UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

For the quarterly period ended March 31, 2016

OR

For the transition period from              to             .

Commission file number: 001-36154

 

SURGICAL CARE AFFILIATES, INC.

(Exact name of registrant as specified in its charter)

 

 

(847) 236-0921

(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  x    No  ¨

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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.

 

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

 

 

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SURGICAL CARE AFFILIATES, INC.

FORM 10-Q

INDEX

 

 

 

 

 

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GENERAL

Unless the context otherwise indicates or requires, references in this Quarterly Report on Form 10-Q to “Surgical Care Affiliates,” the “Company,” “we,” “us” and “our” refer to Surgical Care Affiliates, Inc. and its consolidated affiliates. In addition, unless the context otherwise indicates or requires, the term “SCA” refers to Surgical Care Affiliates, LLC, our direct operating subsidiary.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that reflect our current views with respect to, among other things, future events and financial performance, which involve substantial risks and uncertainties. Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include any statement that, without limitation, may predict, forecast, indicate or imply future results, performance or achievements instead of historical or current facts and may contain words like “anticipates,” “approximately,” “believes,” “budget,” “can,” “could,” “continues,” “contemplates,” “estimates,” “expects,” “forecast,” “intends,” “may,” “might,” “objective,” “outlook,” “predicts,” “probably,” “plans,” “potential,” “project,” “seeks,” “shall,” “should,” “target,” “will,” or the negative of these terms and other words, phrases, or expressions with similar meaning.

Any forward-looking statements contained in this Quarterly Report on Form 10-Q are based upon our historical performance and on our current plans, estimates and expectations in light of information currently available to us. The inclusion of forward-looking information should not be regarded as a representation by us that the future plans, estimates or expectations will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business, prospects, growth strategy and liquidity. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from those projected in the forward-looking statements, and the Company cannot give assurances that such statements will prove to be correct. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information or otherwise. Given these uncertainties, the reader should not place undue reliance on forward-looking statements as a prediction of actual results. Factors that could cause actual results to differ materially from those projected or estimated by us include those that are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 under Part I, “Item 1A. Risk Factors.”

 

 

 

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PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

SURGICAL CARE AFFILIATES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amount)

(Unaudited)  

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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SURGICAL CARE AFFILIATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

 

 

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SURGICAL CARE AFFILIATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands)

(Unaudited)

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

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SURGICAL CARE AFFILIATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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SURGICAL CARE AFFILIATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(In thousands)

(Unaudited)

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

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SURGICAL CARE AFFILIATES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in tables are in thousands of U.S. dollars unless otherwise indicated)

 

NOTE 1 — DESCRIPTION OF BUSINESS

Nature of Operations and Ownership of the Company

Surgical Care Affiliates, Inc. (“Surgical Care Affiliates” or the “Company”), a Delaware corporation, was formed primarily to own and operate a network of multi-specialty ambulatory surgery centers (“ASCs”) and surgical hospitals in the United States of America. We do this through our direct operating subsidiary, Surgical Care Affiliates, LLC (“SCA”). As of March 31, 2016, the Company operated in 33 states and had an interest in and/or operated 186 freestanding ASCs, seven surgical hospitals and one sleep center with 11 locations, with a concentration of facilities in California, Texas, Indiana, Florida and New Jersey. Our ASCs and surgical hospitals primarily provide the facilities, equipment and medical support staff necessary for physicians to perform non-emergency surgical and other procedures in various specialties, including orthopedics, ophthalmology, gastroenterology, pain management, otolaryngology (ear, nose and throat, or “ENT”), urology and gynecology, as well as other general surgery procedures. At our ASCs, physicians perform same-day surgical procedures. At our surgical hospitals, physicians perform a broader range of surgical procedures, and patients may stay in the hospital for several days.

During the three-months ended March 31, 2016, our portfolio of facilities changed as follows:

Business Structure

Our business model is focused on building strategic relationships with health plans, medical groups and health systems to acquire, develop and optimize facilities in an aligned economic model that enables better access to high-quality care at lower cost. As of March 31, 2016, we owned and operated facilities in partnership with approximately 2,800 physician partners. The facilities in which we hold an ownership interest are owned by general partnerships, limited partnerships (“LP”), limited liability partnerships (“LLP”) or limited liability companies (“LLC”) in which a subsidiary of the Company typically serves as the general partner, limited partner, managing member or member. We account for our 194 facilities as follows:

 

Basis of Presentation

The Company maintains its books and records on the accrual basis of accounting, and the accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the instructions for Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (the “SEC”). Such financial statements include the assets, liabilities, revenues and expenses of all wholly-owned subsidiaries, subsidiaries over which we exercise control and, when applicable, affiliates in which we have a controlling financial interest. These interim financial statements do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited financial statements of the Company reflect all adjustments (consisting only of normal, recurring items) necessary for a fair statement of the results for the interim period presented. Operating results for the three-month period ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year

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ending December 31, 2016. The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the Company’s audited December 31, 2015 consolidated financial statements included in our 2015 Annual Report on Form 10-K.

 

NOTE 2 — TRANSACTIONS

Acquisitions of Consolidated Facilities  

During the three-months ended March 31, 2016, we purchased a controlling interest in seven ASCs for total consideration of $61.3 million. One of the seven ASCs was previously a managed-only facility, and two of the seven ASCs were previously equity method investments.  These acquisitions are described in further detail below.

We accounted for these transactions under the acquisition method of accounting and reported the results of operations from the date of acquisition. The assets acquired, liabilities assumed and any noncontrolling interest in the acquired business at the acquisition date are recognized at their fair values as of that date, and the direct costs incurred in connection with the business combination are recorded and expensed separately from the business combination. The fair value of identifiable intangible assets were based on valuations using the cost and income approaches. The cost approach is based on amounts that would be required to replace the asset (i.e., replacement cost). The income approach is based on management’s estimates of future operating results and cash flows discounted using a weighted-average cost of capital that reflects market participant assumptions. The excess of the fair value of the consideration conveyed over the fair value of the net assets acquired was recorded as goodwill. Factors contributing to the recognition of goodwill include the centers’ favorable reputations in their markets, their market positions, their ability to deliver quality care with high patient satisfaction consistent with the Company’s business model and synergistic benefits that are expected to be realized as a result of the acquisitions. The total amount of goodwill that is expected to be tax deductible as a result of these 2016 transactions is approximately $54.2 million.

 

  The details of the seven consolidated acquisitions closed during the three-months ended March 31, 2016 are as follows: 

  

In addition to the acquisitions included in the table above, effective January 1, 2016, an indirect wholly-owned subsidiary of SCA, SCA-Mokena Properties, LLC, purchased the real estate of the CMIS location from CMIS for total consideration of $17.0 million. This real estate was subsequently sold, effective February 26, 2016 (see Closures and Sales).

The aggregate amounts recognized as of the acquisition date for each major class of assets and liabilities assumed in the seven consolidated acquisitions closed during the three-months ended March 31, 2016 are as follows:

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Intangible assets acquired during the three-months ended March 31, 2016 in connection with the above consolidated acquisitions include:

 

The purchase price allocations for 2016 acquisitions above are preliminary. Additionally, all purchase price allocations related to acquisitions completed since March 31, 2015 are preliminary. When all relevant information is obtained, resulting changes, if any, to our provisional purchase price allocation will be adjusted to reflect new information about the facts and circumstances that existed as of the respective acquisition dates that, if known, would have affected the measurement of the amounts recognized as of those dates. The preliminary amounts of these purchase price allocations relate primarily to correcting working capital balances which are generally agreed upon within six to twelve months.

 

During the three-months ended March 31, 2015, the Company, through its indirect wholly owned or join venture entities, purchased a controlling interest in six ASCs for total consideration of $16.8 million. Three of the six ASCs were previously equity method investments.

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Acquisitions of Noncontrolling Interests in Facilities

In March 2015, Multi-Specialty Surgery Center, LLC (“Multi-Specialty”), which owns and operates an ASC in Indianapolis, Indiana, contributed substantially all of its assets to Beltway Surgery Centers, L.L.C. (“Beltway”), in exchange for $15.9 million in cash and 13.75 units, or 3.8% of the total membership interest, of Beltway valued at $6.1 million.  Beltway is a nonconsolidated SCA entity and a joint venture among a subsidiary of SCA, physicians and a health system which owns and operates multiple ASCs in Indiana.  As a result of the transaction, the Multi-Specialty location became an additional location of Beltway and is an equity method investment for us.  

There were no acquisitions of equity method affiliates during the first quarter of 2016.

Deconsolidations

During the three-month period ended March 31, 2016, we deconsolidated one facility and its related parent entity as a result of the adoption by the Financial Accounting Standards Board (the “FASB”) of Accounting Standards Update (“ASU”) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, effective January 1, 2016, which modified existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. We retained a noncontrolling interest in these affiliates. We recorded a gain of approximately $0.5 million as the cumulative-effect adjustment to retained earnings as of January 1, 2016.

As a result of the adoption of ASU No. 2015-02, we also deconsolidated one JV parent entity (the “Future Texas JV”) which served as a holding company and was previously consolidated as a VIE. Prior to the adoption of ASU No. 2015-02, the Future Texas JV consolidated 11 ASCs and one de novo entity and we consolidated the Future Texas JV under the VIE model. After the adoption of ASU No. 2015-02 on January 1, 2016, we determined that we are the primary beneficiary of the ASCs and de novo entity, previously consolidated by the Future Texas JV, and now consolidate them directly as VIEs.

There were no deconsolidation transactions during the three-month period ended March 31, 2015.

Fair values for retained noncontrolling interests are primarily estimated based on third-party valuations we have obtained in connection with such transactions and/or the amount of proceeds received or to be received for the controlling equity interest sold.

 

Closures and Sales

 

During the three-months ended March 31, 2016, we closed one facility.  The operations of this facility were absorbed into an existing SCA facility.

 

There were no closures during the three-months ended March 31, 2015.

 

An indirect wholly-owned subsidiary of SCA, SCA Mokena Properties, LLC, sold the real estate of CMIS to an independent third party for total consideration of $17.0 million.

 

During the fourth quarter of 2015, we ceased operating an ASC located in Memphis, Tennessee (“Memphis ASC”).  We and our health system partner sold the Memphis ASC and its real estate for $0.2 million during the first quarter of 2016.

 

During the three-months ended March 31, 2015, we sold our entire ownership interest in one ASC that we held as an equity method investment for $7.6 million.   

Unaudited Pro Forma Financial Information

Summarized below are our consolidated results of operations for the three-months ended March 31, 2016 and 2015, on an unaudited pro forma basis as if the consolidated acquisitions closed in the three-months ended March 31, 2016 had occurred at the beginning of the earliest period presented. The pro forma information is based on the Company’s consolidated results of operations for the three-months ended March 31, 2016 and 2015 and on other available information. These pro forma amounts include historical financial statement amounts with the following adjustments: we converted the sellers’ historical financial statements to GAAP and applied the Company’s accounting policies, and we adjusted for depreciation and amortization expense assuming the fair value adjustments to intangible assets had been applied beginning January 1, 2015. The pro forma financial information does not purport to be indicative of results of operations that would have occurred had the transactions occurred on the basis assumed above, nor are they indicative of results of the future operations of the combined enterprises.

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Consolidated acquisitions closed during the three-months ended March 31, 2016 contributed Net operating revenues of $7.5 million and Income from continuing operations of $0.3 for the three-months ended March 31, 2016.

 

NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company, its subsidiaries and VIEs for which we are the primary beneficiary. All significant intercompany transactions and accounts have been eliminated.

We evaluate partially owned subsidiaries and joint ventures held in partnership form using authoritative guidance, which includes a framework for evaluating whether a general partner(s) or managing member(s) controls an affiliate and therefore should consolidate it. The framework includes the presumption that general partner or managing member control would be overcome only when the limited partners or members have certain rights. Such rights include the right to dissolve or liquidate the LP, LLP or LLC or otherwise remove the general partner or managing member “without cause,” or the right to effectively participate in significant decisions made in the ordinary course of business of the LP, LLP or LLC. To the extent that any noncontrolling investor has rights that inhibit our ability to control the affiliate, including substantive veto rights, we do not consolidate the affiliate.

We use the equity method to account for our investments in affiliates with respect to which we do not have control rights but have the ability to exercise significant influence over operating and financial policies. Assets, liabilities, revenues and expenses are reported in the respective detailed line items on the condensed consolidated financial statements for our consolidated affiliates. For our equity method affiliates, assets and liabilities are reported on a net basis in Investment in and advances to nonconsolidated affiliates on the condensed consolidated balance sheets, and revenues and expenses are reported on a net basis in Equity in net income of nonconsolidated affiliates on the condensed consolidated statements of operations. This difference in accounting treatment of equity method affiliates impacts certain financial ratios of the Company.

Variable Interest Entities

 

Under the applicable authoritative guidance, a variable interest entity (VIE) is a legal entity that possesses any of the following characteristics: an insufficient amount of equity at risk to finance its activities without additional subordinated financial support; the equity holders, as a group, lack the characteristics of a controlling financial interest; or the entity is established with non-substantive voting rights in which the voting rights of some investors are not proportional to their obligation to absorb expected losses or their right to receive expected residual returns of the entity, and substantially all of the entity’s activities are conducted on behalf of an investor that has disproportionately few voting rights. The primary beneficiary of a VIE is the entity that has both the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive returns that would be significant to the VIE. We consolidate a VIE when we are the primary beneficiary of the VIE and provide certain required disclosures when we determine that we hold a variable interest in a VIE where we are not the primary beneficiary.

Significant judgments made in determining whether or not an entity is a VIE and whether or not we are the primary beneficiary of the VIE include determining if our interest in the entity represents a variable interest, identifying the activities that most significantly impact the economic performance of the entity, determining whether or not our variable interest gives us the power to direct those activities that we determine most significantly impact the economic performance of the entity, and determining whether or not the variability we absorb through our variable interest would be significant to the VIE.  

As a result of the adoption of ASU No. 2015-02, at March 31, 2016, we held a variable interest in 93 facilities, nine JV parent entities, and four other entities that we determined to be VIEs of which we are the primary beneficiary, and 24 facilities, two JV parent entities and two other entities that we determined to be VIEs of which we are not the primary beneficiary.  At December 31, 2015, we held a variable interest in 16 facilities and six JV parent entities of which we were the primary beneficiary, and we did not hold a variable interest in a VIE of which we were not the primary beneficiary. See Note 4 for further discussion of our involvement with VIEs.

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Investment in and Advances to Nonconsolidated Affiliates

Investments in entities we do not control, but for which we have the ability to exercise significant influence over the operating and financial policies, are accounted for under the equity method. Equity method investments are recorded at original cost and adjusted periodically to recognize our proportionate share of the entity’s net income or losses after the date of investment, additional contributions made and distributions received, amortization of definite-lived intangible assets attributable to equity method investments and impairment losses resulting from adjustments to the carrying value of the investment. We record equity method losses in excess of the carrying amount of an investment when we guarantee obligations or we are otherwise committed to provide further financial support to the affiliate.

Reclassifications and Revisions

Certain amounts in the condensed consolidated financial statements for prior periods have been reclassified to conform to the current period presentation.

 

During the quarter ended March 31, 2016, we recorded an out of period correction to increase Depreciation and amortization by $2.9 million related to leasehold improvements as of December 31, 2015, an out of period correction to increase Gain on sale of investments by $2.9 million related to sales and syndications of investments in consolidated facilities during prior years, a correction to decrease Goodwill and Noncontrolling interests – non-redeemable by $8.8 million related to business combinations during prior years, as well as a correction to increase Property and equipment, net of accumulated depreciation and Long-term debt, net of current portion by $2.0 million related to a lease-type misclassification as of December 31, 2015. We do not believe that these errors or their corrections, individually or in the aggregate, are material to either our 2016 interim or our previously issued financial statements. These corrections did not have an effect on the operating, investing, financing or total cash flows on our condensed consolidated statement of cash flows.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Earnings Per Share (“EPS”)

We report two earnings per share numbers, basic and diluted. These are computed by dividing net earnings by the weighted-average common shares outstanding (basic EPS) or weighted-average common shares outstanding assuming dilution (diluted EPS), as set forth below:

 

All dilutive share equivalents are reflected in our earnings per share calculations. Antidilutive share equivalents are not included in our EPS calculations. In periods of loss, shares that otherwise would have been included in our diluted weighted-average common shares outstanding computation are excluded. 1,479,000 dilutive share equivalents were excluded for the three-months ended March 31, 2015.

Reportable Segments

We have six operating segments, which aggregate into one reportable segment. Our six operating segments are generally organized geographically. For reporting purposes, we have aggregated our operating segments into one reportable segment because the nature of the services are similar and the businesses exhibit similar economic characteristics, processes, types and classes of customers, methods of service delivery and distribution and regulatory environments.

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Recent Revisions to Authoritative Guidance

In April 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. This standard simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU No. 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  Early adoption is permitted for financial statements that have not already been issued. We are currently assessing the impact that this ASU will have on our consolidated financial position, results of operation and cash flows.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).   The primary amendments in ASU No. 2016-02 require recognition on the balance sheet of leased assets and liabilities by lessees for those leases classified as operating leases. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early application permitted. We are currently assessing the impact that this ASU will have on our consolidated financial position, results of operation and cash flows.

In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.  This standard clarifies the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements given the lack of guidance on this topic in ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The SEC staff has announced that it would “not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement.”  This ASU should be adopted concurrent with ASU No. 2015-03 which is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2015. This ASU became effective for the Company on January 1, 2016.  The provisions were applied on a retrospective basis as a change in accounting principle. This ASU did not have a material impact on our consolidated financial position and had no impact on our results of operations or cash flows. All prior period financial information presented herein has been adjusted to reflect the retrospective application of this ASU (See Note 7).

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This standard modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. ASU No. 2015-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2015 and requires either a retrospective or a modified retrospective approach to adoption. The ASU became effective for the Company on January 1, 2016 and the Company chose the modified retrospective approach to adoption. The ASU requires, if practical, that the Company recognize the assets and liabilities of any entities that will be consolidated for the first time due to the adoption of the ASU or deconsolidated due to the adoption of the ASU and that such assets and liabilities be measured as if the guidance had always been applied. The modified retrospective approach requires that any difference between the net amount of the assets and liabilities of the entities that are added to, or subtracted from, the Company’s balance sheet and the previously held or retained interest should be recognized as a cumulative-effect adjustment to retained earnings at the beginning of the annual period for the period of adoption.  Due to our adoption of ASU No. 2015-02, we determined that 73 facilities, five parent entities and four other entities that were previously consolidated as voting interest entities due to our ownership of a controlling financial interest are considered VIEs, effective January 1, 2016, and are consolidated under the VIE model due to our ability to control the activities that most significantly impact the economic performance of these entities and our obligation to absorb losses and the right to receive benefits of these VIEs that could potentially be significant to the VIE. The consolidation of these entities under the VIE model did not have an impact on the Company’s financial position, results of operations, or cash flows for the three months ended March 31, 2016 since the Company previously consolidated them as voting interest entities. The adoption of the ASU also resulted in the deconsolidation of one facility and its respective parent entity which we previously consolidated under the voting interest model and one JV parent entity that we previously consolidated under the VIE model. As a result of the deconsolidation, we recorded a gain of approximately $0.5 million as the cumulative-effect adjustment to retained earnings as of January 1, 2016. Our condensed consolidated financial statements as of and for the three-months ended March 31, 2016 reflect the deconsolidation of these entities under the modified retrospective approach. Our adoption of the ASU did not change the nature of the risks associated with our involvement with any VIEs. See Note 4 for further discussion of our involvement with VIEs and for further discussion of the entities we deconsolidated as a result of our adoption of ASU No. 2015-02.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. The ASU becomes effective for the Company at the beginning of its 2017

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fiscal year, and early adoption is not permitted. We are currently assessing the impact that this ASU will have on our consolidated financial position, results of operation and cash flows.

We do not believe that any other recently issued, but not yet effective, revisions to authoritative guidance will have a material effect on our condensed consolidated financial position, results of operations or cash flows.

 

NOTE 4 — VARIABLE INTEREST ENTITIES

 

At March 31, 2016 and December 31, 2015, we consolidated a total of 106 and 22 VIEs, respectively, of which we were the primary beneficiary, as follows:

 

At March 31, 2016 and December 31, 2015, we consolidated seven facilities and seven JV parents under the VIE model via control agreements whereby the health system partner delegated certain rights to SCA giving us control over the activities that most significantly impact the economic performance of these entities. At December 31, 2015, we consolidated four facilities and four JV parent entities under the VIE model via control agreements. In addition to the delegation agreements, we also have management agreements with each of the facilities and own a direct equity interest in the JV parent entities and an indirect equity interest in the facilities that give the Company an obligation to absorb losses and the right to receive returns that would be significant to each of these VIEs. Our adoption of ASU No. 2015-02 did not have an impact on the consolidation conclusions around these VIEs. Prior to entering into these delegation agreements during 2015, four of the facilities and four of the JV parent entities were accounted for as equity method investments, and three of the facilities and three of the JV Parents were consolidated as voting interest entities.

At March 31, 2016, including acquisitions subsequent to December 31, 2015, we consolidated 62 facilities and two JV parent entities under the VIE model via management agreements that we determined were variable interests. These management agreements provide us with the power to direct the activities that most significantly impact the economic performance of these entities. Furthermore, we own an equity interest in each of these facilities and JV parent entities that gives the Company the obligation to absorb losses and provides the Company with the right to receive returns that would be significant to the VIE. Prior to our adoption of ASU No. 2015-02, these facilities and parent entities were consolidated as voting interest entities due to our ownership of a controlling financial interest.

As of March 31, 2016, including acquisitions subsequent to December 31, 2015, the Company holds a promissory note payable (“Promissory Note”) by the Future Texas JV that has majority ownership in 12 facilities and one de novo entity and is wholly-owned by a health system partner. We have a management agreement with each of these 12 facilities and de novo entity which gives us the power over the activities that most significantly impact the economic performance of these facilities and de novo entity, which we have determined to be VIEs. Furthermore the Promissory Note gives the Company the obligation to absorb losses and provides the Company with the right to receive returns that would be significant to the facilities and de novo entity through the Future Texas JV’s equity ownership in the 12 facilities and de novo entity. Consequently we determined that we are the primary beneficiary of the facilities and de novo entity and consolidate them under the VIE model. Prior to our adoption of ASU No. 2015-02, the Future Texas JV consolidated the facilities and de novo entity and we consolidated the Future Texas JV under the VIE model. Due to our adoption of ASU No. 2015-02 on January 1, 2016, we deconsolidated the Future Texas JV and began consolidating the 12 facilities and de novo entity directly under the VIE model.

At March 31, 2016, including acquisitions subsequent to December 31, 2015, we consolidated 11 facilities which are LPs or the functional equivalent to a LP under the VIE model via our general partnership interest that gives us decision making power over the activities that most significantly impact the economic performance of these facilities, gives the Company the obligation to absorb losses and provides the Company with the right to receive returns that would be significant to the VIE. Our variable interest in these facilities is our equity ownership in the facilities and management services agreements with the facilities. Prior to our adoption of ASU No. 2015-02, we consolidated these facilities under the voting interest model.

At March 31, 2016, we consolidated three entities which are LPs or the functional equivalent to a LP, that hold real estate and one functional equivalent to a LP that performs upper extremity surgery management and support services under the VIE model via our general partnership interest that give us decision making power over the activities that most significantly impact the economic performance of these entities, gives the Company the obligation to absorb losses and provides the Company with the right to receive returns that would be significant to the VIEs. Our variable interest in these entities is our equity ownership. Prior to our adoption of ASU No. 2015-02, we consolidated these entities under the voting interest model.

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The carrying amounts and classifications of the assets and liabilities included in our condensed consolidated balance sheets at March 31, 2016 and December 31, 2015 that relate to VIEs we consolidate were as follows:

 

 

The assets of the consolidated VIEs can only be used to settle the obligations of the VIEs. The creditors of the VIEs have no recourse to us, with the exception of $18.7 million and $4.0 million of debt guaranteed by us at March 31, 2016 and December 31, 2015, respectively. Furthermore, from time to time, the Company may provide short-term working capital loans to these entities as needed. These working capital loans are fully collateralized by the assets of the VIEs, are not significant to the overall operations of the Company, and are eliminated in consolidation.

At March 31, 2016 and December 31, 2015, we held variable interests in entities, of which we were not the primary beneficiary, as follows:

 

As of March 31, 2016, we have a variable interest in 24 facilities, two JV parent entities and two other entities which are VIEs of which we do not control the activities that most significantly impact the economic performance of the entities. The variable interest we hold in the 24 facilities and one of the JV parent entities is an equity ownership and a management services agreement, and we account for this equity ownership as an equity method investment. Prior to our adoption of ASU No. 2015-02, we consolidated one of these facilities and accounted for 23 of these facilities and the JV parent entity as equity method investments. Our adoption of ASU No. 2015-02 resulted in the deconsolidation of one of these facilities at January 1, 2016 (see Note 2 for further discussion).

As of March 31, 2016, we own a limited partnership interest in two other entities which hold real estate and are VIEs of which we do not have substantive participating rights (those rights that enable the holder to block or participate in certain significant financial and operating decisions of the entity) or substantive kick-out rights (those rights that enable the holder to replace the general partner or to liquidate the entity). Consequently, we do not have the power over the activities that most significantly impact the economic performance of these VIEs and thus are not the primary beneficiary. We account for these equity ownership interests as equity method investments and our adoption of ASU No. 2015-02 did not change our accounting for these investments.

The Promissory Note payable to us by the Future Texas JV has a fixed interest rate plus a variable component dependent on the earnings of the Future Texas JV. The Promissory Note contains a conversion feature that allows us to convert the Promissory Note into a 49% equity interest in the Future Texas JV at our option upon the occurrence of the renegotiation of certain contractual arrangements. As a result of the financial interest in the earnings of the Future Texas JV held by us via the Promissory Note and the powers granted us in the Promissory Note, we have determined that the Future Texas JV is a VIE; however, because our rights under

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the Promissory Note are participating rights, we do not have the power over the activities that most significantly impact the economic performance of the Future Texas JV and thus we are not the primary beneficiary and do not consolidate it at March 31, 2016. Prior to our adoption of ASU No. 2015-02, we consolidated the Future Texas JV under the VIE model. Due to our adoption of ASU No. 2015-02 on January 1, 2016, we deconsolidated the Future Texas JV (see Note 2 for further discussion). The balance of the Promissory Note is $31.2 million at March 31, 2016 and is included in Other long-term assets on our condensed consolidated balance sheet.

 

The carrying amounts and classifications of the assets and liabilities in the condensed consolidated balance sheets that relate to our variable interest in the VIEs we are not the primary beneficiary and our maximum exposure to loss due to our involvement with these VIEs were as follows:

 

Our maximum exposure to loss as a result of our involvement with these VIEs represents our equity ownership in these VIEs of $40.2 and the amount of the Promissory Note of $31.2 million, at March 31, 2016. Furthermore, from time to time, the Company may provide short-term working capital loans to these entities as needed. These working capital loans are fully collateralized by the assets of the VIE and are not significant to the overall operations of the Company.

 

NOTE 5 — GOODWILL

Goodwill represents the unallocated excess of purchase price over the fair value of identifiable assets and liabilities acquired in business combinations. Goodwill also includes the unallocated excess of purchase price plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair value of identifiable assets and liabilities acquired in the business combination. The following table shows changes in the carrying amount of goodwill for the three-months ended March 31, 2016:

 

 

 

 

NOTE 6 — RESULTS OF OPERATIONS OF NONCONSOLIDATED AFFILIATES

The following summarizes the combined results of operations of our nonconsolidated affiliates:

 

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During the three-months ended March 31, 2016 and 2015, we recorded $0.4 million and $0.2 million, respectively, of amortization expense for definite-lived intangible assets attributable to nonconsolidated affiliates. This expense was included in Equity in net income of nonconsolidated affiliates in our condensed consolidated statements of operations.

During the three-months ended March 31, 2016, we recorded $1.8 million of impairment to our investments in nonconsolidated affiliates due to a decline in the expected future cash flows of four nonconsolidated affiliates that we determined to be other than temporary. This impairment is included in Equity in net income of nonconsolidated affiliates. The decline in the expected future cash flows was caused by events specific to each impacted facility, as further described below. The impairments included:

Also during the first three months of 2016, we recorded an impairment charge of $0.1 million due to advances previously extended to a nonconsolidated affiliate that were deemed not recoverable.  This impairment is included in Equity in net income of nonconsolidated affiliates in the accompanying condensed consolidated statement of operations.

 

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NOTE 7 — LONG-TERM DEBT

Our long-term debt outstanding consisted of the following:

 

On January 1, 2016 we adopted ASU No. 2015-03 and ASU No. 2015-15 requiring all debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the debt instead of being presented as an asset on the balance sheet. The Company retrospectively adopted the new guidance and reclassified its unamortized debt issuance costs related to the Company's debt from other noncurrent assets to noncurrent portion of debt on our consolidated balance sheets for all periods presented. The balance of unamortized debt issuance costs reclassified as of December 31, 2015 was $7.5 million.

First Quarter 2015 Refinancing Transactions

On March 17, 2015, the Company issued senior unsecured notes due 2023 in the aggregate principal amount of $250 million (the “Senior Notes”) under an Indenture dated March 17, 2015 among the Company, The Bank of New York Mellon Trust Company, N.A., as trustee, and certain wholly-owned subsidiaries of the Company (the “Guarantors”) that are guaranteeing the Senior Notes (the “Indenture”).  Also on March 17, 2015, the Company entered into a $700 million credit agreement with JP Morgan Chase Bank, N.A., as administrative agent and collateral agent, and the other lenders party thereto (the “Credit Agreement”). The Credit Agreement provides for a seven-year, $450 million term loan credit facility (the “Term Loan Facility”) and a five-year, $250 million revolving credit facility (the “Revolving Credit Facility” and together with the Term Loan Facility, collectively, the “Credit Facilities”).  This issuance of the Senior Notes and the entry into the Credit Facilities are collectively referred to herein as the “Refinancing Transactions.”

The net proceeds received by the Company from the sale of the Senior Notes were $245.6 million after deducting the Initial Purchasers’ (as defined below) discount. The Company used all of those net proceeds, together with approximately $381 million of the $450 million borrowed under the Term Loan Facility, to repay all of the outstanding indebtedness (including accrued interest and fees) under the Company’s previous credit facilities (the “Old Credit Facilities”). The remaining approximately $69 million of net proceeds from the Refinancing Transactions was used to pay the transaction costs associated with the Refinancing Transactions and for general corporate purposes.  In connection with the settlement of existing debt upon entering into our Credit Facilities, we incurred debt modification expense of $4.9 million.

          Senior Notes

On March 17, 2015, the Company issued the Senior Notes under the Indenture.  The Senior Notes were sold to Goldman, Sachs & Co. and certain other initial purchasers (the “Initial Purchasers”) in a private placement in reliance on Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). The Senior Notes were expected to be resold by the Initial Purchasers to qualified institutional buyers pursuant to Rule 144A and/or in offshore transactions pursuant to Regulation S under the Securities Act.

The Senior Notes are general unsecured obligations of the Company and are guaranteed by the Guarantors and any subsequently acquired wholly-owned subsidiaries that guarantee certain of the Company’s indebtedness, subject to certain exceptions. The Senior Notes are pari passu in right of payment with all of the existing and future senior debt of the Company, including the Company’s indebtedness under the Credit Facilities, and senior to all existing and future subordinated debt of the Company.

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Interest on the Senior Notes accrues at the rate of 6.00% per annum and is payable semi-annually in arrears on April 1 and October 1, beginning on October 1, 2015. The Senior Notes mature on April 1, 2023.

The Indenture contains certain covenants that, with certain exceptions and qualifications, limit the ability of the Company and the restricted subsidiaries to, among other things, incur or guarantee additional indebtedness and issue certain types of preferred stock; pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness; create liens on assets; make investments; sell assets; engage in transactions with affiliates; create restrictions on the ability of the restricted subsidiaries to pay dividends; and consolidate, merge or transfer substantially all of the Company’s assets.  The Indenture also provides for certain events of default which, if any of them were to occur, would permit or require the principal and accrued interest, if any, on the Senior Notes to become or be declared due and payable (subject, in some cases, to specified grace periods).  The Company believes that it was in compliance with the covenants contained in the Indenture as of March 31, 2016.

          Credit Facilities

On March 17, 2015, the Company entered into the Credit Agreement, which, subject to the terms and conditions set forth therein, provides for the Term Loan Facility and the Revolving Credit Facility. The Credit Agreement includes an accordion feature that, subject to the satisfaction of certain conditions, will allow the Company to add one or more incremental term loan facilities to the Term Loan Facility and/or increase the revolving commitments under the Revolving Credit Facility, in each case based on leverage ratios and minimum dollar amounts, as more particularly set forth in the Credit Agreement.  The interest rate on the Term Loan was 4.25% at March 31, 2016.

The Credit Facilities replaced the Company’s Credit Agreement, dated as of June 29, 2007 (as amended and restated and further amended, the “2007 Credit Agreement”), among the Company, SCA, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and the other lenders party thereto.

Quarterly principal payments on the loans under the Term Loan Facility are payable in equal installments in an amount equal to 0.25% of the aggregate initial principal amount of the loans made under the Term Loan Facility. The loans made under the Term Loan Facility mature and all amounts then outstanding thereunder are payable on March 17, 2022.

The Revolving Credit Facility matures, the commitments thereunder terminate, and all amounts then outstanding thereunder are payable, on March 17, 2020.

Borrowings under the Credit Agreement bear interest, at the Company’s election, either at (1) a base rate determined by reference to the highest of (a) the prime rate of JPMorgan Chase Bank, N.A., (b) the United States federal funds rate plus 0.50% and (c) a LIBOR rate plus 1.00% (provided that, with respect to the Term Loan Facility, in no event will the base rate be deemed to be less than 2.00%) (the “Base Rate”) or (2) an adjusted LIBOR rate (provided that, with respect to the Term Loan Facility, in no event will the adjusted LIBOR rate be deemed to be less than 1.00%) (the “LIBOR Rate”), plus in either case an applicable margin. The applicable margin for borrowings under the Term Loan Facility is 2.25% for Base Rate loans and 3.25% for LIBOR Rate loans. The applicable margin for any borrowings under the Revolving Credit Facility depends on the Company’s senior secured leverage ratio and varies from 0.75% to 1.25% for Base Rate loans and from 1.75% to 2.25% for LIBOR Rate loans.  Interest payments, along with the installment payments of principal, are payable at the end of each quarter.  The following table outlines the applicable margin for each portion of the Credit Facilities:

There was $30.0 million and $15.0 million outstanding under the Revolving Credit Facility as of March 31, 2016 and December 31, 2015, respectively, other than $15.1 million and $4.2 million, respectively, of letters of credit. As of March 31, 2016, the Revolving Credit Facility had a capacity of $204.9 million.

Any utilization of the Revolving Credit Facility in excess of $15.0 million is subject to compliance with a total leverage ratio test and the Company was in compliance with such leverage ratio test as of March 31, 2016. The Company pays a commitment fee of either 0.375% or 0.500% per annum, depending on the Company’s senior secured leverage ratio, on the unused portion of the Revolving Credit Facility.

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The Credit Facilities are guaranteed by SCA and certain of SCA’s direct wholly-owned domestic subsidiaries (the “Credit Agreement Guarantors”), subject to certain exceptions, and borrowings under the Credit Facilities are secured by a first priority security interest in substantially all equity interests of SCA and of each wholly-owned domestic subsidiary directly held by SCA or a Credit Agreement Guarantor.  The Credit Agreement contains a provision that could require prepayment of a portion of our indebtedness if SCA has excess cash flow, as defined by the Credit Agreement. Additionally, the Credit Agreement contains various restrictive covenants that, subject to certain exceptions, prohibit the Company from prepaying certain subordinated indebtedness. The Credit Agreement also generally restricts the Company’s and the Company’s restricted subsidiaries’ ability to, among other things, incur indebtedness or liens, make investments or declare or pay dividends. The Company believes that it was in compliance with these covenants as of March 31, 2016.

Interest Rate Swaps

We use an interest rate risk management strategy that incorporates the use of derivative financial instruments to limit our exposure to interest rate risk. The swaps are “receive floating/pay fixed” instruments that define a fixed rate of interest on the economically hedged debt that the Company will pay, meaning we receive floating rate payments, which fluctuate based on LIBOR, from the counterparty and pay at a fixed rate to the counterparty, the result of which is to convert the interest rate of a portion of our floating rate debt into fixed rate debt, or to limit the variability of interest related payments caused by changes in LIBOR. At March 31, 2016, interest rate swaps of $190.0 million were outstanding.  The aggregate notional amount of $190.0 million in interest rate swaps will terminate on September 30, 2016.

All derivative instruments are recognized on the balance sheet on a gross basis at fair value. The fair value of the interest rate swaps is recorded in the Company’s condensed consolidated balance sheets, either in Other current liabilities and Other long-term liabilities or Prepaids and other current assets and Other long-term assets, depending on the changes in the fair value of the swap and the payments or receipts expected within the next 12 months, with an offsetting adjustment reported as Interest expense in the condensed consolidated statements of operations. At March 31, 2016 and December 31, 2015, $0.7 million and $1.1 million, respectively, was included in Other current liabilities in the condensed consolidated balance sheets based on the fair value of the derivative instruments and the amounts expected to be settled within the next 12 months.  Although all our derivative instruments are subject to master netting arrangements, no amounts have been netted against the gross liabilities previously detailed, and no collateral has been posted with counterparties. During the three-months ended March 31, 2016, the liability related to the swaps decreased by $0.4 million due to swap settlements and an immaterial increase in the change in fair value.

The accounting for changes in fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge related to foreign currency exposure. We previously designated our interest rate swaps as a cash flow hedge; however, the interest rate swaps were de-designated as hedges in the second quarter of 2013.

Credit risk occurs when a counterparty to a derivative instrument fails to perform according to the terms of the agreement. Derivative instruments expose the Company to credit risk and could result in material changes from period to period. The Company minimizes its credit risk by entering into transactions with highly rated counterparties. In addition, at least quarterly, the Company evaluates its exposure to counterparties who have experienced or may likely experience significant threats to their ability to perform according to the terms of the derivative agreements to which we are a party. We have completed this review of the financial strength of the counterparties to our interest rate swaps using publicly available information, as well as qualitative inputs, as of March 31, 2016. Based on this review, we do not believe there is a significant counterparty credit risk associated with these derivative instruments. However, no assurances can be provided regarding our potential exposure to counterparty credit risk in the future.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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NOTE 8 — NONCONTROLLING INTERESTS

The following table shows the breakout of net income (loss) attributable to Surgical Care Affiliates between continuing operations and discontinued operations:

 

The following table shows the effects of changes to Surgical Care Affiliates’ ownership interest in its subsidiaries on Surgical Care Affiliates’ equity:

 

$5.3 million of Contributions from noncontrolling interests in the condensed consolidated statement of changes in equity recorded in the first quarter of 2015 relates to funding from our partners for their pro rata portion of cash transferred for business combinations.

Certain of the Company’s noncontrolling interests have industry specific redemption features whereby the Company could be obligated, under the terms of certain of its operating subsidiaries’ partnership and operating agreements, to purchase some or all of the noncontrolling interests of the consolidated subsidiaries. As a result, these noncontrolling interests are not included as part of the Company’s equity and are carried as Noncontrolling interests-redeemable on the Company’s condensed consolidated balance sheets.

The activity relating to the Company’s noncontrolling interests-redeemable is summarized below:

 

 

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NOTE 9 — FAIR VALUE

The Company follows the provisions of the authoritative guidance for fair value measurements, which address how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP.

The fair value of an asset or liability 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. As a basis for considering assumptions, the authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Assets and liabilities measured at fair value are based on one or more of three valuation techniques, as follows:

Disclosures for Recurring Measurements

Interest Rate Swaps

On a recurring basis, we measure our interest rate swaps at fair value. The fair value of our interest rate swaps is a Level 2 measurement derived from models based upon well recognized financial principles and reasonable estimates about relevant future market conditions and calculations of the present value of future cash flows, discounted using market rates of interest. Further, included in the fair value is approximately $0.1 million related to non-performance risk associated with the interest rate swaps at each of March 31, 2016 and December 31, 2015.

The fair values of our liabilities that are measured on a recurring basis are as follows (in millions):

 

 

Disclosures for Nonrecurring Measurements

Where applicable, on a nonrecurring basis, we measure property and equipment, goodwill, other intangible assets, investments in nonconsolidated affiliates and assets and liabilities of discontinued operations at fair value. The fair values of our property and

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equipment and other intangible assets are determined using discounted cash flows and significant unobservable inputs. The fair value of our investments in nonconsolidated affiliates is determined using discounted cash flows or earnings, or market multiples derived from a set of comparables. The fair value of our assets and liabilities of discontinued operations is determined using discounted cash flows and significant unobservable inputs unless there is an offer to purchase such assets and liabilities, which would be the basis for determining fair value. The fair value of our goodwill is determined using discounted cash flows, and, when available and as appropriate, we use comparative market multiples to corroborate discounted cash flow results. Goodwill is tested for impairment as of October 1 of each year, absent any interim impairment indicators.

During the three-months ended March 31, 2016, we recorded $1.8 million of impairment to our investments in nonconsolidated affiliates due to the decline of future cash flows of such nonconsolidated affiliates that we judged to be other than temporary. This impairment is included in Equity in net income of nonconsolidated affiliates in our consolidated statement of operations.

The investments in nonconsolidated affiliates measured at fair value on a nonrecurring basis was as follows (in millions):

 

The input used by the Company in estimating the value of Level 3 Investment in nonconsolidated affiliates above includes the market multiple of EBITDA. Assumptions used by the Company due to the lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s results of operations. The following table includes information regarding the significant unobservable input used in the estimation of Level 3 fair value measurement (in millions).

 

The following table presents the carrying amounts and estimated fair values of our financial instruments that are classified as long-term liabilities in our condensed consolidated balance sheets (in thousands). The carrying value equals fair value for our financial instruments that are classified as current in our condensed consolidated balance sheets. The carrying amounts of a portion of our long-term debt approximate fair value due to various characteristics, including short-term maturities, call features and rates that are reflective of current market rates. As the inputs are not observable, the fair values are in Level 3 of the fair value hierarchy. For our long-term debt without such characteristics, we determine the fair market value by using quoted market prices, when available, or discounted cash flows to calculate their fair values. The fair values utilize inputs other than quoted prices in active markets, although the inputs are observable either directly or indirectly; accordingly, the fair values are in Level 2 of the fair value hierarchy.

 

 

NOTE 10 — EQUITY-BASED COMPENSATION

We have one active equity-based compensation plan, the 2013 Omnibus Long-Term Incentive Plan, and two legacy equity-based compensation plans, the Management Equity Incentive Plan and the Directors and Consultants Equity Incentive Plan, under

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which we are no longer issuing new awards (together, the “Plans”). The Plans provide or have provided for the granting of options to purchase our stock, restricted stock units (“RSUs”), and performance share awards to key teammates, directors, service providers, consultants and affiliates. We also made stand-alone grants (not under any Plan) of RSUs to an executive officer and three non-employee directors prior to our initial public offering.

Option awards are granted with an exercise price equal to at least the fair market value of the underlying shares at the date of grant. Option awards and RSUs vest based upon the passage of time. Performance share awards vest based upon the passage of time and the Company’s achievement of various performance metrics.

At March 31, 2016, 3,278,558 stock-based awards were outstanding (of which 3,198,158 are awards under the Plans) and 381,088 shares were available for future equity grants under the Plans.

During the first three months of 2016, we issued to certain members of our management team 253,430 time-based RSU awards and 77,272 performance share awards with a fair value of $41.25 per award and 328,783 time-based stock options with an exercise price of $41.25 and a fair value of $11.60 per option. The fair value of these RSUs, performance share awards and options was determined using the policies described in Note 3, Summary of Significant Accounting Policies, and Note 12, Equity-Based Compensation, to the consolidated financial statements of our 2015 Annual Report on Form 10-K.

 

NOTE 11 — INCOME TAXES

The significant components of the provision for income taxes related to continuing operations are as follows:

 

The $1.9 million provision for income tax expense for the three-months ended March 31, 2016 resulted primarily from the application of our estimated effective blended Federal and State income tax rate to the Company's portion of projected pre-tax book income for the current tax year.  The $3.8 million provision for income tax expense for the three-months ended March 31, 2015 was reflective of a full valuation allowance.  Accordingly, the majority of tax expense for that period was due to the amortization of tax goodwill that is not amortized for book purposes, as well as write-offs of book and tax goodwill.

Through the period ended June 30, 2015, the Company had a full valuation allowance recorded against its net deferred tax assets, except for the portion of its deferred tax differences related to goodwill, an asset considered to be an indefinite-lived intangible.  The Company’s assessment of whether a full valuation allowance is appropriate includes review of operating performance, the scheduled reversal of temporary differences and our forecast of taxable income in future periods. Based on management’s review of these factors as of the third quarter 2015, we determined that there was sufficient positive evidence to support the release of a significant portion of the valuation allowance.

The Company continues to maintain a $23.9 million valuation allowance with respect to deferred tax assets recorded for capital loss carryforwards not anticipated to be utilized prior to expiration. We continue to closely monitor actual and forecasted earnings and, if there is a change in management’s assessment of the amount of deferred income tax assets that is realizable, adjustments to the valuation allowance will be made in future periods.

At March 31, 2016, we had federal net operating loss (“NOL”) carryforwards of $79.9 million ($228.3 million on a gross basis). The federal NOLs expire in various amounts at varying times beginning in 2027.  The federal NOL carryfowards as of March 31, 2016 excludes $10.5 million for loss carryforwards resulting from excess tax benefits attributable to share-based awards, the tax benefits of which, when recognized, will be accounted for as a credit to additional paid-in capital when they reduce income taxes payable.

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Our continuing practice is to recognize interest and penalties related to income tax matters in income tax expense, should any be accrued related to uncertain tax positions.

 

NOTE 12 —ASSETS AND LIABILITIES HELD FOR SALE AND DISCONTINUED OPERATIONS

We have closed or sold certain facilities that qualify for reporting as discontinued operations. The assets and liabilities associated with these facilities as of March 31, 2016 and December 31, 2015 are immaterial. Additionally, the accompanying condensed consolidated statements of operations and cash flows reflect the loss, net of income tax expense, and the net cash (used in) provided by operating, investing and financing activities, respectively, associated with these facilities as discontinued operations.

The operating results of discontinued operations were as follows:  

 

We had one property partnership that qualified for reporting as held for sale that did not also qualify for reporting as discontinued operations as of December 31, 2015. The sale of the partnership was completed during the first quarter of 2016. The assets and liabilities associated with this partnership were immaterial as of December 31, 2015. There were no assets or liabilities held for sale that were not discontinued operations as of March 31, 2016.

 

 

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NOTE 13 — RELATED PARTY TRANSACTIONS

TPG Capital BD, LLC, an affiliate of TPG Global, LLC (“TPG”), served as an arranger in connection with the Credit Agreement and was paid an arrangement fee in the amount of aproximately $0.2 million during the three-months ended March 31, 2015. TPG Capital BD, LLC also served as an initial purchaser in connection with the offering of the Senior Notes, which resulted in an aggregate gross spread to TPG Capital BD, LLC of approximately $0.2 million.  In addition, TPG Capital BD, LLC participated in the underwriting of the shares of our common stock that were offered and sold by selling stockholders in March 2015 on the same terms as other underwriters in the offering, which resulted in an aggregate underwriting discount to TPG Capital BD, LLC of approximately $0.4 million.

Certain directors of the Company have received equity-based compensation under the 2013 Omnibus Long-Term Incentive Plan and the Directors and Consultants Equity Incentive Plan as part of their compensation for service on the Company’s Board of Directors and for consulting services provided to the Company. Total expense recognized by the Company related to these options was immaterial for the three-month periods ended March 31, 2016 and 2015.

 

NOTE 14 — COMMITMENTS AND CONTINGENT LIABILITIES

Legal Proceedings

The Company provides services in a highly regulated industry and is subject to various legal actions and regulatory and other governmental and internal audits and investigations from time to time. As a result, we expect that various lawsuits, claims and legal and regulatory proceedings may be instituted or asserted against us, including, without limitation, employment-related claims and medical negligence claims. Additionally, governmental agencies often possess a great deal of discretion to assess a wide range of monetary penalties and fines. We record accruals for contingencies to the extent that we conclude that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described below because the inherently unpredictable nature of legal proceedings may be exacerbated by various factors, including, but not limited to: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes. The outcome of any current or future litigation or governmental or internal investigations cannot be accurately predicted, nor can we predict any resulting penalties, fines or other sanctions that may be imposed at the discretion of federal or state regulatory authorities. Nevertheless, it is reasonably possible that any such penalties, fines or other sanctions could be substantial, and the outcome of these matters may have a material adverse effect on our results of operations, financial position and cash flows and may affect our reputation.

Risk Insurance

Risk insurance for the Company and most of our facilities is provided through SCA’s risk insurance program. We insure our professional liability, general liability, property and workers’ compensation risks through commercial insurance plans placed with unrelated carriers.

Provisions for these risks are based upon market driven premiums and actuarially determined estimates for incurred but not reported exposure under claims-made policies. Provisions for losses within the policy deductibles represent the estimated ultimate net cost of all reported and unreported losses incurred through the consolidated balance sheet dates. Those estimates are subject to the effects of trends in loss severity and frequency. While we believe the provisions for losses are adequate, we cannot be sure the ultimate costs will not exceed our estimates.

Leases

We lease certain land, buildings and equipment under non-cancelable operating leases expiring at various dates through 2034. We also lease certain buildings and equipment under capital leases expiring at various dates through 2033. Operating leases generally have 3 to 20 year terms with one or more renewal options and with terms to be negotiated at the time of renewal.

 

NOTE 15 — SUBSEQUENT EVENTS

 

Effective April 1, 2016, an indirect wholly owned subsidiary of SCA purchased a 50.0% controlling interest in Gladiolus Surgery Center, L.L.C., which owns and operates an ASC in Fort Myers, Florida, for total cash consideration of $9.3 million.  This ASC is a consolidated facility.

 

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Effective April 1, 2016, SCA entered into an agreement with a health system to manage three ASCs located in Phoenix, Arizona, which are owned by the health system.  These ASCs are managed-only facilities.

 

Effective May 1, 2016, an indirect wholly-owned subsidiary of SCA purchased a 60.0% controlling interest in Dublin Surgery Center, LLC, which owns and operates an ASC in Dublin, Ohio, for total cash consideration of $3.8 million.  This ASC is a consolidated facility.

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Amounts in tables are in millions of U.S. dollars unless otherwise indicated)

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as our consolidated audited financial statements and related notes included in our 2015 Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those contained in forward-looking statements as a result of many factors, including those discussed in this Quarterly Report on Form 10-Q under Part II, “Item 1A. Risk Factors” and in the 2015 Annual Report on Form 10-K under Part I, “Item 1A. Risk Factors.”

OVERVIEW

We are a leading provider of surgical solutions to physicians, health plans, medical groups and health systems to optimize surgical care. We operate one of the largest networks of outpatient surgery facilities in the United States.  As of March 31, 2016, we operated in 33 states and had an interest in and/or operated 186 freestanding ASCs, seven surgical hospitals and one sleep center with 11 locations. Of these 194 facilities, we consolidated the operations of 109 affiliated facilities, had 67 nonconsolidated affiliated facilities and held no ownership in 18 affiliated facilities that contract with us to provide management services only.

Our business model is focused on building strategic relationships with health plans, medical groups and health systems to invest in, develop and optimize facilities in an aligned economic model that enables better access to high-quality care at lower cost. As of March 31, 2016, we owned and operated facilities in partnership with approximately 2,800 physician partners.  We believe that our partnership strategy and comprehensive suite of solutions will enable continued growth by capitalizing on increasing demand for high quality, cost-effective settings of care, the increasing need for scaled partners in healthcare, the transition to a coordinated care delivery model and the trend of physician and health system consolidation.

With the exception of the managed-only facilities, the entities that own our facilities are structured as general partnerships, LPs, LLPs or LLCs in which either one of our subsidiaries or a joint venture is an owner and serves as the general partner, limited partner, managing member or member. Our partners or co-members in these entities are generally licensed physicians, hospitals or health systems.

EXECUTIVE SUMMARY

Our growth strategy continues to include growing the profits at our existing facilities, entering into strategic relationships with health plans, medical groups and health systems, and making selective acquisitions of existing surgical facilities and groups of facilities.

We took steps during the first three months of 2016 to optimize our portfolio by:

 

 

Our consolidated net operating revenues increased $45.6 million, or 19.5%, for the three-months ended March 31, 2016 compared to the three-months ended March 31, 2015. The main factors that contributed to this increase were revenues earned from acquisitions since March 31, 2015, increased rates paid under certain payor contracts and higher acuity case mix. Consolidated net patient revenues per case grew by 2.7% to $1,972 per case for the three-months ended March 31, 2016 from $1,921 per case during the prior year period, reflecting acquisitions of an interest in consolidated facilities with higher rates per case than the average rates at our consolidated facilities, increased rates paid under certain payor contracts and higher acuity case mix. The number of cases at our consolidated facilities increased to 131,433 cases during the three-months ended March 31, 2016 from 112,782 cases during the three-months ended March 31, 2015, largely due to acquisitions since March 31, 2015. Our number of consolidated facilities increased to 109 facilities as of March 31, 2016 from 101 facilities as of March 31, 2015.

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We do not consolidate 67 of the facilities affiliated with us because we do not hold a controlling equity interest in the entities that own those facilities. To assist management in analyzing our results of operations, including at our nonconsolidated facilities, we prepare and disclose a “systemwide” case volume statistic and certain supplemental “systemwide” growth measures, each of which treats our equity method facilities as if they were consolidated. While the revenues generated at our equity method facilities are not recorded in our consolidated financial statements, we believe that systemwide net operating revenues growth and systemwide net patient revenues per case growth are important to understanding our financial performance because they are used by management to help interpret the sources of our growth and provide management with a growth metric incorporating the revenues earned by all of our affiliated facilities, regardless of the accounting treatment. “Systemwide” is a non-GAAP measure which includes the results of both our consolidated and nonconsolidated facilities (without adjustment based on our percentage of ownership). For more information, please see “Our Consolidated Results and Results of Nonconsolidated Affiliates” under “Summary Results of Operations” below.

During the three-months ended March 31, 2016, systemwide net operating revenues grew by 22.3% compared to the prior year period. Systemwide net patient revenues per case grew by 1.8% compared to the prior year period. These increases were due to acquisitions, increased rates paid under certain payor contracts, increased management fee revenues from nonconsolidated acquisitions, and expansion of an existing facility.

At March 31, 2016, we held interests in 106 facilities in partnership with health systems, which facilities include consolidated, equity method and managed-only facilities.  Our health system relationships include local, regional and national health systems. We typically have co-development arrangements with our health system partners to jointly develop a network of outpatient surgery centers in a defined geographic area. These co-development arrangements are an important source of differentiation and potential growth of our business. We expect our co-development and acquisition activity to continue with a major focus on creating partnerships with health plans, medical groups and health systems as we continue to position ourselves as a partner of choice.

Our Consolidated Subsidiaries and Nonconsolidated Affiliates

At facilities where we serve as an owner and day-to-day manager, we have significant influence over the operations of such facilities. When we have control of the facility, we account for our investment in the facility as a consolidated subsidiary. When this influence does not represent control of the facility, but we have the ability to exercise significant influence over operating and financial policies, we account for our investment in the facility under the equity method and treat the facility as a nonconsolidated affiliate. Our net earnings from a facility are the same under either method, but the classification of those earnings in our condensed consolidated statements of operations differs.

For our consolidated subsidiaries, our financial statements reflect 100% of the revenues and expenses for these subsidiaries, after elimination of intercompany transactions and accounts. The net income attributable to owners of our consolidated subsidiaries, other than us, is classified within the line item Net income attributable to noncontrolling interests.

For our nonconsolidated affiliates, our condensed consolidated statements of operations reflect our earnings from such facilities in two line items:

Our equity in net income of nonconsolidated affiliates is primarily a function of the performance of our nonconsolidated affiliates and our percentage of ownership interest in those affiliates. However, our net patient revenues and associated expense line items only contain the results from our consolidated facilities. As a result of this incongruity in our reported results, management uses a variety of supplemental information to analyze our results of operations, including:

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While revenues of our nonconsolidated affiliates are not recorded in our net operating revenues, we believe this information is important in understanding our financial performance because these revenues are typically the basis for calculating the line item Management fee revenues and, together with the expenses of our nonconsolidated affiliates, are the basis for deriving the line item Equity in net income of nonconsolidated affiliates.

 

key measures

Facilities

Changes in our ownership of individual facilities and related changes in how we account for such facilities drive changes in our consolidated results from period to period in several ways, including:

We took several steps during the three-months ended March 31, 2016 to optimize our facility portfolio by acquiring and closing certain consolidated facilities.

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The following table presents a breakdown of the changes in the number of consolidated, nonconsolidated and managed-only facilities during the periods presented.

 

Revenues

Our consolidated net operating revenues for the three-months ended March 31, 2016 and 2015 were $279.7 million and $234.1 million, respectively.

Given the number of our nonconsolidated facilities, driven by the success of our health system and physician partnership growth strategy, we review nonconsolidated facility revenues and also manage our facilities utilizing certain supplemental systemwide growth metrics.

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The following table summarizes our systemwide net operating revenues growth, systemwide net patient revenues per case growth, same site systemwide net operating revenues growth and same site systemwide net patient revenues per case growth.

 

 

Three-Months Ended March 31, 2016 Compared to Three-Months Ended March 31, 2015

Our consolidated net operating revenues increased by $45.6 million, or 19.5%, for the three-months ended March 31, 2016 to $279.7 million from $234.1 million for the three-months ended March 31, 2015. Consolidated net patient revenues per case increased by 2.7% to $1,972 per case during the three-months ended March 31, 2016 from $1,921 per case during the three-months ended March 31, 2015.

For the three-months ended March 31, 2016, systemwide net operating revenues grew by 22.3% compared to the three-months ended March 31, 2015. In addition, for the three-months ended March 31, 2016, systemwide net patient revenues per case grew by 1.8% compared to the three-months ended March 31, 2015.

The following table quantifies several significant items impacting our consolidated net operating revenues growth and net operating revenues growth of our nonconsolidated affiliates on a period-over-period basis:

 

 

Summary of Key Line Items

Net Operating Revenues

The majority of our net operating revenues consists of net patient revenues from the facilities we consolidate for financial reporting purposes. Net patient revenues are derived from fees we collect from insurance companies, Medicare, Medicaid, state

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workers’ compensation programs, patients and other payors in exchange for providing the facility and related services and supplies a physician requires to perform a surgical procedure. Our Net operating revenues also includes the line item Management fee revenues, which includes fees we earn from managing the facilities that we do not consolidate for financial reporting purposes. The line item Other revenues is composed of other ancillary services and fees received for anesthesia services. The physicians who perform procedures at our facilities bill and collect from their patients and other payors directly for their professional services, and their revenues from such professional services are not included in our net operating revenues.

 

Net Patient Revenues

Net patient revenues are recorded during the period in which the healthcare services are provided, based upon the estimated amounts due from insurance companies, patients and other government and third-party payors, including federal and state agencies (under the Medicare and Medicaid programs), state workers’ compensation programs and employers.

The following table presents a breakdown by payor source of the percentage of net patient revenues at our consolidated and nonconsolidated facilities for the periods presented:

 

Consolidated Facilities

 

Nonconsolidated Facilities

 

The majority of our net patient revenues are related to patients with commercial health insurance coverage. Reimbursement rates have been relatively stable, on an average basis, across our portfolio.

Medicare accounted for 20% of our net patient revenues for the three-months ended March 31, 2016 and 19% of our net patient revenues for the three-months ended March 31, 2015. The Medicare program is subject to statutory and regulatory changes, possible retroactive and prospective rate adjustments, administrative rulings, freezes and funding reductions, all of which may adversely affect the level of payments to our facilities. Significant spending reductions mandated by the Budget Control Act of 2011 (the “BCA”) impacting the Medicare program went into effect on March 1, 2013. Under the BCA, the percentage reduction for Medicare may not be more than 2% for a fiscal year, with a uniform percentage reduction across all providers. The impact from these spending reductions has not been material to our results. The Medicare payment update for ASCs for federal fiscal year 2016 is a net increase of 0.3%, consisting of 0.8% inflation minus a 0.5% productivity adjustment.  We do not expect this update to materially affect our results.

For the three-months ended March 31, 2016, the net patient revenues from our consolidated facilities located in each of Texas and California represented approximately 21% and 10%, respectively, of our total net patient revenues. Additionally, the net patient revenues from our consolidated facilities located in each of Alabama, Florida, Illinois, Idaho and North Carolina represented more than 5% of our total net patient revenues for the three-months ended March 31, 2016. As of March 31, 2016, 29 of our 67

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nonconsolidated facilities accounted for as equity method investments were located in California, and 14 of these 67 facilities were located in Indiana.

Management Fee Revenues

Management fee revenues consist of management fees that we receive from managing the day-to-day operations of the facilities that we do not consolidate for financial reporting purposes.  Management fee revenues represented 5.0% and 6.0% of our net operating revenues for the three-months ended March 31, 2016 and 2015, respectively.

Operating Expenses

Salaries and Benefits

Salaries and benefits represent the most significant cost to us and include all amounts paid to full- and part-time teammates, including all related costs of benefits provided to such teammates. Salaries and benefits expense represented 35.4% and 35.6% of our net operating revenues for the three-months ended March 31, 2016 and 2015, respectively.

Supplies

Supplies expense includes all costs associated with medical supplies used while providing patient care at our consolidated facilities. Our supply costs primarily include sterile disposables, pharmaceuticals, implants and other similar items. Supplies expense represented 23.7% and 21.1% of our net operating revenues for the three-months ended March 31, 2016 and 2015, respectively.  Supplies expense is typically closely related to case volume, the timing of purchases and case mix, as an increase in the acuity of cases and the use of implants in those cases tend to drive supplies expense higher.

Other Operating Expenses

Other operating expenses consists primarily of expenses related to insurance premiums, contract services, legal fees, repairs and maintenance, professional and licensure dues, office supplies and miscellaneous expenses. Other operating expenses do not generally correlate with changes in net patient revenues.

Occupancy Costs

Occupancy costs include facility rent and utility and maintenance expenses. Occupancy costs do not generally correlate with changes in net patient revenues.

         Provision for Doubtful Accounts

We write off uncollectible accounts against the allowance for doubtful accounts after exhausting collection efforts and adding subsequent recoveries. Net accounts receivable includes only those amounts we estimate we will collect. We perform an analysis of our historical cash collection patterns and consider the impact of any known material events in determining the allowance for doubtful accounts. In performing our analysis, we consider the impact of any adverse changes in general economic conditions, business office operations, aging of accounts receivable, payor mix or trends in federal or state governmental healthcare coverage.

HealthSouth Option Expense

HealthSouth Corporation (“HealthSouth”) held an option to purchase equity securities constituting 5% of the equity securities issued and outstanding as of the closing of our acquisition by TPG in 2007 on a fully diluted basis.  The option became exercisable upon certain customary liquidity events, including a public offering of shares of our common stock that results in 30% or more of our common stock being listed or traded on a national securities exchange. Once vested, the option was exercisable on a net exercise basis.

The option’s value as of March 31, 2015 was $9.8 million, and the entire amount was expensed in the first quarter of 2015. On April 9, 2015, HealthSouth exercised the option at a value of $11.7 million. Accordingly, an additional $1.9 million of expense was recorded in the second quarter of 2015.  There was no similar expense in the first quarter of 2016.

Debt Modification Expense

In conjunction with the refinancing of our corporate debt in the first quarter of 2015, we recognized $4.9 million of debt modification expense. There was no similar expense in the first quarter of 2016.

Loss on Extinguishment of Debt

In conjunction with the refinancing of our corporate debt in the first quarter of 2015, we recognized a $0.5 million loss on extinguishment of debt. There was no similar loss in the first quarter of 2016.

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Provision for Income Tax Expense

Since substantially all of our facilities are organized as general partnerships, LPs, LLPs or LLCs, which are not taxed at the entity level for federal income tax purposes and are only taxed at the entity level in five states for state income tax purposes, substantially all of our tax expense is attributable to Surgical Care Affiliates.  For the prior year, because we had a full valuation allowance booked against net deferred tax assets, our tax expense was based primarily on the amortization of tax goodwill and write-offs of book and tax goodwill. Thus, tax expense and the effective tax rate for the prior year did not bear a direct relationship to pre-tax income.  For the current tax year, tax expense will not bear a logical relationship to pre-tax income because the expense is substantially attributable to Surgical Care Affiliates, and pre-tax income includes income attributable to noncontrolling interests.

Net Income (Loss) Attributable to Surgical Care Affiliates

Net income (loss) attributable to Surgical Care Affiliates is derived by subtracting net income attributable to noncontrolling interests from net income. Net income includes certain revenues and expenses that are incurred only through our wholly-owned subsidiaries and, therefore, do not impact net income attributable to noncontrolling interests. These revenues and expenses include management fee revenues, interest expense related to Surgical Care Affiliates’ debt, losses or gains on sales of investments and provision for income taxes. In periods where net income is negatively affected by these non-shared revenues and expenses, the deduction of net income attributable to noncontrolling interests from net income can result in a net loss attributable to Surgical Care Affiliates in periods where net income is positive.

 

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Summary Results of Operations

Three-Months Ended March 31, 2016 Compared to Three-Months Ended March 31, 2015

Our Consolidated Results and Results of Nonconsolidated Affiliates

The following table shows our results of operations and the results of operations of our nonconsolidated affiliates for the three-months ended March 31, 2016 and 2015:

 

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Note: Totals above may not sum due to rounding.

Net Operating Revenues

Our consolidated net operating revenues increased $45.6 million, or 19.5%, for the three-months ended March 31, 2016 compared to the three-months ended March 31, 2015. The main factors that contributed to this increase were revenues earned from acquisitions, increased rates paid under certain payor contracts and higher acuity case mix. Consolidated net patient revenues per case grew by 2.7% to $1,972 per case for the three-months ended March 31, 2016 from $1,921 per case during the prior year period, reflecting acquisitions of facilities with higher rates per case than the average rates at our consolidated facilities, increased rates paid under certain payor contracts and higher acuity case mix. The number of cases at our consolidated facilities increased to 131,433 cases during the three-months ended March 31, 2016 from 112,782 cases during the three-months ended March 31, 2015, largely due to acquisitions since March 31, 2015. Our number of consolidated facilities increased to 109 facilities as of March 31, 2016 from 101 facilities as of March 31, 2015.

For the three-months ended March 31, 2016, systemwide net operating revenues grew by 22.3% compared to the three-months ended March 31, 2015. The growth in systemwide net operating revenues was largely due to acquisitions. The increased management fee revenues from acquisitions made subsequent to the prior year first quarter, increased rates earned under certain payor contracts and expansion of an existing facility also contributed to growth in systemwide net operating revenues. In addition, for the three-months ended March 31, 2016, systemwide net patient revenues per case grew by 1.8% compared to the three-months ended March 31, 2015, due to the acquisitions described above as well as increased rates paid under certain payor contracts.

Equity in Net Income of Nonconsolidated Affiliates

Equity in net income of nonconsolidated affiliates decreased $0.3 million, or 2.1%, to $11.8 million during the three-months ended March 31, 2016 from $12.1 million during the three-months ended March 31, 2015. Equity in net income of nonconsolidated affiliates decreased due to $1.9 million of equity method impairments recorded during the first quarter of 2016 and the consolidation of one facility that was previously accounted for as an equity method investment in the first quarter of 2015.  This decrease was partially offset by the acquisition of several noncontrolling interests in facilities since March 31, 2015 and the deconsolidation of a facility since March 31, 2015 (i.e., the facility became an equity method facility rather than a consolidated facility).

Additionally, changes in our ownership amounts in equity method facilities and changes in the profitability of those equity method facilities also impacted equity in net income of nonconsolidated affiliates.

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Salaries and Benefits

Salaries and benefits expense for consolidated facilities increased $15.6 million, or 18.7%, to $99.0 million for the three-months ended March 31, 2016 from $83.4 million for the three-months ended March 31, 2015 due to the addition of teammates of newly acquired consolidated facilities, annual salary increases and corporate investments related to operations and development.

Supplies

Supplies expense for consolidated facilities increased $16.8 million, or 34.0%, to $66.2 million for the three-months ended March 31, 2016 from $49.4 million for the three-months ended March 31, 2015. Supplies expense per case increased by 15.0% during the three-months ended March 31, 2016, as compared to the prior year period, primarily due to changes in case mix and inflation.

Other Operating Expenses

Other operating expenses for consolidated facilities increased $8.2 million, or 22.3%, to $44.9 million for the three-months ended March 31, 2016 from $36.7 million for the three-months ended March 31, 2015. This increase was primarily attributable to the incurrence of certain additional costs resulting from our organizational growth through acquisitions.

Depreciation and Amortization

Depreciation and amortization expense for consolidated facilities increased $7.1 million, or 46.7%, to $22.3 million for the three-months ended March 31, 2016 from $15.2 million for the three-months ended March 31, 2015, primarily due to consolidated acquisitions, a correction booked in 2016 related to leasehold improvements and the addition of new capitalized assets since March 31, 2015.

Occupancy Costs

Occupancy costs for consolidated facilities increased $2.4 million, or 29.3%, to $10.6 million for the three-months ended March 31, 2016 from $8.2 million for the three-months ended March 31, 2015, primarily due to acquisitions and organizational growth after the prior year period.

Provision for Doubtful Accounts

The provision for doubtful accounts for consolidated facilities decreased to $3.9 million for the three-months ended March 31, 2016 as compared to $4.2 million during the three-months ended March 31, 2015. The provision for doubtful accounts as a percentage of net patient revenues was relatively consistent at 1.5% and 1.9% for three-months ended March 31, 2016 and 2015, respectively.

Interest Expense

Interest income for consolidated facilities increased $4.0 million, or 45.5%, to $12.8 million for the three-months ended March 31, 2016 from $8.8 million for the three-months ended March 31, 2015, primarily due to the refinancing of our indebtedness during March 2015.

Interest Income

Interest income for consolidated facilities increased to $4.4 million for the three-months ended March 31, 2016 as a result of our adoption of ASU No. 2015-02 and the related deconsolidation of the Future Texas JV (see Note 2 for further discussion). The Company holds a $31.2 million promissory note, at March 31, 2016, payable by the Future Texas JV which contains a fixed interest rate plus a variable component dependent on the earnings of the Future Texas JV. The promissory note was previously eliminated upon consolidation and the related interest income reduced distributions to noncontrolling interest, however, as a result of the deconsolidation, the note and related interest are now included in Other long-term assets on our condensed consolidated balance sheet and Interest income on our condensed consolidated statement of operations, respectively.

Gain on Sale of Investments

We recognized gains on sale of investments of $4.2 million and $1.9 million for the three-months ended March 31, 2016 and 2015, respectively. The gains recognized during the three-months ended March 31, 2016 were primarily due to a correction related to sales and syndications of investments in consolidated facilities during prior years and the sale of a nonconsolidated facility.  The gains recognized during the three-months ended March 31, 2015 were primarily due to the sale of the right to manage a facility held as an equity method investment.

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Provision for Income Tax Expense

For the three-months ended March 31, 2016, income tax expense was $1.9 million, representing an effective tax rate of 4.9%, compared to an expense of $3.8 million, representing an effective tax rate of 14.3%, for the three-months ended March 31, 2015. The $1.9 million tax expense for the three-months ended March 31, 2016 included $1.7 million of deferred tax attributable to the Company’s portion of pre-tax income, and $0.2 million of state income taxes accrued by subsidiaries with separate state tax filing requirements, including $0.2 million attributable to noncontrolling interests. The $3.8 million tax expense for the three-months ended March 31, 2015 was reflective of a full valuation allowance and included $3.6 million attributable to the tax amortization of goodwill, an indefinite-lived intangible, as well as write-offs of book and tax goodwill, and $0.2 million of state income taxes accrued by subsidiaries with separate state tax filing requirements, including $0.2 million attributable to noncontrolling interests.

For the prior year, because we had a full valuation allowance booked against net deferred tax assets, our tax expense was based primarily on the amortization of tax goodwill and write-offs of book and tax goodwill. Thus, tax expense and the effective tax rate for the prior year did not bear a direct relationship to pre-tax income.  For the current tax year, tax expense will not bear a logical relationship to pre-tax income because the expense is substantially attributable to Surgical Care Affiliates, and pre-tax income includes income attributable to noncontrolling interests.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests increased $4.7 million, or 15.4%, to $35.2 million for the three-months ended March 31, 2016 from $30.5 million for the three-months ended March 31, 2015. The increase in our consolidated net operating revenues, as described above, drove an increase in consolidated facilities’ net income.  In addition, prior to the deconsolidation of the Future Texas JV, the interest income related to the promissory note with the Future Texas JV served as a reduction to noncontrolling interest expense. Most of our consolidated facilities include noncontrolling owners. An increase in the earnings of these facilities resulted in an increase in net income attributable to noncontrolling interests.

Net Income (Loss) Attributable to Surgical Care Affiliates

Net income (loss) attributable to Surgical Care Affiliates increased $11.6 million to $2.4 million of net income for the three-months ended March 31, 2016 from net loss of $9.2 million for the three-months ended March 31, 2015.  The increase was driven by growth in earnings from acquisitions and lower income tax expense.

Results of Discontinued Operations

We have closed or sold certain facilities that qualify for reporting as discontinued operations. The operating results of discontinued operations were as follows:

 

The operating results of discontinued operations for the three-months ended March 31, 2016 were immaterial. The net loss from our discontinued operations is included in the line item Loss from discontinued operations, net of income tax expense in the condensed consolidated financial statements.

 

 

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Liquidity and Capital Resources

Our primary cash requirements are paying our operating expenses, making distributions to noncontrolling interests, financing acquisitions of interests in ASCs and surgical hospitals, servicing our existing debt and making capital expenditures. These continuing liquidity requirements have been and will continue to be significant. The following chart shows the cash flows provided by or used in operating, investing and financing activities of continuing and discontinued operations (in the aggregate) for the three-months ended March 31, 2016 and 2015:

 

Cash Flows Provided by Operating Activities

Cash flows provided by operating activities is primarily derived from net income before deducting non-cash charges for depreciation and amortization.

 

During the three-months ended March 31, 2016, we generated $61.5 million of cash flows provided by operating activities compared to $38.6 million during the three-months ended March 31, 2015. Cash flows from operating activities increased $22.9 million, or 59.3%, from the prior year period, primarily due to a $23.4 million increase in net income before depreciation and amortization.

Cash Flows Used in Investing Activities

During the three-months ended March 31, 2016, our net cash used in investing activities was $64.6 million, consisting primarily of $51.4 million for business acquisitions, net of cash acquired and $27.5 million of capital expenditures, partially offset by $17.8 million of proceeds from disposal of assets. Cash flows used in investing activities increased $43.9 million, or 212.1%, from the prior year period, primarily due to an increase in cash outflows for business acquisitions and capital leases, partially offset by an increase in cash inflows from proceeds from disposal of assets.

Cash Flows (Used In) Provided by Financing Activities

 

Net cash used in financing activities for the three-months ended March 31, 2016 was $30.1 million, consisting primarily of $40.2 million of distributions to noncontrolling interests, which primarily related to existing facilities, and $19.1 million of principal payments on long-term debt, partially offset by $30.3 million of long-term debt borrowings. Net cash used in financing activities decreased $97.4 million, or 144.7%, from the prior year period, primarily due to net long-term debt borrowings in conjunction with our refinancing transactions completed in March 2015.

Cash and cash equivalents were $46.0 million at March 31, 2016 as compared to $79.3 million at December 31, 2015. Cash and cash equivalents consist of cash on hand, demand deposits with financial institutions (reduced by the amount of outstanding checks and drafts where the right of offset exists for such bank accounts) and short-term, highly liquid investments. We consider all highly liquid investments with original maturities of 90 days or less, such as certificates of deposit, money market funds and commercial

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paper, to be cash equivalents. The overall working capital position at March 31, 2016 was $32.3 million compared to $56.8 million at December 31, 2015, a decrease of $24.5 million, or 43.1%. This decrease was primarily driven by a decrease in cash and cash equivalents.

Based on our current level of operations, we believe cash flow from operations and available cash, together with available borrowings under the Revolving Credit Facility (as defined below), will be adequate to meet our short-term (12 months or less) and longer-term (less than five years) liquidity needs.

Debt

Our primary sources of funding have been the incurrence of debt and cash flows from operations. In the future, our primary sources of liquidity are expected to be cash flows from operations and additional funds available under the Revolving Credit Facility.

First Quarter 2015 Refinancing Transactions

On March 17, 2015, the Company issued $250 million aggregate principal amount of its 6.00% senior unsecured notes due 2023 (the “Senior Notes”) under an Indenture dated March 17, 2015 (the “Indenture”).  Also, on March 17, 2015, the Company entered into a $700 million credit agreement (the “Credit Agreement”). The Credit Agreement provides for a seven-year, $450 million term loan credit facility (the “Term Loan Facility”) and a five-year, $250 million revolving credit facility (the “Revolving Credit Facility” and together with the Term Loan Facility, collectively, the “Credit Facilities”).

The net proceeds received by the Company from the sale of the Senior Notes was $245.6 million after deducting the initial purchasers’ discount. The Company used the net proceeds from the sale of the Senior Notes, together with approximately $381 million of the aggregate of $450.0 million in principal amount of borrowings under the Company’s Term Loan Facility (collectively, the “Refinancing Transactions”), to repay all of the outstanding indebtedness (including accrued interest and fees) under the Company’s then existing credit facilities. The remaining approximately $69 million of net proceeds from the Refinancing Transactions was used to pay the transaction costs associated with the Refinancing Transactions and for general corporate purposes.  In connection with the settlement of existing debt upon entering into our Credit Agreement, we incurred debt modification costs of $4.9 million.

          Senior Notes

On March 17, 2015, the Company issued the Senior Notes under the Indenture.  The Senior Notes are general unsecured obligations of the Company and are guaranteed by certain wholly-owned subsidiaries of the Company and any subsequently acquired wholly-owned subsidiaries that guarantee certain of the Company’s indebtedness, subject to certain exceptions. The Senior Notes are pari passu in right of payment with all of the existing and future senior debt of the Company, including the Company’s indebtedness under the Credit Facilities, and senior to all existing and future subordinated debt of the Company.

Interest on the Senior Notes accrues at the rate of 6.00% per annum and is payable semi-annually in arrears on April 1 and October 1, beginning on October 1, 2015. The Senior Notes mature on April 1, 2023.

The Indenture contains various customary affirmative and restrictive covenants, which are subject to certain significant exceptions. As of March 31, 2016, we believe that we were in compliance with these covenants.

          Credit Facilities

On March 17, 2015, the Company entered into the Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and the other lenders party thereto. The Credit Agreement, subject to the terms and conditions set forth therein, provides for a seven-year, $450 million Term Loan Facility and a five-year, $250 million Revolving Credit Facility. The Credit Agreement also includes an accordion feature that, subject to the satisfaction of certain conditions, will allow the Company to add one or more incremental term loan facilities to the Term Loan Facility and/or increase the revolving commitments under the Revolving Credit Facility, in each case based on leverage ratios and minimum dollar amounts, as more particularly set forth in the Credit Agreement.  The interest rate on the Term Loan was 4.25% at March 31, 2016.

The Credit Facilities replaced the Company’s credit agreement, dated as of June 29, 2007 (as amended and restated and further amended, the “2007 Credit Agreement”), among the Company, SCA, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and the other lenders party thereto.

Quarterly principal payments on the loans under the Term Loan Facility are payable in equal installments in an amount equal to 0.25% of the aggregate initial principal amount of the loans made under the Term Loan Facility. The loans made under the Term Loan Facility mature and all amounts then outstanding thereunder are payable on March 17, 2022.

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The following table indicates the current maturity date of the Credit Facilities:

 

Borrowings under the Credit Agreement bear interest, at the Company’s election, either at (1) a base rate determined by reference to the highest of (a) the prime rate of JPMorgan Chase Bank, N.A., (b) the United States federal funds rate plus 0.50% and (c) a LIBOR rate plus 1.00% (provided that, with respect to the Term Loan Facility, in no event will the base rate be deemed to be less than 2.00%) (the “Base Rate”) or (2) an adjusted LIBOR rate (provided that, with respect to the Term Loan Facility, in no event will the adjusted LIBOR rate be deemed to be less than 1.00%) (the “LIBOR Rate”), plus in either case an applicable margin. The applicable margin for borrowings under the Term Loan Facility is 2.25% for Base Rate loans and 3.25% for LIBOR Rate loans. The applicable margin for any borrowings under the Revolving Credit Facility depends on the Company’s senior secured leverage ratio and varies from 0.75% to 1.25% for Base Rate loans and from 1.75% to 2.25% for LIBOR Rate loans.  Interest payments, along with the installment payments of principal, are made at the end of each quarter.  The following table outlines the applicable margin for each portion of the Credit Facilities:

 

There was $30.0 million and $15.0 million outstanding under the Revolving Credit Facility as of March 31, 2016 and December 31, 2015, respectively. At March 31, 2016 and December 31, 2015, we had approximately $15.1 million and $4.2 million, respectively, of letters of credit outstanding under the Revolving Credit Facility. As of March 31, 2016, the Revolving Credit Facility had a capacity of $204.9 million.

Any utilization of the Revolving Credit Facility in excess of $15.0 million is subject to compliance with a total leverage ratio test and the Company was in compliance with such leverage ratio test as of March 31, 2016. At March 31, 2016, we had approximately $15.1 million in letters of credit outstanding that utilize capacity under the Revolving Credit Facility.  We pay a commitment fee of either 0.375% or 0.500% per annum, depending on our senior secured leverage ratio, on the unused portion of the Revolving Credit Facility.

The Credit Facilities are guaranteed by SCA and certain of SCA’s direct wholly-owned domestic subsidiaries (the “Credit Agreement Guarantors”), subject to certain exceptions, and borrowings under the Credit Facilities are secured by a first priority security interest in substantially all equity interests of SCA and of each wholly-owned domestic subsidiary directly held by SCA or a Credit Agreement Guarantor.  The Credit Agreement contains a provision that could require prepayment of a portion of our indebtedness if SCA has excess cash flow, as defined by the Credit Agreement. No such payment was required at March 31, 2016.  Additionally, the Credit Agreement contains various restrictive covenants that, subject to certain exceptions, prohibit us from prepaying certain subordinated indebtedness. The Credit Agreement also generally restricts the Company’s and its restricted subsidiaries’ ability to, among other things, incur indebtedness or liens, make investments or declare or pay dividends. We believe that we were in compliance with these covenants as of March 31, 2016.

Capital Expenditures

Capital expenditures totaled $27.5 million and $8.0 million for the three-months ended March 31, 2016 and 2015, respectively. The capital expenditures made during the three-months ended March 31, 2016 consisted primarily of the purchase of real estate related to the CMIS acquisition and fixture improvements made at our leased facilities, remodeling and expansion of existing facilities and our purchase of medical and other equipment. These capital expenditures were financed primarily through internally generated funds and bank or manufacturer financing. We believe that our capital expenditure program is adequate to improve and equip our existing facilities.

Capital Leases

We engage in a significant number of leasing transactions, including real estate, medical equipment, computer equipment and other equipment utilized in operations. Certain leases that meet the lease capitalization criteria in accordance with authoritative guidance for leases have been recorded as an asset and liability at the net present value of the minimum lease payments at the

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inception of the lease. Interest rates used in computing the net present value of the lease payments generally range from 2.3% to 13.0% based on our incremental borrowing rate at the inception of the lease.

Inflation

For the past three years, inflation has not significantly affected our operating results or the geographic areas in which we operate.

 

 

Off-Balance Sheet Transactions

As a result of our strategy of partnering with physicians and health systems, we do not own controlling interests in many of our facilities. At March 31, 2016, we accounted for 67 of our 194 affiliated facilities under the equity method. Similar to our consolidated facilities, our nonconsolidated facilities have debts, including capitalized lease obligations that are generally non-recourse to us. With respect to our equity method facilities, these debts are not included in our consolidated financial statements. At March 31, 2016, the total debt on the balance sheets of our nonconsolidated affiliates was approximately $67.0 million. Our average percentage ownership of these nonconsolidated affiliates, weighted based on the individual affiliate’s amount of debt and our ownership of such affiliate, was approximately 25% at March 31, 2016. We or one of our wholly-owned subsidiaries collectively guaranteed $16.2 million of the $67.0 million in total debt of our nonconsolidated affiliates as of March 31, 2016. Additionally, our guarantees related to operating leases of nonconsolidated affiliates were $9.3 million at March 31, 2016.

As described above, our nonconsolidated affiliates are structured as general partnerships, LPs, LLPs or LLCs. None of these affiliates provide financing, liquidity, or market or credit risk support for us. They also do not engage in hedging or research and development services with us. Moreover, we do not believe that they expose us to any of their liabilities that are not otherwise reflected in our consolidated financial statements and related disclosures. Except as noted above with respect to guarantees, we are not obligated to fund losses or otherwise provide additional funding to these affiliates other than as we determine to be economically required in order to successfully implement our development plans.

Critical Accounting Policies

General

Our discussion and analysis of our financial condition, results of operations and liquidity and capital resources are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of consolidated financial statements under GAAP requires our management to make certain estimates and assumptions that impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. These estimates and assumptions also impact the reported amount of net earnings during any period. Estimates are based on information available as of the date financial statements are prepared. Accordingly, actual results could differ from those estimates. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and operating results and that require management’s most subjective judgments. Our critical accounting policies and estimates include our policies and estimates regarding consolidation, variable interest entities, revenue recognition, accounts receivable, noncontrolling interests in consolidated affiliates, equity-based compensation, income taxes, goodwill, impairment of long-lived assets and other intangible assets and other than temporary impairments. There were no material changes to our critical accounting policies during the three-months ended March 31, 2016.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our principal market risk is our exposure to variable interest rates. As of March 31, 2016, we had $811.8 million of indebtedness (excluding capital leases), of which $511.5 million is at variable interest rates and $300.3 million is at fixed interest rates. In seeking to reduce the risks and costs associated with such activities, we manage exposure to changes in interest rates primarily through the use of derivatives. We do not use financial instruments for trading or other speculative purposes, nor do we use leveraged financial instruments.

At March 31, 2016, we held interest rate swaps hedging interest rate risk on $190.0 million of our variable rate debt through two forward starting interest rate swaps with an aggregate notional amount of $190.0 million, which we entered into during 2011. These swaps are “receive floating/pay fixed” instruments, meaning we receive floating rate payments, which fluctuate based upon LIBOR, from the counterparty and provide payments to the counterparty at a fixed rate, the result of which is to convert the interest rate of a portion of our floating rate debt into fixed rate debt in order to limit the variability of interest-related payments caused by changes in LIBOR. The aggregate notional amount of $190.0 million in forward starting interest rate swaps will terminate on September 30, 2016. Assuming a 100 basis point increase in LIBOR on our un-hedged debt at March 31, 2016, our annual interest expense would increase by approximately $2.9 million.

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Counterparties to the interest rate swaps discussed above expose us to credit risks to the extent of their potential non-performance. The credit ratings of the counterparties, which consist of investment banks, are monitored at least quarterly. We have completed a review of the financial strength of the counterparties using publicly available information, as well as qualitative inputs, as of March 31, 2016. Based on this review, we do not believe there is a significant counterparty credit risk associated with these interest rate swaps. However, we cannot assure you that these actions will protect us against or limit our exposure to all counterparty or market risks.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We have carried out an evaluation under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2016, the Company’s disclosure controls and procedures are effective in ensuring that material information relating to the Company required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods and is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the Company’s quarter ended March 31, 2016, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

From time to time, we are party to various legal proceedings that have arisen in the normal course of conducting business. See Note 14, Commitments and Contingent Liabilities, to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q for information regarding legal proceedings, which is incorporated herein by reference in response to this item.

 

Item 1A. Risk Factors

 

In addition to the other information contained in this Quarterly Report on Form 10-Q, the risks and uncertainties that we believe could materially affect our business, financial condition or future results and are most important for you to consider are discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015. Additional risks and uncertainties which are not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also materially and adversely affect any of our business, financial position or future results.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosure

Not applicable.

 

Item 5. Other Information

 

None.

 

 

 

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Item 6. Exhibits

 

 

 

 

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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.

 

 

 

 

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EXHIBIT INDEX

 

 

 

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