10-Q 1 a2014q2form10q.htm 10-Q 2014 Q2 FORM 10Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________
Form 10-Q
(Mark One)
T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
or
o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
Commission file number:  000-50574
Symbion, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
62-1625480
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

40 Burton Hills Boulevard, Suite 500
Nashville, Tennessee 37215
(Address of principal executive offices and zip code)
(615) 234-5900
(Registrant’s telephone number, including area code) 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  o  No  x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer x
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No  x
None of the registrant’s common stock is held by non-affiliates.
As of August 8, 2014, there were 1,000 shares of the registrant’s common stock outstanding.
 



SYMBION, INC.
FORM 10-Q
TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
 
 
 
 
Signatures




PART 1 - FINANCIAL INFORMATION

Item 1.  Financial Statements

SYMBION, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except shares and per share amounts)
 
 
June 30,
2014
 
December 31,
2013
 
 
 
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
50,793

 
$
55,792

Accounts receivable, less allowance for doubtful accounts of $16,409 and $16,939 at June 30, 2014 and December 31, 2013, respectively
 
78,597

 
77,630

Inventories
 
17,037

 
17,080

Prepaid expenses and other current assets
 
10,103

 
9,594

Current assets of discontinued operations
 
1,428

 
2,580

Total current assets
 
157,958

 
162,676

Property and equipment, net
 
134,806

 
127,334

Intangible assets, net
 
17,391

 
18,566

Goodwill
 
661,179

 
661,758

Investments in and advances to affiliates
 
6,617

 
6,773

Restricted invested assets
 
315

 
177

Other long-term assets
 
12,838

 
13,957

Long-term assets of discontinued operations
 
1,764

 
15,498

Total assets
 
$
992,868

 
$
1,006,739

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
20,091

 
$
19,132

Accrued payroll and benefits
 
12,947

 
12,102

Other current liabilities
 
32,241

 
33,534

Current maturities of long-term debt
 
10,874

 
8,993

Current liabilities of discontinued operations
 
393

 
1,180

Total current liabilities
 
76,546

 
74,941

Long-term debt, less current maturities
 
569,826

 
550,986

Long-term deferred tax liabilities
 
76,974

 
76,020

Other long-term liabilities
 
65,253

 
61,404

Long-term liabilities of discontinued operations
 
125

 
4,854

 
 
 
 
 
Non-controlling interests—redeemable
 
30,091

 
30,545

 
 
 
 
 
Stockholders' equity:
 
 
 
 
Common stock, $0.01 par value, 1,000 shares authorized, issued and outstanding at June 30, 2014 and December 31, 2013
 
—

 
—

Additional paid-in-capital
 
227,805

 
243,312

Stockholders' notes
 
(485
)
 
(485
)
Retained deficit
 
(118,351
)
 
(106,136
)
Total Symbion, Inc. stockholders' equity
 
108,969

 
136,691

Non-controlling interests—non-redeemable
 
65,084

 
71,298

Total equity
 
174,053

 
207,989

Total liabilities and stockholders' equity
 
$
992,868

 
$
1,006,739



1


See notes to unaudited consolidated financial statements.
SYMBION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
Revenues
 
$
142,210

 
$
132,264

 
$
276,176

 
$
262,647

Operating expenses:
 
 
 
 
 
 
 
 
Salaries and benefits
 
39,122

 
37,182

 
77,142

 
73,788

Supplies
 
36,995

 
36,041

 
70,913

 
70,445

Professional and medical fees
 
11,811

 
10,750

 
22,477

 
21,091

Lease expense
 
6,976

 
6,668

 
13,735

 
13,403

Other operating expenses
 
9,408

 
8,854

 
18,560

 
17,582

Cost of revenues
 
104,312

 
99,495

 
202,827

 
196,309

General and administrative expenses
 
5,530

 
5,283

 
11,175

 
11,124

Depreciation and amortization
 
5,899

 
5,350

 
11,474

 
11,227

Provision for doubtful accounts
 
2,891

 
2,359

 
6,686

 
5,184

Income from equity investments
 
(1,008
)
 
(1,039
)
 
(1,606
)
 
(1,920
)
Loss (gain) on disposal or impairment of long-lived assets, net
 
4

 
7,673

 
(257
)
 
7,181

Proceeds from insurance settlements, net
 
(31
)
 
—

 
(81
)
 
—

Merger transaction costs
 
2,318

 
—

 
2,318

 
—

Litigation settlements, net
 
—

 
(35
)
 
3

 
(198
)
Total operating expenses
 
119,915

 
119,086

 
232,539

 
228,907

Operating income
 
22,295

 
13,178

 
43,637

 
33,740

Interest expense, net
 
(14,491
)
 
(14,643
)
 
(28,856
)
 
(29,396
)
Income (loss) before income taxes and discontinued operations
 
7,804

 
(1,465
)
 
14,781

 
4,344

Provision for (benefit from) income taxes
 
1,429

 
(540
)
 
2,784

 
608

Income (loss) from continuing operations
 
6,375

 
(925
)
 
11,997

 
3,736

Income (loss) from discontinued operations, net of income taxes
 
208

 
2,410

 
(5,934
)
 
2,007

Net income
 
6,583

 
1,485

 
6,063

 
5,743

Less: Net income attributable to non-controlling interests
 
(9,665
)
 
(8,663
)
 
(18,278
)
 
(16,967
)
Net loss attributable to Symbion, Inc.
 
$
(3,082
)
 
$
(7,178
)
 
$
(12,215
)
 
$
(11,224
)
See notes to unaudited consolidated financial statements.



2


SYMBION, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
Net income
 
$
6,583

 
$
1,485

 
$
6,063

 
$
5,743

 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
6,583

 
$
1,485

 
$
6,063

 
$
5,743

Less: Comprehensive income attributable to non-controlling interests
 
(9,665
)
 
(8,663
)
 
(18,278
)
 
(16,967
)
Comprehensive loss attributable to Symbion, Inc.
 
$
(3,082
)
 
$
(7,178
)
 
$
(12,215
)
 
$
(11,224
)
See notes to unaudited consolidated financial statements.




3


SYMBION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited, in thousands, except shares)
 
 
Symbion, Inc.
Common Stock
 
Additional
Paid-in Capital
 
Stockholders' Notes
 
Retained Deficit
 
Non-Controlling Interests—
Non-Redeemable
 
Total
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
 
1,000

 
$
—

 
$
242,597

 
$
—

 
$
(93,516
)
 
$
59,447

 
$
208,528

Net (loss) income
 
 
 
 
 
 
 
 
 
(11,224
)
 
9,095

 
(2,129
)
Stock-based compensation
 
 
 
 
 
103

 
 
 
 
 
 
 
103

Acquisition and disposal of shares of non-controlling interests, net
 
 
 
 
 
1,407

 
 
 
 
 
8,345

 
9,752

Distributions to non-controlling interest—non-redeemable holders
 
 
 
 
 
 
 
 
 
 
 
(7,695
)
 
(7,695
)
Balance at June 30, 2013
 
1,000

 
$
—

 
$
244,107

 
$
—

 
$
(104,740
)
 
$
69,192

 
$
208,559

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
 
1,000

 
$
—

 
$
243,312

 
$
(485
)
 
$
(106,136
)
 
$
71,298

 
$
207,989

Net (loss) income
 
 
 
 
 
 
 
 
 
(12,215
)
 
9,971

 
(2,244
)
Stock-based compensation
 
 
 
 
 
194

 
 
 
 
 
 
 
194

Acquisition and disposal of shares of non-controlling interests, net
 
 
 
 
 
(15,701
)
 
 
 
 
 
(6,383
)
 
(22,084
)
Distributions to non-controlling interest—non-redeemable holders
 
 
 
 
 
 
 
 
 
 
 
(9,802
)
 
(9,802
)
Balance at June 30, 2014
 
1,000

 
$
—

 
$
227,805

 
$
(485
)
 
$
(118,351
)
 
$
65,084

 
$
174,053

See notes to unaudited consolidated financial statements.



4


SYMBION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
 
Six Months Ended
June 30,
 
 
2014
 
2013
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
Net income
 
$
6,063

 
$
5,743

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
 
Loss (income) from discontinued operations, net of income taxes
 
5,934

 
(2,007
)
Depreciation and amortization
 
11,474

 
11,227

Amortization of debt issuance costs and discounts
 
2,027

 
1,928

Payment-in-kind interest expense
 
4,762

 
4,403

Stock-based compensation
 
194

 
103

(Gain) Loss on disposal or impairment of long-lived assets, net
 
(257
)
 
7,181

Deferred income taxes
 
2,645

 
257

Income (loss) from equity investments, net of distributions received
 
225

 
(341
)
Provision for doubtful accounts
 
6,686

 
5,184

Changes in operating assets and liabilities, net of acquisitions and divestitures:
 
 
 
 
Accounts receivable
 
(7,653
)
 
(6,132
)
Other operating assets and liabilities
 
(397
)
 
(6,346
)
Net cash provided by operating activities—continuing operations
 
31,703

 
21,200

Net cash provided by operating activities—discontinued operations
 
478

 
1,467

Net cash provided by operating activities
 
32,181

 
22,667

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of property and equipment, net
 
(11,341
)
 
(8,127
)
Payments for acquisitions, net of cash acquired
 
(434
)
 
(236
)
Proceeds from divestitures
 
313

 
3,137

Other investing activities
 
—

 
2,200

Net cash used in investing activities—continuing operations
 
(11,462
)
 
(3,026
)
Net cash provided by investing activities—discontinued operations
 
3,479

 
3,383

Net cash (used in) provided by investing activities
 
(7,983
)
 
357

 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Borrowings on revolving credit facility
 
10,000

 
—

Principal payments on long-term debt
 
(5,688
)
 
(13,500
)
Borrowings of long-term debt
 
8,694

 
6,525

Payments of debt issuance costs
 
—

 
(488
)
Change in restricted invested assets
 
(138
)
 
792

Distributions to non-controlling interest holders
 
(18,330
)
 
(16,288
)
(Payments related to) proceeds from ownership transactions with consolidated affiliates
 
(23,546
)
 
558

Other financing activities
 
(120
)
 
(23
)
Net cash used in financing activities—continuing operations
 
(29,128
)
 
(22,424
)
Net cash used in financing activities—discontinued operations
 
(69
)
 
(290
)
Net cash used in financing activities
 
(29,197
)
 
(22,714
)
Net (decrease) increase in cash and cash equivalents
 
(4,999
)
 
310

Cash and cash equivalents at beginning of period
 
55,792

 
73,308

Cash and cash equivalents at end of period
 
$
50,793

 
$
73,618

See notes to unaudited consolidated financial statements.


5
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)


1. Organization
Symbion, Inc. (the “Company”), through its wholly-owned subsidiaries, owns interests in partnerships and limited liability companies that own and operate a national network of short stay surgical facilities in joint ownership with physicians and in some cases healthcare systems. As of June 30, 2014, the Company owned and operated 50 surgical facilities, including 44 ambulatory surgery centers ("ASCs") and six surgical hospitals. The Company also managed six ASCs and one physician clinic in a market in which the Company operates an ASC and a surgical hospital. The Company owns a majority ownership interest in 30 of the 50 surgical facilities and consolidates 45 surgical facilities for financial reporting purposes. The Company reported one operating surgical facility in discontinued operations.
The Company is a wholly-owned subsidiary of Symbion Holdings Corporation (“Holdings”), which is owned by an investor group that includes affiliates of Crestview Partners, L.P. ("Crestview"), members of the Company's management and other investors.
2. Merger with Surgery Center Holdings, Inc.
On June 13, 2014, Holdings entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Surgery Center Holdings, Inc. (“Buyer”), Buyer’s wholly-owned subsidiary, SCH Acquisition Corp. (“Merger Sub”), and, solely in its capacity as the Stockholders’ Representative under the Merger Agreement, Crestview Symbion Holdings, L.L.C., an affiliate of Crestview. Pursuant to the terms of the Merger Agreement, Merger Sub is to merge with and into Holdings, with Holdings being the surviving corporation in the merger (the “Merger”). At the closing of the Merger, each share of common stock of Holdings, other than those held by Holdings or by Buyer, Merger Sub or their subsidiaries and other than those shares with respect to which appraisal rights are properly exercised in accordance with the General Corporation Law of the State of Delaware, will be converted into the right to receive a cash payment per share equal to (x) $792.0 million, subject to certain adjustments for Holdings’ cash, debt, transaction expenses, working capital and other items at closing, plus the aggregate exercise price of all vested options, minus certain escrowed amounts relating to post-closing purchase price adjustment and indemnity obligations, divided by (y) the number of shares outstanding on a fully-diluted basis assuming full exercise of vested options and exercise of rights to receive shares upon the exchange of the 8.00% Senior PIK Exchangeable Notes due 2017 issued by Symbion (the “Merger Consideration”). In addition, each outstanding option to purchase shares of Holdings’ common stock will be cancelled, and the holders of vested options will be paid an amount equal to the excess, if any, of the Merger Consideration over the per-share exercise price of such vested options.
Buyer has obtained financing commitments for the transactions contemplated by the Merger Agreement, the aggregate proceeds of which are to be sufficient for Buyer to pay the aggregate Merger Consideration and all related fees and expenses. Consummation of the Merger is not subject to a financing condition, but it is subject to customary closing conditions including (i) the absence of a material adverse effect on Holdings, (ii) the receipt of certain state regulatory approvals and (iii) the expiration or termination of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The parties anticipate that the transactions contemplated by the Merger Agreement will close near the end of the third quarter or early in the fourth quarter of 2014.
3. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, as well as interests in partnerships and limited liability companies controlled by the Company through its ownership of a majority voting interest or other rights granted to the Company by contract to manage and control the affiliate's business. All significant intercompany balances and transactions are eliminated in consolidation.
Non-Controlling Interests
The physician limited partners and physician minority members of the entities that the Company controls are responsible for the supervision and delivery of medical services. The governance rights of limited partners and minority members are restricted to those that protect their financial interests. Under certain partnership and operating agreements governing these partnerships and limited liability companies, the Company could be removed as the sole general partner or managing member for certain events such as material breach of the partnership or operating agreement, gross negligence or bankruptcy. These protective rights do not preclude consolidation of the respective partnerships and limited liability companies.
Non-Controlling Interests—Non-Redeemable
The consolidated financial statements of the Company include all assets, liabilities, revenues and expenses of surgical facilities in which the Company has sufficient ownership and rights to allow the Company to consolidate the surgical facilities. Similar to its investments in non-consolidated affiliates, the Company regularly engages in the purchase and sale of ownership interests with respect to its consolidated subsidiaries that do not result in a change of control. These transactions are accounted for as equity transactions as they are undertaken among the Company, its consolidated subsidiaries and the non-controlling interest holders. The cash flow effect of these transactions is classified within financing activities in the consolidated statements of cash flows.


6
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)

Non-Controlling Interests—Redeemable
Each of the partnerships and limited liability companies through which the Company owns and operates its surgical facilities is governed by a partnership or operating agreement.  In certain circumstances, the partnership and operating agreements for the Company's surgical facilities provide that the facilities will purchase all of the physicians’ ownership if certain adverse regulatory events occur, such as it becoming illegal for the physicians to own an interest in a surgical facility, refer patients to a surgical facility or receive cash distributions from a surgical facility.  The non-controlling interests—redeemable are reported outside of stockholders' equity on the consolidated balance sheets.
A summary of activity related to the non-controlling interests—redeemable follows (in thousands):
Balance at December 31, 2012
 
$
29,269

Net income attributable to non-controlling interests—redeemable
 
7,872

Acquisition and disposal of shares of non-controlling interests—redeemable
 
(338
)
Distributions to non-controlling interest —redeemable holders
 
(8,593
)
Balance at June 30, 2013
 
$
28,210

 
 
 
Balance at December 31, 2013
 
$
30,545

Net income attributable to non-controlling interests—redeemable
 
8,307

Acquisition and disposal of shares of non-controlling interests—redeemable
 
(233
)
Distributions to non-controlling interest —redeemable holders
 
(8,528
)
Balance at June 30, 2014
 
$
30,091

Variable Interest Entities
The consolidated financial statements include the accounts of variable interest entities in which the Company is the primary beneficiary, under the provisions of Accounting Standards Codification Topic 810, Consolidation. The variable interest entities of the Company include a surgical facility located in Florida and a surgical facility located in New York. Regarding the Florida facility, the Company has the power to direct the activities of the facility and has fully guaranteed the facility's debt obligations. The debt obligations are subordinated to such a level that the Company absorbs the majority of the expected losses. The consolidated balance sheets of the Company at June 30, 2014 and December 31, 2013 included total assets of $2.3 million and $2.4 million, respectively, and total liabilities of $1.8 million and $2.0 million, respectively, related to the Florida facility. Effective March 31, 2014, the Company reclassified the New York facility to discontinued operations and, on May 22, 2014, the Company sold this facility. With regard to the New York facility prior to the sale, the Company was the primary beneficiary as it had the power to direct the activities of the facility and the level of variability within the management service agreement as well as the obligation and likelihood of absorbing the majority of expected gains and losses. At December 31, 2013, the discontinued operations line items on the consolidated balance sheet included assets of $14.9 million and liabilities of $936,000 related to the New York facility. See Note 5 on Discontinued Operations and Divestitures for further discussion on the sale of the New York facility.
Equity Method Investments
The Company has non-consolidating investments in surgical facilities and management companies that own or manage surgical facilities and hospitals. These investments are accounted for using the equity method of accounting. The total amount of these investments included in investments in and advances to affiliates on the consolidated balance sheets was $6.6 million and $6.8 million as of June 30, 2014 and December 31, 2013, respectively. The cash flow effect of transactions related to the purchase and sale of ownership interests with respect to the Company's non-consolidated affiliates is classified within investing activities in the consolidated statements of cash flows.
Use of Estimates
The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes. Examples include, but are not limited to, estimates of accounts receivable allowances, insurance liabilities and deferred tax assets or liabilities. In the opinion of the Company's management, all adjustments considered necessary for a fair presentation have been included in the consolidated financial statements. All adjustments are of a normal, recurring nature. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the comparative period's financial statements to conform to the three and six months ended June 30, 2014 presentation. The reclassifications primarily related to the presentation of discontinued operations and non-controlling interests and had no impact on the Company's consolidated financial position, results of operations or cash flows.


7
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)

Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. The Company uses fair value measurements based on quoted prices in active markets for identical assets or liabilities (Level 1), or inputs other than quoted prices in active markets that are either directly or indirectly observable (Level 2), or unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions (Level 3), depending on the nature of the item being valued.
The carrying amounts reported on the consolidated balance sheets for cash and cash equivalents, accounts receivable, restricted invested assets and accounts payable approximate their fair values.
A summary of the carrying amounts and fair values of the Company's long-term debt follows (in thousands):
 
 
Carrying Amount
 
Fair Value
 
 
June 30,
2014
 
December 31,
2013
 
June 30,
2014
 
December 31,
2013
 
 
 
 
 
 
 
 
 
Senior Secured Notes, net of debt issuance discount
 
$
338,679

 
$
338,142

 
$
352,226

 
$
357,585

PIK Exchangeable Notes
 
123,384

 
118,639

 
123,384

 
118,639

Toggle Notes
 
73,307

 
73,475

 
73,307

 
73,475

The fair values of the Senior Secured Notes and Toggle Notes were based on a Level 1 measurement using quoted prices at June 30, 2014 and December 31, 2013, as applicable. The fair value of the PIK Exchangeable Notes was based on a Level 3 measurement, using a Company-specific discounted cash flow analysis. The carrying amounts related to the Company's other long-term debt obligations approximate their fair values.
The Company maintains a supplemental executive retirement savings plan (the "SERP"). The SERP is a non-qualified deferred compensation plan for eligible executive officers and other key employees of the Company that allows participants to defer portions of their compensation. The assets of the SERP and related obligation are recorded on the consolidated balance sheets at fair value. The fair value was determined based on a quoted market price for the underlying investments held in the SERP, or a Level 1 measurement. As of June 30, 2014 and December 31, 2013, the fair values of the SERP assets were $2.0 million and $1.8 million, respectively, which were included in other long-term assets on the consolidated balance sheets. The Company had liabilities related to the SERP of $2.0 million and $1.8 million as of June 30, 2014 and December 31, 2013, respectively, which were included in other long-term liabilities on the consolidated balance sheets.
Revenue Recognition
The Company recognizes revenues in the period in which the services are performed. Patient service revenues and receivables from third-party payors are recorded net of estimated contractual adjustments and allowances from third-party payors, which the Company estimates based on the historical trend of its surgical facilities’ cash collections and contractual write-offs, accounts receivable agings, established fee schedules, relationships with payors and procedure statistics.
A summary of revenues by service type as a percentage of total revenues follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
Patient service revenues
 
99.0
%
 
99.0
%
 
98.9
%
 
99.1
%
Other service revenues
 
1.0
%
 
1.0
%
 
1.1
%
 
0.9
%
Total revenues
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Patient service revenues. Patient service revenues are revenues from healthcare procedures performed in surgical facilities that the Company consolidates for financial reporting purposes.  The fee charged varies depending on the type of service provided, but usually includes all charges for usage of an operating room, a recovery room, special equipment, medical supplies, nursing staff and medications.  The fee does not normally include professional fees charged by the patient’s surgeon, anesthesiologist or other attending physician, which are billed directly by such physicians to the patient or third-party payor.  In a very limited number of surgical facilities, the Company charges for anesthesia services. Patient service revenues are recognized on the date of service, net of estimated contractual adjustments and discounts from third-party payors, including Medicare and Medicaid. 
Other service revenues. Other service revenues consist of management and administrative service fees derived from the non-consolidated surgical facilities that the Company either accounts for using the equity method or does not own an interest. The fees derived from these


8
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)

management arrangements are based on a predetermined percentage of the revenues of each surgical facility and are recognized in the period in which services are rendered.
The following tables set forth patient service revenues by type of payor and as a percentage of total patient service revenues for the Company's consolidated surgical facilities included in continuing operations (dollars in thousands):
 
 
Three Months Ended June 30,
 
 
2014
 
2013
 
 
Amount
 
%
 
Amount
 
%
 
 
 
 
 
 
 
 
 
Private insurance
 
$
80,761

 
57.4
%
 
$
77,530

 
59.2
%
Government
 
51,621

 
36.7
%
 
43,958

 
33.6
%
Self-pay
 
3,037

 
2.2
%
 
4,024

 
3.1
%
Other
 
5,348

 
3.7
%
 
5,502

 
4.1
%
Total patient service revenues
 
$
140,767

 
100.0
%
 
$
131,014

 
100.0
%
 
 
Six Months Ended June 30,
 
 
2014
 
2013
 
 
Amount
 
%
 
Amount
 
%
 
 
 
 
 
 
 
 
 
Private insurance
 
$
157,688

 
57.7
%
 
$
153,681

 
59.1
%
Government
 
99,007

 
36.2
%
 
87,897

 
33.8
%
Self-pay
 
6,151

 
2.3
%
 
7,331

 
2.8
%
Other
 
10,451

 
3.8
%
 
11,293

 
4.3
%
Total patient service revenues
 
$
273,297

 
100.0
%
 
$
260,202

 
100.0
%
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.  The Company maintains its cash and cash equivalent balances at high credit quality financial institutions.
Accounts Receivable and Allowances for Contractual Adjustments and Doubtful Accounts
Accounts receivable are recorded net of contractual adjustments and allowances for doubtful accounts to reflect accounts receivable at net realizable value. Accounts receivable consists of receivables from federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies, employers and patients. Management recognizes that revenues and receivables from government agencies are significant to the Company's operations, but it does not believe that there is significant credit risk associated with these government agencies. Concentration of credit risk with respect to other payors is limited because of the large number of such payors. As of June 30, 2014 and December 31, 2013, the Company had accruals for third-party Medicare and Medicaid settlements of $8.1 million and $10.0 million, respectively, in other current liabilities and $2.2 million and $1.9 million, respectively, in other long-term liabilities on the consolidated balance sheets.
The Company recognizes that final reimbursement of accounts receivable is subject to final approval by each third-party payor.  However, because the Company has contracts with its third-party payors and also verifies insurance coverage of the patient before medical services are rendered, the amounts that are pending approval from third-party payors are minimal.  The Company does not require collateral from self-pay patients. The Company's policy is to collect co-payments and deductibles prior to providing medical services. It is also the Company's policy to verify a patient’s insurance 72 hours prior to the patient’s procedure.  The patient services provided by the Company's surgical facilities are primarily non-emergency services which allows the surgical facilities to have the ability to control the procedures related to seeking and obtaining third-party reimbursements.
Each surgical facility is responsible for analyzing its own accounts receivable to ensure proper collection. On a consolidated basis, the Company's policy is to review accounts receivables aging, by surgical facility, to determine the appropriate allowance for doubtful accounts. Patient account balances are reviewed for delinquency based on contractual terms. This review is supported by an analysis of the actual revenues, contractual adjustments and cash collections received. An account balance is written off only after the Company has pursued collection with legal or collection agency assistance or otherwise deemed an account to be uncollectible.


9
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)

A summary of the activity in the allowance for doubtful accounts receivable for the six months ended June 30, 2014 follows (in thousands):
Balance at December 31, 2013
 
$
16,939

Provision for doubtful accounts
 
6,686

Accounts written off, net of recoveries
 
(7,216
)
Balance at June 30, 2014
 
$
16,409

Inventories
Inventories, which consist primarily of medical and drug supplies, are stated at the lower of cost or market value. Cost is determined using the first-in, first-out method.
Prepaid Expenses and Other Current Assets
A summary of prepaid expenses and other current assets follows (in thousands):
 
 
June 30,
2014
 
December 31,
2013
 
 
 
 
 
Prepaid expenses
 
$
4,618

 
$
5,143

Other current assets
 
5,485

 
4,451

Total prepaid expenses and other current assets
 
$
10,103

 
$
9,594

Property and Equipment
Property and equipment are stated at cost or, if obtained through acquisition, at fair value determined on the date of acquisition. Depreciation is recognized using the straight-line method over the estimated useful lives of the assets, generally three to five years for computers and software and five to seven years for furniture and equipment.  Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease term or the estimated useful life of the assets. Routine maintenance and repairs are charged to expense as incurred, while expenditures that increase capacities or extend useful lives are capitalized.
A summary of property and equipment follows (in thousands):
 
 
June 30,
2014
 
December 31, 2013
 
 
 
 
 
Land
 
$
5,713

 
$
5,713

Buildings and improvements
 
110,113

 
103,980

Furniture and equipment
 
14,450

 
13,522

Computer and software
 
15,737

 
12,715

Medical equipment
 
88,112

 
79,994

Construction in progress
 
1,084

 
3,000

Property and equipment, at cost
 
235,209

 
218,924

Less: Accumulated depreciation
 
(100,403
)
 
(91,590
)
Property and equipment, net
 
$
134,806

 
$
127,334

The Company leases certain facilities and equipment under capital leases. These assets are depreciated using the straight-line method over the lesser of the lease term or the remaining useful life of the leased asset. The carrying values of assets under capital leases were $5.6 million and $4.4 million as of June 30, 2014 and December 31, 2013, respectively, and were included in property and equipment, net, on the consolidated balance sheets.
Intangible Assets
The Company has indefinite-lived intangible assets related to the certificates of need held by its surgical facilities located in jurisdictions where certificates of need are required. The Company also has finite-lived intangible assets related to physician guarantee agreements, non-compete agreements and a management rights agreement. Physician income guarantees are amortized as recruitment expense into salaries and benefits costs on the consolidated statements of operations over the commitment period of the contract, generally three to four years. Non-compete agreements and the management rights agreement are amortized into depreciation and amortization expense in the consolidated statements of operations over the service lives of the agreements, ranging from three to five years for non-compete agreements and 15 years for the management rights agreement.


10
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)

A summary of activity related to intangible assets for the six months ended June 30, 2014 follows (in thousands):
 
 
Physician Income Guarantees
 
Management Rights
 
Non-Compete Agreements
 
Certificates of Need
 
Total Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
 
$
1,032

 
$
1,930

 
$
1,814

 
$
13,790

 
$
18,566

Recruitment expense
 
(252
)
 
—

 
—

 
—

 
(252
)
Amortization
 
—

 
(77
)
 
(846
)
 
—

 
(923
)
Balance at June 30, 2014
 
$
780

 
$
1,853

 
$
968

 
$
13,790

 
$
17,391

Goodwill
Goodwill represents the fair value of the consideration provided in an acquisition over the fair value of net assets acquired and is not amortized. Additions to goodwill include new business combinations and incremental ownership purchases ("buy-ups") in the Company's subsidiaries.
A summary of activity related to goodwill for the six months ended June 30, 2014 follows (in thousands):
Balance at December 31, 2013
 
$
661,758

Acquisitions
 
108

Divestitures
 
(499
)
Purchase price adjustments
 
(188
)
Balance at June 30, 2014
 
$
661,179

Impairment of Long-Lived Assets, Goodwill and Intangible Assets
The Company evaluates the carrying values of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist. The Company performs an impairment test by preparing an expected undiscounted cash flow projection. If the projection indicates that the recorded amount of a long-lived asset is not expected to be recovered, the carrying value is reduced to the new estimated fair value.  The cash flow projection applied represents management’s best estimate, using appropriate and customary assumptions and projections, at the date of evaluation.  During the six months ended June 30, 2014, the Company recorded an impairment charge of $6.6 million related to its consolidated surgical facility located in Lynbrook, New York and sold this facility on May 22, 2014. See Note 5 on Discontinued Operations and Divestitures for further discussion on the sale of this facility.
The Company tests its goodwill and intangible assets for impairment at least annually, or more frequently if certain impairment indicators arise.  The Company tests goodwill at the reporting unit level, which the Company has concluded to be the consolidated operating results of Symbion, Inc., as the Company has only one operating segment.  In performing the test, the Company compares the carrying value of the net assets of the Company as of December 31, or additionally if impairment indicators are present, to the net present value of the estimated discounted future cash flows of the reporting unit, or the Company.  The cash flow projection and discount rate applied represents management’s best estimate, using appropriate and customary assumptions and projections, at the date of evaluation.  The Company corroborates the results of the discounted cash flow analysis with a market-based approach. As the Company does not have publicly traded equity from which to derive a market value, an assessment of peer company data is performed whereby the Company selects comparable peers based on growth and leverage ratios, as well as healthcare industry specific characteristics.  Management estimates a reasonable market value of the Company based on earnings multiples and trading data of the Company's peers.
Restricted Invested Assets
As a requirement of the operating lease agreement related to the Company's surgical facility located in Chesterfield, Missouri, the Company is required to maintain a letter of credit that is secured by restricted invested assets in the form of certificates of deposit. As of June 30, 2014 and December 31, 2013, restricted invested assets were $315,000 and $177,000, respectively. There were no borrowings against the letter of credit at June 30, 2014 and December 31, 2013.


11
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)

Other Long-Term Assets
A summary of other long-term assets follows (in thousands):
 
 
June 30,
2014
 
December 31,
2013
 
 
 
 
 
Deferred loan costs
 
$
5,393

 
$
6,809

Medical malpractice insurance recoveries
 
2,193

 
2,193

Assets of the SERP
 
2,046

 
1,783

Other assets
 
3,206

 
3,172

Total other long-term assets
 
$
12,838

 
$
13,957

Deferred loan costs are amortized into interest expense over the maturity period of the related debt obligation. Other long-term assets, not individually disclosed, generally includes security deposits, notes receivable and other miscellaneous deferred costs.
Other Current Liabilities
A summary of other current liabilities follows (in thousands):
 
 
June 30,
2014
 
December 31,
2013
 
 
 
 
 
Interest payable
 
$
4,481

 
$
4,434

Current taxes payable
 
2,297

 
1,975

Insurance liabilities
 
3,613

 
3,726

Third-party settlements
 
8,075

 
10,015

Accounts receivable credit balances
 
3,050

 
3,443

Other accrued expenses
 
10,725

 
9,941

Total other current liabilities
 
$
32,241

 
$
33,534

Other Long-Term Liabilities
A summary of other long-term liabilities follows (in thousands):
 
 
June 30,
2014
 
December 31,
2013
 
 
 
 
 
Facility lease obligations
 
$
51,730

 
$
48,044

Third-party settlements
 
2,190

 
1,910

Medical malpractice insurance liability
 
3,683

 
4,083

Deferred rent
 
3,332

 
3,324

Liability for the SERP
 
2,046

 
1,783

Other liabilities
 
2,272

 
2,260

Total other long-term liabilities
 
$
65,253

 
$
61,404

The Company has a facility lease obligation which was assumed in connection with the Company's acquisition of the surgical hospital located in Idaho Falls, Idaho. This obligation is payable to the lessor of this facility for the land, building and improvements. During the six months ended June 30, 2014, the Company recorded an additional facility lease obligation of $3.9 million for construction costs associated with a radiation oncology building at this facility which was completed in the second quarter of 2014. The current portion of the facility lease obligations was $449,000 and $308,000 at June 30, 2014 and December 31, 2013, respectively, and was included in other current liabilities on the consolidated balance sheets. The total of the facility lease obligations related to the surgical hospital and radiation oncology building in Idaho Falls, Idaho was $52.2 million and $48.4 million at June 30, 2014 and December 31, 2013, respectively.
Stockholders' Notes
In December 2013, certain employees of the Company exercised stock options and borrowed funds from Holdings to pay the exercise price and applicable taxes payable. Each loan is represented by a full recourse promissory note bearing interest and payable in three equal


12
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)

annual installments beginning December 10, 2014. Payment and performance under the notes is secured by the shares of Holdings common stock received upon exercise of the stock options. The total amount of stockholders' notes outstanding was $485,000 at both June 30, 2014 and December 31, 2013, and was included in stockholders' equity on the consolidated balance sheets. Subject to and conditioned upon the closing of the Merger, such employees will be required to satisfy all obligations and repay all amounts owed under their respective promissory notes.
Operating Leases
The Company leases office space and equipment for its surgical facilities, including surgical facilities under development.  The lease agreements generally require the lessee, or the Company, to pay all maintenance, property taxes, utilities and insurance costs.  The Company accounts for operating lease obligations and sublease income on a straight-line basis.  Contingent obligations of the Company, as defined by each lease agreement, are recognized when specific contractual measures have been met, typically the result of an increase in the Consumer Price Index.  Lease obligations paid in advance are recorded as prepaid rent and included in the prepaid expenses and other current assets on the consolidated balance sheets.  The difference between actual lease payments and straight-line lease expense over the initial lease term, excluding optional renewal periods, is recorded as deferred rent and included in other current liabilities and other long-term liabilities on the consolidated balance sheets.
Stock-Based Compensation
The Company recognizes in the financial statements the cost of employee services received in exchange for awards of equity instruments based on the fair value of those awards. The Company uses the Black-Scholes option pricing model to value stock options awarded subsequent to adoption of ASC 718, Compensation, Stock Compensation.  The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable.  All option pricing models require the input of highly subjective assumptions including the expected stock price volatility and the expected exercise patterns of the option holders.
The Company’s policy is to recognize stock compensation expense using the straight-line method. The Company’s stock compensation expense estimate could vary in the future depending on many factors, including levels of options and awards granted in the future, forfeitures and when option or award holders exercise these awards and depending on whether performance targets are met and a liquidity event occurs.
Professional, General and Workers' Compensation Insurance
The Company maintains general liability and professional liability insurance in excess of self-insured retentions through third-party commercial insurance carriers in amounts that management believes is sufficient for the Company's operations, although, potentially some claims may exceed the scope of coverage in effect. General liability and professional insurance coverage is on a claims-made basis and workers' compensation insurance is on an occurrence basis.
The Company expenses costs under the self-insured retention exposure for general and professional liability and workers' compensation claims which relate to (i) deductibles on claims made during the policy period and (ii) an estimate of claims incurred but not yet reported that are expected to be reported after the policy period expires. Reserves and provisions are based upon actuarially determined estimates. The reserves are estimated using individual case-basis valuations and actuarial analysis. Based on historical results and data currently available, management does not believe a change in one or more of the underlying assumptions will have a material impact on the Company's consolidated financial position or results of operations. Expected insurance recoveries are presented on the consolidated balance sheets separately from the liabilities. At June 30, 2014 and December 31, 2013, $1.9 million and $1.9 million, respectively, were included in other current liabilities and $3.7 million and $4.1 million, respectively, were included in other long-term liabilities on the consolidated balance sheets.  Expected insurance recoveries of $1.1 million and $1.1 million, respectively, were included in prepaid expenses and other current assets and $2.2 million and $2.2 million, respectively, were included in other long-term assets on the consolidated balance sheets at June 30, 2014 and December 31, 2013.
Electronic Health Record Incentives
The American Recovery and Reinvestment Act of 2009 provides for Medicare and Medicaid incentive payments beginning in calendar year 2011 for eligible hospitals and professionals that implement and achieve meaningful use of certified Electronic Health Records ("EHR") technology. Several of the Company's surgical hospitals have implemented plans to comply with the EHR meaningful use requirements of the Health Information Technology for Economic and Clinical Health Act ("HITECH") in time to qualify for the maximum available incentive payments.
Compliance with the meaningful use requirements has and will continue to result in significant costs including business process changes, professional services focused on successfully designing and implementing the Company's EHR solutions along with costs associated with the hardware and software components of the project. The Company currently estimates that total costs incurred to comply will be recovered through the total EHR incentive payments over the projected life cycle of this initiative. The Company incurs both capital expenditures and operating expenses in connection with the implementation of its various EHR initiatives. The amount and timing of these expenditures do not directly correlate with the timing of the Company's cash receipts or recognition of the EHR incentives as other income. The Company initiated its meaningful use initiatives in 2012. During the three months ended June 30, 2014 and 2013, the Company spent $96,000 and $1.1 million, respectively, related to hardware, software and implementation costs, of which $96,000 and $938,000, respectively, was capitalized in these periods. For the six months ended June 30, 2014 and 2013, the Company spent $572,000 and $3.0 million, respectively, related to hardware,


13
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)

software and implementation costs, of which $548,000 and $2.5 million, respectively, was capitalized in these periods. The Company expects to receive incentive payments and recognize corresponding revenue upon the completion of the EHR meaningful use requirements.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return.  The partnerships and limited liability companies in which the Company has ownership each file separate income tax returns.  The Company's allocated share of income or loss based on its percentage ownership in each partnership and limited liability company is included in taxable income of the Company.  The remaining income or loss of each partnership and limited liability company is allocated to the other owners as taxable income.
The Company uses the asset and liability method to account for income taxes.  Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  If a net operating loss carryforward exists, the Company makes a determination as to whether that net operating loss carryforward will be utilized in the future.  A valuation allowance is established for certain net operating loss carryforwards when their recoverability is deemed to be uncertain.  The carrying value of the net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions.  If these estimates and related assumptions change in the future, the Company may be required to adjust its deferred tax valuation allowances.
During the three and six months ended June 30, 2014, the Company increased its reserve for uncertain tax positions by $23,000 and $40,000, respectively, principally as a result of the accrual of tax and interest on existing uncertain tax positions. These increases affected the effective tax rate in each period. The reserve for uncertain tax positions is included in long-term deferred tax liabilities on the consolidated balance sheets.  The total amounts of accrued liabilities related to uncertain tax positions that would affect the Company's effective tax rate if recognized were $497,000 and $435,000 as of June 30, 2014 and December 31, 2013, respectively.
Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-8, “Presentation of Financial Statements and Property, Plant, and Equipment—Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-8”). Among other provisions and in addition to expanded disclosures, ASU 2014-8 changes the definition of what components of an entity qualify for discontinued operations treatment and reporting from a reportable segment, operating segment, reporting unit, subsidiary or asset group to only those components of an entity that represent a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. Additionally, ASU 2014-8 requires disclosure about a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements, including the pretax profit or loss, attributable to the component of an entity for the period in which it is disposed of or is classified as held for sale. The disclosure of this information is required for all of the same periods that are presented in the entity’s results of operations for the period.
From time-to-time, a company may identify one or more individual facilities that do not meet its on-going or future business strategy. In accordance with ASU 2014-8, in the event that an individually significant facility is identified for disposal but does not represent a strategic shift that has, or will have, a major effect on a company's operating and financial results, the results of an identified facility would continue to be reported as a component of the company's consolidated results. In this event and in accordance with ASU 2014-8, additional disclosures would be required.
The provisions of ASU 2014-8 are effective prospectively for all disposals or classifications as held for sale of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted. The Company is currently assessing the impact of ASU 2014-8 on its operating and financial results and anticipates adopting the provisions of ASU 2014-8 as of January 1, 2015.
In May 2014, the FASB issued Accounting Standards Update No. 2014-9 (ASU 2014-9) “Revenue from Contracts with Customers.” ASU 2014-9 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)” and requires entities to recognize revenue when they transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-9 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted.
4. Acquisitions and Developments
Effective March 7, 2014, the Company acquired an incremental ownership interest of 13.6% in the surgical hospital located in Idaho Falls, Idaho for a purchase price of $24.4 million. As of June 30, 2014, the Company had a 61.7% ownership interest in this facility. This transaction was partially financed with $10.0 million of proceeds from the Company's revolving credit facility and the remainder was funded with cash from continuing operations.
Effective January 31, 2014, the surgical hospital located in Lubbock, Texas, in which the Company has a 58.3% ownership interest, acquired the ancillary services of a physician practice located in the same market. The purchase price paid for the acquisition of these services


14


was $428,000. The Company funded this acquisition with cash from continuing operations. These services were merged into the operations of the surgical hospital.
5. Discontinued Operations and Divestitures
Effective March 31, 2014, the Company reclassified its surgical facility located in Lynbrook, New York to discontinued operations. On May 22, 2014, the Company completed the sale of this facility. The Company recorded net proceeds of $3.7 million on this transaction and recognized a net loss of $6.6 million. The net loss consisted of an impairment charge of $6.6 million recorded as of March 31, 2014 and $37,000 of other net write-offs related to the facility, which were recorded in the three months ended June 30, 2014. The fair value used to calculate impairment as of March 31, 2014 was estimated based on what a market participant would be willing to pay as of that date and represented a Level 2 non-recurring fair value measurement. The net loss on sale of this facility, including impairment, was included in net loss from discontinued operations, net of income taxes, in the consolidated statements of income for the three and six months ended June 30, 2014, as applicable. This facility was previously consolidated for financial reporting purposes.
Effective December 31, 2013, the Company reclassified its surgical facility located in Worcester, Massachusetts to discontinued operations. The Company entered into a purchase agreement effective January 2, 2014 related to the sale of this facility and expects to complete this transaction in the third quarter of 2014. The results of operations related to this facility have been included in discontinued operations for the three and six months ended June 30, 2014 and 2013. This facility is consolidated for financial reporting purposes.
A summary of certain operating results impacting the statements of operations related to discontinued operations follows (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
Revenues
 
$
3,050

 
$
4,034

 
$
5,468

 
$
9,553

Operating income
 
208

 
465

 
632

 
982

Loss (gain) on sale or disposal
 
37

 
(1,478
)
 
37

 
(563
)
Impairment of assets held for sale
 
—

 
—

 
6,577

 
—

Benefit from income taxes
 
(37
)
 
(467
)
 
(48
)
 
(462
)
Income (loss) from discontinued operations, net of income taxes
 
208

 
2,410

 
(5,934
)
 
2,007

6. Long-Term Debt
A summary of long-term debt follows (in thousands):
 
 
June 30,
2014
 
December 31,
2013
 
 
 
 
 
Credit Facility
 
$
10,000

 
$
—

Senior Secured Notes, net of debt issuance discount of $2,321 and $2,858 at June 30, 2014 and December 31, 2013, respectively
 
338,679

 
338,142

PIK Exchangeable Notes
 
123,384

 
118,639

Toggle Notes
 
73,307

 
73,475

Notes payable and secured loans
 
29,148

 
24,970

Capital lease obligations
 
6,182

 
4,753

Total debt
 
580,700

 
559,979

Less: Current maturities
 
(10,874
)
 
(8,993
)
Total long-term debt
 
$
569,826

 
$
550,986

Credit Facility
The Company's senior secured super-priority revolving credit facility (the "Credit Facility”) matures on December 15, 2015. During the six months ended June 30, 2014, the Company borrowed $10.0 million on the Credit Facility. As of June 30, 2014, the Company had letters of credit outstanding of $1.8 million and availability of $38.2 million under the Credit Facility.
Loans under the Credit Facility bear interest, at the Company's option, at the reserve adjusted LIBOR plus 4.50% or at the alternate base rate plus 3.50%. The Company is required to pay a commitment fee at a rate of 0.50% per annum on the undrawn portion of commitments


15
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)

under the Credit Facility. This fee is payable quarterly in arrears and on the date of termination or expiration of the commitments. The interest rate on the Credit Facility was 4.65% at June 30, 2014.
The Credit Facility contains financial covenants requiring the Company not to exceed a maximum net senior secured leverage ratio or fall below a minimum cash interest coverage ratio, in each case tested quarterly. Borrowings under the Credit Facility are subject to significant conditions, including the absence of any material adverse change in the Company's business, financial condition, operations or cash flows. At June 30, 2014, the Company was in compliance with all material covenants contained in the Credit Facility.
Subject to and conditioned upon the closing of the Merger, the Company is required to repay all amounts outstanding under the Credit Facility.
Senior Secured Notes
The Senior Secured Notes mature on June 15, 2016. The Senior Secured Notes were issued at a 1.51% discount and accrue interest at the rate of 8.00% per annum, payable on June 15 and December 15 of each year. At June 30, 2014, the Company was in compliance with all material covenants contained in the indenture governing the Senior Secured Notes.
The Company may redeem all or any portion of the Senior Secured Notes on or after June 15, 2014 at the redemption price set forth in the indenture governing the Senior Secured Notes, plus accrued interest. At June 30, 2014, the Company had not redeemed any of its Senior Secured Notes.
Subject to and conditioned upon the closing of the Merger, the Company is required to redeem for cash or otherwise satisfy and discharge its obligations with respect to all of the outstanding Senior Secured Notes under the Merger Agreement.
PIK Exchangeable Notes
The PIK Exchangeable Notes mature on June 15, 2017. Interest accrues on the PIK Exchangeable Notes at a rate of 8.00% per year, compounding semi-annually on June 15 and December 15 of each year. The Company pays interest on the PIK Exchangeable Notes in kind by increasing the principal amount of the PIK Exchangeable Notes on each interest accrual date by an amount equal to the entire amount of the accrued interest. On June 15 and December 15 of each year, the Company reclassifies accrued interest to long-term debt. As of June 30, 2014, the Company had accrued interest of $439,000 on the PIK Exchangeable Notes, which was included in other current liabilities on the consolidated balance sheet. At June 30, 2014, the Company was in compliance with all material covenants contained in the indenture governing the PIK Exchangeable Notes.
The PIK Exchangeable Notes are exchangeable into shares of common stock of Holdings at any time prior to the close of business on the business day immediately preceding the maturity date of the PIK Exchangeable Notes at a per share exchange price of $3.50. Upon exchange, holders of the PIK Exchangeable Notes will receive a number of shares of common stock of Holdings equal to (i) the accreted principal amount of the PIK Exchangeable Notes to be exchanged, plus accrued and non-capitalized interest, divided by (ii) the exchange price. The exchange price in effect at any time will be subject to customary adjustments.
On or after June 15, 2014, the Company may redeem some or all of the PIK Exchangeable Notes for cash at a redemption price equal to a specified percentage of the accreted principal amount of the PIK Exchangeable Notes to be redeemed, plus accrued and non-capitalized interest. The specific percentage for such redemptions will be 104% for redemptions during the year commencing on June 15, 2014, 102% for redemptions during the year commencing on June 15, 2015, and 100% for redemptions during the year commencing on June 15, 2016.
Subject to and conditioned upon the closing of the Merger, the Company expects all of the PIK Exchangeable Notes to be exchanged for shares of common stock of Holdings immediately prior to the closing of the Merger.
Toggle Notes
The Toggle Notes mature on August 23, 2015. The payment-in-kind interest option on the Toggle Notes expired in February 2012. Cash interest on the Toggle Notes accrues at the rate of 11.0% per annum. As of June 30, 2014, the Company had accrued interest of $2.9 million on the Toggle Notes, which was included in other current liabilities on the consolidated balance sheet.
The indenture governing the Toggle Notes includes a mandatory redemption provision. Under this provision, if the Toggle Notes would otherwise constitute applicable high yield discount obligations, within the meaning of Section 163(i)(1) of the Internal Revenue Code of 1986, as amended, the Company is required to redeem, for cash, a portion of the Toggle Notes then outstanding, equal to the mandatory principal redemption amount. Under the mandatory redemption provisions of the Toggle Notes, the Company has repaid $21.4 million of the principal outstanding balance through June 30, 2014.
The indenture governing the Toggle Notes contains various restrictive covenants, including financial covenants that limit the Company's ability and the ability of the Company's subsidiaries to borrow money or guarantee other indebtedness, grant liens, make investments, sell assets, pay dividends or engage in transactions with affiliates. At June 30, 2014, the Company was in compliance with all material covenants contained in the indenture governing the Toggle Notes.


16
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)

Subject to and conditioned upon the closing of the Merger, the Company is required to redeem for cash or otherwise satisfy and discharge its obligations with respect to all of the outstanding Toggle Notes under the Merger Agreement.
Notes Payable to Banks
Certain of the Company's subsidiaries have third-party bank indebtedness secured by real estate and equipment assets at the surgical facilities to which the loans were made.  These bank indebtedness agreements contain customary covenants related to maintaining certain financial ratios and restricting activities, including the encumbrance of assets, other indebtedness, investing activities and payment of minority interest distributions.
7. Related Party Transactions
On August 23, 2007, the Company entered into a ten-year advisory services and management agreement with Crestview Advisors, L.L.C.  The annual management fee is $1.0 million and payable on August 23 of each year.  As of June 30, 2014, the Company had a prepaid asset of $145,000 related to this annual management fee, which was included in prepaid expenses and other current assets on the consolidated balance sheet.
Affiliates of Crestview and affiliates of the Northwestern Mutual Insurance Company hold the majority of the PIK Exchangeable Notes which entitle them to additional ownership in Holdings upon exchange. The PIK Exchangeable Notes are exchangeable into shares of common stock of Holdings at any time prior to the close of business on the business day immediately preceding the maturity date of the PIK Exchangeable Notes at a per share exchange price of $3.50. Upon exchange, holders of the PIK Exchangeable Notes will receive a number of shares of common stock of Holdings equal to (i) the accreted principal amount of the PIK Exchangeable Notes to be exchanged, plus accrued and non-capitalized interest, divided by (ii) the exchange price. The exchange price in effect at any time will be subject to customary adjustments.
As of June 30, 2014, the principal outstanding balance of the PIK Exchangeable Notes was $123.4 million and accrued interest related to the PIK Exchangeable Notes was $439,000. See Note 6 on Long-Term Debt for further discussion of the PIK Exchangeable Notes.
8. Commitments and Contingencies
Lease Guarantees on Non-Consolidated Affiliates
As of June 30, 2014, the Company had outstanding lease guarantees of $731,000 related to operating lease payments of certain of its non-consolidated surgical facilities. These operating leases typically have ten-year terms, with optional renewal periods.
Professional, General and Workers' Compensation Liability Risks
The Company is subject to claims and legal actions in the ordinary course of business, including claims relating to patient treatment, employment practices and personal injuries. To cover these claims, the Company maintains general liability and professional liability insurance in excess of self-insured retentions through third party commercial insurance carriers in amounts that management believes is sufficient for the Company's operations, although, potentially, some claims may exceed the scope of coverage in effect. The professional and general insurance coverage is on a claims-made basis. The workers compensation insurance is on an occurrence basis. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is not aware of any such proceedings that would have a material adverse effect on the Company's business, financial condition or results of operations.
Laws and Regulations
Laws and regulations governing our business, including those relating to the Medicare and Medicaid programs, are complex and subject to interpretation. These laws and regulations govern every aspect of how our surgical facilities conduct their operations, from licensing requirements to how and whether our facilities may receive payments pursuant to the Medicare and Medicaid programs. Compliance with such laws and regulations can be subject to future government agency review and interpretation as well as legislative changes to such laws. Noncompliance with such laws and regulations may subject the Company to significant regulatory action including fines, penalties, and exclusion from the Medicare, Medicaid and other federal healthcare programs. From time to time, governmental regulatory agencies will conduct inquiries of the Company's practices, including, but not limited to, the Company's compliance with federal and state fraud and abuse laws, billing practices and relationships with physicians. It is the Company's current practice and future intent to cooperate fully with such inquiries. The Company is not aware of any such inquiry that would have a material adverse effect on the Company's business, results of operations or financial condition.
Acquired Facilities
The Company, through its wholly-owned subsidiaries or controlled partnerships and limited liability companies, has acquired and will continue to acquire surgical facilities with prior operating histories. Such facilities may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company attempts to assure that no such liabilities exist, obtain indemnification from prospective sellers covering such matters and institute policies designed to conform centers to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for past activities that may later be asserted to be improper by private plaintiffs or government


17
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)

agencies. There can be no assurance that any such matter will be covered by indemnification or, if covered, that the liability sustained will not exceed contractual limits or the financial capacity of the indemnifying party.
The Company cannot predict whether federal or state statutory or regulatory provisions will be enacted that would prohibit or otherwise regulate relationships which the Company has established or may establish with other healthcare providers or have materially adverse effects on its business or revenues arising from such future actions. Management believes, however, that it will be able to adjust the Company's operations so as to be in compliance with any statutory or regulatory provision as may be applicable.
Potential Physician Investor Liability
A majority of the physician investors in the partnerships and limited liability companies which operate the Company's surgical facilities carry general and professional liability insurance on a claims-made basis. Each partnership or limited liability company may, however, be liable for damages to persons or property arising from occurrences at the surgical facilities. Although the various physician investors and other surgeons generally are required to obtain general and professional liability insurance with tail coverage that extends beyond the period of any claims-made policies, such individuals may not be able to obtain coverage in amounts sufficient to cover all potential liability. Since most insurance policies contain exclusions, the physician investors will not be insured against all possible occurrences. In the event of an uninsured or underinsured loss, the value of an investment in the partnership interests or limited liability company membership units and the amount of distributions could be adversely affected.
9. Subsequent Events
None.
10. Financial Information for the Company and Its Subsidiaries
The Company conducts substantially all of its business through its subsidiaries. Presented below is consolidating financial information for the Company and its subsidiaries as required by regulations of the Securities and Exchange Commission (“SEC”) in connection with the Company's Senior Secured Notes and Toggle Notes that have been registered with the SEC. The information segregates the parent company issuer, the combined wholly-owned subsidiary guarantors, the combined non-guarantors, and consolidating adjustments. The operating and investing activities of the separate legal entities are fully interdependent and integrated. Accordingly, the results of the separate legal entities are not representative of what the operating results would be on a stand-alone basis. All of the subsidiary guarantees are both full and unconditional and joint and several.


18
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)

Condensed Consolidating Balance Sheet as of June 30, 2014
(In thousands)

 
 
Parent Issuer
 
Guarantor Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Consolidated Total
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
3,245

 
$
3,374

 
$
44,174

 
$
—

 
$
50,793

Accounts receivable, net
 
—

 
290

 
78,307

 
—

 
78,597

Inventories
 
—

 
—

 
17,037

 
—

 
17,037

Prepaid expenses and other current assets
 
559

 
1,594

 
7,950

 
—

 
10,103

Due from related parties
 
1,953

 
22,584

 
—

 
(24,537
)
 
—

Current assets of discontinued operations
 
—

 
—

 
1,428

 
—

 
1,428

Total current assets
 
5,757

 
27,842

 
148,896

 
(24,537
)
 
157,958

Property and equipment, net
 
1,771

 
2,100

 
130,935

 
—

 
134,806

Intangible assets, net
 
1,853

 
—

 
15,538

 
—

 
17,391

Goodwill
 
661,179

 
—

 
—

 
—

 
661,179

Investments in and advances to affiliates
 
66,835

 
39,123

 
500

 
(99,841
)
 
6,617

Restricted invested assets
 
—

 
—

 
315

 
—

 
315

Other long-term assets
 
8,305

 
—

 
4,533

 
—

 
12,838

Long-term assets of discontinued operations
 
—

 
—

 
1,764

 
—

 
1,764

Total assets
 
$
745,700

 
$
69,065

 
$
302,481

 
$
(124,378
)
 
$
992,868

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
49

 
$
—

 
$
20,042

 
$
—

 
$
20,091

Accrued payroll and benefits
 
1,534

 
39

 
11,374

 
—

 
12,947

Due to related parties
 
—

 
—

 
24,537

 
(24,537
)
 
—

Other current liabilities
 
10,398

 
27

 
21,816

 
—

 
32,241

Current maturities of long-term debt
 
363

 
867

 
9,644

 
—

 
10,874

Current liabilities of discontinued operations
 
—

 
—

 
393

 
—

 
393

Total current liabilities
 
12,344

 
933

 
87,806

 
(24,537
)
 
76,546

Long-term debt, less current maturities
 
545,008

 
1,297

 
23,521

 
—

 
569,826

Long-term deferred tax liabilities
 
76,974

 
—

 
—

 
—

 
76,974

Other long-term liabilities
 
2,405

 
—

 
62,848

 
—

 
65,253

Long-term liabilities of discontinued operations
 
—

 
—

 
125

 
—

 
125

Non-controlling interests—redeemable
 
—

 
—

 
30,091

 
—

 
30,091

Total Symbion, Inc. stockholders' equity
 
108,969

 
66,835

 
33,006

 
(99,841
)
 
108,969

Non-controlling interests—non-redeemable
 
—

 
—

 
65,084

 
—

 
65,084

Total equity
 
108,969

 
66,835

 
98,090

 
(99,841
)
 
174,053

Total liabilities and stockholders' equity
 
$
745,700

 
$
69,065

 
$
302,481

 
$
(124,378
)
 
$
992,868



19
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)

Condensed Consolidating Balance Sheet as of December 31, 2013
(In thousands)

 
 
Parent Issuer
 
Guarantor Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Consolidated Total
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
6,415

 
$
4,788

 
$
44,589

 
$
—

 
$
55,792

Accounts receivable, net
 
—

 
—

 
77,630

 
—

 
77,630

Inventories
 
—

 
—

 
17,080

 
—

 
17,080

Prepaid expenses and other current assets
 
1,476

 
1,301

 
6,817

 
—

 
9,594

Due from related parties
 
3,050

 
23,579

 
—

 
(26,629
)
 
—

Current assets of discontinued operations
 
—

 
—

 
2,580

 
—

 
2,580

Total current assets
 
10,941

 
29,668

 
148,696

 
(26,629
)
 
162,676

Property and equipment, net
 
1,422

 
2,100

 
123,812

 
—

 
127,334

Intangible assets, net
 
1,929

 
—

 
16,637

 
—

 
18,566

Goodwill
 
661,758

 
—

 
—

 
—

 
661,758

Investments in and advances to affiliates
 
69,558

 
40,384

 
563

 
(103,732
)
 
6,773

Restricted invested assets
 
—

 
—

 
177

 
—

 
177

Other long-term assets
 
9,419

 
—

 
4,538

 
—

 
13,957

Long-term assets of discontinued operations
 
—

 
—

 
15,498

 
—

 
15,498

Total assets
 
$
755,027

 
$
72,152

 
$
309,921

 
$
(130,361
)
 
$
1,006,739

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
269

 
$
—

 
$
18,863

 
$
—

 
$
19,132

Accrued payroll and benefits
 
1,151

 
—

 
10,951

 
—

 
12,102

Due to related parties
 
—

 
—

 
26,629

 
(26,629
)
 
—

Other current liabilities
 
8,348

 
3

 
25,183

 
—

 
33,534

Current maturities of long-term debt
 
344

 
859

 
7,790

 
—

 
8,993

Current liabilities of discontinued operations
 
—

 
—

 
1,180

 
—

 
1,180

Total current liabilities
 
10,112

 
862

 
90,596

 
(26,629
)
 
74,941

Long-term debt, less current maturities
 
529,912

 
1,732

 
19,342

 
—

 
550,986

Long-term deferred tax liabilities
 
76,020

 
—

 
—

 
—

 
76,020

Other long-term liabilities
 
2,292

 
—

 
59,112

 
—

 
61,404

Long-term liabilities of discontinued operations
 
—

 
—

 
4,854

 
—

 
4,854

Non-controlling interests—redeemable
 
—

 
—

 
30,545

 
—

 
30,545

Total Symbion, Inc. stockholders' equity
 
136,691

 
69,558

 
34,174

 
(103,732
)
 
136,691

Non-controlling interests—non-redeemable
 
—

 
—

 
71,298

 
—

 
71,298

Total equity
 
136,691

 
69,558

 
105,472

 
(103,732
)
 
207,989

Total liabilities and stockholders' equity
 
$
755,027

 
$
72,152

 
$
309,921

 
$
(130,361
)
 
$
1,006,739



20
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)

Condensed Consolidating Statement of Operations for the Three Months Ended June 30, 2014
(In thousands)

 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Consolidated Total
 
 
 
 
 
 
 
 
 
 
Revenues
$
5,397

 
$
304

 
$
140,708

 
$
(4,199
)
 
$
142,210

Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and benefits
—

 
—

 
39,122

 
—

 
39,122

Supplies
—

 
—

 
36,995

 
—

 
36,995

Professional and medical fees
—

 
253

 
11,558

 
—

 
11,811

Lease expense
—

 
—

 
6,976

 
—

 
6,976

Other operating expenses
—

 
5

 
9,403

 
—

 
9,408

Cost of revenues
—

 
258

 
104,054

 
—

 
104,312

General and administrative expenses
5,530

 
—

 
—

 
—

 
5,530

Depreciation and amortization
238

 
—

 
5,661

 
—

 
5,899

Provision for doubtful accounts
—

 
—

 
2,891

 
—

 
2,891

Income from equity investments
—

 
(964
)
 
(44
)
 
—

 
(1,008
)
Loss on disposal or impairment of long-lived assets, net
—

 
—

 
4

 
—

 
4

Management fees
—

 
—

 
4,199

 
(4,199
)
 
—

Equity in earnings of affiliates
(13,603
)
 
(12,277
)
 
—

 
25,880

 
—

Proceeds from insurance settlements, net
—

 
—

 
(31
)
 
—

 
(31
)
Merger transaction costs
2,318

 
—

 
—

 
—

 
2,318

Total operating expenses
(5,517
)
 
(12,983
)
 
116,734

 
21,681

 
119,915

Operating income
10,914

 
13,287

 
23,974

 
(25,880
)
 
22,295

Interest (expense) income, net
(12,721
)
 
271

 
(2,041
)
 
—

 
(14,491
)
(Loss) income before income taxes and discontinued operations
(1,807
)
 
13,558

 
21,933

 
(25,880
)
 
7,804

Provision for income taxes
1,357

 
—

 
72

 
—

 
1,429

(Loss) income from continuing operations
(3,164
)
 
13,558

 
21,861

 
(25,880
)
 
6,375

Income from discontinued operations, net of income taxes
82

 
45

 
81

 
—

 
208

Net (loss) income
(3,082
)
 
13,603

 
21,942

 
(25,880
)
 
6,583

Less: Net income attributable to non-controlling interests
—

 
—

 
(9,665
)
 
—

 
(9,665
)
Net (loss) income attributable to Symbion, Inc.
$
(3,082
)
 
$
13,603

 
$
12,277

 
$
(25,880
)
 
$
(3,082
)


21
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)

Condensed Consolidating Statement of Operations for the Three Months Ended June 30, 2013
(In thousands)

 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Consolidated Total
 
 
 
 
 
 
 
 
 
 
Revenues
$
5,101

 
$
—

 
$
131,211

 
$
(4,048
)
 
$
132,264

Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and benefits
—

 
—

 
37,182

 
—

 
37,182

Supplies
—

 
—

 
36,041

 
—

 
36,041

Professional and medical fees
—

 
—

 
10,750

 
—

 
10,750

Lease expense
—

 
—

 
6,668

 
—

 
6,668

Other operating expenses
—

 
—

 
8,854

 
—

 
8,854

Cost of revenues
—

 
—

 
99,495

 
—

 
99,495

General and administrative expense
5,283

 
—

 
—

 
—

 
5,283

Depreciation and amortization
167

 
—

 
5,183

 
—

 
5,350

Provision for doubtful accounts
—

 
—

 
2,359

 
—

 
2,359

Income on equity investments
—

 
(986
)
 
(53
)
 
—

 
(1,039
)
(Gain) loss on disposal or impairment and long-lived assets, net
(1,000
)
 
21,248

 
(12,575
)
 
—

 
7,673

Management fees
—

 
—

 
4,048

 
(4,048
)
 
—

Equity in earnings of affiliates
(4,177
)
 
(23,785
)
 
—

 
27,962

 
—

Litigation settlements, net
—

 
—

 
(35
)
 
—

 
(35
)
Total operating expenses
273

 
(3,523
)
 
98,422

 
23,914

 
119,086

Operating income
4,828

 
3,523

 
32,789

 
(27,962
)
 
13,178

Interest (expense) income, net
(12,980
)
 
615

 
(2,278
)
 
—

 
(14,643
)
(Loss) income before income taxes and discontinued operations
(8,152
)
 
4,138

 
30,511

 
(27,962
)
 
(1,465
)
(Benefit from) provision for income taxes
(842
)
 
—

 
302

 
—

 
(540
)
(Loss) income from continuing operations
(7,310
)
 
4,138

 
30,209

 
(27,962
)
 
(925
)
Income from discontinued operations, net of income taxes
132

 
39

 
2,239

 
—

 
2,410

Net (loss) income
(7,178
)
 
4,177

 
32,448

 
(27,962
)
 
1,485

Less: Net income attributable to non-controlling interests
—

 
—

 
(8,663
)
 
—

 
(8,663
)
Net (loss) income attributable to Symbion, Inc.
$
(7,178
)
 
$
4,177

 
$
23,785

 
$
(27,962
)
 
$
(7,178
)


22
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)

Condensed Consolidating Statement of Operations for the Six Months Ended June 30, 2014
(In thousands)

 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Consolidated Total
 
 
 
 
 
 
 
 
 
 
Revenues
$
10,418

 
$
516

 
$
273,359

 
$
(8,117
)
 
$
276,176

Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and benefits
—

 
—

 
77,142

 
—

 
77,142

Supplies
—

 
—

 
70,913

 
—

 
70,913

Professional and medical fees
—

 
409

 
22,068

 
—

 
22,477

Lease expense
—

 
—

 
13,735

 
—

 
13,735

Other operating expenses
—

 
5

 
18,555

 
—

 
18,560

Cost of revenues
—

 
414

 
202,413

 
—

 
202,827

General and administrative expenses
11,175

 
—

 
—

 
—

 
11,175

Depreciation and amortization
441

 
—

 
11,033

 
—

 
11,474

Provision for doubtful accounts
—

 
—

 
6,686

 
—

 
6,686

Income from equity investments
—

 
(1,556
)
 
(50
)
 
—

 
(1,606
)
Gain on disposal or impairment of long-lived assets, net
—

 
(64
)
 
(193
)
 
—

 
(257
)
Management fees
—

 
—

 
8,117

 
(8,117
)
 
—

Equity in earnings of affiliates
(19,221
)
 
(16,901
)
 
—

 
36,122

 
—

Proceeds from insurance settlements, net
—

 
—

 
(81
)
 
—

 
(81
)
Merger transaction costs
2,318

 
—

 
—

 
—

 
2,318

Litigation settlements, net
—

 
—

 
3

 
—

 
3

Total operating expenses
(5,287
)
 
(18,107
)
 
227,928

 
28,005

 
232,539

Operating income
15,705

 
18,623

 
45,431

 
(36,122
)
 
43,637

Interest (expense) income, net
(25,324
)
 
497

 
(4,029
)
 
—

 
(28,856
)
(Loss) income before income taxes and discontinued operations
(9,619
)
 
19,120

 
41,402

 
(36,122
)
 
14,781

Provision for (benefit from) income taxes
2,796

 
—

 
(12
)
 
—

 
2,784

(Loss) income from continuing operations
(12,415
)
 
19,120

 
41,414

 
(36,122
)
 
11,997

Income (loss) from discontinued operations, net of income taxes
200

 
101

 
(6,235
)
 
—

 
(5,934
)
Net (loss) income
(12,215
)
 
19,221

 
35,179

 
(36,122
)
 
6,063

Less: Net income attributable to non-controlling interests
—

 
—

 
(18,278
)
 
—

 
(18,278
)
Net (loss) income attributable to Symbion, Inc.
$
(12,215
)
 
$
19,221

 
$
16,901

 
$
(36,122
)
 
$
(12,215
)


23
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)

Condensed Consolidating Statement of Operations for the Six Months Ended June 30, 2013
(In thousands)

 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Consolidated Total
 
 
 
 
 
 
 
 
 
 
Revenues
$
10,035

 
$
—

 
$
260,615

 
$
(8,003
)
 
$
262,647

Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and benefits
—

 
—

 
73,788

 
—

 
73,788

Supplies
—

 
—

 
70,445

 
—

 
70,445

Professional and medical fees
—

 
—

 
21,091

 
—

 
21,091

Lease expense
—

 
—

 
13,403

 
—

 
13,403

Other operating expenses
—

 
—

 
17,582

 
—

 
17,582

Cost of revenues
—

 
—

 
196,309

 
—

 
196,309

General and administrative expenses
11,124

 
—

 
—

 
—

 
11,124

Depreciation and amortization
282

 
—

 
10,945

 
—

 
11,227

Provision for doubtful accounts
—

 
—

 
5,184

 
—

 
5,184

Income from equity investments
—

 
(1,843
)
 
(77
)
 
—

 
(1,920
)
(Gain) loss on disposal or impairment of long-lived assets, net
(1,000
)
 
20,812

 
(12,631
)
 
—

 
7,181

Management fees
—

 
—

 
8,003

 
(8,003
)
 
—

Equity in earnings of affiliates
(14,709
)
 
(32,345
)
 
—

 
47,054

 
—

Litigation settlements, net
—

 
—

 
(198
)
 
—

 
(198
)
Total operating expenses
(4,303
)
 
(13,376
)
 
207,535

 
39,051

 
228,907

Operating income
14,338

 
13,376

 
53,080

 
(47,054
)
 
33,740

Interest (expense) income, net
(25,930
)
 
1,190

 
(4,656
)
 
—

 
(29,396
)
(Loss) income before income taxes and discontinued operations
(11,592
)
 
14,566

 
48,424

 
(47,054
)
 
4,344

(Benefit from) provision for income taxes
(13
)
 
—

 
621

 
—

 
608

(Loss) income from continuing operations
(11,579
)
 
14,566

 
47,803

 
(47,054
)
 
3,736

Income from discontinued operations, net of income taxes
355

 
143

 
1,509

 
—

 
2,007

Net (loss) income
(11,224
)
 
14,709

 
49,312

 
(47,054
)
 
5,743

Less: Net income attributable to non-controlling interests
—

 
—

 
(16,967
)
 
—

 
(16,967
)
Net (loss) income attributable to Symbion, Inc.
$
(11,224
)
 
$
14,709

 
$
32,345

 
$
(47,054
)
 
$
(11,224
)



24
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)

Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended June 30, 2014
(In thousands)

 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Consolidated Total
 
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(3,082
)
 
$
13,603

 
$
21,942

 
$
(25,880
)
 
$
6,583

 
 
 
 
 
 
 
 
 
 
Comprehensive (loss) income
$
(3,082
)
 
$
13,603

 
$
21,942

 
$
(25,880
)
 
$
6,583

Less: Comprehensive income attributable to non-controlling interests
—

 
—

 
(9,665
)
 
—

 
(9,665
)
Comprehensive (loss) income attributable to Symbion, Inc.
$
(3,082
)
 
$
13,603

 
$
12,277

 
$
(25,880
)
 
$
(3,082
)










Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended June 30, 2013
(In thousands)

 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Consolidated Total
 
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(7,178
)
 
$
4,177

 
$
32,448

 
$
(27,962
)
 
$
1,485

 
 
 
 
 
 
 
 
 
 
Comprehensive (loss) income
$
(7,178
)
 
$
4,177

 
$
32,448

 
$
(27,962
)
 
$
1,485

Less: Comprehensive income attributable to non-controlling interests
—

 
—

 
(8,663
)
 
—

 
(8,663
)
Comprehensive (loss) income attributable to Symbion, Inc.
$
(7,178
)
 
$
4,177

 
$
23,785

 
$
(27,962
)
 
$
(7,178
)


25
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)

Condensed Consolidating Statement of Comprehensive Income for the Six Months Ended June 30, 2014
(In thousands)

 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Consolidated Total
 
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(12,215
)
 
$
19,221

 
$
35,179

 
$
(36,122
)
 
$
6,063

 
 
 
 
 
 
 
 
 
 
Comprehensive (loss) income
$
(12,215
)
 
$
19,221

 
$
35,179

 
$
(36,122
)
 
$
6,063

Less: Comprehensive income attributable to non-controlling interests
—

 
—

 
(18,278
)
 
—

 
(18,278
)
Comprehensive (loss) income attributable to Symbion, Inc.
$
(12,215
)
 
$
19,221

 
$
16,901

 
$
(36,122
)
 
$
(12,215
)










Condensed Consolidating Statement of Comprehensive Income for the Six Months Ended June 30, 2013
(In thousands)

 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Consolidated Total
 
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(11,224
)
 
$
14,709

 
$
49,312

 
$
(47,054
)
 
$
5,743

 
 
 
 
 
 
 
 
 
 
Comprehensive (loss) income
$
(11,224
)
 
$
14,709

 
$
49,312

 
$
(47,054
)
 
$
5,743

Less: Comprehensive income attributable to non-controlling interests
—

 
—

 
(16,967
)
 
—

 
(16,967
)
Comprehensive (loss) income attributable to Symbion, Inc.
$
(11,224
)
 
$
14,709

 
$
32,345

 
$
(47,054
)
 
$
(11,224
)



26
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)

Condensed Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2014
(In thousands)
 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Consolidated Total
 
 
 
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(12,215
)
 
$
19,221

 
$
35,179

 
$
(36,122
)
 
$
6,063

Adjustments to reconcile net (loss) income to net cash from operating activities:
 
 
 
 
 
 
 
 
 
(Income) loss from discontinued operations, net of income taxes
(200
)
 
(101
)
 
6,235

 
—

 
5,934

Depreciation and amortization
441

 
—

 
11,033

 
—

 
11,474

Amortization of debt issuance costs and discounts
1,981

 
—

 
46

 
—

 
2,027

Payment-in-kind interest expense
4,762

 
—

 
—

 
—

 
4,762

Stock-based compensation
194

 
—

 
—

 
—

 
194

Gain on disposal or impairment of long-lived assets, net
—

 
(64
)
 
(193
)
 
—

 
(257
)
Deferred income taxes
2,645

 
—

 
—

 
—

 
2,645

Equity in earnings of affiliates
(19,221
)
 
(16,901
)
 
—

 
36,122

 
—

Income from equity investments, net of distributions received
—

 
276

 
(51
)
 
—

 
225

Provision for doubtful accounts
—

 
—

 
6,686

 
—

 
6,686

Changes in operating assets and liabilities, net of acquisitions and divestitures:
 
 
 
 
 
 
 
 
 
Accounts receivable
—

 
—

 
(7,653
)
 
—

 
(7,653
)
Other operating assets and liabilities
9,797

 
19,822

 
(30,016
)
 
—

 
(397
)
Net cash (used in) provided by operating activities—continuing operations
(11,816
)
 
22,253

 
21,266

 
—

 
31,703

Net cash provided by operating activities—discontinued operations
—

 
—

 
478

 
—

 
478

Net cash (used in) provided by operating activities
(11,816
)
 
22,253

 
21,744

 
—

 
32,181

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment, net
(759
)
 
—

 
(10,582
)
 
—

 
(11,341
)
Payments for acquisitions, net of cash acquired
—

 
(434
)
 
—

 
—

 
(434
)
Proceeds from divestitures
—

 
313

 
—

 
—

 
313

Net cash used in investing activities—continuing operations
(759
)
 
(121
)
 
(10,582
)
 
—

 
(11,462
)
Net cash provided by investing activities—discontinued operations
—

 
—

 
3,479

 
—

 
3,479

Net cash used in investing activities
(759
)
 
(121
)
 
(7,103
)
 
—

 
(7,983
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Borrowings on revolving credit facility
10,000

 
—

 
—

 
—

 
10,000

Principal payments on long-term debt
(595
)
 
—

 
(5,093
)
 
—

 
(5,688
)
Borrowings of long-term debt
—

 
—

 
8,694

 
—

 
8,694

Change in restricted invested assets
—

 
—

 
(138
)
 
—

 
(138
)
Distributions to non-controlling interest holders
—

 
—

 
(18,330
)
 
—

 
(18,330
)
Payments related to ownership transactions with consolidated affiliates
—

 
(23,546
)
 
—

 
—

 
(23,546
)
Other financing activities
—

 
—

 
(120
)
 
—

 
(120
)
Net cash provided by (used in) financing activities—continuing operations
9,405

 
(23,546
)
 
(14,987
)
 
—

 
(29,128
)
Net cash used in financing activities—discontinued operations
—

 
—

 
(69
)
 
—

 
(69
)
Net cash provided by (used in) financing activities
9,405

 
(23,546
)
 
(15,056
)
 
—

 
(29,197
)
Net decrease in cash and cash equivalents
(3,170
)
 
(1,414
)
 
(415
)
 
—

 
(4,999
)
Cash and cash equivalents at beginning of period
6,415

 
4,788

 
44,589

 
—

 
55,792

Cash and cash equivalents at end of period
$
3,245

 
$
3,374

 
$
44,174

 
$
—

 
$
50,793



27
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
SIX MONTHS ENDED JUNE 30, 2014
(Unaudited)

Condensed Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2013
(In thousands)
 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Consolidated Total
 
 
 
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(11,224
)
 
$
14,709

 
$
49,312

 
$
(47,054
)
 
$
5,743

Adjustments to reconcile net (loss) income to net cash from operating activities:
 
 
 
 
 
 
 
 
 
Income from discontinued operations, net of income taxes
(355
)
 
(143
)
 
(1,509
)
 
—

 
(2,007
)
Depreciation and amortization
282

 
—

 
10,945

 
—

 
11,227

Amortization of debt issuance costs and discounts
1,928

 
—

 
—

 
—

 
1,928

Payment-in-kind interest expense
4,403

 
—

 
—

 
—

 
4,403

Stock-based compensation
103

 
—

 
—

 
—

 
103

(Gain) loss on disposal or impairment of long-lived assets, net
(1,000
)
 
20,812

 
(12,631
)
 
—

 
7,181

Deferred income taxes
257

 
—

 
—

 
—

 
257

Equity in earnings of affiliates
(14,709
)
 
(32,345
)
 
—

 
47,054

 
—

Income from equity investments, net of distributions received
—

 
(264
)
 
(77
)
 
—

 
(341
)
Provision for doubtful accounts
—

 
—

 
5,184

 
—

 
5,184

Changes in operating assets and liabilities, net of acquisitions and divestitures:
 
 
 
 
 
 
 
 
 
Accounts receivable
—

 
—

 
(6,132
)
 
—

 
(6,132
)
Other operating assets and liabilities
18,054

 
163

 
(24,563
)
 
—

 
(6,346
)
Net cash (used in) provided by operating activities - continuing operations
(2,261
)
 
2,932

 
20,529

 
—

 
21,200

Net cash provided by operating activities - discontinued operations
—

 
—

 
1,467

 
—

 
1,467

Net cash (used in) provided by operating activities
(2,261
)
 
2,932

 
21,996

 
—

 
22,667

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment, net
(1,226
)
 
—

 
(6,901
)
 
—

 
(8,127
)
Payments for acquisitions, net of cash acquired
—

 
(432
)
 
196

 
—

 
(236
)
Proceeds from divestitures
—

 
447

 
2,690

 
—

 
3,137

Other investing activities
—

 
—

 
2,200

 
—

 
2,200

Net cash (used in) provided by investing activities - continuing operations
(1,226
)
 
15

 
(1,815
)
 
—

 
(3,026
)
Net cash provided by investing activities - discontinued operations
—

 
—

 
3,383

 
—

 
3,383

Net cash (used in) provided by investing activities
(1,226
)
 
15

 
1,568

 
—

 
357

Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Principal payments on long-term debt
—

 
—

 
(13,500
)
 
—

 
(13,500
)
Borrowings of long-term debt
—

 
—

 
6,525

 
—

 
6,525

Payment of debt issuance costs
—

 
—

 
(488
)
 
—

 
(488
)
Change in restricted invested assets
—

 
—

 
792

 
—

 
792

Distributions to non-controlling interest holders
—

 
—

 
(16,288
)
 
—

 
(16,288
)
Proceeds from ownership transactions with consolidated affiliates
—

 
558

 
—

 
—

 
558

Other financing activities
—

 
—

 
(23
)
 
—

 
(23
)
Net cash provided by (used in) financing activities - continuing operations
—

 
558

 
(22,982
)
 
—

 
(22,424
)
Net cash used in financing activities - discontinued operations
—

 
—

 
(290
)
 
—

 
(290
)
Net cash provided by (used in) financing activities
—

 
558

 
(23,272
)
 
—

 
(22,714
)
Net (decrease) increase in cash and cash equivalents
(3,487
)
 
3,505

 
292

 
—

 
310

Cash and cash equivalents at beginning of period
8,505

 
26,174

 
38,629

 
—

 
73,308

Cash and cash equivalents at end of period
$
5,018

 
$
29,679

 
$
38,921

 
$
—

 
$
73,618




28


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements, which are based on our current expectations, estimates and assumptions about future events. All statements other than statements of current or historical fact contained in this report, including statements regarding our future financial position, business strategy, budgets, effective tax rate, projected costs and plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” and similar expressions are generally intended to identify forward-looking statements. These statements involve risks, uncertainties and other factors that may cause actual results to differ from the expectations expressed in the statements. Many of these factors are beyond our ability to control or predict.  These factors include, without limitation:
•
the occurrence of any event, change or other circumstances that delays the consummation of the Merger contemplated by the merger agreement with Surgery Center Holdings, Inc. or results in the Merger failing to be consummated;
•
the failure to obtain required regulatory approvals for the Merger, including expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976;
•
requirements that we comply with certain restrictions and covenants until the completion of the Merger;
•
risks that the Merger disrupts current plans and operations and gives rise to potential difficulties in employee retention;
•
the amount of the costs, fees, expenses and charges related to the Merger;
•
our substantial leverage and its impact on our ability to raise additional capital, react to changes in the economy and our industry and meet our obligations under our debt instruments;
•
our ability to comply with the restrictive covenants in our debt instruments;
•
uncertainty associated with the implementation of legislative and regulatory initiatives relating to healthcare reform and healthcare spending and the possible enactment of additional federal or state healthcare reforms affecting the healthcare industry;
•
the risk that payments from third-party payors, including government healthcare programs, decrease or remain constant and our costs increase;
•
the status of the federal economy and its impact on the healthcare sector;
•
our dependence upon payments from third-party payors, including governmental healthcare programs and managed care organizations;
•
our ability to acquire and develop additional surgical facilities on favorable terms and to integrate their business operations successfully;
•
our ability to enter into strategic alliances with healthcare systems that are leaders in their markets;
•
efforts to regulate the construction, acquisition or expansion of healthcare facilities;
•
our ability to attract and maintain good relationships with physicians who use our facilities;
•
our ability to enhance operating efficiencies at our surgical facilities and to control costs as the volume of cases performed at our facilities changes;
•
our ability to comply with applicable laws and regulations regulating the operation of our surgical facilities, including physician self-referral laws, laws relating to illegal remuneration under the Medicare, Medicaid or other governmental programs, and rules relating to privacy and security of patient health information and standards for electronic transactions;
•
our ability to comply with applicable corporate governance and financial reporting standards;
•
legislative changes restricting physician ownership of hospitals;
•
the risk of changes to laws governing the corporate practice of medicine that may require us to restructure some of our relationships, which could result in a significant loss of revenues, require us to purchase some or all of the non-controlling interests in our facilities, and divert resources to restructure or repurchase these interests;
•
risks related to the nature of our corporate structure, including the level of control exercised by Crestview;
•
our legal responsibility to the holders of ownership interests in the entities through which we own surgical facilities, which may conflict with the interests of our noteholders and prevent us from acting solely in our own best interests or the interests of our noteholders;
•
our ability to obtain the capital required to operate our business and fund acquisitions and developments on favorable terms;
•
the intense competition for physicians, strategic relationships, acquisitions and managed care contracts, which may result in a decline in our revenues, profitability and market share;
•
the geographic concentration of our operations in certain states, which makes us particularly sensitive to regulatory, economic and other conditions in those states;
•
our dependence on our senior management;
•
risks relating to the operation and integration of our information systems and potential cyber-security risks; and
•
other risks and uncertainties described in this report or detailed from time to time in our filings with the SEC.


29


In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur, and actual results could differ materially from those anticipated or implied in the forward-looking statements. When you consider these forward-looking statements, you should keep in mind these risk factors and other cautionary statements in this report.
These forward-looking statements speak only as of the date made. Other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Merger with Surgery Center Holdings, Inc.
On June 13, 2014, Holdings entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Surgery Center Holdings, Inc. (“Buyer”), Buyer’s wholly-owned subsidiary, SCH Acquisition Corp. (“Merger Sub”), and, solely in its capacity as the Stockholders’ Representative under the Merger Agreement, Crestview Symbion Holdings, L.L.C., an affiliate of Crestview. Pursuant to the terms of the Merger Agreement, Merger Sub is to merge with and into Holdings, with Holdings being the surviving corporation in the merger (the “Merger”). At the closing of the Merger, each share of common stock of Holdings, other than those held by Holdings or by Buyer, Merger Sub or their subsidiaries and other than those shares with respect to which appraisal rights are properly exercised in accordance with the General Corporation Law of the State of Delaware, will be converted into the right to receive a cash payment per share equal to (x) $792.0 million, subject to certain adjustments for Holdings’ cash, debt, transaction expenses, working capital and other items at closing, plus the aggregate exercise price of all vested options, minus certain escrowed amounts relating to post-closing purchase price adjustment and indemnity obligations, divided by (y) the number of shares outstanding on a fully-diluted basis assuming full exercise of vested options and exercise of rights to receive shares upon the exchange of the 8.00% Senior PIK Exchangeable Notes due 2017 issued by Symbion (the “Merger Consideration”). In addition, each outstanding option to purchase shares of Holdings’ common stock will be cancelled, and the holders of vested options will be paid an amount equal to the excess, if any, of the Merger Consideration over the per-share exercise price of such vested options.
Buyer has obtained financing commitments for the transactions contemplated by the Merger Agreement, the aggregate proceeds of which are to be sufficient for Buyer to pay the aggregate Merger Consideration and all related fees and expenses. Consummation of the Merger is not subject to a financing condition, but it is subject to customary closing conditions including (i) the absence of a material adverse effect on Holdings, (ii) the receipt of certain state regulatory approvals and (iii) the expiration or termination of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The parties anticipate that the transactions contemplated by the Merger Agreement will close near the end of the third quarter or early in the fourth quarter of 2014.
Executive Overview
We own and operate a national network of short stay surgical facilities in 23 states. Our surgical facilities, which include ambulatory surgery centers ("ASCs") and surgical hospitals, primarily provide non-emergency surgical procedures across many specialties, including, among others, cardiology, gastroenterology, ophthalmology, orthopedics and pain management.  Some of our surgical hospitals also provide acute care services such as diagnostic imaging, laboratory, obstetrics, oncology, pharmacy, physical therapy and wound care.
We own our surgical facilities in partnership with physicians and in some cases healthcare systems in the markets and communities we serve. We apply a market-based approach in structuring our partnerships with individual market dynamics driving the structure. We believe this approach aligns our interests with those of our partners.
As of August 8, 2014, we owned and operated 50 surgical facilities, including 44 ASCs and six surgical hospitals.  We also managed six additional ASCs.  We owned a majority interest in 30 of the 50 surgical facilities and consolidated 45 facilities for financial reporting purposes.  In addition to our surgical facilities, we also manage one physician clinic in a market in which we operate an ASC and a surgical hospital. We reported one operating surgical facility in discontinued operations.
When attractive opportunities arise, we may develop, acquire or operate surgical facilities through strategic relationships with healthcare systems and other healthcare providers.  We believe that forming a relationship with a healthcare system can enhance our ability to attract physicians and access managed care contracts for our surgical facilities in that market.  As of August 8, 2014, we have relationships with ten healthcare systems relating to 14 ASCs. These healthcare systems include:
•
Adventist Health System, with which we own and operate a surgical facility in Orange City, Florida;
•
Baptist Memorial Health Services, Inc., for which we manage six surgical facilities in Memphis, Tennessee and surrounding areas;
•
Berger Health Foundation, with which we own and operate a surgical facility in Circleville, Ohio;
•
Community Health Systems, with which we have partnered to acquire and develop surgical facilities;
•
Crozer-Keystone Health Systems, for which we manage and operate a surgical facility in Havertown, Pennsylvania;
•
Lee Health Ventures, with which we own and operate a surgical facility in Ft. Myers, Florida;
•
Munroe Regional Health Systems, with which we own and operate a surgical facility in Ocala, Florida;
•
Trinity Health System, with which we own and operate a surgical facility in Steubenville, Ohio;
•
Vanderbilt Health Services, Inc., with which we own and operate a surgical facility in Franklin, Tennessee; and
•
Wellmont Health Systems, with which we own and operate a surgical facility in Bristol, Tennessee.
We have benefited from both growth in overall outpatient surgery cases as well as the migration of surgical procedures from the hospital to the surgical facility setting.  Advancements in medical technology, such as lasers, arthroscopy and enhanced endoscopic techniques, have


30


reduced the trauma of surgery and the amount of recovery time required by patients following a surgical procedure.  Improvements in anesthesia also have shortened the recovery time for many patients and have reduced post-operative side effects such as pain, nausea and drowsiness.  These medical advancements have enabled more patients to undergo surgery in a surgical facility setting.
We continue to focus on improving the performance of our same store facilities, selectively acquiring established facilities, developing new facilities and adding new services. During the six months ended June 30, 2014, we acquired an incremental ownership interest of 13.6% in our surgical hospital located in Idaho Falls, Idaho for a purchase price of $24.4 million. In addition, the surgical hospital located in Lubbock, Texas, in which we have a 58.3% ownership interest, acquired the ancillary services of a physician practice located in the same market. The purchase price paid for the acquisition of these services was $428,000.
Revenues
Our revenues consist of patient service revenues and other service revenues.  Our patient service revenues relate to fees charged for surgical or diagnostic procedures performed at surgical facilities that we consolidate for financial reporting purposes.  Other service revenues consist of management and administrative service fees derived from the non-consolidated facilities that we account for under the equity method, management of surgical facilities in which we do not own an interest, and management services we provide to physician clinics for which we are not required to provide capital or additional assets.
The following table summarizes our revenues by service type as a percentage of total revenues:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
Patient service revenues
 
99.0
%
 
99.0
%
 
98.9
%
 
99.1
%
Other service revenues
 
1.0
%
 
1.0
%
 
1.1
%
 
0.9
%
Total revenues
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Payor Mix
The following table sets forth by type of payor the percentage of our patient service revenues generated in the periods indicated:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
Private insurance
 
57.4
%
 
59.2
%
 
57.7
%
 
59.1
%
Government
 
36.7
%
 
33.6
%
 
36.2
%
 
33.8
%
Self-pay
 
2.2
%
 
3.1
%
 
2.3
%
 
2.8
%
Other
 
3.7
%
 
4.1
%
 
3.8
%
 
4.3
%
Total patient service revenues
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Case Mix
We primarily operate multi-specialty facilities where physicians perform a variety of procedures in various specialties, including orthopedics, pain management, gastroenterology and ophthalmology, among others. We believe this diversification helps to protect us from adverse pricing and utilization trends in any individual procedure type and results in greater consistency in our case volume.


31


The following table sets forth the percentage of our cases by specialty generated in the periods indicated:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
Cardiology
 
2.1
%
 
2.1
%
 
2.0
%
 
2.2
%
Ear, nose and throat
 
4.9
%
 
5.7
%
 
4.9
%
 
5.8
%
Gastrointestinal
 
29.9
%
 
28.7
%
 
30.2
%
 
28.3
%
General surgery
 
4.0
%
 
4.1
%
 
4.1
%
 
4.1
%
Obstetrics/gynecology
 
3.7
%
 
3.5
%
 
3.6
%
 
3.6
%
Ophthalmology
 
16.3
%
 
17.3
%
 
16.2
%
 
17.2
%
Orthopedic
 
15.3
%
 
14.9
%
 
15.4
%
 
15.4
%
Pain management
 
12.6
%
 
12.8
%
 
12.5
%
 
12.4
%
Plastic surgery
 
2.2
%
 
2.4
%
 
2.1
%
 
2.5
%
Other
 
9.0
%
 
8.5
%
 
9.0
%
 
8.5
%
Total
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Case Growth
Same Store Information
For the three months ended June 30, 2014, we define same store facilities as those facilities that we have owned and operated since July 1, 2013 and for the six months ended June 30, 2014, we define same store facilities as those facilities that we have owned and operated since January 1, 2013. The following table includes same store information about both consolidated surgical facilities included in continuing operations whose revenues are included in our revenues and non-consolidated surgical facilities that are not reported in our revenues, as we account for these surgical facilities using the equity method.  This same store facilities table is presented to allow comparability to other companies in our industry.
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
Cases
 
55,242

 
55,384

 
107,212

 
107,290

Case growth
 
(0.3
)%
 
 
 
(0.1
)%
 
 
Net patient service revenue per case
 
$
2,727

 
$
2,454

 
$
2,720

 
$
2,526

Net patient service revenue per case growth
 
11.1
 %
 
 
 
7.7
 %
 
 
Number of same store surgical facilities
 
46

 
 
 
46

 
 
Consolidated Information
The following table sets forth information for all surgical facilities included in continuing operations that we consolidate for financial reporting purposes. Accordingly, the table includes surgical facilities that we have acquired or developed since July 1, 2013 for the three month periods and January 1, 2013 for the six month periods:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
Cases
 
51,913

 
53,074

 
100,875

 
102,841

Case growth
 
(2.2
)%
 
 
 
(1.9
)%
 
 
Net patient service revenue per case
 
$
2,712

 
$
2,469

 
$
2,709

 
$
2,530

Net patient service revenue per case growth
 
9.8
 %
 
 
 
7.1
 %
 
 
Number of consolidated surgical facilities included in continuing operations
 
44

 
44

 
44

 
44



32


Sources of Revenue and Recent Regulatory Developments
We are dependent upon private and government third-party sources of payment for the healthcare patient services we provide. The amounts that our surgical facilities receive in payment for their services may be adversely affected by market and cost factors as well as other factors over which we have no control, including Medicare, Medicaid, other federal and state regulations, cost containment and utilization decisions and reduced reimbursement schedules of third-party payors. The disclosures in this section are meant to supplement, and should be read in connection with, the disclosures set forth under the headings "Sources of Revenue" and "Governmental Regulation" in Item 1 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
Medicare Reimbursement
Medicare payment methodologies have been, and are expected to continue to be, reduced or revised significantly based on cost containment and policy considerations. The Centers for Medicare and Medicaid Services (“CMS”) has already begun to implement some of the Medicare reimbursement reductions required by the Patient Protection and Affordable Care Act (the “Affordable Care Act”) and the Health Care and Education Reconciliation Act of 2010 (together with the Affordable Care Act, the “Healthcare Reform Acts”). These reductions will likely be more prevalent and significant as more of the cost savings and other measures of the Affordable Care Act become effective.
In addition to the Healthcare Reform Acts, other legislation has required further reductions in Medicare payments. For example, the Budget Control Act of 2011 (the “BCA”), which was enacted on August 2, 2011, increased the nation’s debt ceiling while taking steps to reduce the federal deficit. The BCA requires $1.2 trillion in automatic across-the-board spending reductions for federal fiscal year (“FFY”) 2013 through FFY 2021, split evenly between domestic and defense spending. While certain programs (including the Medicaid program) are protected from these automatic spending reductions, payments to Medicare providers may be subject to reductions of up to 2.0%. The BCA's automatic spending reductions were originally set to begin on January 2, 2013. However, the enactment of the American Taxpayer Relief Act of 2012 (“ATRA”) postponed the implementation of the automatic spending reductions required by the BCA until March 1, 2013. On March 1, 2013, President Barack Obama signed an order implementing the automatic spending reductions required by the BCA. On December 26, 2013, the Pathway for SGR Reform Act of 2013 (the “Pathway Act”) was enacted. Among other things, the Pathway Act extended the automatic across-the-board spending reductions required by the BCA through FFY 2023. On February 11, 2014, Congress, as a part of a bill to restore certain military retiree pension benefits, approved a one-year extension of the automatic across-the-board spending reductions required by the BCA through 2024. On April 1, 2014, President Obama signed the Protecting Access to Medicare Act of 2014 (the “PAMA”) into law, which, among other things, realigns the automatic spending reductions in FFY 2024 such that there will be a 4.0% sequester for the first six months of FFY 2024 and a 0.0% sequester for the second six months of FFY 2024.
On March 4, 2014, the Office of Management & Budget released President Obama’s proposed budget for FFY 2015. Among other things, the Proposed Budget would reduce Medicare spending by $400 billion from FFY 2015 to FFY 2024. The Proposed Budget would achieve these reductions by, among other things, reducing payments to Medicare providers, reducing payments for prescription drugs covered under Medicare Part B and Part D, and increasing financial liabilities for certain Medicare beneficiaries.
We cannot predict whether President Obama's proposed budget will be implemented in its entirety, or if Congress will pass a different budget bill or take other legislative action that alters the across-the-board-spending reductions that have been implemented, reduces Medicare spending by a different or additional amount, or that imposes additional restrictions on Medicare programs, which could further reduce the revenue we receive from governmental payment programs.
Medicare Reimbursement-Ambulatory Surgery Centers
Payments under the Medicare program to ASCs are made under a system whereby the Secretary of the Department of Health and Human Services determines payment amounts prospectively for various categories of medical services performed in ASCs based upon the hospital outpatient prospective payment system (“OPPS”). On July 14, 2014, CMS published a proposed rule to update the Medicare program's payment policies and rates for ASCs for calendar year (“CY”) 2015. Among other things, the proposed rule applies a 1.2% increase to the ASC payment rate for CY 2015 for ASCs that successfully report the quality measures for the ASC Quality Reporting (“ASCQR”) Program and a 0.8% decrease for ASCs that do not. The increase is based on a proposed consumer price index for all urban consumers (CPI-U) update of 1.7%, which is reduced by a multi-factor productivity adjustment of 0.5%. In addition, among other things, the proposed rule also adds ten new procedures to the Medicare program’s list of ASC covered surgical procedures and adds one new quality measure to the ASCQR Program that ASCs will need to report in order to receive the full payment rate update for CY 2017 and subsequent years. CMS estimates that total Medicare payments to ASCs will increase by $243 million in CY 2015.
Medicare Reimbursement-Hospital Inpatient Services
Six of our surgical facilities are licensed as hospitals. Most inpatient services provided by hospitals are reimbursed by Medicare under the inpatient prospective payment system (“IPPS”). Under this prospective payment system, a hospital receives a fixed amount for inpatient hospital services based on each patient's final assigned Medicare-severity diagnosis related group (“MS-DRG”). Each MS-DRG is assigned a payment rate that is prospectively set using national average resources used per case for treating a patient with a particular diagnosis. This MS-DRG assignment also affects the prospectively determined capital rate paid with each MS-DRG. MS-DRG and capital payments are adjusted by a predetermined geographic adjustment factor assigned to the geographic area in which the hospital is located. The index used to


33


adjust the MS-DRG rates, known as the “hospital market basket index,” gives consideration to the inflation experienced by hospitals in purchasing goods and services.
On April 30, 2014, CMS issued the IPPS proposed rule for FFY 2015, which begins on October 1, 2014. Under the proposed rule, rates for inpatient stays in hospitals paid under the IPPS that successfully report certain quality data under the Hospital Inpatient Quality Reporting (“IQR”) Program would be increased by 1.3%. The rate increase is based on a proposed hospital market basket increase of 2.7%, which is reduced by (i) a multi-factor productivity adjustment of 0.4%, (ii) a 0.2% reduction required by the Healthcare Reform Acts, and (iii) a 0.8% documentation and coding recoupment adjustment required by the ATRA. Those hospitals that do not successfully report quality data under the IQR Program will be subject to a one-fourth reduction of the market basket increase prior to the application of the statutory adjustments. Previously, those hospitals received a 2.0% reduction in the “percentage increase” in IPPS payment rates. The update for hospitals that are not meaningful EHR users will be reduced by one-quarter of the market basket update, as well. In addition to the proposed payment rate increase for inpatient hospital stays, the IPPS proposed rule also, among other things, solicited comments on alternative payment approaches for short hospital stays. CMS projects that total Medicare spending on inpatient services will decrease by approximately $241 million in FFY 2015.
Medicare Reimbursement-Hospital Outpatient Services
On July 14, 2014, CMS published its OPPS proposed rule for CY 2015. Among other things, the proposed rule provides for a payment rate increase of 2.1% percent for hospitals that meet the reporting requirements of the Medicare Hospital Outpatient Quality Reporting Program and a payment rate increase of 0.1% for hospitals that do not. The proposed rate increase is based on a proposed hospital market basket increase of 2.7%, which is reduced by a multi-factor productivity adjustment of 0.4% and an additional 0.2% reduction required by the Healthcare Reform Acts.
The proposed rule also makes several other changes to the Medicare program’s OPPS, including revising the requirements for physician certification of hospital inpatient services such that a physician certification is only required for outlier and long-stay cases of 20 days or more, and requiring hospitals and physicians to provide additional information about services provided in off-campus provider-based departments on their claim forms.
Privacy and Security Requirements
On January 16, 2009, CMS published its 10th Edition of International Statistical Classification of Diseases and Related Health Problems (“ICD-10”) and related changes to the formats used for certain electronic transactions. ICD-10 contains significantly more diagnostic and procedural codes than the existing ICD-9 coding system, and as a result, the coding for the services provided in our surgical facilities and hospitals will require much greater specificity. ICD-10 will require a significant investment in technology and training. As a result, we may experience delays in reimbursement while our surgical facilities and the payors from which we seek reimbursement make the transition to ICD-10. While providers were originally required to complete the implementation of ICD-10 by October 1, 2014, Congress extended this deadline to October 1, 2015 with the passage of the PAMA. If any of our surgical facilities fail to implement the new ICD-10 diagnosis coding system by the deadline, the affected surgical facility will not be paid for services. We are not able to predict the overall financial impact of our transition to ICD-10
Adoption of Electronic Health Records
The HITECH Act  includes provisions designed to increase the use of Electronic Health Records (“EHR”) by both physicians and hospitals. Beginning with FFY 2011 and extending through FFY 2016, eligible hospitals may receive incentive payments based upon successfully demonstrating meaningful use of its certified EHR technology. Beginning in FFY 2015, those hospitals that do not successfully demonstrate meaningful use of EHR technology will be subject to reduced payments from Medicare. EHR meaningful use objectives and measures that hospitals and physicians must meet in order to qualify for incentive payments will be implemented in three stages. Stage 1 has been in effect since 2011 and on August 23, 2012, HHS released final requirements for Stage 2, which took effect starting in FFY 2014 for hospitals. We strive to comply with the EHR meaningful use requirements of the HITECH Act so as to qualify for incentive payments. Continued implementation of EHR and compliance with the HITECH Act will result in significant costs.  During the three months ended June 30, 2014 and 2013, we spent $96,000 and $1.1 million, respectively, related to hardware, software and implementation costs, of which $96,000 and $938,000, respectively, was capitalized in these periods. For the six months ended June 30, 2014 and 2013, we spent $572,000 and $3.0 million, respectively, related to hardware, software and implementation costs, of which $548,000 and $2.5 million, respectively, was capitalized in these periods. We expect to receive incentive payments and recognize corresponding revenue upon the completion of the EHR meaningful use requirements.
Healthcare Reform
The Healthcare Reform Acts have been subject to a number of challenges to their constitutionality. However, on June 28, 2012, the United States Supreme Court upheld most of the Affordable Care Act, including the “individual mandate” provision, which generally requires all individuals to purchase healthcare insurance or pay a penalty. The only provision of the Affordable Care Act that the Supreme Court struck down as unconstitutional was the provision that would have allowed the federal government to revoke all federal Medicaid funding to any state that did not expand its Medicaid program. In response to the ruling, a number of states have already indicated that they will not expand their Medicaid programs, which would result in the Affordable Care Act not providing coverage to some low-income persons in those states.


34


In addition, on July 22, 2014, the U.S. Court of Appeals for the District of Columbia and the U.S. Court of Appeals for the Fourth Circuit issued conflicting rulings on whether premium subsidies may be made available to individuals residing in the 36 states that have federally-run health insurance exchanges. The unavailability of premium subsidies for individuals purchasing their insurance through federally-run health insurance exchanges would result in many of those individuals dropping their coverage and increasing the number of uninsured.
In addition to the legal challenges, several bills have been and will likely continue to be introduced in Congress to defund, repeal or amend all or significant provisions of the Affordable Care Act, and a number of provisions of the Affordable Care Act that were supposed to become effective in 2014, such as the provision that requires employers with 50 or more full-time employees or full-time employee equivalents to provide affordable health insurance to those employees, have been delayed until 2015 or 2016. As a result, it is difficult to predict the impact the Healthcare Reform Acts will have on our business given the delay in implementing regulations and key provisions of the Healthcare Reform Acts and the possible ongoing amendment or repeal of elements of the Healthcare Reform Acts. However, depending on how the Healthcare Reform Acts are ultimately interpreted, amended and implemented, they could have an adverse effect on our business, financial condition and results of operations.
Operating Income Margin
Our operating income margin for the three months ended June 30, 2014 increased to 15.7% from 10.0% during the three months ended June 30, 2013. During the three months ended June 30, 2014, we recorded $2.3 million of merger transaction costs related to the Merger. During the three months ended June 30, 2013, we recorded a loss of $7.7 million related to an asset sale at our surgical hospital in Austin, Texas. Excluding the impact of these items, our operating income margin was 17.3% for the three months ended June 30, 2014 and 15.8% for the three months ended June 30, 2013. This increase in the 2014 period from the 2013 period is primarily attributable to our surgical hospital in Lubbock, Texas, which we acquired in June 2012. We have made significant investments in this facility to implement new patient service lines. During 2013, these investments put pressure on our operating margins as they were not fully developed. For 2014, the new patient service lines are maturing and are positively impacting our operating margins.
Acquisitions and Developments
Effective March 7, 2014, we acquired an incremental ownership interest of 13.6% in the surgical hospital located in Idaho Falls, Idaho for a purchase price of $24.4 million. As of June 30, 2014, we had a 61.7% ownership interest in this facility. This transaction was partially financed with $10.0 million of proceeds from the Credit Facility and the remainder was funded with cash from continuing operations.
Effective January 31, 2014, the surgical hospital located in Lubbock, Texas, in which we have a 58.3% ownership interest, acquired the ancillary services of a physician practice located in the same market. The purchase price paid for the acquisition of these services was $428,000. We funded this acquisition with cash from continuing operations. These services were merged into the operations of the surgical hospital.
Discontinued Operations and Divestitures
Effective March 31, 2014, we reclassified our surgical facility located in Lynbrook, New York to discontinued operations. On May 22, 2014, we completed the sale of this facility. We recorded net proceeds of $3.7 million on this transaction and recognized a net loss of $6.6 million. The net loss consisted of an impairment charge of $6.6 million recorded as of March 31, 2014 and $37,000 of other net write-offs related to the facility, which were recorded in the three months ended June 30, 2014. The fair value used to calculate impairment as of March 31, 2014 was estimated based on what a market participant would be willing to pay as of that date and represented a Level 2 non-recurring fair value measurement. The net loss on sale of this facility, including impairment, was included in net loss from discontinued operations, net of income taxes, on the consolidated statements of income for the three and six months ended June 30, 2014, as applicable. This facility was previously consolidated for financial reporting purposes.
Effective December 31, 2013, we reclassified our surgical facility located in Worcester, Massachusetts to discontinued operations. We entered into a purchase agreement effective January 2, 2014 related to the sale of this facility and expect to complete this transaction in the third quarter of 2014. The results of operations related to this facility have been included in discontinued operations for the three and six months ended June 30, 2014 and 2013. This facility is consolidated for financial reporting purposes.


35


A summary of certain operating results impacting the statements of operations related to discontinued operations follows (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
Revenues
 
$
3,050

 
$
4,034

 
$
5,468

 
$
9,553

Operating income
 
208

 
465

 
632

 
982

Loss (gain) on sale or disposal
 
37

 
(1,478
)
 
37

 
(563
)
Impairment of assets held for sale
 
—

 
—

 
6,577

 
—

Benefit from income taxes
 
(37
)
 
(467
)
 
(48
)
 
(462
)
Income (loss) from discontinued operations, net of income taxes
 
208

 
2,410

 
(5,934
)
 
2,007

Results of Operations
The following tables summarize certain results from the statements of operations for the three and six months ended June 30, 2014 and 2013. The tables also show the percentage relationship to revenues for the periods indicated (dollars in thousands):
    
 
 
Three Months Ended June 30,
 
 
2014
 
2013
 
 
Amount
 
% of Revenues
 
Amount
 
% of Revenues
 
 
 
 
 
 
 
 
 
Revenues
 
$
142,210

 
100.0
 %
 
$
132,264

 
100.0
 %
Operating expenses:
 
 
 
 
 
 
 
 
Cost of revenues
 
104,312

 
73.4
 %
 
99,495

 
75.2
 %
General and administrative expenses
 
5,530

 
3.9
 %
 
5,283

 
4.0
 %
Depreciation and amortization
 
5,899

 
4.1
 %
 
5,350

 
4.0
 %
Provision for doubtful accounts
 
2,891

 
2.0
 %
 
2,359

 
1.8
 %
Income from equity investments
 
(1,008
)
 
(0.7
)%
 
(1,039
)
 
(0.8
)%
Loss on disposal or impairment of
 long-lived assets, net
 
4

 
—
 %
 
7,673

 
5.8
 %
Proceeds from insurance settlements, net
 
(31
)
 
—
 %
 
—

 
—
 %
Merger transaction costs
 
2,318

 
1.6
 %
 
—

 
—
 %
Litigation settlements, net
 
—

 
—
 %
 
(35
)
 
—
 %
Total operating expenses
 
119,915

 
84.3
 %
 
119,086

 
90.0
 %
Operating income
 
22,295

 
15.7
 %
 
13,178

 
10.0
 %
Interest expense, net
 
(14,491
)
 
(10.2
)%
 
(14,643
)
 
(11.1
)%
Income (loss) before income taxes and discontinued operations
 
7,804

 
5.5
 %
 
(1,465
)
 
(1.1
)%
Provision for (benefit from) income taxes
 
1,429

 
1.0
 %
 
(540
)
 
(0.4
)%
Income (loss) from continuing operations
 
6,375

 
4.5
 %
 
(925
)
 
(0.7
)%
Income from discontinued operations, net of income taxes
 
208

 
0.1
 %
 
2,410

 
1.8
 %
Net income
 
6,583

 
4.6
 %
 
1,485

 
1.1
 %
Less: Net income attributable to non-controlling interests
 
(9,665
)
 
(6.8
)%
 
(8,663
)
 
(6.5
)%
Net loss attributable to Symbion, Inc.
 
$
(3,082
)
 
(2.2
)%
 
$
(7,178
)
 
(5.4
)%


36


    
 
 
Six Months Ended June 30,
 
 
2014
 
2013
 
 
Amount
 
% of Revenues
 
Amount
 
% of Revenues
 
 
 
 
 
 
 
 
 
Revenues
 
$
276,176

 
100.0
 %
 
$
262,647

 
100.0
 %
Operating expenses:
 
 
 
 
 
 
 
 
Cost of revenues
 
202,827

 
73.4
 %
 
196,309

 
74.7
 %
General and administrative expenses
 
11,175

 
4.1
 %
 
11,124

 
4.3
 %
Depreciation and amortization
 
11,474

 
4.2
 %
 
11,227

 
4.3
 %
Provision for doubtful accounts
 
6,686

 
2.4
 %
 
5,184

 
2.0
 %
Income from equity investments
 
(1,606
)
 
(0.6
)%
 
(1,920
)
 
(0.7
)%
(Gain) loss on disposal or impairment of
 long-lived assets, net
 
(257
)
 
(0.1
)%
 
7,181

 
2.7
 %
Proceeds from insurance settlements, net
 
(81
)
 
—
 %
 
—

 
—
 %
Merger transaction costs
 
2,318

 
0.8
 %
 
—

 
—
 %
Litigation settlements, net
 
3

 
—
 %
 
(198
)
 
(0.1
)%
Total operating expenses
 
232,539

 
84.2
 %
 
228,907

 
87.2
 %
Operating income
 
43,637

 
15.8
 %
 
33,740

 
12.8
 %
Interest expense, net
 
(28,856
)
 
(10.4
)%
 
(29,396
)
 
(11.2
)%
Income before income taxes and discontinued operations
 
14,781

 
5.4
 %
 
4,344

 
1.6
 %
Provision for income taxes
 
2,784

 
1.0
 %
 
608

 
0.2
 %
Income from continuing operations
 
11,997

 
4.4
 %
 
3,736

 
1.4
 %
(Loss) income from discontinued operations, net of income taxes
 
(5,934
)
 
(2.1
)%
 
2,007

 
0.8
 %
Net income
 
6,063

 
2.3
 %
 
5,743

 
2.2
 %
Less: Net income attributable to non-controlling interests
 
(18,278
)
 
(6.6
)%
 
(16,967
)
 
(6.5
)%
Net loss attributable to Symbion, Inc.
 
$
(12,215
)
 
(4.3
)%
 
$
(11,224
)
 
(4.3
)%
Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013
Overview. During the three months ended June 30, 2014, our revenues increased 7.5% to $142.2 million from $132.3 million for the three months ended June 30, 2013. We incurred a net loss attributable to Symbion, Inc. for the 2014 period of $3.1 million, compared to $7.2 million for the 2013 period.
Our financial results for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 reflect the addition of surgical facilities and ancillary services that we have acquired since July 1, 2013. In July 2013, we acquired a minority ownership interest in a surgical facility located in Jackson, Tennessee which we previously managed and now account for under the equity method. In December 2013, we acquired a surgical facility located in Providence, Rhode Island which we consolidate for financial reporting purposes. We also acquired ancillary services at our surgical hospitals located in Great Falls, Montana and Lubbock, Texas in December 2013 and January 2014, respectively. Our financial results for the 2014 period when compared to the 2013 period also reflect the impact of the June 2013 transaction associated with our surgical hospital located in Austin, Texas, which included an asset sale and a decrease in our ownership interest to 25.0% in this facility. This facility was previously consolidated for financial reporting purposes but is now accounted for as an equity method investment.
Revenues. Revenues for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 were as follows (dollars in thousands):
 
 
Three Months Ended
June 30,
 
 
 
 
 
 
2014
 
2013
 
Dollar
Variance
 
Percent
Variance
 
 
 
 
 
 
 
 
 
Patient service revenues
 
$
140,767

 
$
131,014

 
$
9,753

 
7.4
%
Other service revenues
 
1,443

 
1,250

 
193

 
15.4
%
Total revenues
 
$
142,210

 
$
132,264

 
$
9,946

 
7.5
%
Patient service revenues increased 7.4% to $140.8 million for the three months ended June 30, 2014 compared to $131.0 million for the three months ended June 30, 2013. This increase is primarily attributable to the surgical facilities and ancillary services acquired since July 1, 2013.


37


Cost of Revenues. Cost of revenues increased to $104.3 million for the three months ended June 30, 2014 compared to $99.5 million for the three months ended June 30, 2013 primarily attributable to the surgical facilities and ancillary services we acquired since July 1, 2013. As a percentage of revenues, cost of revenues were 73.4% for the 2014 period and 75.2% for the 2013 period.
General and Administrative Expenses. General and administrative expenses increased to $5.5 million for the three months ended June 30, 2014 compared to $5.3 million for the three months ended June 30, 2013. As a percentage of revenues, general and administrative expenses were 3.9% for the 2014 period compared to 4.0% for the 2013 period.
Depreciation and Amortization. Depreciation and amortization expenses increased to $5.9 million for the three months ended June 30, 2014 compared to $5.4 million for the three months ended June 30, 2013. As a percentage of revenues, depreciation and amortization expenses were 4.1% for the 2014 period and 4.0% for the 2013 period.
Provision for Doubtful Accounts. The provision for doubtful accounts increased to $2.9 million for the three months ended June 30, 2014 compared to $2.4 million for the three months ended June 30, 2013. As a percentage of revenues, the provision for doubtful accounts was 2.0% for the 2014 period and 1.8% for the 2013 period.
Loss on Disposal or Impairment of Long-Lived Assets, Net. The net loss on disposal of long-lived assets was $4,000 for the three months ended June 30, 2014 and $7.7 million for the three months ended June 30, 2013. The loss in each period was primarily related to the sale of ownership interests in surgical facilities.
Merger Transaction Costs. We incurred $2.3 million of merger transaction costs for the three months ended June 30, 2014 related to the Merger.
Operating Income. Our operating income was $22.3 million for the three months ended June 30, 2014 compared to $13.2 million for the three months ended June 30, 2013. As a percentage of revenues, operating income was 15.7% for the 2014 period and 10.0% for the 2013 period. During the three months ended June 30, 2014, we recorded $2.3 million of merger transaction costs related to the Merger. During the three months ended June 30, 2013, we recorded a loss of $7.7 million related to an asset sale at our surgical hospital in Austin, Texas. Excluding the impact of these items, our operating income margin was 17.3% for the three months ended June 30, 2014 and 15.8% for the three months ended June 30, 2013.
The increase in the 2014 period from the 2013 period is primarily attributable to our surgical hospital in Lubbock, Texas, which we acquired in June 2012. We have made significant investments in this facility to implement new patient service lines. During the 2013 period, these investments put pressure on our operating margins as they were not fully developed. For the 2014 period, the service lines have more fully matured and are positively impacting our operating margins.
Interest Expense, Net. Interest expense, net, was $14.5 million for the three months ended June 30, 2014 compared to $14.6 million for the three months ended June 30, 2013.
Income from Discontinued Operations, Net of Income Taxes. During the three months ended June 30, 2014, we had income from discontinued operations of $208,000 which primarily related to the sale of our surgical facility located in Lynbrook, New York. In the three months ended June 30, 2013, we had income from discontinued operations of $2.4 million, primarily related to the net impact of the sale of our surgical facility located in Havertown, Pennsylvania.
Provision for (Benefit From) Income Taxes.  The provision for income taxes was $1.4 million for the three months ended June 30, 2014 compared to a benefit of $540,000 for the three months ended June 30, 2013. Income tax expense in both periods was primarily attributable to non-cash deferred income tax expense related to our partnership investments. Income tax expense for the three months ended June 30, 2013 was offset by the tax benefit related to the deferred tax effect of the asset sale at our surgical hospital in Austin, Texas.
Net Income Attributable to Non-Controlling Interests. Net income attributable to non-controlling interests increased to $9.7 million for the three months ended June 30, 2014 compared to $8.7 million for the three months ended June 30, 2013. The increase was primarily due to the increase in net income at our surgical facilities. As a percentage of revenues, net income attributable to non-controlling interests was 6.8% in the 2014 period and 6.5% for the 2013 period.
Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013
Overview. During the six months ended June 30, 2014, our revenues increased 5.2% to $276.2 million from $262.6 million for the six months ended June 30, 2013. We incurred a net loss attributable to Symbion, Inc. for the 2014 period of $12.2 million, compared to $11.2 million for the 2013 period.
Our financial results for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 reflect the addition of surgical facilities and ancillary services that we have acquired since July 1, 2013. In July 2013, we acquired a minority ownership interest in a surgical facility located in Jackson, Tennessee, which we previously managed and now account for under the equity method. In December 2013, we acquired a surgical facility located in Providence, Rhode Island which we consolidate for financial reporting purposes. We also acquired ancillary services at our surgical hospitals located in Great Falls, Montana and Lubbock, Texas in December 2013 and January 2014, respectively. Our financial results for the 2014 period when compared to the 2013 period also reflect the impact of the June 2013 transaction associated with our surgical hospital located in Austin, Texas, which included an asset sale and a decrease in our ownership interest to 25.0% in this facility. This facility was previously consolidated for financial reporting purposes but is now accounted for as an equity method investment.


38


Revenues. Revenues for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 were as follows (dollars in thousands):
 
 
Six Months Ended
June 30,
 
 
 
 
 
 
2014
 
2013
 
Dollar
Variance
 
Percent
Variance
 
 
 
 
 
 
 
 
 
Patient service revenues
 
$
273,297

 
$
260,202

 
$
13,095

 
5.0
%
Other service revenues
 
2,879

 
2,445

 
434

 
17.8
%
Total revenues
 
$
276,176

 
$
262,647

 
$
13,529

 
5.2
%
Patient service revenues increased 5.0% to $273.3 million for the six months ended June 30, 2014 compared to $260.2 million for the six months ended June 30, 2013. This increase is primarily attributable to the surgical facilities and ancillary services we acquired since July 1, 2013.
Cost of Revenues. Cost of revenues increased to $202.8 million for the six months ended June 30, 2014 compared to $196.3 million for the six months ended June 30, 2013 primarily attributable to the surgical facilities and ancillary services we acquired since July 1, 2013. As a percentage of revenues, cost of revenues were 73.4% for the 2014 period and 74.7% for the 2013 period.
General and Administrative Expenses. General and administrative expenses were $11.2 million for the six months ended June 30, 2014 compared to $11.1 million for the six months ended June 30, 2013. As a percentage of revenues, general and administrative expenses were 4.1% for the 2014 period compared to 4.3% for the 2013 period.
Depreciation and Amortization. Depreciation and amortization expenses increased to $11.5 million for the six months ended June 30, 2014 compared to $11.2 million for the six months ended June 30, 2013. As a percentage of revenues, depreciation and amortization expenses were 4.2% for the 2014 period and 4.3% for the 2013 period.
Provision for Doubtful Accounts. The provision for doubtful accounts increased to $6.7 million for the six months ended June 30, 2014 compared to $5.2 million for the six months ended June 30, 2013. As a percentage of revenues, the provision for doubtful accounts was 2.4% for the 2014 period and 2.0% for the 2013 period.
(Gain) Loss on Disposal or Impairment of Long-Lived Assets, Net. The net gain on disposal or impairment of long-lived assets was $257,000 for the six months ended June 30, 2014, and the net loss on disposal of long-lived assets was $7.2 million for the six months ended June 30, 2013. The net loss for the six months ended June 30, 2013 primarily related to the asset sale at our surgical hospital located in Austin, Texas.
Merger Transaction Costs. We incurred $2.3 million of merger transaction costs for the six months ended June 30, 2014 related to the Merger.
Operating Income. Our operating income was $43.6 million for the six months ended June 30, 2014 compared to $33.7 million for the six months ended June 30, 2013. As a percentage of revenues, operating income was 15.8% for the 2014 period and 12.8% for the 2013 period. During the six months ended June 30, 2014, we recorded $2.3 million of merger transaction costs related to the Merger. During the six months ended June 30, 2013, we recorded a loss of $7.7 million related to the asset sale at our surgical hospital in Austin, Texas. Excluding the impact of these items, our operating income margin was 16.6% for the six months ended June 30, 2014 and 15.8% for the six months ended June 30, 2013.
Interest Expense, Net. Interest expense, net, was $28.9 million for the six months ended June 30, 2014 compared to $29.4 million for the six months ended June 30, 2013.
Loss (Income) from Discontinued Operations, Net of Income Taxes. During the six months ended June 30, 2014, we had a loss from discontinued operations of $5.9 million, which primarily related to our surgical facility located in Lynbrook, New York, which included an impairment charge of $6.6 million to write-down our assets held for sale at this facility to fair value, less costs to sell. In the six months ended June 30, 2013, we had income from discontinued operations of $2.0 million primarily related to the disposal of our surgical facility located in San Antonio, Texas and the sale of our surgical facility located in Havertown, Pennsylvania.
Provision for Income Taxes.  The provision for income taxes was $2.8 million for the six months ended June 30, 2014 compared to $608,000 for the six months ended June 30, 2013. Income tax expense in both periods was primarily attributable to non-cash deferred income tax expense related to our partnership investments.
Net Income Attributable to Non-Controlling Interests. Net income attributable to non-controlling interests increased to $18.3 million for the six months ended June 30, 2014 compared to $17.0 million for the six months ended June 30, 2013. The increase was primarily due to the increase in net income at our surgical facilities. As a percentage of revenues, net income attributable to non-controlling interests was 6.6% for the 2014 period and 6.5% for the 2013 period.


39


Liquidity and Capital Resources
Operating Activities
During the six months ended June 30, 2014, we generated operating cash flow from continuing operations of $31.7 million compared to $21.2 million for the six months ended June 30, 2013. This increase is primarily due to the increase in operating income in the 2014 period compared to the 2013 period and the investment that we made in new patient service lines at our surgical hospital located in Lubbock, Texas. Additionally, the 2013 period was negatively impacted as a result of implementing EHR technology. At June 30, 2014, we had working capital of $81.4 million compared to $87.7 million at December 31, 2013.
Investing Activities
Net cash used in investing activities of continuing operations for the six months ended June 30, 2014 was $11.5 million. We paid $11.3 million related to purchases of property and equipment. In addition, we paid $434,000 related to our acquisition of ancillary services at our surgical hospital located in Lubbock, Texas, which was funded with cash from continuing operations. During the 2014 period, we received net proceeds from discontinued operations of $3.7 million from the sale of surgical facilities, primarily related to the sale of our surgical facility located in Lynbrook, New York.
Net cash used in investing activities of continuing operations for the six months ended June 30, 2013 was $3.0 million. We paid $8.1 million related to purchases of property and equipment. During the 2013 period, we received proceeds of $2.9 million, primarily related to our asset sale at our surgical hospital located in Austin, Texas. Additionally, we had proceeds from discontinued operations of $3.7 million, net of distributions to non-controlling interest partners, related to our sale of a surgical facility located in Havertown, Pennsylvania.
Financing Activities
Net cash used in financing activities of continuing operations during the six months ended June 30, 2014 was $29.1 million. We paid $24.4 million to acquire an additional 13.6% ownership interest in our surgical hospital located in Idaho Falls, Idaho. We borrowed $10.0 million on our revolving credit facility to partially fund this transaction. We distributed $18.3 million in cash to non-controlling interest holders during the 2014 period. In addition, we incurred other facility level borrowings of $8.7 million during the six months ended June 30, 2014 and made scheduled principal payments on our long-term debt totaling $5.7 million.
Net cash used in financing activities of continuing operations during the six months ended June 30, 2013 was $22.4 million. We distributed $16.3 million in cash to non-controlling interest holders during the period. During the 2013 period, we refinanced facility level debt at our surgical hospital located in Idaho Falls, Idaho facility. This refinancing transaction resulted in $6.5 million of borrowings from a new lender, $7.5 million of repayments to the previous lenders and $488,000 of debt issuance cost payments. We made scheduled principal payments on our long-term debt during the six months ended June 30, 2013 totaling $6.1 million.
Long-Term Debt
A summary of long-term debt follows (in thousands):
 
 
June 30,
2014
 
December 31,
2013
 
 
 
 
 
Credit Facility
 
$
10,000

 
$
—

Senior Secured Notes, net of debt issuance discount of $2,321 and $2,858 at June 30, 2014 and December 31, 2013, respectively
 
338,679

 
338,142

PIK Exchangeable Notes
 
123,384

 
118,639

Toggle Notes
 
73,307

 
73,475

Notes payable and secured loans
 
29,148

 
24,970

Capital lease obligations
 
6,182

 
4,753

Total debt
 
580,700

 
559,979

Less: Current maturities
 
(10,874
)
 
(8,993
)
Total long-term debt
 
$
569,826

 
$
550,986

Credit Facility
Our Credit Facility matures on December 15, 2015. During the six months ended June 30, 2014, we borrowed $10.0 million on the Credit Facility. As of June 30, 2014, we had letters of credit outstanding of $1.8 million and $38.2 million of availability under the Credit Facility.
Loans under the Credit Facility bear interest, at our option, at the reserve adjusted LIBOR plus 4.50% or at the alternate base rate plus 3.50%. We are required to pay a commitment fee at a rate equal to 0.50% per annum on the undrawn portion of commitments under the Credit Facility. This fee is payable quarterly in arrears and on the date of termination or expiration of the commitments. The interest rate on the Credit Facility was 4.65% at June 30, 2014.


40


The Credit Facility contains financial covenants requiring us not to exceed a maximum net senior secured leverage ratio or fall below a minimum cash interest coverage ratio, in each case tested quarterly. Borrowings under the Credit Facility are subject to significant conditions, including the absence of any material adverse change. At June 30, 2014, we were in compliance with all material covenants contained in the Credit Facility.
Subject to and conditioned upon the closing of the Merger, we are required to repay all amounts outstanding under the Credit Facility.
Senior Secured Notes
The Senior Secured Notes mature on June 15, 2016. The Senior Secured Notes were issued at a 1.51% discount and interest accrues at the rate of 8.00% per annum, payable on June 15 and December 15 of each year. At June 30, 2014, we were in compliance with all material covenants contained in the indenture governing the Senior Secured Notes.
We may redeem all or any portion of the Senior Secured Notes on or after June 15, 2014 at the redemption price set forth in the indenture governing the Senior Secured Notes, plus accrued interest. At June 30, 2014, we had not redeemed any of the Senior Secured Notes.
Subject to and conditioned upon the closing of the Merger, we are required to redeem for cash or otherwise satisfy and discharge our obligations with respect to all of the outstanding Senior Secured Notes under the Merger Agreement.
PIK Exchangeable Notes
The PIK Exchangeable Notes mature on June 15, 2017. Interest accrues on the PIK Exchangeable Notes at a rate of 8.00% per annum, compounding semi-annually on June 15 and December 15 of each year. We pay interest on the PIK Exchangeable Notes in kind by increasing the principal amount of the PIK Exchangeable Notes on each interest accrual date by an amount equal to the entire amount of the accrued interest. We record this accrued interest in other current liabilities until the interest payment date. On June 15 and December 15 of each year, we reclassify the accrued interest to long-term debt. As of June 30, 2014, we had accrued interest of $439,000 on the PIK Exchangeable Notes, which was included in other current liabilities on the consolidated balance sheet. At June 30, 2014, we were in compliance with all material covenants contained in the indenture governing the PIK Exchangeable Notes.
The PIK Exchangeable Notes are exchangeable into shares of common stock of Holdings at any time prior to the close of business on the business day immediately preceding the maturity date of the PIK Exchangeable Notes at a per share exchange price of $3.50. Upon exchange, holders of the PIK Exchangeable Notes will receive a number of shares of common stock of Holdings equal to (i) the accreted principal amount of the PIK Exchangeable Notes to be exchanged, plus accrued and non-capitalized interest, divided by (ii) the exchange price. The exchange price in effect at any time will be subject to customary adjustments.
On or after June 15, 2014, we may redeem some or all of the PIK Exchangeable Notes for cash at a redemption price equal to a specified percentage of the accreted principal amount of the PIK Exchangeable Notes to be redeemed, plus accrued and non-capitalized interest. The specific percentage for such redemptions will be 104% for redemptions during the year commencing on June 15, 2014, 102% for redemptions during the year commencing on June 15, 2015, and 100% for redemptions during the year commencing on June 15, 2016.
Subject to and conditioned upon the closing of the Merger, we expect all of the PIK Exchangeable Notes to be exchanged for shares of common stock of Holdings immediately prior to the closing of the Merger.
Toggle Notes
The Toggle Notes mature on August 23, 2015.  The payment in kind option on the Toggle Notes expired in February 2012. Cash interest on the Toggle Notes accrues at the rate of 11.0% per year. As of June 30, 2014, we had accrued interest of $2.9 million on the Toggle Notes which is included in other current liabilities on the consolidated balance sheet.
The indenture governing the Toggle Notes contains various restrictive covenants, including financial covenants that limit our ability and the ability of our subsidiaries to borrow money or guarantee other indebtedness, grant liens, make investments, sell assets, pay dividends or engage in transactions with affiliates. At June 30, 2014, we were in compliance with all material covenants contained in the indenture governing the Toggle Notes.
The indenture governing the Toggle Notes includes a mandatory redemption provision. Under this provision, if the Toggle Notes would otherwise constitute applicable high yield discount obligations within the meaning of Section 163(i)(1) of the Internal Revenue Code of 1986, as amended, we are required to redeem, for cash, a portion of the Toggle Notes then outstanding, equal to the mandatory principal redemption amount. Under the mandatory redemption provisions of the Toggle Notes, we have repaid $21.4 million of the principal outstanding balance through June 30, 2014.
Subject to and conditioned upon the closing of the Merger, we are required to redeem for cash or otherwise satisfy and discharge our obligations with respect to all of the outstanding Toggle Notes under the Merger Agreement.
Notes Payable to Banks
Certain of our subsidiaries have outstanding bank indebtedness, which is collateralized by the real estate and equipment owned by the surgical facilities to which the loans were made.  The various bank indebtedness agreements contain covenants to maintain certain financial ratios and also restrict encumbrance of assets, creation of indebtedness, investing activities and payment of distributions.


41



Inflation
Inflation and changing prices have not significantly affected our operating results or the markets in which we operate.
Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-8, “Presentation of Financial Statements and Property, Plant, and Equipment - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-8”). Among other provisions and in addition to expanded disclosures, ASU 2014-8 changes the definition of what components of an entity qualify for discontinued operations treatment and reporting from a reportable segment, operating segment, reporting unit, subsidiary or asset group to only those components of an entity that represent a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. Additionally, ASU 2014-8 requires disclosure about a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements, including the pretax profit or loss, attributable to the component of an entity for the period in which it is disposed of or is classified as held for sale. The disclosure of this information is required for all of the same periods that are presented in the entity’s results of operations for the period.
From time-to-time, a company may identify one or more individual facilities that do not meet its on-going or future business strategy. In accordance with ASU 2014-8, in the event that an individually significant facility is identified for disposal but does not represent a strategic shift that has, or will have, a major effect on a company's operating and financial results, the results of an identified facility would continue to be reported as a component of the company's consolidated results. In this event and in accordance with ASU 2014-8, additional disclosures would be required.
The provisions of ASU 2014-8 are effective prospectively for all disposals or classifications as held for sale of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted. We are currently assessing the impact of ASU 2014-8 on our operating and financial results and anticipates adopting the provisions of ASU 2014-8 as of January 1, 2015.
In May 2014, the FASB issued Accounting Standards Update No. 2014-9 (ASU 2014-9) “Revenue from Contracts with Customers.” ASU 2014-9 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)”, and requires entities to recognize revenue when they transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-9 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2014-9 on our consolidated financial statements.
EBITDA and Consolidated Adjusted EBITDA
When we use the term “EBITDA,” we are referring to net income plus (a) income (loss) from discontinued operations, net of income taxes, (b) (provision for) benefit from income taxes, (c) interest expense, net, (d) depreciation and amortization, (e) non-cash (gains) losses, including those related to disposal or impairment of long-lived assets and debt extinguishment, if any, (f) merger transaction costs and (g) non-cash stock-based compensation expense, minus (h) net income attributable to non-controlling interests. Non-controlling interests represent the interests of third parties, such as physicians, and in some cases, healthcare systems that own an interest in surgical facilities that we consolidate for financial reporting purposes. Our operating strategy is to apply a market-based approach in structuring our partnerships with individual market dynamics driving the structure. We believe that it is helpful to investors to present EBITDA as defined above because it excludes the portion of net income attributable to these third-party interests and clarifies for investors our portion of EBITDA generated by our surgical facilities and other operations.
We use EBITDA as a measure of liquidity. We have included it because we believe that it provides investors with additional information about our ability to incur and service debt and make capital expenditures. We use "Consolidated Adjusted EBITDA" to determine compliance with some of the covenants under the Credit Facility, as well as to determine the interest rate and commitment fee payable under our Credit Facility. When we use the term "Consolidated Adjusted EBITDA", we are referring to EBITDA, as defined above, adjusted for cash payments on our Idaho Falls facility lease, intercompany notes and pro forma acquisition and other non-cash adjustments.
EBITDA and Consolidated Adjusted EBITDA are not measurements of financial performance or liquidity under GAAP. They should not be considered in isolation or as a substitute for net income, operating income, cash flows from operating, investing or financing activities, or any other measure calculated in accordance with generally accepted accounting principles. The items excluded from EBITDA and Consolidated Adjusted EBITDA are significant components in understanding and evaluating financial performance and liquidity. Our calculation of EBITDA is not comparable to the EBITDA measure we have used in certain prior periods but our EBITDA measure is consistent with the measure of EBITDA less income attributable to non-controlling interests previously reported. Our calculation of EBITDA and Consolidated Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.


42


The following table reconciles EBITDA to net cash provided by operating activities — continuing operations (in thousands and unaudited):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
EBITDA
 
$
20,949

 
$
17,538

 
$
39,088

 
$
35,284

Interest expense, net
 
(14,491
)
 
(14,643
)
 
(28,856
)
 
(29,396
)
(Provision for) benefit from income taxes
 
(1,429
)
 
540

 
(2,784
)
 
(608
)
Depreciation and amortization
 
(5,899
)
 
(5,350
)
 
(11,474
)
 
(11,227
)
Stock-based compensation
 
(98
)
 
—

 
(194
)
 
(103
)
(Loss) gain on disposal or impairment of long-lived assets, net
 
(4
)
 
(7,673
)
 
257

 
(7,181
)
Merger transaction costs
 
(2,318
)
 
—

 
(2,318
)
 
—

Net income attributable to non-controlling interests
 
9,665

 
8,663

 
18,278

 
16,967

Income (loss) from discontinued operations, net of income taxes
 
208

 
2,410

 
(5,934
)
 
2,007

Net (loss) income
 
6,583

 
1,485

 
6,063

 
5,743

Loss (income) from discontinued operations, net of income taxes
 
(208
)
 
(2,410
)
 
5,934

 
(2,007
)
Depreciation and amortization
 
5,899

 
5,350

 
11,474

 
11,227

Amortization of debt issuance costs and discounts
 
1,023

 
965

 
2,027

 
1,928

Payment-in-kind interest expense
 
2,389

 
2,209

 
4,762

 
4,403

Stock-based compensation
 
98

 
—

 
194

 
103

Loss (gain) on disposal or impairment of long-lived assets, net
 
4

 
7,673

 
(257
)
 
7,181

Deferred income taxes
 
1,271

 
(838
)
 
2,645

 
257

Income (loss) from equity investments, net of distributions received
 
(133
)
 
(272
)
 
225

 
(341
)
Provision for doubtful accounts
 
2,891

 
2,359

 
6,686

 
5,184

Changes in operating assets and liabilities, net of acquisitions and divestitures:
 
 
 
 
 
 
 
 
Accounts receivable
 
(1,078
)
 
(4,760
)
 
(7,653
)
 
(6,132
)
Other operating assets and liabilities
 
(5,246
)
 
(7,427
)
 
(397
)
 
(6,346
)
Net cash provided by operating activities — continuing operations
 
$
13,493

 
$
4,334

 
$
31,703

 
$
21,200

 
 
 
 
 
 
 
 
 
Other Data:
 
 
 
 
 
 
 
 
Number of surgical facilities included in continuing operations as of the end of period (1)
 
55

 
55

 
55

 
55

Number of consolidated surgical facilities included in continuing operations as of the end of period
 
44

 
44

 
44

 
44

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


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The following table reconciles Consolidated Adjusted EBITDA to EBITDA and EBITDA to net cash provided by operating activities—continuing operations (in thousands):
 
 
Twelve Months
Ended
June 30, 2014
 
 
 
 
 
 
Consolidated Adjusted EBITDA (1)
 
$
81,796

Cash payments on facility lease obligations (2)
 
5,734

Intercompany notes adjustment (3)
 
(2,884
)
Pro forma transactions and other non-cash adjustments (4)
 
(4,069
)
EBITDA
 
80,577

Interest expense, net
 
(57,454
)
Provision for income taxes
 
(7,480
)
Depreciation and amortization
 
(22,725
)
Stock-based compensation
 
(501
)
Gain on disposal or impairment of long-lived assets, net
 
1,568

Merger transaction costs
 
(2,318
)
Net income attributable to non-controlling interests
 
38,919

Loss from discontinued operations, net of income taxes
 
(5,278
)
Net income
 
25,308

Loss from discontinued operations, net of income taxes
 
5,278

Depreciation and amortization
 
22,725

Amortization of debt issuance costs and discounts
 
4,093

Payment-in-kind interest expense
 
9,341

Stock-based compensation
 
501

Gain on disposal or impairment of long-lived assets, net
 
(1,568
)
Deferred income taxes
 
6,970

Income from equity investments, net of distributions received
 
(202
)
Provision for doubtful accounts
 
12,739

Changes in operating assets and liabilities, net of acquisitions and divestitures:
 
 
Accounts receivable
 
(15,173
)
Other operating assets and liabilities
 
715

Net cash provided by operating activities—continuing operations
 
$
70,727

(1)
When we use the term Consolidated Adjusted EBITDA, we are referring to EBITDA as reported adjusted for covenant related items per our Credit Facility.
(2)
Represents the cash lease payment adjustment for our facility located in Idaho Falls, Idaho as contemplated by our Credit Facility.
(3)
Adjustments relating to outstanding balances on intercompany notes issued by our restricted subsidiaries as contemplated by our Credit Facility.
(4)
Includes the pro forma effect of transactions and other non-cash adjustments as contemplated by our Credit Facility.
Summary
Subject to and conditioned upon the closing of the Merger, we are required to repay all amounts outstanding under the Credit Facility. The Credit Facility will be terminated simultaneously with the closing of the Merger.
If the Merger were to fail to close for any reason, we believe that existing funds, cash flows from operations and available borrowings under our Credit Facility will provide sufficient liquidity for the next 12 months. Our 2011 debt restructuring extended the maturities of our long-term debt and revised our financial covenants to make them less restrictive. However, our ability to meet our funding needs could be adversely affected if we suffer adverse results from our operations. In addition, based on our expected liquidity and capital resource needs, we may consider various alternatives to improve our capital structure, including reducing debt, extending maturities or relaxing financial covenants. These alternatives may include new equity or debt financings or exchange offers with our existing security holders (including exchanges of debt for debt or equity) and other transactions involving our outstanding securities, given their secondary market trading prices. We cannot assure you, if we pursue any of these transactions, that we will be successful in completing a transaction on attractive terms, or at all.


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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Historically, we have not held or issued derivative financial instruments other than the use of a variable-to-fixed interest rate swap for a portion of the Credit Facility. We do not use derivative instruments for speculative purposes. Our outstanding debt to commercial lenders is generally based on a predetermined percentage above LIBOR or the lenders' prime rate. At June 30, 2014, $13.1 million of our long-term debt, which included $10.0 million of borrowings under our Credit Facility, was subject to variable interest rates. At June 30, 2014, the fair value of our total debt, based on quoted market prices as of this date, was $594.2 million.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us (including our consolidated subsidiaries) in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported in a timely manner.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the three months ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION

Item 1. Legal Proceedings
We are, from time to time, subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, breach of management contracts and employment related claims. In certain of these actions, plaintiffs request payment for damages, including punitive damages, that may not be covered by insurance. In the opinion of management, we are not currently a party to any proceedings that would have a material adverse effect on our business, financial condition or results of operations.
Item 1A. Risk Factors
You should consider the risks and uncertainties described under Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, which we filed with the Securities and Exchange Commission on March 14, 2014, together with all other information contained or incorporated by reference in this Quarterly Report on Form 10-Q when evaluating our business and our prospects. Except as set forth below, there have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. If any of the risks and uncertainties described in our Annual Report on Form 10-K or this Quarterly Report on Form 10-Q actually occurs, our business, financial condition, results of operations and our future growth prospects could be materially and adversely affected.
Risks Related to Our Proposed Acquisition by Surgery Center Holdings, Inc.
We may be unable to obtain satisfaction of all conditions to complete the Merger in the anticipated timeframe.
The Merger is subject to customary closing conditions including (i) the absence of a material adverse effect on Holdings, (ii) the receipt of certain state regulatory approvals and (iii) the expiration or termination of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. These and the other conditions to the Merger may fail to be satisfied. In addition, satisfying the conditions to, and completion of, the Merger may take longer than, and could cost more than, we expect.
Failure to complete the Merger could negatively impact our business and financial results.
If the Merger is not completed for any reason, we would still remain liable for significant transaction costs and the focus of our management would have been diverted from seeking other potential strategic opportunities, in each case without realizing any benefits of a completed merger.  For these and other reasons, a failed merger could adversely affect our business, operating results or financial condition.
While the Merger is pending, we are subject to business uncertainties and contractual restrictions that could adversely affect our business.
Our employees, patients, customers and suppliers may have uncertainties about the effects of the Merger. Although we have taken actions designed to reduce any adverse effects of these uncertainties, these uncertainties may impair our ability to attract, retain and motivate key employees and could cause customers, suppliers and others that deal with us to try to change our existing business relationships. The pursuit of the Merger and preparations for integration have placed, and will continue to place, a significant burden on many employees and internal


45


resources. If, despite our efforts, key employees depart because of these uncertainties and burdens, or because they do not wish to remain with the combined company, our business and operating results could be adversely affected. In addition, the Merger Agreement restricts us from taking certain actions with respect to our business and financial affairs without the consent of the buyer, and these restrictions could be in place for an extended period of time if the Merger is delayed. For these and other reasons, the pendency of the Merger could adversely affect our business, operating results or financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
No.
 
Description
 
 
 
2.1
 
Agreement and Plan of Merger dated as of June 13, 2014, by and among Symbion Holdings Corporation, Surgery Center Holdings, Inc., SCH Acquisition Corp. and Crestview Symbion Holdings, L.L.C. (a)

3.1
 
Amended Certificate of Incorporation of Symbion, Inc. (b)
3.2
 
Amended and Restated Bylaws of Symbion, Inc. (b)
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
 
XBRL Instance Document (c)
101.SCH
 
XBRL Taxonomy Extension Schema Document (c)
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document (c)
101.DEF
 
XBRL Taxonomy Definition Linkbase Document (c)
101.LAB
 
XBRL Taxonomy Label Linkbase Document (c)
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document (c)
(a)
Incorporated by reference to exhibits filed with the Company's Current Report on Form 8-K filed June 13, 2014.
(b)
Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-4 (Registration No. 333-153678)
(c)
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.


46


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SYMBION, INC.
 
 
By:
/s/ TERESA F. SPARKS
Teresa F. Sparks
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: August 8, 2014


47


EXHIBIT INDEX
No.
 
Description
 
 
 
2.1
 
Agreement and Plan of Merger dated as of June 13, 2014, by and among Symbion Holdings Corporation, Surgery Center Holdings, Inc., SCH Acquisition Corp. and Crestview Symbion Holdings, L.L.C. (a)

3.1
 
Amended Certificate of Incorporation of Symbion, Inc. (b)
3.2
 
Amended and Restated Bylaws of Symbion, Inc. (b)
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
 
XBRL Instance Document (c)
101.SCH
 
XBRL Taxonomy Extension Schema Document (c)
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document (c)
101.DEF
 
XBRL Taxonomy Definition Linkbase Document (c)
101.LAB
 
XBRL Taxonomy Label Linkbase Document (c)
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document (c)
(a)
Incorporated by reference to exhibits filed with the Company's Current Report on Form 8-K filed June 13, 2014.
(b)
Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-4 (Registration No. 333-153678)
(c)
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.


48