Attached files
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EX-31.2 - EX-31.2 - SYMBION INC/TN | q12011exh312symbion.htm |
EX-32.2 - EX-32.2 - SYMBION INC/TN | q12011exh322symbion.htm |
EX-32.1 - EX-32.1 - SYMBION INC/TN | q12011exh321symbion.htm |
EX-31.1 - EX-31.1 - SYMBION INC/TN | q12011exh311symbion.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________
Form 10-Q
(Mark One)
T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 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)
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 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 May 12, 2011, 1,000 shares of the registrant’s common stock were outstanding.
SYMBION, INC.
FORM 10-Q
MAY 13, 2010
TABLE OF CONTENTS
Part I - FINANCIAL INFORMATION | |||
Item 1. | Financial Statements | ||
Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010 | 3 | ||
Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and March 31, 2010 (unaudited) | 4 | ||
Consolidated Statements of Stockholders' Equity as of and for the Three Months Ended March 31, 2011 and the Three Months Ended March 31, 2010 | 5 | ||
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and March 31, 2010 (unaudited) | 6 | ||
Notes to Consolidated Financial Statements | 7 | ||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 21 | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 31 | |
Item 4. | Controls and Procedures | 31 | |
Part II - OTHER INFORMATION | |||
Item 1. | Legal Proceedings | 32 | |
Item 6. | Exhibits | 32 | |
Signatures | 33 |
2
Item 1. Financial Statements
SYMBION, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share amounts)
March 31, 2011 | December 31, 2010 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 77,284 | $ | 73,458 | |||
Accounts receivable, less allowance for doubtful accounts of $10,251 and $10,051, respectively | 60,328 | 61,825 | |||||
Inventories | 11,330 | 10,798 | |||||
Prepaid expenses and other current assets | 8,924 | 8,636 | |||||
Current assets of discontinued operations | 625 | 1,003 | |||||
Total current assets | 158,491 | 155,720 | |||||
Land | 5,713 | 5,713 | |||||
Buildings and improvements | 103,564 | 102,795 | |||||
Furniture and equipment | 71,008 | 70,129 | |||||
Computers and software | 4,785 | 4,757 | |||||
185,070 | 183,394 | ||||||
Less accumulated depreciation | (47,423 | ) | (42,762 | ) | |||
Property and equipment, net | 137,647 | 140,632 | |||||
Intangible assets | 21,696 | 21,817 | |||||
Goodwill | 624,737 | 624,737 | |||||
Investments in and advances to affiliates | 17,397 | 17,824 | |||||
Other assets | 9,150 | 9,633 | |||||
Long-term assets of discontinued operations | 34 | 34 | |||||
Total assets | $ | 969,152 | $ | 970,397 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 11,644 | $ | 12,396 | |||
Accrued payroll and benefits | 12,245 | 10,090 | |||||
Other accrued expenses | 18,974 | 25,814 | |||||
Current maturities of long-term debt | 29,696 | 29,195 | |||||
Current liabilities of discontinued operations | 300 | 923 | |||||
Total current liabilities | 72,859 | 78,418 | |||||
Long-term debt, less current maturities | 513,137 | 507,417 | |||||
Deferred income tax payable | 52,431 | 51,309 | |||||
Other liabilities | 69,329 | 68,950 | |||||
Long-term liabilities of discontinued operations | 17 | 22 | |||||
Noncontrolling interests — redeemable | 36,152 | 36,030 | |||||
Stockholders’ equity: | |||||||
Common stock, 1,000 shares, $0.01 par value, authorized, issued and outstanding at March 31, 2011 and December 31, 2010 | — | — | |||||
Additional paid-in-capital | 240,753 | 240,959 | |||||
Accumulated other comprehensive loss | (228 | ) | (314 | ) | |||
Retained deficit | (57,638 | ) | (55,219 | ) | |||
Total Symbion, Inc. stockholders’ equity | 182,887 | 185,426 | |||||
Noncontrolling interests — non-redeemable | 42,340 | 42,825 | |||||
Total equity | 225,227 | 228,251 | |||||
Total liabilities and stockholders’ equity | $ | 969,152 | $ | 970,397 |
See notes to unaudited consolidated financial statements.
3
SYMBION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands)
Three Months Ended March 31, | |||||||
2011 | 2010 | ||||||
Revenues | $ | 109,334 | $ | 83,545 | |||
Operating expenses: | |||||||
Salaries and benefits | 30,385 | 24,347 | |||||
Supplies | 24,971 | 18,158 | |||||
Professional and medical fees | 8,239 | 5,666 | |||||
Rent and lease expense | 5,987 | 6,222 | |||||
Other operating expenses | 8,065 | 6,810 | |||||
Cost of revenues | 77,647 | 61,203 | |||||
General and administrative expense | 5,869 | 5,232 | |||||
Depreciation and amortization | 5,161 | 4,084 | |||||
Provision for doubtful accounts | 1,626 | 1,213 | |||||
Income on equity investments | (269 | ) | (628 | ) | |||
Impairment and loss on disposal of long-lived assets | 44 | 1,061 | |||||
Gain on sale of long-lived assets and other gains | (122 | ) | — | ||||
Insurance and litigation settlements, net | — | (36 | ) | ||||
Total operating expenses | 89,956 | 72,129 | |||||
Operating income | 19,378 | 11,416 | |||||
Interest expense, net | (11,978 | ) | (10,731 | ) | |||
Income before income taxes and discontinued operations | 7,400 | 685 | |||||
Provision for income taxes | 1,621 | 1,609 | |||||
Income (loss) from continuing operations | 5,779 | (924 | ) | ||||
Loss from discontinued operations, net of taxes | (17 | ) | (280 | ) | |||
Net income (loss) | 5,762 | (1,204 | ) | ||||
Less: Net income attributable to noncontrolling interests | (8,181 | ) | (4,444 | ) | |||
Net loss attributable to Symbion, Inc. | $ | (2,419 | ) | $ | (5,648 | ) |
See notes to unaudited consolidated financial statements.
4
SYMBION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands)
Symbion, Inc. Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (Deficit) | Noncontrolling Interests-Non-redeemable | Total Stockholders’ Equity | |||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||
Balance at December 31, 2009 | 1,000 | $ | — | $ | 242,623 | $ | (2,731 | ) | $ | (46,479 | ) | $ | 3,397 | $ | 196,810 | |||||||||||
Net (loss) income | (5,648 | ) | 3 | (5,645 | ) | |||||||||||||||||||||
Amortized compensation expense related to stock options | — | — | 324 | — | — | — | 324 | |||||||||||||||||||
Recognition of interest rate swap liability to earnings, net of taxes | — | — | — | 955 | — | — | 955 | |||||||||||||||||||
Distributions to noncontrolling interest holders | — | — | — | — | — | (1,546 | ) | (1,546 | ) | |||||||||||||||||
Acquisitions and disposal of shares of noncontrolling interests | — | — | (7 | ) | — | — | (183 | ) | (190 | ) | ||||||||||||||||
Balance at March 31, 2010 | 1,000 | $ | — | $ | 242,940 | $ | (1,776 | ) | $ | (52,127 | ) | $ | 1,671 | $ | 190,708 | |||||||||||
Balance at December 31, 2010 | 1,000 | $ | — | $ | 240,959 | $ | (314 | ) | $ | (55,219 | ) | $ | 42,825 | $ | 228,251 | |||||||||||
Net (loss) income | — | — | — | — | (2,419 | ) | 3,249 | 830 | ||||||||||||||||||
Amortized compensation expense related to stock options | — | — | 334 | — | — | — | 334 | |||||||||||||||||||
Distributions to noncontrolling interest holders | — | — | — | — | — | (2,953 | ) | (2,953 | ) | |||||||||||||||||
Acquisitions and disposal of shares of noncontrolling interests | — | — | (540 | ) | — | — | (781 | ) | (1,321 | ) | ||||||||||||||||
Unrealized gain on interest rate swap, net of taxes | — | — | — | 86 | — | — | 86 | |||||||||||||||||||
Balance at March 31, 2011 | 1,000 | $ | — | $ | 240,753 | $ | (228 | ) | $ | (57,638 | ) | $ | 42,340 | $ | 225,227 |
See notes to unaudited consolidated financial statements.
5
SYMBION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Three Months Ended March 31, | |||||||
2011 | 2010 | ||||||
Cash flows from operating activities: | |||||||
Net income (loss) | $ | 5,762 | $ | (1,204 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||
Loss from discontinued operations | 17 | 280 | |||||
Depreciation and amortization | 5,161 | 4,084 | |||||
Amortization of deferred financing costs | 501 | 501 | |||||
Non-cash payment-in-kind interest option | 6,984 | 6,230 | |||||
Non-cash stock option compensation expense | 334 | 324 | |||||
Non–cash recognition of other comprehensive loss into earnings | — | 826 | |||||
Non–cash credit risk adjustment of financial instruments | — | 89 | |||||
Non–cash (gains) losses | (78 | ) | 1,061 | ||||
Deferred income taxes | 1,534 | 1,828 | |||||
Equity in earnings of non-consolidated affiliates, net of distributions received | 341 | (70 | ) | ||||
Provision for doubtful accounts | 1,626 | 1,213 | |||||
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: | |||||||
Accounts receivable | (128 | ) | (109 | ) | |||
Income taxes payable | — | 2,971 | |||||
Other assets and liabilities | 114 | 911 | |||||
Net cash provided by operating activities — continuing operations | 22,168 | 18,935 | |||||
Net cash provided by operating activities — discontinued operations | 4 | (231 | ) | ||||
Net cash provided by operating activities | 22,172 | 18,704 | |||||
Cash flows from investing activities: | |||||||
Purchases of property and equipment, net | (2,198 | ) | (1,261 | ) | |||
Payments from unit activity of non-consolidated facilities | — | (55 | ) | ||||
Change in other assets | 54 | (17 | ) | ||||
Net cash used in investing activities — continuing operations | (2,144 | ) | (1,333 | ) | |||
Net cash used in investing activities — discontinued operations | — | (17 | ) | ||||
Net cash used in investing activities | (2,144 | ) | (1,350 | ) | |||
Cash flows from financing activities: | |||||||
Principal payments on long-term debt | (7,350 | ) | (3,535 | ) | |||
Proceeds from debt issuances | 27 | — | |||||
Distributions to noncontrolling interests | (7,675 | ) | (5,645 | ) | |||
Unit activity of consolidated facilities | (1,663 | ) | (188 | ) | |||
Other financing activities | 463 | (72 | ) | ||||
Net cash used in financing activities — continuing operations | (16,198 | ) | (9,440 | ) | |||
Net cash used in financing activities — discontinued operations | (4 | ) | (26 | ) | |||
Net cash used in financing activities | (16,202 | ) | (9,466 | ) | |||
Net increase in cash and cash equivalents | 3,826 | 7,888 | |||||
Cash and cash equivalents at beginning of period | 73,458 | 47,749 | |||||
Cash and cash equivalents at end of period | $ | 77,284 | $ | 55,637 |
See notes to unaudited consolidated financial statements.
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SYMBION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
1. Organization
Symbion, Inc. (the “Company”), through its wholly owned subsidiaries, owns interests in partnerships and limited liability companies that own and operate a national network of short stay surgical facilities in joint ownership with physicians and physician groups, hospitals and hospital systems. As of March 31, 2011, the Company owned and operated 54 surgical facilities, including 49 ambulatory surgery centers, four surgical hospitals, and one general acute care hospital with a surgical and obstetrics focus. The Company also managed eight additional ambulatory surgery centers and one physician network. The Company owns a majority ownership interest in 29 of the 54 surgical facilities and consolidates 49 of these surgical facilities for financial reporting purposes.
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.
2. 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.
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 Accounting Standards Codification ("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 the facility's 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 March 31, 2011 and December 31, 2010 include assets of $15.3 million for both periods, and liabilities of $4.2 million and $4.1 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.
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The carrying amount and fair value of the Company’s term loans and revolving facility under its senior secured credit facility and the Company's 11.00%/11.75% senior PIK Toggle Notes due 2015 (the "Toggle Notes") as of March 31, 2011 and December 31, 2010 were as follows (in thousands):
Carrying Amount | Fair Value | ||||||||||||||
March 31, 2011 | December 31, 2010 | March 31, 2011 | December 31, 2010 | ||||||||||||
Tranche A Term Loan | $ | 101,375 | $ | 106,062 | $ | 97,236 | $ | 101,732 | |||||||
Tranche B Term Loan | 115,125 | 115,438 | 110,424 | 110,724 | |||||||||||
Revolving facility | 56,000 | 56,000 | 53,715 | 53,715 | |||||||||||
Toggle Notes | 245,630 | 232,000 | 232,440 | 198,662 |
The fair value of the term loans and revolving facility under the Company's senior secured credit facility and the Toggle Notes were based on quoted prices at March 31, 2011 and December 31, 2010. The Company’s long-term debt instruments are discussed further in Note 5.
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 6 for further discussion regarding the interest rate swap.
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. Also, the Company has amounts recorded in other liabilities for third-party settlements of $12.4 million and $12.0 as of March 31, 2011 and December 31, 2010, respectively. The Company does not require collateral for private pay patients. Accounts receivable at March 31, 2011 and December 31, 2010 were as follows (in thousands):
March 31, 2011 (unaudited) | December 31, 2010 | ||||||
Surgical facilities | $ | 59,715 | $ | 61,242 | |||
Physician network | 613 | 583 | |||||
Total | $ | 60,328 | $ | 61,825 |
The following table sets forth by type of payor the percentage of the Company’s accounts receivable for consolidated surgical facilities as of March 31, 2011 and December 31, 2010:
March 31, 2011 (unaudited) | December 31, 2010 | ||||
Private insurance | 52 | % | 58 | % | |
Government | 20 | 18 | |||
Self-pay | 9 | 8 | |||
Other | 19 | 16 | |||
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.
8
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):
March 31, 2011 (unaudited) | December 31, 2010 | ||||||
Prepaid expenses | $ | 4,495 | $ | 5,034 | |||
Other receivables | 4,429 | 3,602 | |||||
Total | $ | 8,924 | $ | 8,636 |
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. Similar to its investments in unconsolidated affiliates, the Company regularly engages in the purchase and sale of equity interests with respect to its consolidated subsidiaries that do not result in a change of control. These transactions are accounted for as equity transactions, as they are undertaken among the Company, its consolidated subsidiaries, and noncontrolling interest holders, and their cash flow effect is classified within financing activities.
Other Accrued Expenses
A summary of other accrued expenses is as follows (in thousands):
March 31, 2011 (unaudited) | December 31, 2010 | ||||||
Interest payable | $ | 3,213 | $ | 9,865 | |||
Current taxes payable | 6,311 | 6,344 | |||||
Insurance liabilities | 1,980 | 1,540 | |||||
Other accrued expenses | 7,470 | 8,065 | |||||
Total | $ | 18,974 | $ | 25,814 |
Other Obligations
In connection with the acquisition of a 54.5% ownership interest in Mountain View Hospital, in Idaho Falls, Idaho, the Company assumed lease payment obligations of $48.0 million. As of March 31, 2011, the balance of the obligation was $48.3 million. This obligation is payable to the lessor of the land, building and improvements of the hospital.
Other Comprehensive Loss
The Company reports other comprehensive loss as a measure of changes in stockholders' equity that results from recognized transactions. The change in other comprehensive loss of the Company from December 31, 2010 to March 31, 2011 resulted from fluctuation in the value of the Company's interest rate swap. The Company entered into an interest rate swap agreement on December 31, 2010. The change in value of the interest rate swap was recorded as other comprehensive income of $86,000 for the three months ended March 31, 2011. The Company's total comprehensive loss for the three months ended March 31, 2011 and the three months ended March 31, 2010 was $2,333 and $4,693, respectively. See Note 6 for further discussion of derivative instruments.
Revenues
Revenues by service type consist of the following for the periods indicated (in thousands):
Three Months Ended March 31, | |||||||
2011 | 2010 | ||||||
Patient service revenues | $ | 106,611 | $ | 80,437 | |||
Physician service revenues | 1,445 | 1,429 | |||||
Other service revenues | 1,278 | 1,679 | |||||
Total | $ | 109,334 | $ | 83,545 |
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The following table sets forth by type of payor the percentage of the Company’s patient service revenues generated for the periods indicated:
Three Months Ended March 31, | |||||
2011 | 2010 | ||||
Private Insurance | 66 | % | 69 | % | |
Government | 26 | 26 | |||
Self-pay | 3 | 4 | |||
Other | 5 | 1 | |||
Total | 100 | % | 100 | % |
Recently Adopted Accounting Guidlines
In August 2010, the FASB issued ASU No. 2010-24, “Health Care Entities” (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries. This ASU eliminates the practice of netting claim liabilities with expected related insurance recoveries for balance sheet presentation. Claim liabilities are to be determined with no regard for recoveries and presented on the balance sheet on a gross basis. Expected insurance recoveries are presented separately. ASU 2010-24 was effective January 1, 2011, and did not impact the Company's results of operations or cash flows.
Reclassifications
Certain reclassifications have been made to the comparative periods’ financial statements to conform to the 2011 presentation. The reclassifications primarily related to the presentation of discontinued operations and had no impact on the Company’s financial position or results of operations.
3. Acquisitions and Equity Method Investments
Effective January 7, 2011, the Company acquired an incremental ownership interest of 3.5% in one of its surgical facilities located in Chesterfield, Missouri, for an aggregate of $1.8 million, financed with cash from operations. On July 1, 2010, the Company acquired an incremental, controlling ownership interest of 37.0% in this same facility located in Chesterfield, Missouri for $18.8 million and began consolidating the facility for financial reporting purposes. Prior to the July 1, 2010 acquisition date, the Company owned a 13.0% interest in this facility which was accounted for as an equity method investment. The July 1, 2010 acquisition date fair value of the existing equity interest was $16.3 million and is included in the measurement of the consideration transferred for purposes of allocating the purchase price. The fair value was determined using comparable market multiples. As of March 31, 2011, the Company owned a 53.5% interest in this facility.
On April 9, 2010, the Company completed the acquisition of a 54.5% ownership interest in a 43-bed general acute care hospital with a surgical and obstetrics focus located in Idaho Falls, Idaho. The purchase price for the acquisition was $31.9 million, plus existing third-party indebtedness of $6.1 million and other obligations of $48.0 million, which are consolidated on the Company's balance sheet.
The Company has accounted for these acquisitions under the purchase method of accounting. Under the purchase method of accounting, the total purchase price is allocated to the net tangible and intangible assets acquired and liabilities assumed in connection with the acquisition based on their estimated fair values. The preliminary allocation of the purchase price was based upon management's preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, and such valuation is subject to change.
The results for the three months ended March 31, 2011 of the facilities in which we have acquired interests are included in the Company's statement of operations. Following are the results for the three months ended March 31, 2010 as if the acquisitions had occurred on January 1, 2010 (in thousands):
Three Months Ended March 31, 2010 | |||
Revenues | $ | 104,172 | |
Net income | 1,226 | ||
Net loss attributable to Symbion, Inc. | $ | (4,535 | ) |
4. Discontinued Operations and Divestitures
The Company evaluates its portfolio of surgical facilities to ensure the facilities are performing as the Company expects. During 2010, the Company committed to, and executed a plan, to divest its interest in four facilities which were consolidated for financial reporting purposes. In connection with one of these disposed facilities, the Company recorded an accrual of $1.7 million for future contractual obligations under a facility operating lease. There were no future contractual obligations in connection with the divestiture of the other three
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facilities. As of March 31, 2011, the lease liability was $1.3 million. The assets, liabilities, revenues, expenses and cash flows of the four facilities have been classified as discontinued operations for all periods presented.
Revenues, loss on operations before income taxes, income tax provision, loss on the sale, net of taxes, and loss from discontinued operations, net of taxes, for the following periods indicated, were as follows (in thousands):
Three Months Ended March 31, | ||||||
2011 | 2010 | |||||
Revenues | — | $ | 2,620 | |||
Loss on operations before income taxes | — | (276 | ) | |||
Income tax provision | — | 4 | ||||
Loss on sale, net of taxes | (17 | ) | — | |||
Loss from discontinued operations, net of taxes | (17 | ) | $ | (280 | ) |
5. Long-Term Debt
The Company’s long-term debt is summarized as follows (in thousands):
March 31, | December 31, | ||||||
2011 | 2010 | ||||||
Senior secured credit facility | $ | 272,500 | $ | 277,500 | |||
Toggle Notes | 245,630 | 232,000 | |||||
Notes payable to banks | 13,876 | 14,786 | |||||
Secured term loans | 6,866 | 7,236 | |||||
Capital lease obligations | 3,961 | 5,090 | |||||
542,833 | 536,612 | ||||||
Less current maturities | (29,696 | ) | (29,195 | ) | |||
Total | $ | 513,137 | $ | 507,417 |
Senior Secured Credit Facility
On August 23, 2007, the Company entered into a $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. 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 payments of $4.7 million 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 the lender's 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 an aggregate amount not to exceed $5.0 million throughout the term of the senior secured credit facility.
11
As of March 31, 2011, the interest rate on the borrowings under the senior secured credit facility was 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 March 31, 2011, the amount available under the Revolving Facility was $44.0 million.
Senior PIK Toggle Notes
On June 3, 2008, the Company completed a private offering of $179.9 million aggregate principal amount of the Toggle Notes. 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 accrues at the rate of 11.0% per annum. PIK interest on the Toggle Notes accrues at the rate of 11.75% per annum. The Company elects to pay cash interest or to exercise the PIK option in advance of the interest period.
Since August 23, 2008, the Company has elected the PIK option of the Toggle Notes in lieu of making scheduled interest payments for various interest periods. As a result, the principal due on the Toggle Notes has increased by $65.7 million from the issuance of the Toggle Notes to March 31, 2011. On February 23, 2011, the Company elected the PIK option of the Toggle Notes in lieu of making scheduled interest payments for the interest period from February 24, 2011 to August 23, 2011. The Company has accrued $3.0 million in interest in other accrued expenses as of March 31, 2011.
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.
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 March 31, 2011, 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 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.
Capital Lease Obligations
The Company is liable to various vendors for several equipment leases. The carrying value of the assets was $4.8 million and $5.2 million as of March 31, 2011 and December 31, 2010, respectively.
Other Long-Term Debt Information
Scheduled maturities of obligations as of March 31, 2011 are as follows (in thousands):
Long-term Debt | Capital Lease Obligations | Total | |||||||||
April 1, 2011 through March 31, 2012 | $ | 27,999 | $ | 1,697 | $ | 29,696 | |||||
April 1, 2012 through March 31, 2013 | 59,036 | 1,384 | 60,420 | ||||||||
April 1, 2013 through March 31, 2014 | 92,794 | 729 | 93,523 | ||||||||
April 1, 2014 through March 31, 2015 | 112,707 | 110 | 112,817 | ||||||||
April 1, 2015 through March 31, 2016 | 246,336 | 41 | 246,377 | ||||||||
Thereafter | — | — | — | ||||||||
Total | $ | 538,872 | $ | 3,961 | $ | 542,833 |
6. Derivative Instruments
Interest Rate Swap
On November 2, 2010, the Company entered into an interest rate swap agreement to protect the Company against certain interest rate fluctuations of the LIBOR rate on $100.0 million of the Company’s variable rate debt under the senior secured credit facility. Goldman
12
Sachs, Inc. is the counterparty to the interest rate swap. The effective date of the interest rate swap is December 31, 2010, and it is scheduled to expire on December 31, 2012. The interest rate swap effectively fixes the Company’s LIBOR interest rate on $100.0 million of variable debt at a rate of 0.85%.
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.
The Company does not hold or issue derivative financial instruments for trading purposes. The fair value of the Company’s interest rate swap at March 31, 2011 reflected a liability of approximately $228,000. The interest rate swap reflects a liability balance as of March 31, 2011 because of a decrease in market interest rates since inception of the swap.
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. As of March 31, 2011, the Company determined the hedge instrument to be effective.
7. Commitments and Contingencies
Debt and Lease Guaranty on Non-consolidated Entities
As of March 31, 2011, the Company had guaranteed $1.9 million of operating lease payments of certain non-consolidated surgical facilities. These operating leases typically have 10-year terms, with optional renewal periods. As of March 31, 2011, the Company had also guaranteed $1.6 million of debt of four non-consolidated surgical facilities. In the event that the Company meets certain financial and debt service benchmarks, the guarantees relating to these surgical facilities will expire between 2011 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 Medicare, Medicaid and other federal healthcare 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.
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 healthcare 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 healthcare 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
13
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 individuals may not be able to obtain coverage in amounts sufficient to cover all potential liability. Since most insurance policies contain exclusions, the physician investors 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.
8. 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, as of March 31, 2011, had an asset of $391,781 that is included in prepaid expenses and other current assets.
As of March 31, 2011 and December 31, 2010, the Company had $783,000 and $575,000, respectively, payable to physicians at the Company's physician network as a result of cash receipts in excess of expenditures for the related physician network. These amounts are included in other accrued expenses.
9. 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 eliminations. 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.
14
SYMBION, INC.
CONSOLIDATING BALANCE SHEET
March 31, 2011
(Unaudited, in thousands)
Parent Issuer | Guarantor Subsidiaries | Combined Non-Guarantors | Eliminations | Total Consolidated | |||||||||||||||
ASSETS | |||||||||||||||||||
Current assets: | |||||||||||||||||||
Cash and cash equivalents | $ | 15,837 | $ | 25,266 | $ | 36,181 | $ | — | $ | 77,284 | |||||||||
Accounts receivable, net | — | 560 | 59,768 | — | 60,328 | ||||||||||||||
Inventories | — | 300 | 11,030 | — | 11,330 | ||||||||||||||
Prepaid expenses and other current assets | 933 | 65 | 7,926 | — | 8,924 | ||||||||||||||
Due from related parties | 2,433 | 44,782 | — | (47,215 | ) | — | |||||||||||||
Current assets of discontinued operations | — | — | 625 | — | 625 | ||||||||||||||
Total current assets | 19,203 | 70,973 | 115,530 | (47,215 | ) | 158,491 | |||||||||||||
Property and equipment, net | 866 | 2,294 | 134,487 | — | 137,647 | ||||||||||||||
Goodwill and intangible assets | 646,433 | — | — | — | 646,433 | ||||||||||||||
Investments in and advances to affiliates | 97,772 | 26,063 | 5,903 | (112,341 | ) | 17,397 | |||||||||||||
Other assets | 7,599 | 1 | 1,550 | — | 9,150 | ||||||||||||||
Long-term assets of discontinued operations | — | — | 34 | — | 34 | ||||||||||||||
Total assets | $ | 771,873 | $ | 99,331 | $ | 257,504 | $ | (159,556 | ) | $ | 969,152 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Accounts payable | $ | 38 | $ | 74 | $ | 11,532 | $ | — | $ | 11,644 | |||||||||
Accrued payroll and benefits | 2,142 | 206 | 9,897 | — | 12,245 | ||||||||||||||
Due to related parties | — | — | 47,215 | (47,215 | ) | — | |||||||||||||
Other accrued expenses | 9,965 | 366 | 8,643 | — | 18,974 | ||||||||||||||
Current maturities of long-term debt | 23,281 | 53 | 6,362 | — | 29,696 | ||||||||||||||
Current liabilities of discontinued operations | — | — | 300 | — | 300 | ||||||||||||||
Total current liabilities | 35,426 | 699 | 83,949 | (47,215 | ) | 72,859 | |||||||||||||
Long-term debt, less current maturities | 495,048 | 80 | 18,009 | — | 513,137 | ||||||||||||||
Deferred income tax payable | 52,431 | — | — | — | 52,431 | ||||||||||||||
Other liabilities | 178 | 780 | 68,371 | — | 69,329 | ||||||||||||||
Long-term liabilities of discontinued operations | — | — | 17 | — | 17 | ||||||||||||||
Noncontrolling interest - redeemable | — | — | 36,152 | — | 36,152 | ||||||||||||||
Total Symbion, Inc. stockholders’ equity | 188,790 | 97,772 | 8,666 | (112,341 | ) | 182,887 | |||||||||||||
Noncontrolling interests - nonredeemable | — | — | 42,340 | — | 42,340 | ||||||||||||||
Total equity | 188,790 | 97,772 | 51,006 | (112,341 | ) | 225,227 | |||||||||||||
Total liabilities and stockholders’ equity | $ | 771,873 | $ | 99,331 | $ | 257,504 | $ | (159,556 | ) | $ | 969,152 |
15
SYMBION, INC.
CONSOLIDATING BALANCE SHEET
December 31, 2010
(Unaudited, in thousands)
Parent Issuer | Guarantor Subsidiaries | Combined Non-Guarantors | Eliminations | Total Consolidated | |||||||||||||||
ASSETS | |||||||||||||||||||
Current assets: | |||||||||||||||||||
Cash and cash equivalents | $ | 14,849 | $ | 27,700 | $ | 30,909 | $ | — | $ | 73,458 | |||||||||
Accounts receivable, net | — | 554 | 61,271 | — | 61,825 | ||||||||||||||
Inventories | — | 159 | 10,639 | — | 10,798 | ||||||||||||||
Prepaid expenses and other current assets | 1,203 | 78 | 7,355 | — | 8,636 | ||||||||||||||
Due from related parties | 2,285 | 43,798 | — | (46,083 | ) | — | |||||||||||||
Current assets of discontinued operations | — | — | 1,003 | — | 1,003 | ||||||||||||||
Total current assets | 18,337 | 72,289 | 111,177 | (46,083 | ) | 155,720 | |||||||||||||
Property and equipment, net | 1,005 | 2,329 | 137,298 | — | 140,632 | ||||||||||||||
Goodwill and intangible assets | 646,554 | — | — | — | 646,554 | ||||||||||||||
Investments in and advances to affiliates | 96,761 | 23,711 | 5,903 | (108,551 | ) | 17,824 | |||||||||||||
Other assets | 7,979 | 1 | 1,653 | — | 9,633 | ||||||||||||||
Long-term assets of discontinued operations | — | — | 34 | — | 34 | ||||||||||||||
Total assets | $ | 770,636 | $ | 98,330 | $ | 256,065 | $ | (154,634 | ) | $ | 970,397 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Accounts payable | $ | 15 | $ | 103 | $ | 12,278 | $ | — | $ | 12,396 | |||||||||
Accrued payroll and benefits | 2,014 | 138 | 7,938 | — | 10,090 | ||||||||||||||
Due to related parties | — | — | 46,083 | (46,083 | ) | — | |||||||||||||
Other accrued expenses | 15,906 | 331 | 9,577 | — | 25,814 | ||||||||||||||
Current maturities of long-term debt | 21,783 | 42 | 7,370 | — | 29,195 | ||||||||||||||
Current liabilities of discontinued operations | — | — | 923 | — | 923 | ||||||||||||||
Total current liabilities | 39,718 | 614 | 84,169 | (46,083 | ) | 78,418 | |||||||||||||
Long-term debt, less current maturities | 487,994 | 84 | 19,339 | — | 507,417 | ||||||||||||||
Deferred income tax payable | 51,307 | — | 2 | — | 51,309 | ||||||||||||||
Other liabilities | 288 | 871 | 67,791 | — | 68,950 | ||||||||||||||
Long-term liabilities of discontinued operations | — | — | 22 | — | 22 | ||||||||||||||
Noncontrolling interest - redeemable | — | — | 36,030 | — | 36,030 | ||||||||||||||
Total Symbion, Inc. stockholders’ equity | 191,329 | 96,761 | 5,887 | (108,551 | ) | 185,426 | |||||||||||||
Noncontrolling interests - nonredeemable | — | — | 42,825 | — | 42,825 | ||||||||||||||
Total equity | 191,329 | 96,761 | 48,712 | (108,551 | ) | 228,251 | |||||||||||||
Total liabilities and stockholders’ equity | $ | 770,636 | $ | 98,330 | $ | 256,065 | $ | (154,634 | ) | $ | 970,397 |
16
SYMBION, INC.
CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 2011
(Unaudited, in thousands)
Parent Issuer | Guarantor Subsidiaries | Combined Non-Guarantors | Eliminations | Total Consolidated | |||||||||||||||
Revenues | $ | 8,351 | $ | 2,358 | $ | 102,412 | $ | (3,787 | ) | $ | 109,334 | ||||||||
Operating expenses: | |||||||||||||||||||
Salaries and benefits | — | 1,116 | 29,269 | — | 30,385 | ||||||||||||||
Supplies | — | 203 | 24,768 | — | 24,971 | ||||||||||||||
Professional and medical fees | — | 231 | 8,008 | — | 8,239 | ||||||||||||||
Rent and lease expense | — | 196 | 5,791 | — | 5,987 | ||||||||||||||
Other operating expenses | — | 96 | 7,969 | — | 8,065 | ||||||||||||||
Cost of revenues | — | 1,842 | 75,805 | — | 77,647 | ||||||||||||||
General and administrative expense | 5,869 | — | — | — | 5,869 | ||||||||||||||
Depreciation and amortization | 172 | 61 | 4,928 | 5,161 | |||||||||||||||
Provision for doubtful accounts | — | 36 | 1,590 | — | 1,626 | ||||||||||||||
Income on equity investments | — | (269 | ) | — | — | (269 | ) | ||||||||||||
Impairment and gains on disposal of long-lived assets | (99 | ) | — | 21 | — | (78 | ) | ||||||||||||
Management fees | — | — | 3,788 | (3,788 | ) | — | |||||||||||||
Equity in earnings of affiliates | (7,401 | ) | (6,713 | ) | — | 14,114 | — | ||||||||||||
Total operating expenses | (1,459 | ) | (5,043 | ) | 86,132 | 10,326 | 89,956 | ||||||||||||
Operating income (loss) | 9,810 | 7,401 | 16,280 | (14,113 | ) | 19,378 | |||||||||||||
Interest expense, net | (10,589 | ) | — | (1,389 | ) | — | (11,978 | ) | |||||||||||
(Loss) income before taxes and discontinued operations | (779 | ) | 7,401 | 14,891 | (14,113 | ) | 7,400 | ||||||||||||
Provision (benefit) for income taxes | 1,641 | — | (20 | ) | — | 1,621 | |||||||||||||
(Loss) income from continuing operations | (2,420 | ) | 7,401 | 14,911 | (14,113 | ) | 5,779 | ||||||||||||
Loss from discontinued operations, net of taxes | — | — | (17 | ) | — | (17 | ) | ||||||||||||
Net (loss) income | (2,420 | ) | 7,401 | 14,894 | (14,113 | ) | 5,762 | ||||||||||||
Net income attributable to noncontrolling interests | — | — | (8,181 | ) | — | (8,181 | ) | ||||||||||||
Net (loss) income attributable to Symbion, Inc. | $ | (2,420 | ) | $ | 7,401 | $ | 6,713 | $ | (14,113 | ) | $ | (2,419 | ) |
17
SYMBION, INC.
CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 2010
(Unaudited, in thousands)
Parent Issuer | Guarantor Subsidiaries | Combined Non-Guarantors | Eliminations | Total Consolidated | |||||||||||||||
Revenues | $ | 8,359 | $ | 2,513 | $ | 76,343 | $ | (3,670 | ) | $ | 83,545 | ||||||||
Operating expenses: | |||||||||||||||||||
Salaries and benefits | — | 1,192 | 23,155 | — | 24,347 | ||||||||||||||
Supplies | — | 179 | 17,979 | — | 18,158 | ||||||||||||||
Professional and medical fees | — | 250 | 5,416 | — | 5,666 | ||||||||||||||
Rent and lease expense | — | 198 | 6,024 | — | 6,222 | ||||||||||||||
Other operating expenses | — | 97 | 6,713 | — | 6,810 | ||||||||||||||
Cost of revenues | — | 1,916 | 59,287 | — | 61,203 | ||||||||||||||
General and administrative expense | 5,232 | — | — | — | 5,232 | ||||||||||||||
Depreciation and amortization | 170 | 77 | 3,837 | — | 4,084 | ||||||||||||||
Provision for doubtful accounts | — | 47 | 1,166 | — | 1,213 | ||||||||||||||
Income on equity investments | — | (628 | ) | — | — | (628 | ) | ||||||||||||
Impairment and gains on disposal of long-lived assets | — | 1,057 | 4 | — | 1,061 | ||||||||||||||
Proceeds from insurance settlements, net | — | (36 | ) | — | — | (36 | ) | ||||||||||||
Management fees | — | — | 3,670 | (3,670 | ) | — | |||||||||||||
Equity in earnings of affiliates | (4,164 | ) | (4,084 | ) | — | 8,248 | — | ||||||||||||
Total operating expenses | 1,238 | (1,651 | ) | 67,964 | 4,578 | 72,129 | |||||||||||||
Operating income (loss) | 7,121 | 4,164 | 8,379 | (8,248 | ) | 11,416 | |||||||||||||
Interest (expense) income, net | (11,205 | ) | — | 474 | — | (10,731 | ) | ||||||||||||
(Loss) income before taxes and discontinued operations | (4,084 | ) | 4,164 | 8,853 | (8,248 | ) | 685 | ||||||||||||
Provision for income taxes | 1,564 | — | 45 | — | 1,609 | ||||||||||||||
(Loss) income from continuing operations | (5,648 | ) | 4,164 | 8,808 | (8,248 | ) | (924 | ) | |||||||||||
Loss from discontinued operations, net of taxes | — | — | (280 | ) | — | (280 | ) | ||||||||||||
Net (loss) income | (5,648 | ) | 4,164 | 8,528 | (8,248 | ) | (1,204 | ) | |||||||||||
Net loss attributable to noncontrolling interests | — | — | (4,444 | ) | — | (4,444 | ) | ||||||||||||
Net (loss) income attributable to Symbion, Inc. | $ | (5,648 | ) | $ | 4,164 | $ | 4,084 | $ | (8,248 | ) | $ | (5,648 | ) |
18
SYMBION, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2011
(Unaudited, in thousands)
Parent Issuer | Guarantor Subsidiaries | Combined Non- Guarantors | Eliminations | Total Consolidated | |||||||||||||||
Cash flows from operating activities: | |||||||||||||||||||
Net (loss) income | $ | (2,420 | ) | $ | 7,401 | $ | 14,894 | $ | (14,113 | ) | $ | 5,762 | |||||||
Adjustments to reconcile net (loss) income to net cash from operating activities: | |||||||||||||||||||
Loss from discontinued operations | — | — | 17 | — | 17 | ||||||||||||||
Depreciation and amortization | 172 | 61 | 4,928 | — | 5,161 | ||||||||||||||
Amortization of deferred financing costs | 501 | — | — | — | 501 | ||||||||||||||
Non-cash payment-in-kind interest option | 6,984 | — | — | — | 6,984 | ||||||||||||||
Non-cash stock option compensation expense | 334 | — | — | — | 334 | ||||||||||||||
Non-cash gains | (78 | ) | — | — | — | (78 | ) | ||||||||||||
Deferred income taxes | 1,534 | — | — | — | 1,534 | ||||||||||||||
Equity in earnings of consolidated affiliates | (7,401 | ) | (6,712 | ) | — | 14,113 | — | ||||||||||||
Equity in earnings of unconsolidated affiliates, net of distributions received | — | 341 | — | — | 341 | ||||||||||||||
Provision for doubtful accounts | — | 36 | 1,590 | — | 1,626 | ||||||||||||||
Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: | |||||||||||||||||||
Accounts receivable | — | — | (128 | ) | — | (128 | ) | ||||||||||||
Income taxes payable | — | — | — | — | — | ||||||||||||||
Other assets and liabilities | 8,199 | (3,829 | ) | (4,256 | ) | — | 114 | ||||||||||||
Net cash provided by (used in) operating activities — continuing operations | 7,825 | (2,702 | ) | 17,045 | — | 22,168 | |||||||||||||
Net cash used in operating activities —discontinued operations | — | — | 4 | — | 4 | ||||||||||||||
Net cash provided by (used in) operating activities | 7,825 | (2,702 | ) | 17,049 | — | 22,172 | |||||||||||||
Cash flows from investing activities: | |||||||||||||||||||
Purchases of property and equipment, net | (14 | ) | — | (2,184 | ) | — | (2,198 | ) | |||||||||||
Payments from unit activity of unconsolidated facilities | — | — | — | — | — | ||||||||||||||
Change in other assets | — | 268 | (214 | ) | — | 54 | |||||||||||||
Net cash (used in) provided by investing activities —continuing operations | (14 | ) | 268 | (2,398 | ) | — | (2,144 | ) | |||||||||||
Net cash used in investing activities —discontinued operations | — | — | — | — | — | ||||||||||||||
Net cash (used in) provided by investing activities | (14 | ) | 268 | (2,398 | ) | — | (2,144 | ) | |||||||||||
Cash flows from financing activities: | |||||||||||||||||||
Principal payments on long-term debt | (5,160 | ) | — | (2,190 | ) | — | (7,350 | ) | |||||||||||
Proceeds from debt issuances | — | — | 27 | — | 27 | ||||||||||||||
Distributions to noncontrolling interests | — | — | (7,675 | ) | — | (7,675 | ) | ||||||||||||
Unit activity of consolidated facilities | (1,663 | ) | — | — | — | (1,663 | ) | ||||||||||||
Other financing activities | — | — | 463 | — | 463 | ||||||||||||||
Net cash used in financing activities —continuing operations | (6,823 | ) | — | (9,375 | ) | — | (16,198 | ) | |||||||||||
Net cash used in financing activities —discontinued operations | — | — | (4 | ) | — | (4 | ) | ||||||||||||
Net cash used in financing activities | (6,823 | ) | — | (9,379 | ) | — | (16,202 | ) | |||||||||||
Net increase (decrease) in cash and cash equivalents | 988 | (2,434 | ) | 5,272 | — | 3,826 | |||||||||||||
Cash and cash equivalents at beginning of period | 14,849 | 27,700 | 30,909 | — | 73,458 | ||||||||||||||
Cash and cash equivalents at end of period | $ | 15,837 | $ | 25,266 | $ | 36,181 | $ | — | $ | 77,284 |
19
SYMBION, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2010
(Unaudited, in thousands)
Parent Issuer | Guarantor Subsidiaries | Combined Non- Guarantors | Eliminations | Total Consolidated | |||||||||||||||
Cash flows from operating activities: | |||||||||||||||||||
Net (loss) income | $ | (5,648 | ) | $ | 4,164 | $ | 8,528 | $ | (8,248 | ) | $ | (1,204 | ) | ||||||
Adjustments to reconcile net (loss) income to net cash from operating activities: | |||||||||||||||||||
Loss from discontinued operations | — | — | 280 | — | 280 | ||||||||||||||
Depreciation and amortization | 170 | 77 | 3,837 | — | 4,084 | ||||||||||||||
Amortization of deferred financing costs | 501 | — | — | — | 501 | ||||||||||||||
Non-cash payment-in-kind interest option | 6,230 | — | — | — | 6,230 | ||||||||||||||
Non-cash stock option compensation expense | 324 | — | — | — | 324 | ||||||||||||||
Non-cash recognition of other comprehensive loss into earnings | 826 | — | — | — | 826 | ||||||||||||||
Non-cash credit risk adjustment of financial instruments | 89 | — | — | — | 89 | ||||||||||||||
Non-cash losses | — | 1,057 | 4 | — | 1,061 | ||||||||||||||
Deferred income taxes | 1,828 | — | — | — | 1,828 | ||||||||||||||
Equity in earnings of consolidated affiliates | (4,164 | ) | (4,084 | ) | — | 8,248 | — | ||||||||||||
Equity in earnings of affiliates, net of distributions received | — | (70 | ) | — | — | (70 | ) | ||||||||||||
Provision for doubtful accounts | — | 47 | 1,166 | — | 1,213 | ||||||||||||||
Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: | |||||||||||||||||||
Accounts receivable | — | — | (109 | ) | — | (109 | ) | ||||||||||||
Income taxes payable | 2,971 | — | — | — | 2,971 | ||||||||||||||
Other assets and liabilities | (2,576 | ) | 4,898 | (1,411 | ) | — | 911 | ||||||||||||
Net cash provided by operating activities — continuing operations | 551 | 6,089 | 12,295 | — | 18,935 | ||||||||||||||
Net cash used in operating activities —discontinued operations | — | — | (231 | ) | — | (231 | ) | ||||||||||||
Net cash provided by operating activities | 551 | 6,089 | 12,064 | — | 18,704 | ||||||||||||||
Cash flows from investing activities: | |||||||||||||||||||
Purchases of property and equipment, net | (17 | ) | — | (1,244 | ) | — | (1,261 | ) | |||||||||||
Payments from unit activity of non-consolidated facilities | (55 | ) | — | — | — | (55 | ) | ||||||||||||
Change in other assets | — | — | (17 | ) | — | (17 | ) | ||||||||||||
Net cash used in investing activities —continuing operations | (72 | ) | — | (1,261 | ) | — | (1,333 | ) | |||||||||||
Net cash used in investing activities —discontinued operations | — | — | (17 | ) | — | (17 | ) | ||||||||||||
Net cash used in investing activities | (72 | ) | — | (1,278 | ) | — | (1,350 | ) | |||||||||||
Cash flows from financing activities: | |||||||||||||||||||
Principal payments on long-term debt | (1,966 | ) | — | (1,569 | ) | — | (3,535 | ) | |||||||||||
Distributions to noncontrolling interests | — | — | (5,645 | ) | — | (5,645 | ) | ||||||||||||
Unit activity of consolidated facilities | (188 | ) | — | — | — | (188 | ) | ||||||||||||
Other financing activities | (447 | ) | — | 375 | — | (72 | ) | ||||||||||||
Net cash used in financing activities —continuing operations | (2,601 | ) | — | (6,839 | ) | — | (9,440 | ) | |||||||||||
Net cash used in financing activities —discontinued operations | — | — | (26 | ) | — | (26 | ) | ||||||||||||
Net cash used in financing activities | (2,601 | ) | — | (6,865 | ) | — | (9,466 | ) | |||||||||||
Net (decrease) increase in cash and cash equivalents | (2,122 | ) | 6,089 | 3,921 | — | 7,888 | |||||||||||||
Cash and cash equivalents at beginning of period | 11,272 | 14,992 | 21,485 | — | 47,749 | ||||||||||||||
Cash and cash equivalents at end of period | $ | 9,150 | $ | 21,081 | $ | 25,406 | $ | — | $ | 55,637 |
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10. 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.
Item 2. 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 the accompanying unaudited consolidated financial statements and related notes.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements, which are 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, effective tax rate, 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 generally are intended to identify forward-looking statements. These statements involve risks, uncertainties and other factors that may cause actual results to differ from the expectations expressed in the statements. Many of these factors are beyond our ability to control or predict. These factors include, without limitation:
• | our substantial leverage and its impact on our ability to raise additional capital, react to changes in the economy and our industry and meet our obligations under our debt instruments; |
• | our inability to pay interest in kind on our Toggle Notes beginning August 23, 2011, and its impact on our financial condition and business plans; |
• | uncertainty associated with the implementation of legislative and regulatory initiatives relating to health care reform; |
• | the status of the federal economy and its impact on the health care sector; |
• | our dependence upon payments from third-party payors, including governmental health care programs and managed care organizations; |
• | our ability to acquire and develop additional surgical facilities on favorable terms and to integrate their business operations successfully; |
• | our ability to enter into strategic alliances with health care systems and other third-party payors that are leaders in their markets; |
• | efforts to regulate the construction, acquisition or expansion of health care facilities; |
• | our ability to attract and maintain good relationships with physicians who use our facilities; |
• | our ability to enhance operating efficiencies at our surgical facilities and to control costs as the volume of cases performed at our facilities changes; |
• | our ability to comply with applicable laws and regulations regulating the operation of our surgical facilities, including physician self-referral laws and laws relating to illegal remuneration under Medicare, Medicaid or other governmental programs; |
• | our ability to comply with applicable corporate governance and financial reporting standards; |
• | legislative changes restricting physician ownership of hospitals; |
• | the risk of changes to laws governing the corporate practice of medicine that may require us to restructure some of our relationships, which could result in a significant loss of revenues, require us to purchase some or all of the noncontrolling interests, and divert other resources; |
• | risks related to the nature of our corporate structure, including the level of control exercised by Crestview; |
• | our legal responsibility to the holders of ownership interests in the entities through which we own surgical facilities, which may conflict with the interests of our noteholders and prevent us from acting solely in our own bests interests or the interests of our noteholders; |
• | our ability to obtain the capital required to operate our business and fund acquisitions and developments on favorable terms; |
• | the 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 geographic concentration of our operations in certain states, which makes us particularly sensitive to regulatory, economic and other conditions in those states; |
• | our dependence on our senior management; and |
• | other risks and uncertainties described in this report or detailed from time to time in our filings with the SEC. |
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.
These 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.
Executive Overview
We own and operate a national network of short stay surgical facilities in 27 states. Our surgical facilities, which include ambulatory surgery centers ("ASCs") and surgical hospitals, primarily provide non-emergency surgical procedures across many specialties, including, among others, orthopedics, pain management, gastroenterology and ophthalmology. Some of our hospitals also offer additional services, such as diagnostic imaging, pharmacy, laboratory, obstetrics, physical therapy and wound care.
We own our surgical facilities in partnership with physicians and, in some cases, healthcare systems in the markets and
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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 March 31, 2011, we owned and operated 54 surgical facilities, including 49 ASCs, four surgical hospitals, and one general acute care hospital with a surgical and obstetrics focus. We also managed eight additional ASCs. We owned a majority interest in 29 of the 54 surgical facilities and consolidated 49 facilities for financial reporting purposes. In addition to our surgical facilities, we also manage one physician network in a market in which we operate an ASC.
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 on a selective basis that we believe have favorable growth potential. On April 9, 2010, we acquired a 54.5% ownership interest in a general acute care hospital with a surgical and obstetrics focus, located in Idaho Falls, Idaho. The acquisition provides us with the opportunity to expand into a new market, and the results of the facility are consolidated for financial reporting purposes. Effective July 1, 2010, we acquired an incremental, controlling ownership interest of 37.0% in one of our surgical facilities located in Chesterfield, Missouri for $18.8 million. Subsequent to the acquisition, we held a 50.0% ownership interest in this facility. As a result of this acquisition, we began consolidating the facility in the third quarter of 2010. Effective January 7, 2011, we acquired an incremental ownership interest of 3.5% in this facility.
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 our physician network consisting of reimbursed expenses, plus participation in the excess of revenues over expenses of the physician network, as provided for in our service agreements with our physician network. 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 network for which we are not required to provide capital or additional assets.
The following tables summarize our revenues by service type as a percentage of revenues for the periods indicated:
Three Months Ended March 31, | |||||
2011 | 2010 | ||||
Patient service revenues | 98 | % | 96 | % | |
Physician service revenues | 1 | 2 | |||
Other service revenues | 1 | 2 | |||
Total | 100 | % | 100 | % |
Payor Mix
The following table sets forth by type of payor the percentage of our patient service revenues generated in the periods indicated:
Three Months Ended March 31, | |||||
2011 | 2010 | ||||
Private insurance | 66 | % | 69 | % | |
Government | 26 | 26 | |||
Self-pay | 3 | 4 | |||
Other | 5 | 1 | |||
Total | 100 | % | 100 | % |
Case Mix
We primarily operate multi-specialty facilities where physicians perform a variety of procedures in various 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.
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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:
Three Months Ended March 31, | |||||
2011 | 2010 | ||||
Ear, nose and throat | 5.9 | % | 5.8 | % | |
Gastrointestinal | 29.6 | 29.9 | |||
General surgery | 4.0 | 4.0 | |||
Obstetrics/gynecology | 2.8 | 2.8 | |||
Ophthalmology | 14.8 | 16.5 | |||
Orthopedic | 17.7 | 17.1 | |||
Pain management | 14.0 | 13.2 | |||
Plastic surgery | 3.5 | 3.2 | |||
Other | 7.7 | 7.5 | |||
Total | 100 | % | 100 | % |
Case Growth
Same Store Information
We define same store facilities as those facilities that were operating throughout the three months ended March 31, 2011 and March 31, 2010. The following same store facility table includes information from both consolidated surgical facilities included in continuing operations (whose results are included in our revenue) and non consolidated surgical facilities (whose results 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:
Three Months Ended March 31, | |||||||
2011 | 2010 | ||||||
Cases | 60,384 | 61,169 | |||||
Case growth | (1.3 | )% | N/A | ||||
Net patient service revenue per case | $ | 1,535 | $ | 1,531 | |||
Net patient service revenue per case growth | 0.3 | % | N/A | ||||
Number of same store surgical facilities | 52 | N/A |
The following same store facility table is presented for purposes of explaining changes in our consolidated financial results and accordingly excludes non consolidated surgical facilities that are not reported in our revenue:
Three Months Ended March 31, | |||||||
2011 | 2010 | ||||||
Cases | 55,165 | 56,094 | |||||
Case growth | (1.7 | )% | N/A | ||||
Net patient service revenue per case | $ | 1,426 | $ | 1,434 | |||
Net patient service revenue per case growth | (0.6 | )% | N/A | ||||
Number of same store surgical facilities | 46 | 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, 2010.
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Three Months Ended March 31, | |||||||
2011 | 2010 | ||||||
Cases | 58,251 | 56,094 | |||||
Case growth | 3.8 | % | N/A | ||||
Net patient service revenue per case | $ | 1,830 | $ | 1,434 | |||
Net patient service revenue per case growth | 27.6 | % | N/A | ||||
Number of surgical facilities operated as of end of the period(1) | 62 | 61 | |||||
Number of consolidated surgical facilities | 49 | 47 |
(1) | Includes surgical facilities that we manage but in which we have no ownership. |
Sources of Revenue and Recent Regulatory Developments
We are dependent upon private and government third-party sources of payment for the services we provide. The amounts that our surgical facilities and physician network 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 and federal regulations and the cost containment and utilization decisions and reduced reimbursement schedules of third-party payors. The disclosure in this section is meant to supplement, and should be read in connection with, the disclosures set forth under the headings "Sources of Revenue" and "Governmental Regulation" in Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2010.
Health Care Reform
The Patient Protection and Affordable Care Act (the “Affordable Care Act”) and the Health Care and Education Reconciliation Act of 2010 (collectively with the Affordable Care Act, the “Acts”) were signed into law 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 also contain a number of measures intended to reduce fraud and abuse in the Medicare and Medicaid programs, such as requiring the use of recovery audit contractors in the Medicaid program and limitations on the Stark (physician self-referral) 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. It is difficult to predict the impact the Acts will have on the Company's operations as a majority of the measures contained in the Acts do not take effect until 2014. The Acts could have an adverse effect on our financial condition and results of operations.
Medicare Reimbursement-Hospital Inpatient Services
Five 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”). On April 19, 2011, the Centers of Medicare and Medicaid Services ("CMS") issued the inpatient prospective payment system (“IPPS”) proposed rule for federal fiscal year (“FFY”) 2012, beginning on October 1, 2011. CMS projects that Medicare reimbursement for hospital inpatient services will decrease by 0.5%, or $498 million, between FFY 2011 and FFY 2012. The proposed market basket update is 1.5% for hospitals that submit quality data in accordance with the Hospital Inpatient Quality Reporting Program (formerly the Reporting Hospital Quality Data for Annual Payment Update) in FFY 2012. The proposed market basket update for hospitals that do not submit quality data is two percentage points less, or (0.5)%. In addition, Medicare payments under the proposed rule are subject to a 1.1% increase in response to certain litigation, as well as a (3.15)% documentation and coding adjustment as required under a statutory provision requiring CMS to recoup the effects of increased aggregate payments due to documentation and coding changes resulting from the adoption of Medicare Severity Diagnosis Related Groups.
On April 29, 2011, CMS issued the final rule on the Hospital Value-Based Purchasing program, an initiative authorized by the Affordable Care Act, which is intended to reward hospitals for the quality of care they provide to Medicare patients receiving inpatient hospital services. An estimated $850 million will be allocated to hospitals in FFY 2013, based on their performance on certain quality measures, which have been drawn from the set of measures that most hospitals already report under the Hospital Inpatient Quality Reporting Program. For FFY 2013, CMS will measure hospital performance using two domains: the clinical process of care domain, which is comprised of 12 clinical process of care measures, and the patient experience of care domain, which is comprised of the Hospital Consumer Assessment of Healthcare Providers and Systems survey measure. Hospitals will be evaluated, and incentive payments will be allocated, based on hospitals' level of achievement and improvement over past performances. The Hospital Value-Based Purchasing program will not increase overall Medicare spending for inpatient stays in acute care hospitals. Rather, the Affordable Care Act requires CMS to fund the incentive payments by reducing the base operating DRG payment amounts. The reduction will be 1% in FFY 2013, rising to 2% by FFY
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2017.
In addition, the Affordable Care Act requires the Secretary of Health and Human Services (“HHS”) to develop a plan to implement a value-based purchasing program for payments under the Medicare program for ASCs. On April 18, 2011, HHS released its report to Congress, which contained a framework for establishing such a value-based purchasing program. We cannot predict how the Hospital Value-Based Purchasing program will impact our hospitals' Medicare reimbursement for hospital inpatient services. However, our revenue could be negatively impacted if our hospitals perform poorly on the quality measures reported under the Hospital Value-Based Purchasing program. Furthermore, we do not know if or when a value-based purchasing program will be implemented for Medicare payments to ASCs or, if such a program is implemented, whether it will follow the recommendations set forth by HHS, or have a negative impact on our revenues.
Accountable Care Organizations
On March 31, 2011, CMS issued proposed regulations under the Affordable Care Act that are intended to allow providers including hospitals, physicians, and other designated professionals and suppliers, to coordinate care for Medicare beneficiaries through Accountable Care Organizations (“ACOs”). This shared savings program is intended to produce savings as a result of improved quality and operational efficiency. ACOs that achieve certain savings benchmarks and quality performance standards will be eligible to share in a portion of the amounts saved by the Medicare program. The proposed rules outline certain key characteristics of an ACO, including the scope and length of an ACO's contract with CMS, the required governance of an ACO, the assignment of Medicare beneficiaries to an ACO, the payment models under which an ACO can share in cost savings, and the quality and other reporting requirements expected of an ACO. Under the proposed regulations, patient and provider participation in ACOs will be voluntary. Proposed regulations were also issued with respect to waivers of certain Federal laws, including the Stark (physician self-referral) law, the anti-kickback statute, and certain provisions of the civil monetary penalty laws with respect to financial relationships for organizations operating as ACOs. Under the proposed rules, we would be required to meet certain requirements in order to be eligible for such waivers. The implementation of ACOs could have a negative impact on our financial condition and results of operations if our facilities and physician network are unable to participate or if reimbursement is greatly reduced. We will continue to monitor developments in the proposed ACO regulations. We cannot predict if the proposed ACO regulations will be adopted or, if adopted, if they will be adopted in their current form.
Recovery Audit Contractors
Recovery Audit Contractors (“RACs”) are private companies contracting with CMS to identify overpayments and underpayments for services reimbursed by Medicare through post-payment reviews of Medicare providers and suppliers. The Affordable Care Act expanded the RAC program's scope to include Medicaid by requiring all states to establish programs to contract with RACs to audit payments to Medicaid providers by December 31, 2010. CMS previously indicated that it expected states to fully implement their RAC programs by April 1, 2011; however, on Feburary 1, 2011, CMS published an informational bulletin withdrawing the April 1, 2011 deadline and stating that a new implementation deadline will be established at a later date. We cannot quantify the financial impact of potential RAC Medicaid audits, but could incur expenses associated with responding to and challenging any audit, as well as costs of repayment of alleged overpayments.
Operating Margins
Our operating income margin for the three months ended March 31, 2011 increased to 17.7% from 13.7% for the three months ended March 31, 2010. Our operating income margin for the 2010 period reflects, among other things, $816,000 of impairment charge related to our equity method investment located in Gresham, Oregon. Excluding the impairment charges, our operating income margin increased to 17.7% in the 2011 period from 14.9% in the 2010 period. This increase is primarily attributable to surgical facilities and additional incremental, controlling ownership interests acquired since January 1, 2010.
Acquisitions and Developments
Effective January 7, 2011, we acquired an incremental ownership interest of 3.5% in one of our surgical facilities located in Chesterfield, Missouri, for an aggregate of $1.8 million, financed with cash from operations. Prior to the acquisition, we owned 50.0% of this facility. We consolidate this surgical facility for financial reporting purposes.
Discontinued Operations and Divestitures
We evaluate our portfolio of surgical facilities to ensure the facilities are performing as we expect. During 2010, we committed to, and executed a plan to, divest our interest in four facilities that we consolidated for financial reporting purposes. In connection with one of our disposed facilities, we recorded an accrual of $1.7 million for future contractual obligations under a facility operating lease. As of March 31, 2011, the lease liability was $1.3 million. There were no future contractual obligations in connection with the divestiture of the other three facilities. The facilities' assets, liabilities, revenues, expenses and cash flows of the four facilities have been classified as discontinued operations for all periods presented.
Revenues, loss on operations before income taxes, income tax provision, loss on the sale, net of taxes, and loss from discontinued operations, net of taxes, for the following periods indicated, were as follows (in thousands):
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Three Months Ended March 31, | ||||||
2011 | 2010 | |||||
Revenues | — | $ | 2,620 | |||
Loss on operations before income taxes | — | (276 | ) | |||
Income tax provision | — | 4 | ||||
Loss on sale, net of taxes | (17 | ) | — | |||
Loss from discontinued operations, net of taxes | (17 | ) | $ | (280 | ) |
Results of Operations
The following table summarizes certain statements of operations items for each of the three months ended March 31, 2011 and 2010. The table also shows the percentage relationship to revenues for the periods indicated:
2011 | 2010 | ||||||||||
Amount | % of Revenues | Amount | % of Revenues | ||||||||
(in thousands) | |||||||||||
Revenues | 109,334 | 100.0 | % | 83,545 | 100.0 | % | |||||
Cost of revenues | 77,647 | 71.0 | 61,203 | 73.3 | |||||||
General and administrative expense | 5,869 | 5.4 | 5,232 | 6.3 | |||||||
Depreciation and amortization | 5,161 | 4.7 | 4,084 | 4.9 | |||||||
Provision for doubtful accounts | 1,626 | 1.5 | 1,213 | 1.5 | |||||||
Income on equity investments | (269 | ) | (0.2 | ) | (628 | ) | (0.8 | ) | |||
Impairment and loss on disposal of long-lived assets | 44 | — | 1,061 | 1.2 | |||||||
Gain on sale of long-lived assets | (122 | ) | (0.1 | ) | — | — | |||||
Insurance and litigation settlements, net | — | — | (36 | ) | (0.1 | ) | |||||
Total operating expenses | 89,956 | 82.3 | 72,129 | 86.3 | |||||||
Operating income | 19,378 | 17.7 | 11,416 | 13.7 | |||||||
Interest expense, net | (11,978 | ) | (10.9 | ) | (10,731 | ) | (12.9 | ) | |||
Income before income taxes and discontinued operations | 7,400 | 6.8 | 685 | 0.8 | |||||||
Provision for income taxes | 1,621 | 1.5 | 1,609 | 1.9 | |||||||
Income (loss) from continuing operations | 5,779 | 5.3 | (924 | ) | (1.1 | ) | |||||
Loss from discontinued operations, net of taxes | (17 | ) | — | (280 | ) | (0.3 | ) | ||||
Net income (loss) | 5,762 | 5.3 | (1,204 | ) | (1.4 | ) | |||||
Less: Net income attributable to noncontrolling interests | (8,181 | ) | (7.5 | ) | (4,444 | ) | (5.3 | ) | |||
Net loss attributable to Symbion, Inc. | (2,419 | ) | (2.2 | )% | (5,648 | ) | (6.7 | )% |
Overview. Our revenues increased 30.9% to $109.3 million for the three months ended March 31, 2011 from $83.5 million for the three months ended March 31, 2010. We incurred a net loss attributable to Symbion, Inc. for the 2011 period of $(2.4 million) compared to $(5.6 million) for the 2010 period. Our financial results for the 2011 period compared to the 2010 period reflect the addition of one surgical facility which we consolidate for financial reporting purposes. Also, subsequent to the 2010 period, we acquired an incremental, controlling ownership interest in a surgical facility which was previously recorded as an equity method investment. As a result of this acquisition, we hold a controlling interest in the facility and began consolidating the facility for financial reporting purposes in the third quarter of 2010.
We disposed of one surgical facility which we accounted for using the equity method and four facilities which we consolidated for financial reporting purposes as of March 31, 2010. The financial results of the four disposed facilities for the three months ended March 31, 2011, and all comparative periods, are reported as discontinued operations. For purposes of this management's discussion of our consolidated financial results, we consider same store facilities as those facilities that were operating throughout the respective periods listed below.
Revenues. Revenues for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 were as follows (in thousands):
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2011 | 2010 | Dollar Variance | Percent Variance | |||||||||||
Patient service revenues: | ||||||||||||||
Same store revenues | $ | 78,671 | $ | 80,437 | $ | (1,766 | ) | (2.2 | )% | |||||
Revenues from other surgical facilities | 27,940 | — | 27,940 | — | ||||||||||
Total patient service revenues | 106,611 | 80,437 | 26,174 | 32.5 | ||||||||||
Physician service revenues | 1,445 | 1,429 | 16 | 1.1 | ||||||||||
Other service revenues | 1,278 | 1,679 | (401 | ) | (23.9 | ) | ||||||||
Total | $ | 109,334 | $ | 83,545 | $ | 25,789 | 30.9 | % |
Patient service revenues at same store facilities decreased 2.2% for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. We experienced a 1.7% decrease in cases, and a 0.6% decrease in net revenue per case. The decrease in cases and revenues was primarily driven by the scheduled termination of an agreement with a health plan to utilize one of our same store facilities for a specified period of time. In addition, revenue was negatively impacted by a reduction in Medicaid disproportionate share payments in Colorado and a reduction of workers' compensation reimbursement rates in South Carolina. Revenues from other surgical facilities increased by $28.0 million. This increase is attributable to surgical facilities and additional incremental, controlling ownership interests acquired since January 1, 2010.
Cost of Revenues. Cost of revenues for the three months ended March 31, 2011 compared to the three months ended March 31, 2010, were as follows (in thousands):
2011 | 2010 | Dollar Variance | Percent Variance | |||||||||||
Same store cost of revenues | $ | 59,982 | $ | 61,203 | $ | (1,221 | ) | (2.0 | )% | |||||
Cost of revenues from other surgical facilities | 17,665 | — | 17,665 | — | ||||||||||
Total | $ | 77,647 | $ | 61,203 | $ | 16,444 | 26.9 | % |
As a percentage of same store revenues including physician services and other revenue, same store cost of revenues increased to 73.7% for the three months ended March 31, 2011 compared to 73.3% for the three months ended March 31, 2010. The increase in same store cost of revenues as a percentage of same store revenues was primarily driven by the decrease in revenues as a result of the scheduled termination of an agreement with a health plan to utilize one of our same store facilities for a specified period of time and specific payor reimbursement reductions in Colorado and South Carolina. Cost of revenues from other surgical facilities increased by $17.7 million. This increase is attributable to surgical facilities and additional incremental, controlling ownership interests acquired since January 1, 2010. As a percentage of revenues, total cost of revenues decreased to 71.0% for the 2011 period compared to 73.3% for the 2010 period.
General and Administrative Expense. General and administrative expense increased to $5.9 million for the three months ended March 31, 2011 from $5.2 million for the three months ended March 31, 2010. As a percentage of revenues, general and administrative expense decreased to 5.4% for the 2011 period from 6.3% for the 2010 period. This decrease is primarily attributable to our leveraging of corporate overhead costs while continuing to increase revenue through recent acquisitions.
Depreciation and Amortization. Depreciation and amortization expense increased to $5.2 million for the three months ended March 31, 2011 compared to $4.1 million for the three months ended March 31, 2010. This increase is attributable to surgical facilities and additional incremental, controlling ownership interests acquired since January 1, 2010. As a percentage of revenues, depreciation and amortization expense decreased to 4.7% for the 2011 period from 4.9% for the 2010 period.
Provision for Doubtful Accounts. The provision for doubtful accounts increased to $1.6 million for the three months ended March 31, 2011 compared to $1.2 million for the three months ended March 31, 2010. As a percentage of revenues, the provision for doubtful accounts remained at 1.5% for both the 2011 and the 2010 periods.
Operating Income. Operating income increased to $19.4 million for the three months ended March 31, 2011 from $11.4 million for the three months ended March 31, 2010. This change is primarily attributable to surgical facilities and additional incremental, controlling ownership interests acquired since January 1, 2010.
Interest Expense, Net of Interest Income. Interest expense, net of interest income, increased to $12.0 million for the three months ended March 31, 2011 from $10.7 million for the three months ended March 31, 2010. Interest expense increased $423,000 as a result of our borrowings under our revolving credit facility during 2010, and $547,000 due to our election to pay interest on the Toggle Notes in kind, whereby the outstanding principal amount of debt has increased $26.5 million since March 31, 2010. We incurred additional interest expense at facilities acquired since January 1, 2010 of $1.4 million. These increases are offset by a $1.0 million decrease in interest expense due to the principal payments on our senior secured credit facility which resulted in lower interest costs and the expiration of our previous interest rate swap in October 2010, which fixed a portion of our borrowings at a rate higher than our current interest rate swap.
Provision for Income Taxes. The provision for income taxes was $1.6 million for both the three months ended March 31, 2011 and March 31, 2010. Tax expense in both periods is primarily due to the recording of non-cash deferred income tax expense related to our
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partnership investments.
Income Attributable to Noncontrolling Interests. Income attributable to noncontrolling interests increased to $8.2 million for the three months ended March 31, 2011 from $4.4 million for the three months ended March 31, 2010. As a percentage of revenues, income attributable to noncontrolling interests increased to 7.5% for the 2011 period from 5.3% for the 2010 period. This increase is attributable to an increase in operating income at same store facilities and the impact of surgical facilities and additional incremental, controlling ownership interests acquired since January 1, 2010.
Liquidity and Capital Resources
Operating Activities
During the three months ended March 31, 2011, we generated operating cash flow from continuing operations of $22.2 million compared to $18.9 million for the three months ended March 31, 2010. This increase is primarily attributable to surgical facilities and incremental, controlling interests acquired since January 1, 2010.
At March 31, 2011, we had working capital of $85.6 million compared to $77.3 million at December 31, 2010. This increase is primarily attributable to our in-kind payment of accrued PIK interest in February 2011 of $13.6 million. This accrued interest was reclassified from interest payable to long-term debt in February 2011. We currently have $3.0 million of PIK interest accrued in interest payable as of March 31, 2011. We believe 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 three months ended March 31, 2011 was $2.1 million, which included $2.2 million related to purchases of property and equipment. Cash used in investing activities in the 2011 period was funded primarily from cash from continuing operations.
During the three months ended March 31, 2010, net cash used in investing activities from continuing operations was $1.3 million, which included $1.3 million related to purchases of property and equipment. Cash used in investing activities in the 2010 period was funded primarily from cash from continuing operations.
Financing Activities
Net cash used in financing activities from continuing operations during the three months ended March 31, 2011 was $16.2 million. We distributed $7.7 million in cash to noncontrolling interest partners. We also made scheduled principal payments on our senior secured credit facility totaling $5.0 million.
Net cash used in financing activities from continuing operations during the three months ended March 31, 2010 was $9.4 million. During the 2010 period, we made scheduled principal payments on our senior secured credit facility of $1.9 million. Additionally, we distributed $5.6 million in cash to noncontrolling interest partners.
Long-Term Debt
The Company's long-term debt is summarized as follows (in thousands):
March 31, 2011 (Unaudited) | December 31, 2010 | ||||||
Senior secured credit facility | $ | 272,500 | $ | 277,500 | |||
Toggle Notes | 245,630 | 232,000 | |||||
Notes payable to banks | 13,876 | 14,786 | |||||
Secured term loans | 6,866 | 7,236 | |||||
Capital lease obligations | 3,961 | 5,090 | |||||
542,833 | 536,612 | ||||||
Less current maturities | (29,696 | ) | (29,195 | ) | |||
Total | $ | 513,137 | $ | 507,417 |
Senior Secured Credit Facility
On August 23, 2007, in conjunction with the Merger, we entered into a $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
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“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 $4.7 million 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 the lender's 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 an aggregate amount not to exceed $5.0 million throughout the term of the senior secured credit facility.
As of March 31, 2011, the interest rate on the borrowings under the senior secured credit facility was 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 March 31, 2011, the amount available under the Revolving Facility was $44.0 million.
Interest Rate Swap
On November 2, 2010, we entered into an interest rate swap agreement to protect against certain interest rate fluctuations of the LIBOR rate on $100.0 million of our variable rate debt under the senior secured credit facility. The effective date of the interest rate swap is December 31, 2010, and it is scheduled to expire on December 31, 2012. The interest rate swap effectively fixes our LIBOR interest rate on the $100.0 million of variable rate debt at a rate of 0.85%. We have recognized the fair value of our interest rate swap as a long-term liability of approximately $228,000 at March 31, 2011. We have designated our current interest rate swap as a cash flow hedge instrument. As of March 31, 2011, we have determined the hedge to be effective.
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.
Since August 23, 2008, we have elected the PIK option of the Toggle Notes in lieu of making scheduled interest payments for various interest periods. As a result, the principal due on the Toggle Notes has increased by $65.7 million from the issuance of the Toggle Notes to March 31, 2011. On February 23, 2011, we elected the PIK option of the Toggle Notes in lieu of making scheduled interest payments for the interest period from February 24, 2011 to August 23, 2011. We have accrued $3.0 million in interest in other accrued expenses as of March 31, 2011.
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.
The indenture governing the Toggle Notes contains various restrictive covenants, including financial covenants that limit our ability
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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 March 31, 2011, 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 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.
Capital Lease Obligations
We are liable to various vendors for several equipment leases. The outstanding balance related to these capital leases at March 31, 2011 and December 31, 2010 was $4.0 million and $5.1 million, respectively.
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations by period as of March 31, 2011 (in thousands):
Payments Due by Period | |||||||||||||||||||
Total | Within 1 Year | During Years 2-3 | During Years 4-5 | After 5 Years | |||||||||||||||
Contractual Obligations: | |||||||||||||||||||
Long-term debt | $ | 538,872 | $ | 27,999 | $ | 151,830 | $ | 359,043 | $ | — | |||||||||
Capital lease obligations | 3,961 | 1,697 | 2,113 | 151 | — | ||||||||||||||
Operating lease obligations | 123,095 | 22,221 | 39,481 | 24,172 | 37,221 | ||||||||||||||
Other financing obligations(1) | 48,284 | (194 | ) | 64 | 829 | 47,585 | |||||||||||||
Total | $ | 714,212 | $ | 51,723 | $ | 193,488 | $ | 384,195 | $ | 84,806 |
(1) Other financing obligations are payable to the lessor of the land, building and improvements of our hospital located in Idaho Falls, Idaho.
Inflation
Inflation and changing prices have not significantly affected our operating results or the markets in which we operate.
Earnings Before Interest, Taxes, Depreciation and Amortization and Other Adjustments
When we use the term “EBITDA,” we are referring to net income (loss) plus (a) loss from discontinued operations, net of taxes, (b) income tax expense, (c) interest expense, net, (d) depreciation and amortization, (e) non-cash (gains) losses, and (f) non-cash stock option compensation expense, and less (g) net income attributable to noncontrolling interests. Noncontrolling interest represents the interests 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.
EBITDA increased to $16.6 million for the three months ended March 31, 2011 from $12.4 million for the three months ended March 31, 2010. EBITDA margin for the three month period increased 30 basis points to 15.2% for 2011 from 14.9% for 2010. This increase is primarily attributable to surgical facilities and incremental, controlling ownership interests acquired since January 1, 2010.
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 is not comparable to the EBITDA measure we have used in certain prior periods but is consistent with the measure of EBITDA less income attributable to noncontrolling interests previously reported.
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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 (in thousands):
Three Months Ended March 31, | |||||||
2011 | 2010 | ||||||
EBITDA | $ | 16,614 | $ | 12,441 | |||
Depreciation and amortization | (5,161 | ) | (4,084 | ) | |||
Non-cash gains (losses) | 78 | (1,061 | ) | ||||
Non-cash stock option compensation expense | (334 | ) | (324 | ) | |||
Interest expense, net | (11,978 | ) | (10,731 | ) | |||
Provision for income taxes | (1,621 | ) | (1,609 | ) | |||
Net income attributable to noncontrolling interests | 8,181 | 4,444 | |||||
Loss on discontinued operations, net of taxes | (17 | ) | (280 | ) | |||
Net income (loss) | 5,762 | (1,204 | ) | ||||
Loss from discontinued operations | 17 | 280 | |||||
Depreciation and amortization | 5,161 | 4,084 | |||||
Amortization of deferred financing costs | 501 | 501 | |||||
Non-cash payment-in-kind interest option | 6,984 | 6,230 | |||||
Non-cash stock option compensation expense | 334 | 324 | |||||
Non-cash recognition of other comprehensive loss into earnings | — | 826 | |||||
Non-cash credit risk adjustment of financial instruments | — | 89 | |||||
Non-cash (gains) losses | (78 | ) | 1,061 | ||||
Deferred income taxes | 1,534 | 1,828 | |||||
Equity in earnings of unconsolidated affiliates, net of distributions received | 341 | (70 | ) | ||||
Provision for doubtful accounts | 1,626 | 1,213 | |||||
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: | |||||||
Accounts receivable | (128 | ) | (109 | ) | |||
Other assets and liabilities | 114 | 3,882 | |||||
Net cash provided by operating activities - continuing operations | $ | 22,168 | $ | 18,935 | |||
Other Data: | |||||||
Number of surgical facilities included in continuing operations, as of the end of period(1) | 62 | 61 |
(1) | Includes surgical facilities that we manage but in which we have no ownership. |
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.
Item 3. 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 March 31, 2011, $172.5 million of our total long-term debt was subject to variable rates of interest, while the remaining $370.3 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 $1.7 million. The fair value of our total long-term debt, based on quoted market prices as of March 31, 2011, is approximately $518.5 million.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We carried out an evaluation, under the supervision and with the participation
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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 Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 (including our consolidated subsidiaries) in reports that we file or submit under the Exchange Act , is recorded, processed, summarized and reported in a timely manner.
Changes in Internal Control Over Financial Reporting. There has been no change in our internal control over financial reporting that occurred during the three months ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. 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.
Item 6. Exhibits
No. | Description | ||
2.1 | 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) | ||
2.2 | Contribution and Distribution Agreement by and among SMBI Idaho, LLC, Mountain View Hospital, LLC and the existing unitholders and their owners, dated as of April 9, 2010. (b) | ||
3.1 | Amended Certificate of Incorporation of Symbion, Inc. (c) | ||
3.2 | Amended and Restated Bylaws of Symbion, Inc. (c) | ||
4.1 | Indenture, dated as of June 3, 2008, among Symbion, Inc., the Guarantors named therein and U.S. Bank National Association, as Trustee (c) | ||
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. (c) | ||
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 (c) | ||
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 Quarterly Report on Form 10-Q for the three months ended March 31, 2010 (File No. 000-50574)
(c) Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-4 (Registration No. 333-153678)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SYMBION, INC. | |||
By: | /s/ TERESA F. SPARKS Teresa F. Sparks Senior Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer) |
Date: May 12, 2011
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EXHIBIT INDEX
No. | Description | |||
2.1 | 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) | |||
2.2 | Contribution and Distribution Agreement by and among SMBI Idaho, LLC, Mountain View Hospital, LLC and the existing unitholders and their owners, dated as of April 9, 2010. (b) | |||
3.1 | Amended Certificate of Incorporation of Symbion, Inc. (c) | |||
3.2 | Amended and Restated Bylaws of Symbion, Inc. (c) | |||
4.1 | Indenture, dated as of June 3, 2008, among Symbion, Inc., the Guarantors named therein and U.S. Bank National Association, as Trustee (c) | |||
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. (c) | |||
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 (c) | |||
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 Quarterly Report on Form 10-Q for the three months ended March 31, 2010 (File No. 000-50574)
(c) Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-4 (Registration No. 333-153678)
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