 Equity Incentive Plan (b) (g)

10.7

 

Symbion, Inc. Executive Change in Control Severance Plan (b) (g)

10.8

 

Symbion Holdings Corporation Compensatory Equity Participation Plan (b) (g)

10.9

 

Shareholders Agreement, dated as of August 23, 2007, among Symbion Holdings Corporation and the stockholders of Symbion Holdings Corporation and other persons named therein (b)

10.10

 

Advisory Services and Monitoring Agreement, dated as of August 23, 2007, among Symbion, Inc., Symbion Holdings Corporation and Crestview Advisors, L.L.C. (b)

10.11

 

Form of Employee Contribution Agreement (b)

10.12

 

Symbion, Inc. Supplemental Executive Retirement Plan (f) (g)

10.13

 

Management Rights Purchase Agreement, dated as of July 27, 2005, by and among Parthenon Management Partners, LLC, Andrew A. Brooks, M.D., Randhir S. Tuli and SymbionARC Management Services, Inc. (c)

10.14

 

Interest Rate Swap Agreement, dated October 31, 2007, between Symbion, Inc and Merrill Lynch Capital Services, Inc. (c)

21

 

Subsidiaries of Registrant

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

 

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

 

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 


(a)         Incorporated by reference to exhibits filed with the Registrant’s Current Report on Form 8-K filed April 24, 2007 (File No. 000-50574)

(b)        Incorporated by reference to exhibits filed with the Registrant’s Registration Statement on Form S-4 (Registration No. 333-153678)

(c)         Incorporated by reference to exhibits filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, as amended (File No. 000-50574)

(d)        Incorporated by reference to exhibits filed with the Registrant’s Registration Statement on Form S-1 (Registration No. 333-89554)

(e)         Incorporated by reference to exhibits filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 000-50574)

(f)           Incorporated by reference to exhibits filed with the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 (File No. 000-50574)

(g)        Compensation plan or arrangement