UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report:
June 23, 2014
AMSURG CORP.
(Exact Name of Registrant as Specified in Charter)
Tennessee | 000-22217 | 62-1493316 | ||
(State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(I.R.S. Employer Identification No.) |
20 Burton Hills Boulevard Nashville, Tennessee |
37215 | |||
(Address of Principal Executive Offices) | (Zip Code) |
(615) 665-1283
(Registrants Telephone Number, Including Area Code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 8.01 | Other Events. |
As previously announced, on May 29, 2014, AmSurg Corp., a Tennessee corporation (the Company), Arizona Merger Corporation, a Delaware corporation and direct wholly-owned subsidiary of the Company (Merger Sub), and Arizona II Merger Corporation, a Delaware corporation and direct wholly-owned subsidiary of the Company (Merger Sub II), entered into a Purchase Agreement and Agreement and Plan of Merger with Sunbeam GP Holdings, LLC, a Delaware limited liability company, (Seller), Sunbeam GP LLC, a Delaware limited liability company and the general partner of the Partnership (the General Partner), Sunbeam Holdings, L.P., a Delaware limited partnership (the Partnership), Sunbeam Primary Holdings, Inc., a Delaware corporation and a wholly owned subsidiary of the Partnership (Sunbeam Primary), and HFCP VI Securityholders Rep LLC, a Delaware limited liability company, in its capacity as agent and attorney-in-fact for Seller and the unitholders of the Partnership, as amended by Amendment No. 1 to Purchase Agreement and Agreement and Plan of Merger, dated June 12, 2014 (as amended, the Merger Agreement). The Partnership is an indirect parent company of Sheridan Healthcare, Inc.
Under the terms of the Merger Agreement, (i) the Company will purchase 100% of the issued and outstanding membership interests of the General Partner (the Equity Purchase) and (ii) the Partnership will merge with and into Sunbeam Primary, with Sunbeam Primary surviving such merger (Merger 1), and immediately following Merger 1, Merger Sub will merge with and into Sunbeam Primary, with Sunbeam Primary surviving such merger as a wholly-owned subsidiary of the Company (Merger 2). If, based upon the relative proportion of cash and Company stock included in the Merger Consideration (as defined in Exhibit 99.1), the transactions contemplated by the Merger Agreement are intended to qualify as a plan of reorganization within the meaning of Section 1.368-2(g) of the Treasury Regulations, then following Merger 2, Sunbeam Primary will merge with and into Merger Sub II, with Merger Sub II surviving as a wholly-owned subsidiary of the Company (Merger 3 and collectively with Merger 1 and Merger 2, the Merger).
Furnished as Exhibit 99.1 and incorporated herein by reference are the unaudited pro forma condensed combined financial statements of the Company for the year ended December 31, 2013, for the three months ended March 31, 2014 and 2013 and as of March 31, 2014. The pro forma financial statements give pro forma effect to the Merger and certain proposed financing transactions that will occur in connection with the Merger. The pro forma financial statements are derived from the historical financial statements of the Company and the Partnership. The pro forma financial statements, which have been prepared in connection with the proposed financing transactions, are preliminary and reflect a number of assumptions, including, among others, that the Merger and the proposed financing transactions will be consummated. There can be no assurance that any of such transactions will be consummated or that the actual terms of such transactions will not differ materially from the Companys current expectations.
Attached hereto as Exhibit 99.2 and incorporated herein by reference are the audited consolidated balance sheets of the Partnership at December 31, 2013 and December 31, 2012 and the audited consolidated statements of income and comprehensive income, statements of equity and statements of cash flows for each of the three years in the period ended December 31, 2013 with the report of the independent auditors. Attached hereto as Exhibit 99.3 and incorporated herein by reference are the unaudited condensed consolidated balance sheets of the Partnership at March 31, 2014 and December 31, 2013 and the unaudited condensed consolidated statements of income and comprehensive income and statements of cash flows for the three months ended March 31, 2014 and March 31, 2013.
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Item 9.01 | Financial Statements and Exhibits. |
(d) | Exhibits: |
15.1 | Awareness Letter of Deloitte & Touche LLP regarding Sunbeam Holdings, L.P. and Subsidiaries unaudited interim financial information. |
23.1 | Consent of Independent Auditors. |
99.1 | Unaudited pro forma condensed combined financial statements of AmSurg Corp. for the three months ended March 31, 2014 and 2013, for the year ended December 31, 2013 and as of March 31, 2014, and the notes related thereto. |
99.2 | Audited consolidated balance sheets of Sunbeam Holdings, L.P. and Subsidiaries at December 31, 2013 and December 31, 2012 and the audited consolidated statements of income and comprehensive income, statements of equity and statements of cash flows for each of the three years in the period ended December 31, 2013, and the related notes thereto. |
99.3 | Unaudited condensed consolidated balance sheets of Sunbeam Holdings, L.P. and Subsidiaries at March 31, 2014 and December 31, 2013 and the unaudited condensed consolidated statements of income and comprehensive income and statements of cash flows for the three months ended March 31, 2014 and March 31, 2013, and the related notes thereto. |
Cautionary Statement Regarding Forward-Looking Statements
This Current Report on Form 8-K (including the exhibits) hereto contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statements that address future events, occurrences or results. In some cases, forward-looking statements can be identified by terminology such as may, might, will, would, should, could or the negative thereof. Generally, the words anticipate, believe, continue, expect, intend, estimate, project, plan and similar expressions used in connection with any discussion of the Merger Agreement and the Merger identify forward-looking statements. Such forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results could differ materially and adversely from these forward-looking statements.
The Company has based these forward-looking statements on its current expectations, assumptions, estimates and projections. Although the Company believes that such expectations, assumptions, estimates and projections are reasonable, forward-looking statements are only predictions and involve known and unknown risks, uncertainties and other factors, many of which are outside of the Companys control and could cause the Companys actual results, performance or achievements to differ materially and adversely from any results, performance or achievements expressed or implied by such forward-looking statements.
Given these risks and uncertainties, undue reliance should not be placed on these forward-looking statements. These forward-looking statements are made only as of the date of this Current Report on Form 8-K. The Company does not undertake, and expressly disclaims, any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
AMSURG CORP. | ||
By: | /s/ Kevin D. Eastridge | |
Kevin D. Eastridge | ||
Senior Vice President, Finance and | ||
Chief Accounting Officer |
Date: June 23, 2014
EXHIBIT INDEX
No. |
Exhibit | |
15.1 | Awareness Letter of Deloitte & Touche LLP regarding Sunbeam Holdings, L.P. and Subsidiaries unaudited interim financial information. | |
23.1 | Consent of Independent Auditors. | |
99.1 | Unaudited pro forma condensed combined financial statements of AmSurg Corp. for the three months ended March 31, 2014 and 2013, for the year ended December 31, 2013 and as of March 31, 2014, and the notes related thereto. | |
99.2 | Audited consolidated balance sheets of Sunbeam Holdings, L.P. and Subsidiaries at December 31, 2013 and December 31, 2012 and the audited consolidated statements of income and comprehensive income, statements of equity and statements of cash flows for each of the three years in the period ended December 31, 2013, and the related notes thereto. | |
99.3 | Unaudited condensed consolidated balance sheets of Sunbeam Holdings, L.P. and Subsidiaries at March 31, 2014 and December 31, 2013 and the unaudited condensed consolidated statements of income and comprehensive income and statements of cash flows for the three months ended March 31, 2014 and March 31, 2013, and the related notes thereto. |
Exhibit 15.1
June 23, 2014
The Board of Directors of Sunbeam Holdings, L.P.
1613 N. Harrison Parkway, Suite 200
Sunrise, FL 33323
We have reviewed, in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information, the unaudited interim financial information of Sunbeam Holdings, L.P. and its subsidiaries for the three-month periods ended March 31, 2014 and 2013, as indicated in our report dated June 6, 2014; because we did not perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in this Current Report on Form 8-K of AmSurg Corp. dated June 23, 2014, is incorporated by reference in Registration Statement Nos. 333-41961, 333-33576, 333-56950, 333-65748, 333-81880, 333-90156, 333-107637, 333-118095, 333-134948, 333-149976, 333-151262, and 333-170531 on Forms S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement Nos. 333-41961, 333-33576, 333-56950, 333-65748, 333-81880, 333-90156, 333-107637, 333-118095, 333-134948, 333-149976, 333-151262, and 333-170531 on Forms S-8 of AmSurg Corp. of our report dated March 31, 2014 (May 13, 2014 as to the presentation of the consolidated statement of equity as discussed in Note 1 and the disclosure of reportable segments as disclosed in Note 20) relating to the consolidated financial statements of Sunbeam Holdings, L.P. and Subsidiaries as of December 31, 2013 and 2012, and each of the three years in the period ended December 31, 2013 appearing in this Current Report on Form 8-K of AmSurg Corp.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
June 23, 2014
Exhibit 99.1
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The accompanying unaudited pro forma condensed combined statements of earnings (the Pro Forma Statements of Earnings) for the three months ended March 31, 2014 and 2013 and for the year ended December 31, 2013 combine the historical consolidated statements of earnings of AmSurg and Sunbeam Holdings, L.P. and its subsidiaries, whose wholly-owned subsidiaries include Sunbeam Primary Holdings, Inc. and Sheridan Holdings, Inc. (collectively Sheridan). The Pro Forma Statements of Earnings give effect to the Merger as if it had been completed on January 1, 2013, the beginning of the earliest period presented. The accompanying unaudited pro forma condensed combined balance sheet (the Pro Forma Balance Sheet) as of March 31, 2014 combines the historical consolidated balance sheets of AmSurg and Sheridan, giving effect to the Merger as if it had been completed on March 31, 2014.
The accompanying unaudited pro forma condensed combined financial statements (the Statements) and related notes were prepared using the acquisition method of accounting with AmSurg considered the acquirer of Sheridan. Accordingly, the Merger Consideration (as defined herein) has been allocated to the assets and liabilities of Sheridan based upon their estimated fair values assuming the Merger is consummated. The pro forma adjustments for the Merger do not include any adjustments to the Merger Consideration that may occur pursuant to the Merger Agreement and any such adjustments may be material. Any amount of the Merger Consideration that is in excess of the estimated fair values of assets acquired and liabilities assumed will be recorded as goodwill in AmSurgs balance sheet after the completion of the Merger. As of the date hereof, AmSurg has not completed the detailed valuation work necessary to arrive at the required estimates of the fair value of the Sheridan assets to be acquired and the liabilities to be assumed and the related allocation of the Merger Consideration, nor has it identified all adjustments necessary to conform Sheridans accounting policies to AmSurgs accounting policies. A final determination of the fair value of Sheridans assets and liabilities will be based on the actual net tangible and intangible assets and liabilities of Sheridan that exist as of the date of completion of the Merger and, therefore, cannot be made prior to that date. Accordingly, the accompanying unaudited pro forma Merger Consideration allocation is preliminary and is subject to further adjustments as additional information becomes available and as additional analyses are performed. The preliminary unaudited pro forma Merger Consideration allocation has been made solely for the purpose of preparing the accompanying Statements. The preliminary Merger Consideration allocation was based on AmSurgs historical experience and AmSurgs due diligence review of Sheridans business. Upon completion of the Merger, valuation work will be performed. Increases or decreases in the fair value of relevant balance sheet amounts will result in adjustments to the balance sheet and/or statements of earnings until the Merger Consideration allocation is finalized. There can be no assurance that such finalization will not result in material changes from the preliminary Merger Consideration allocation included in the accompanying Statements.
The Statements do not include any adjustment for liabilities or related costs that may result from integration activities, since management is in the process of making these assessments. Significant liabilities and related costs may ultimately be recorded for employee severance and costs associated with other integration activities. The Statements also do not include any adjustment for recent acquisitions made by AmSurg or Sheridan.
We anticipate that the Merger will result in significant annual synergies that would be unachievable without completing the Merger. No assurance can be made that we will be able to achieve these synergies and any such synergies have not been reflected in these Statements.
The Pro Forma Statements of Earnings do not include any material nonrecurring charges that might arise as a result of the Merger. The Pro Forma Balance Sheet only includes adjustments for transaction-related costs that are factually supportable.
The accompanying Statements and related notes are being provided for illustrative purposes only and do not purport to represent what the actual consolidated results of operations or the consolidated balance sheet of AmSurg would have been had the Merger occurred on the dates assumed, nor are they necessarily indicative of AmSurgs future consolidated results of operations or consolidated financial position. The Statements do not
1
reflect synergies expected as a result of the Merger, nor do they reflect the full impact of acquisitions that occurred during the periods presented. The Statements are based upon currently available information and estimates and assumptions that AmSurg management believes are reasonable as of the date hereof. Any of the factors underlying these estimates and assumptions may change or prove to be materially different, and the estimates and assumptions may not be representative of facts existing at the closing date of the Merger.
The accompanying Statements have been developed from and should be read in conjunction with the audited annual and unaudited interim consolidated financial statements and related notes of AmSurg on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission (the SEC) on February 26, 2014 and Form 10-Q and Form 10-Q/A for the quarter ended March 31, 2014 filed with the SEC on May 1, 2014 and May 2, 2014, respectively, and Sheridan included in Exhibits 99.2 and 99.3, respectively, contained in this Current Report on Form 8-K.
2
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS
For the three months ended March 31, 2014
(In thousands, except earnings per share data)
Historical AmSurg |
Historical Sheridan |
Adjustments | Pro Forma Combined |
|||||||||||||||||||
Revenues |
$ | 263,107 | $ | 263,458 | $ | | $ | 526,565 | ||||||||||||||
Provision for uncollectibles |
| (12,636 | ) | | (12,636 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Net revenues |
263,107 | 250,822 | | 513,929 | ||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||
Salaries and benefits |
83,194 | 179,509 | | 262,703 | ||||||||||||||||||
Supply cost |
38,720 | | 1,347 | (b) | 40,067 | |||||||||||||||||
Other operating expenses |
55,269 | 39,652 | (1,347 | ) | (b) | 91,757 | ||||||||||||||||
(1,817 | ) | (b) | ||||||||||||||||||||
Depreciation and amortization |
8,374 | 9,889 | 6,739 | (g) | 25,002 | |||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Total operating expenses |
185,557 | 229,050 | 4,922 | 419,529 | ||||||||||||||||||
Gain (loss) on deconsolidation |
2,045 | | (1,817 | ) | (b) | 228 | ||||||||||||||||
Equity in earnings (loss) of unconsolidated affiliates |
764 | (432 | ) | | 332 | |||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Operating income |
80,359 | 21,340 | (6,739 | ) | 94,960 | |||||||||||||||||
Interest expense, net |
6,963 | 19,017 | 6,538 | (h) | 32,518 | |||||||||||||||||
Other expense, net |
| 12 | | 12 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Earnings from continuing operations before income taxes |
73,396 | 2,311 | (13,277 | ) | 62,430 | |||||||||||||||||
Income tax expense |
13,057 | 1,138 | (5,324 | ) | (i) | 8,871 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Net earnings from continuing operations |
60,339 | 1,173 | (7,953 | ) | 53,559 | |||||||||||||||||
Less net earnings from continuing operations attributable to noncontrolling interests |
42,835 | 635 | | 43,470 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Net earnings from continuing operations |
$ | 17,504 | $ | 538 | $ | (7,953 | ) | $ | 10,089 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Earnings per share from continuing operations attributable to AmSurg Corp. common shareholders: |
||||||||||||||||||||||
Basic |
$ | 0.55 | $ | 0.18 | (l) | |||||||||||||||||
Diluted |
$ | 0.54 | $ | 0.18 | (m) | |||||||||||||||||
Weighted average number of shares and share equivalents outstanding: |
||||||||||||||||||||||
Basic |
31,716 | 15,284 | (j) | 47,000 | ||||||||||||||||||
Diluted |
32,120 | 15,284 | (j) | 47,404 |
The accompanying notes are an integral part of this unaudited pro forma condensed combined financial information.
3
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS
For the three months ended March 31, 2013
(In thousands, except earnings per share data)
Historical AmSurg |
Historical Sheridan |
Adjustments | Pro Forma Combined |
|||||||||||||||||||
Revenues |
$ | 258,189 | $ | 229,626 | $ | | $ | 487,815 | ||||||||||||||
Provision for uncollectibles |
| (12,950 | ) | | (12,950 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Net revenues |
258,189 | 216,676 | | 474,865 | ||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||
Salaries and benefits |
80,958 | 157,654 | | 238,612 | ||||||||||||||||||
Supply cost |
37,213 | | 1,409 | (b) | 38,622 | |||||||||||||||||
Other operating expenses |
52,727 | 31,272 | (1,409 | ) | (b) | 82,590 | ||||||||||||||||
Depreciation and amortization |
8,008 | 8,743 | 6,739 | (g) | 23,490 | |||||||||||||||||
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|
|
|
|
|
|
|||||||||||||||
Total operating expenses |
178,906 | 197,669 | 6,739 | 383,314 | ||||||||||||||||||
Gain on deconsolidation |
2,237 | | | 2,237 | ||||||||||||||||||
Equity in earnings of unconsolidated affiliates |
402 | | | 402 | ||||||||||||||||||
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|
|
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|
|
|
|||||||||||||||
Operating income |
81,922 | 19,007 | (6,739 | ) | 94,190 | |||||||||||||||||
Interest expense, net |
7,542 | 12,006 | 13,076 | (h) | 32,624 | |||||||||||||||||
Loss on extinguishment of debt |
| 4,390 | | 4,390 | ||||||||||||||||||
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|
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|
|||||||||||||||
Earnings from continuing operations before income taxes |
74,380 | 2,611 | (19,815 | ) | 57,176 | |||||||||||||||||
Income tax expense |
12,269 | 1,372 | (7,946 | ) | (i) | 5,695 | ||||||||||||||||
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|
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|
|||||||||||||||
Net earnings from continuing operations |
62,111 | 1,239 | (11,869 | ) | 51,481 | |||||||||||||||||
Less net earnings from continuing operations attributable to noncontrolling interests |
44,361 | 917 | | 45,278 | ||||||||||||||||||
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|
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|
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|
|||||||||||||||
Net earnings from continuing operations |
$ | 17,750 | $ | 322 | $ | (11,869 | ) | $ | 6,203 | |||||||||||||
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|
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Earnings per share from continuing operations attributable to AmSurg Corp. common shareholders: |
||||||||||||||||||||||
Basic |
$ | 0.57 | $ | 0.10 | (l) | |||||||||||||||||
Diluted |
$ | 0.56 | $ | 0.10 | (m) | |||||||||||||||||
Weighted average number of shares and share equivalents outstanding: |
||||||||||||||||||||||
Basic |
31,217 | 15,284 | (j) | 46,501 | ||||||||||||||||||
Diluted |
31,881 | 15,284 | (j) | 47,165 |
The accompanying notes are an integral part of this unaudited pro forma condensed combined financial information.
4
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS
For the year ended December 31, 2013
(In thousands, except earnings per share data)
Historical AmSurg |
Historical Sheridan |
Adjustments | Pro Forma Combined |
|||||||||||||||||||
Revenues |
$ | 1,079,343 | $ | 976,934 | $ | | $ | 2,056,277 | ||||||||||||||
Provision for uncollectibles |
| (57,691 | ) | | (57,691 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Net revenues |
1,079,343 | 919,243 | | 1,998,586 | ||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||
Salaries and benefits |
333,190 | 654,941 | | 988,131 | ||||||||||||||||||
Supply cost |
157,771 | | 5,344 | (b | ) | 163,115 | ||||||||||||||||
Other operating expenses |
222,677 | 135,041 | (5,344 | ) | (b | ) | 352,374 | |||||||||||||||
Depreciation and amortization |
33,028 | 35,551 | 26,957 | (g | ) | 95,536 | ||||||||||||||||
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|
|
|
|
|
|
|||||||||||||||
Total operating expenses |
746,666 | 825,533 | 26,957 | 1,599,156 | ||||||||||||||||||
Gain on deconsolidation |
2,237 | | | 2,237 | ||||||||||||||||||
Equity in earnings of unconsolidated affiliates |
3,151 | | | 3,151 | ||||||||||||||||||
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|
|
|
|
|
|
|
|||||||||||||||
Operating income |
338,065 | 93,710 | (26,957 | ) | 404,818 | |||||||||||||||||
Interest expense, net |
29,538 | 47,818 | 52,966 | (h | ) | 130,322 | ||||||||||||||||
Loss on extinguishment of debt |
| 11,018 | | 11,018 | ||||||||||||||||||
Other expense, net |
| 41 | | 41 | ||||||||||||||||||
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|
|
|
|
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|
|||||||||||||||
Earnings from continuing operations before income taxes |
308,527 | 34,833 | (79,923 | ) | 263,437 | |||||||||||||||||
Income tax expense |
49,754 | 18,300 | (32,049 | ) | (i | ) | 36,005 | |||||||||||||||
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|
|
|
|
|
|
|||||||||||||||
Net earnings from continuing operations |
258,773 | 16,533 | (47,874 | ) | 227,432 | |||||||||||||||||
Less net earnings from continuing operations attributable to noncontrolling interests |
186,120 | 2,789 | | 188,909 | ||||||||||||||||||
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|
|
|
|
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|
|||||||||||||||
Net earnings from continuing operations |
$ | 72,653 | $ | 13,744 | $ | (47,874 | ) | $ | 38,523 | |||||||||||||
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|
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Earnings per share from continuing operations attributable to AmSurg Corp. common shareholders: |
||||||||||||||||||||||
Basic |
$ | 2.32 | $ | 0.68 | (l) | |||||||||||||||||
Diluted |
$ | 2.27 | $ | 0.67 | (m) | |||||||||||||||||
Weighted average number of shares and share equivalents outstanding: |
||||||||||||||||||||||
Basic |
31,338 | 15,284 | (j | ) | 46,622 | |||||||||||||||||
Diluted |
31,954 | 15,284 | (j | ) | 47,238 |
The accompanying notes are an integral part of this unaudited pro forma condensed combined information.
5
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
March 31, 2014
(In thousands)
Historical AmSurg |
Historical Sheridan |
Adjustments | Pro Forma Combined |
|||||||||||||||||
Assets |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 47,116 | $ | 105,890 | $ | (105,890 | ) | (a) | $ | 85,582 | ||||||||||
(2,159,059 | ) | (a) | ||||||||||||||||||
2,603,178 | (c) | |||||||||||||||||||
(405,653 | ) | (c) | ||||||||||||||||||
Restricted cash and marketable securities |
| 22,504 | | 22,504 | ||||||||||||||||
Accounts receivable, net |
106,209 | 133,993 | | 240,202 | ||||||||||||||||
Supplies inventory |
18,433 | | 923 | (b) | 19,356 | |||||||||||||||
Deferred income taxes |
1,026 | 11,996 | | 13,022 | ||||||||||||||||
Prepaid and other current assets |
37,151 | 31,570 | (923 | ) | (b) | 91,516 | ||||||||||||||
23,718 | (e) | |||||||||||||||||||
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|
|||||||||||||
Total current assets |
209,935 | 305,953 | (43,706 | ) | 472,182 | |||||||||||||||
Property and equipment, net |
169,006 | 29,784 | | 198,790 | ||||||||||||||||
Goodwill |
1,764,623 | 912,160 | (912,160 | ) | (a) | 3,370,606 | ||||||||||||||
1,605,983 | (a) | |||||||||||||||||||
Intangible assets, net |
21,093 | 541,323 | (541,323 | ) | (a) | 1,236,644 | ||||||||||||||
1,168,058 | (a) | |||||||||||||||||||
47,493 | (f) | |||||||||||||||||||
Investments in unconsolidated affiliates and other |
19,484 | 35,410 | (20,348 | ) | (f) | 34,546 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 2,184,141 | $ | 1,824,630 | $ | 1,303,997 | $ | 5,312,768 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Liabilities and Equity |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Current portion of long-term debt |
$ | 20,285 | $ | 8,270 | $ | (8,270 | ) | (a) | $ | 9,571 | ||||||||||
(10,714 | ) | (d) | ||||||||||||||||||
Accounts payable |
25,359 | 1,397 | | 26,756 | ||||||||||||||||
Accrued salaries and benefits |
26,218 | 84,438 | | 110,656 | ||||||||||||||||
Other accrued liabilities |
12,387 | 41,910 | | 54,297 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total current liabilities |
84,249 | 136,015 | (18,984 | ) | 201,280 | |||||||||||||||
Long-term debt |
564,937 | 1,203,029 | (1,203,029 | ) | (a) | 2,241,187 | ||||||||||||||
(293,750 | ) | (d) | ||||||||||||||||||
1,970,000 | (c) | |||||||||||||||||||
Deferred income taxes |
185,882 | 171,616 | 236,224 | (a) | 593,722 | |||||||||||||||
Other long-term liabilities |
25,753 | 63,374 | (2,817 | ) | (a) | 86,310 | ||||||||||||||
Noncontrolling interestsredeemable |
177,683 | | | 177,683 | ||||||||||||||||
Equity: |
||||||||||||||||||||
Mandatory convertible preferred shares |
| | 120,950 | (k) | 120,950 | |||||||||||||||
Common stock, no par value, 70,000 shares authorized |
186,894 | | 754,755 | (j) | 941,649 | |||||||||||||||
Members equity |
| 223,922 | (223,922 | ) | (a) | | ||||||||||||||
Retained earnings |
595,519 | | (35,428 | ) | (e) | 560,091 | ||||||||||||||
Accumulated other comprehensive loss, net of income taxes |
| 2 | (2 | ) | (a) | | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total AmSurg Corp. equity |
782,413 | 223,924 | 616,353 | 1,622,690 | ||||||||||||||||
Noncontrolling interestsnon-redeemable |
363,224 | 26,672 | | 389,896 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total equity |
1,145,637 | 250,596 | 616,353 | 2,012,586 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities and equity |
$ | 2,184,141 | $ | 1,824,630 | $ | 1,303,997 | $ | 5,312,768 | ||||||||||||
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this unaudited pro forma condensed combined information.
6
Note 1. Description of the Transaction
On May 29, 2014, AmSurg, Arizona Merger Corporation, a Delaware corporation and direct wholly-owned subsidiary of AmSurg (Merger Sub), and Arizona II Merger Corporation, a Delaware corporation and direct wholly-owned subsidiary of AmSurg (Merger Sub II), entered into a Purchase Agreement and Agreement and Plan of Merger with Sunbeam GP Holdings, LLC, a Delaware limited liability company, solely for purposes of Article V and Section 2.8 and solely in its capacity as the sole holder of membership interests in the General Partner, Sunbeam GP LLC, a Delaware limited liability company and the general partner of the Partnership (the General Partner), Sunbeam Holdings, L.P., a Delaware limited partnership (the Partnership and, collectively with the Partnerships subsidiaries, Sheridan), Sunbeam Primary Holdings, Inc., a Delaware corporation and a wholly owned subsidiary of the Partnership (Sunbeam Primary), and HFCP VI Securityholders Rep LLC, a Delaware limited liability company, solely in its capacity as agent and attorney-in-fact for Seller and the unitholders of the Partnership (the Unitholders) (as amended, the Merger Agreement). The Partnership is an indirect parent company of Sheridan Healthcare, Inc.
Under the terms of the Merger Agreement, (i) AmSurg will purchase 100% of the issued and outstanding membership interests of the General Partner (the Equity Purchase) and (ii) the Partnership will merge with and into Sunbeam Primary, with Sunbeam Primary surviving such merger (Merger 1), and immediately following Merger 1, Merger Sub will merge with and into Sunbeam Primary, with Sunbeam Primary surviving such merger as a wholly-owned subsidiary of AmSurg (Merger 2). If, based upon the relative proportion of cash and AmSurg stock included in the Merger Consideration, the transactions contemplated by the Merger Agreement are intended to qualify as a plan of reorganization within the meaning of Section 1.368-2(g) of the Treasury Regulations, then following Merger 2, Sunbeam Primary will merge with and into Merger Sub II, with Merger Sub II surviving as a wholly-owned subsidiary of AmSurg (Merger 3 and collectively with Merger 1 and Merger 2, the Merger).
The aggregate merger consideration payable as a result of the Merger will be $2.35 billion, subject to certain adjustments, and will be composed of cash and either shares of AmSurgs common stock or shares of AmSurgs preferred stock (the Merger Consideration). The cash component of the Merger Consideration will be approximately $1.74 billion, subject to certain adjustments, including an increase based upon the Partnerships cash on hand as of the closing of the Equity Purchase and the Mergers (the Closing), and subject to reduction based upon the indebtedness of the Partnership to be repaid as of the Closing and expenses incurred by the Partnership in connection with the transaction. The remaining portion of the Merger Consideration will be composed of either shares of AmSurgs common stock or shares of AmSurgs preferred stock. Prior to the Closing, AmSurg may elect to replace all or any portion of the Merger Consideration to be paid in AmSurg capital stock with cash.
We intend to fund the Merger Consideration through anticipated concurrent public offerings of our common stock (the Common Stock Offering) and mandatory convertible preferred stock (the Mandatory Convertible Preferred Stock Offering and, collectively with the Common Stock Offering, the Equity Offerings), $1.375 billion in new senior secured credit facilities, comprised of a revolving credit facility of up to $250.0 million (the New Revolving Credit Facility) and a term loan facility of up to $1.125 billion (the New Term Loan Facility and, together with the New Revolving Credit Facility, the New Senior Credit Facilities), a senior unsecured increasing rate bridge loan of up to $1.021 billion (the Bridge Facility and, collectively with the New Senior Credit Facilities, the Facilities) and additional debt securities (the Debt Securities) that we expect to issue through a private offering (the Debt Securities Offering and collectively with the Facilities, the Financing Transactions). The proceeds of the Debt Securities Offering will reduce or terminate the Bridge Facility commitments on a dollar for dollar basis. Additionally, in accordance with the Merger Agreement, we estimate that we will issue approximately $343.0 million of our common stock, based upon the closing price of our common stock of $50.55 on June 20, 2014, to the Unitholders and provide them with certain registration rights for such shares. We estimate that the net proceeds of the Common Stock Offering will be approximately $411.8 million, based upon the closing price of our common stock on June 20, 2014, and that the net proceeds of the Mandatory Convertible Preferred Stock Offering will be approximately $121.0 million. We have assumed that the mandatory convertible preferred stock will be issued at a price equal to $100.00 per share, will pay dividends quarterly, and will convert into shares of our common stock on the third anniversary of the date of its issuance. We have obtained the financing commitment to provide us with the Facilities. The obligations of the lenders to provide us with the Facilities are subject to a number of customary conditions, including, without limitation, execution and delivery of certain definitive documentation. The Merger Agreement requires us to use our reasonable best efforts to obtain the financing on the terms and conditions described in the financing commitment. Our obligation to consummate the Merger is not subject to a financing condition. We have made no final determination with respect to the Financing Transactions and are continuing to review and consider all alternatives. In no event shall any disclosure contained herein be deemed indicative of the final financing that we will choose to adopt.
Note 2. Basis of Pro Forma Presentation
These Statements have been derived from the historical condensed consolidated financial statements of AmSurg on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission (the SEC) on February 26, 2014 and Form 10-Q and Form 10-Q/A for the quarter ended March 31, 2014 filed with the SEC on May 1, 2014 and May 2, 2014, respectively, and Sheridan that are included in Exhibits 99.2 and 99.3 in this Current Report on Form 8-K. Certain financial statement line items included in Sheridans historical presentation have been disaggregated or condensed to conform to corresponding financial statement line items included in our historical presentation. For the Pro Forma Statements of Earnings, Sheridans other practice expenses and general and administrative expense line items have been combined into other operating expenses to conform to our presentation. Additionally, for the Pro Forma Statements of Earnings, Sheridans net income (loss) from unconsolidated joint ventures line item has been moved to be included in operating income to conform to our presentation. The reclassification of these items had no impact on the historical earnings from continuing operations, total assets, total liabilities, or shareholders equity reported by AmSurg or Sheridan, respectively.
The Merger is reflected in the Statements as an acquisition of Sheridan by AmSurg using the acquisition method of accounting, in accordance with business combination accounting guidance under accounting principles generally accepted in the United States (GAAP). Under these accounting standards, the total estimated Merger Consideration will be calculated as described in Note 3 to these Statements, and the assets acquired and the liabilities assumed will be measured at estimated fair value. For the purpose of measuring the estimated fair value of the assets acquired and liabilities assumed, we have applied the accounting guidance under GAAP for fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The fair value measurements utilize estimates based on key assumptions in connection with the Merger, including historical and current market data. The final Merger Consideration allocation will be determined after the completion of the Merger, and the final allocation may differ materially from those presented herein. The Merger Agreement allows for consummation of the Merger under various financing
7
arrangements. For purposes of these Statements, we have assumed no preferred stock will be issued to the Unitholders in connection with the Merger based on our estimate of the most likely financing structure.
Note 3. Adjustments to Unaudited Pro Forma Condensed Combined Financial Information
Pro forma adjustments are necessary to reflect the estimated Merger Consideration, to adjust amounts related to Sheridans assets and liabilities to a preliminary estimate of their fair values, to reflect financing transactions associated with the Merger, to reflect changes in depreciation and amortization expense resulting from the estimated fair value adjustments to tangible and intangible assets, to reflect other transactions directly related to the Merger, and to reflect the income tax effects related to the pro forma adjustments. There were no inter-company transactions between AmSurg and Sheridan. Certain pro forma adjustments were required to conform Sheridans accounting policies and presentation to our accounting policies and presentation.
The accompanying Statements have been prepared as if the Merger was completed on March 31, 2014 for balance sheet purposes and January 1, 2013 for statement of earnings purposes, and reflect the following adjustments:
(a) Records the preliminary Merger Consideration of proposed Merger and elimination of Sheridans equity.
The estimated Merger Consideration is $2.35 billion which will be funded through a combination of cash and our stock. In addition, we will pay an amount equal to Sheridans cash and cash equivalents on hand at the date of the Closing. The Merger Agreement prescribes a certain minimum amount of cash to be delivered upon closing. These Statements contemplate the most likely result, which includes the delivery of $2.159 billion in cash and $343.0 million in common stock, which assumes the completion of the Equity Offerings. Our expectation differs from that described in Note 1 due to the intent to raise cash through the Equity Offerings. The number of shares of common stock issued as part of the Merger Consideration will be determined based upon the price at which shares of our common stock would be valued in the Merger.
The allocation of the preliminary Merger Consideration to the fair values of assets to be acquired and liabilities to be assumed in the Merger includes unaudited pro forma adjustments to reflect the estimated fair values of Sheridans assets and liabilities at the completion of the Merger. The allocation of the preliminary Merger Consideration is as follows (in millions):
Current assets |
$ | 306.0 | ||
Property and equipment(1) |
29.8 | |||
Goodwill |
1,606.0 | |||
Amortizable intangible assets |
1,028.8 | |||
Indefinite-lived intangible assets |
139.2 | |||
Other long-term assets |
15.0 | |||
Current liabilities |
(127.7 | ) | ||
Deferred income taxes(2) |
(407.8 | ) | ||
Other long-term liabilities(3) |
(60.6 | ) | ||
Noncontrolling interests in consolidated subsidiaries |
(26.7 | ) | ||
|
|
|||
Total consideration(4) |
$ | 2,502.0 | ||
|
|
(1) | We believe that the carrying value of property and equipment approximates fair value. Additionally, we reviewed Sheridans policies regarding its useful lives and determined that those policies were reasonable. Therefore, no adjustments have been made to historical depreciation. |
(2) | Amount includes the addition of approximately $236.2 million of deferred tax liabilities related to amortizable intangible assets acquired which are not expected to be deductible for tax purposes. |
(3) | Amount includes the elimination of $2.8 million of deferred rent credits. |
(4) | This amount differs from the cash payment made to Unitholders due to the additional shares issued to the Unitholders, in accordance with the Merger Agreement, with a fair value estimating $343.0 million. |
8
The preliminary Merger Consideration allocation for Sheridan is subject to revision as more detailed analysis is completed and additional information on the fair values of Sheridans assets and liabilities become available and Merger related costs are finalized. Any change in the fair value of the assets and liabilities of Sheridan will change the amount of the Merger Consideration allocable to goodwill. The final Merger Consideration allocation may differ materially from the allocation presented above.
We have made preliminary allocation estimates based on limited access to information and will not have sufficient information to make final allocations until after completion of the Merger. The final determination of the Merger Consideration allocation is anticipated to be completed as soon as practicable after completion of the Merger. We anticipate that the valuations of the acquired assets and liabilities will include, but not be limited to, fixed assets, customer relationships with hospitals, noncompete agreements and other potential intangible assets. The valuations will consist of physical appraisals, discounted cash flow analyses, or other appropriate valuation techniques to determine the fair value of the assets acquired and liabilities assumed.
The final amounts allocated to assets acquired and liabilities assumed in the Merger could differ materially from the preliminary amounts presented in these Statements. A decrease in the fair value of assets acquired or an increase in the fair value of liabilities assumed in the Merger from those preliminary valuations presented in these Statements would result in a dollar-for-dollar corresponding increase in the amount of goodwill that will result from the Merger. In addition, if the value of the acquired assets is higher than the preliminary estimate, it may result in higher amortization and depreciation expense than is presented in these Statements.
(b) Adjusts the historical presentation of Sheridans financial statements to conform to our presentation.
(c) Reflects the incurrence of approximately $1.970 billion of debt, estimated net proceeds of the Common Stock Offering of approximately $411.8 million and estimated net proceeds of Mandatory Convertible Preferred Stock Offering of approximately $121.0 million to fund the Merger and repay certain of our existing debt and fund debt issuance costs. A detailed estimate of the sources and uses of cash associated with the Merger are as follows (in thousands):
Sources: |
||||
New Term Loan Facility (net of original issue discount of $5,450) |
$ | 1,084,550 | ||
Debt Securities |
880,000 | |||
Common Stock Offering, net of applicable discounts, commissions and expenses |
411,788 | |||
Mandatory Convertible Preferred Stock Offering, net of applicable discounts, commissions and expenses |
120,950 | |||
Cash on hand at closing |
105,890 | |||
|
|
|||
Total Sources |
$ | 2,603,178 | ||
|
|
|||
Uses: |
||||
Cash payments to Unitholders: |
||||
Merger Consideration(1) |
$ | (2,159,059 | ) | |
Cash payments related to refinancing and debt repayments: |
||||
Existing senior secured revolving credit facility |
$ | (237,500 | ) | |
Senior secured notes due 2020 |
(66,964 | ) | ||
Termination fee related to the senior secured notes due 2020 |
(12,859 | ) | ||
Other estimated transaction fees |
(41,363 | ) | ||
Financing fees(2) |
(46,967 | ) | ||
|
|
|||
(405,653 | ) | |||
Working capital(3) |
(38,466 | ) | ||
|
|
|||
Total Uses |
$ | (2,603,178 | ) | |
|
|
(1) | This amount differs from the total Merger Consideration due to the additional shares issued to the Unitholders with a fair value estimating $343.0 million as defined in the Merger Agreement. In addition, amount includes a payment of $105.9 million to acquire Sheridans cash and cash equivalents on hand. |
9
(2) | Financing fees will be capitalized as deferred loan costs and amortized accordingly. |
(3) | Amount reflects working capital generated as part of the Merger. |
(d) Records debt payoff and termination of our existing senior secured revolving credit facility and our senior secured notes due 2020 as follows (in thousands):
Current | Long-term | Total | ||||||||||
Existing revolving credit facility |
$ | | $ | 237,500 | $ | 237,500 | ||||||
Senior secured notes due 2020 |
10,714 | 56,250 | 66,964 | |||||||||
|
|
|
|
|
|
|||||||
$ | 10,714 | $ | 293,750 | $ | 304,464 | |||||||
|
|
|
|
|
|
(e) Records estimated transaction fees paid to third parties related to the Merger, including related income tax effects as follows (in thousands):
Termination fee related to the senior secured notes due 2020 |
$ | 12,859 | ||
Other estimated transaction fees |
41,363 | |||
Disposal of deferred financing fees related to the existing senior secured revolving credit facility and senior secured notes due 2020 |
4,924 | |||
|
|
|||
59,146 | ||||
Expected tax benefit |
(23,718 | ) | ||
|
|
|||
Estimated impact on retained earnings at March 31, 2014 |
$ | 35,428 | ||
|
|
(f) Reflects the recording of debt issuance costs of $52.4 million expected to occur as a result of the New Term Loan Facility and the Debt Securities Offering, the write-off of debt issuance costs of $4.9 million related to the senior secured notes due 2020, and $20.3 million of debt issue costs related to debt retired by AmSurg and Sheridan, respectively, as a result of the Merger. Such amounts for our debt will be reflected in the results of operations as a loss from early extinguishment of debt upon completion of refinancing.
(g) To record additional amortization expense of identifiable intangible assets related to the estimated fair value of such identifiable intangible assets held by Sheridan at the time of the Merger. Intangible assets will principally relate to noncompete agreements and customer relationships with hospitals and are expected to have a useful life of approximately three to 25 years.
(h) To record estimated interest expense based upon the assumed debt structure as follows (in thousands):
Three Months Ended March 31, | Year Ended December 31, 2013 |
|||||||||||
2014 | 2013 | |||||||||||
Financing Transactions |
$ | 26,796 | $ | 26,796 | $ | 107,187 | ||||||
Existing 2020 Notes |
3,516 | 3,516 | 14,063 | |||||||||
Deferred loan costs |
1,975 | 1,975 | 7,899 | |||||||||
Capitalized leases and other debt, net of interest income |
231 | 337 | 1,173 | |||||||||
|
|
|
|
|
|
|||||||
Total estimated interest costs |
32,518 | 32,624 | 130,322 | |||||||||
Less: Historical interest expense, net |
||||||||||||
AmSurg |
(6,963 | ) | (7,542 | ) | (29,538 | ) | ||||||
Sheridan |
(19,017 | ) | (12,006 | ) | (47,818 | ) | ||||||
|
|
|
|
|
|
|||||||
Net interest expense adjustment |
$ | 6,538 | $ | 13,076 | $ | 52,966 | ||||||
|
|
|
|
|
|
10
For purposes of these Statements, management has assumed an interest rate for the New Term Loan Facility and the New Revolving Credit Facility (which will not be drawn upon as part of these Statements). A fluctuation in our assumed interest rate for purposes of these Statements of 0.125% would have no impact on interest expense as calculated in the pro forma adjustment. For purposes of the Debt Securities, management assumed an interest rate and a fluctuation of 0.125% would impact the estimated interest by $1.1 million for the year ended December 31, 2013 and $0.275 million for each of the three months ended March 31, 2014 and 2013, respectively.
Concurrent with the Equity Offerings, we are preparing a private offering under Rule 144A of Debt Securities which we intend to offer on or immediately after the commencement of the Equity Offerings. In the unlikely event that we are unable to place the Debt Securities, we would utilize the Bridge Facility. Interest expense included in these Statements would increase by $11.0 million for the year ended December 31, 2013, $4.95 million for the three months ended March 31, 2014 and $1.1 million for the three months ended March 31, 2013. Accordingly, net earnings from continuing operations and diluted earnings per share would decrease by $6.6 million and $0.14, respectively, for the year ended December 31, 2013, $3.0 million and $0.06, respectively, for the three months ended March 31, 2014 and $0.7 million and $0.02, respectively, for the three months ended March 31, 2013.
(i) To record the income tax effects of the Pro Forma Statements of Earnings adjustments using a combined statutory and federal rate of 40.1%.
(j) To record the issuance of approximately 15.3 million shares of our common stock in the Common Stock Offering and as part of the Merger Consideration to the Unitholders as described in Note 1. We expect to issue approximately 8.5 million common shares in the Common Stock Offering, resulting in estimated net proceeds of $411.8 million. We determined the number of shares of common stock to be issued in the Common Stock Offering based on the last reported sale price of our common stock on the Nasdaq Global Select Market for June 20, 2014. A 5% increase or decrease in the price of our common stock on the Nasdaq Global Select Market on the closing date of the Merger compared to the price assumed in these Statements will result in a corresponding decrease or increase of approximately 0.5 million shares to be issued in the Common Stock Offering, respectively. Additionally, in accordance with the Merger Agreement, we expect to issue 6.8 million common shares, having an approximate fair value of $343.0 million, to owners of Sheridan, as previously described in Note 1. Based on the terms of the Merger Agreement, the number of shares deliverable to the owners of Sheridan is dependent on the price at which shares of our common stock would be valued in the Merger. Based on the market price of our common stock on June 20, 2014, a 5% increase or decrease in the price of our common stock on the Nasdaq Global Select Market would have no impact on the number of shares issued to the Unitholders.
(k) To record the issuance of approximately 1.25 million shares of the mandatory convertible preferred stock to be issued in the Mandatory Convertible Preferred Stock Offering which will be paid quarterly, and mandatorily converts to common shares after three years from the date of issuance. A 0.125% change in the dividend rate would result in a change of less than $0.2 million in annual dividends paid. A 5% increase or decrease in the price of our mandatory convertible preferred stock on the closing date of the Merger compared to the price assumed in these Statements will result in a corresponding decrease or increase of approximately 0.1 million shares issued, respectively.
(l) For purposes of calculating basic earnings per share, estimated dividends are subtracted from net earnings to arrive at net earnings available to common shareholders. Estimated dividends for the year ended December 31, 2013 was $6.9 million and for each of the three months ended March 31, 2014 and 2013 was $1.7 million, respectively.
(m) Diluted earnings per share was calculated under the if-converted method which assumes conversion of the mandatory convertible preferred stock if the effect of such is dilutive.
11
Exhibit 99.2
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![]() | |
INDEPENDENT AUDITORS REPORT |
To the Board of Directors and Members of
Sunbeam Holdings, L.P.
Sunrise, Florida
We have audited the accompanying consolidated financial statements of Sunbeam Holdings, L.P. and subsidiaries (the Company), which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of income and comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2013, and the related notes to the consolidated financial statements.
Managements Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Companys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sunbeam Holdings, L.P. and subsidiaries as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in accordance with accounting principles generally accepted in the United States of America.
March 31, 2014 (May 13, 2014 as to the presentation of the consolidated statement of equity as discussed in Note 1 and the disclosure of reportable segments as disclosed in Note 20)
Member of
Deloitte Touche Tohmatsu Limited
1
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, 2013 |
December 31, 2012 |
|||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 100,562 | $ | 64,636 | ||||
Restricted cash |
14,270 | 18,472 | ||||||
Restricted marketable securities |
4,231 | 5,476 | ||||||
Accounts receivable, net of allowances of $20.1 million and $24.3 million as of December 31, 2013 and 2012, respectively |
130,541 | 121,821 | ||||||
Deferred taxes |
13,902 | 32,557 | ||||||
Other current assets |
23,655 | 18,274 | ||||||
|
|
|
|
|||||
Total current assets |
287,161 | 261,236 | ||||||
Property and equipment, net |
29,462 | 30,156 | ||||||
Goodwill |
881,023 | 796,446 | ||||||
Other intangible assets, net |
512,299 | 447,982 | ||||||
Other assets |
22,427 | 14,126 | ||||||
|
|
|
|
|||||
Total assets |
$ | 1,732,372 | $ | 1,549,946 | ||||
|
|
|
|
|||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 8,270 | $ | 6,000 | ||||
Accounts payable |
1,168 | 1,791 | ||||||
Accrued salaries and benefits |
70,178 | 53,198 | ||||||
Accrued professional liabilities |
11,895 | 12,817 | ||||||
Other current liabilities |
23,019 | 18,815 | ||||||
|
|
|
|
|||||
Total current liabilities |
114,530 | 92,621 | ||||||
Long-term debt, net of current portion |
1,135,022 | 694,498 | ||||||
Deferred taxes |
174,803 | 161,022 | ||||||
Accrued professional liabilities |
48,501 | 53,156 | ||||||
Other long-term liabilities |
10,784 | 2,047 | ||||||
|
|
|
|
|||||
Total liabilities |
1,483,640 | 1,003,344 | ||||||
|
|
|
|
|||||
Commitments and contingencies (Note 16) |
||||||||
Equity: |
||||||||
General Partner interest |
1 | 1 | ||||||
Class A Units, 416,563 and 409,318 authorized and issued as of December 31, 2013 and 2012, respectively |
210,155 | 504,243 | ||||||
Class B Units, 110,034 authorized and 87,155 and 92,303 issued as of December 31, 2013 and 2012, respectively |
11,968 | 13,032 | ||||||
Class C Units, 2,250 authorized and issued as of December 31, 2012 |
| 1,912 | ||||||
Class D Units, 30,275 and 18,275 authorized and issued as of December 31, 2013 and 2012, respectively |
| 118 | ||||||
Accumulated other comprehensive income (loss), net of tax |
2 | (1 | ) | |||||
|
|
|
|
|||||
Total members equity |
222,126 | 519,305 | ||||||
Noncontrolling interests |
26,606 | 27,297 | ||||||
|
|
|
|
|||||
Total equity |
248,732 | 546,602 | ||||||
|
|
|
|
|||||
Total liabilities and equity |
$ | 1,732,372 | $ | 1,549,946 | ||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
2
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands)
Years Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Revenue, net of contractual discounts |
$ | 976,934 | $ | 887,815 | $ | 814,002 | ||||||
Provision for uncollectibles |
(57,691 | ) | (51,499 | ) | (51,609 | ) | ||||||
|
|
|
|
|
|
|||||||
Net revenue |
919,243 | 836,316 | 762,393 | |||||||||
Operating expenses |
||||||||||||
Practice personnel expenses |
654,941 | 583,381 | 532,887 | |||||||||
Other practice expenses |
56,764 | 57,554 | 47,249 | |||||||||
General and administrative |
78,277 | 58,338 | 55,463 | |||||||||
Depreciation and amortization |
35,551 | 32,197 | 26,124 | |||||||||
|
|
|
|
|
|
|||||||
Income from operations |
93,710 | 104,846 | 100,670 | |||||||||
Interest expense, net |
47,818 | 43,638 | 37,677 | |||||||||
Other (income) expense, net |
41 | (59 | ) | 99 | ||||||||
Loss on extinguishment of debt |
11,018 | 8,126 | | |||||||||
|
|
|
|
|
|
|||||||
Income before income taxes and noncontrolling interests |
34,833 | 53,141 | 62,894 | |||||||||
Provision for income taxes |
18,300 | 16,286 | 26,875 | |||||||||
|
|
|
|
|
|
|||||||
Net income from consolidated operations |
16,533 | 36,855 | 36,019 | |||||||||
Net (income) attributable to noncontrolling interests |
(2,789 | ) | (1,969 | ) | (740 | ) | ||||||
|
|
|
|
|
|
|||||||
Net income attributable to Sunbeam Holdings, L.P. and subsidiaries limited partners |
$ | 13,744 | $ | 34,886 | $ | 35,279 | ||||||
|
|
|
|
|
|
|||||||
Net income from consolidated operations |
$ | 16,533 | $ | 36,855 | $ | 36,019 | ||||||
Other comprehensive loss (income), net of taxes: |
||||||||||||
Net change in fair value of interest rate swap, net of taxes of $1,801 and $3,982 for 2012 and 2011, respectively |
| 2,653 | 5,869 | |||||||||
Net change in fair value of investments, net of taxes of $25 and $70 for 2012 and 2011, respectively |
3 | (37 | ) | (168 | ) | |||||||
|
|
|
|
|
|
|||||||
Total comprehensive income |
16,536 | 39,471 | 41,720 | |||||||||
Less: Comprehensive income attributable to noncontrolling interests |
(2,789 | ) | (1,969 | ) | (740 | ) | ||||||
|
|
|
|
|
|
|||||||
Comprehensive income attributable to Sunbeam Holdings, L.P. and subsidiaries limited partners |
$ | 13,747 | $ | 37,502 | $ | 40,980 | ||||||
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
Members Capital | Accumulated Other Comprehensive Income (Loss) |
Non- controlling Interest |
Total Equity |
|||||||||||||||||||||||||||||
Limited Partners | ||||||||||||||||||||||||||||||||
General Partner |
Class A Units |
Class B Units |
Class C Units |
Class D Units |
||||||||||||||||||||||||||||
Balance at December 31, 2010 |
$ | 1 | $ | 446,306 | $ | 8,028 | $ | 8,500 | $ | | $ | (8,318 | ) | $ | 6,323 | $ | 460,840 | |||||||||||||||
Net income (loss) |
| 38,094 | (2,815 | ) | | | | 740 | 36,019 | |||||||||||||||||||||||
Other comprehensive income, net of taxes |
| | | | | 5,701 | | 5,701 | ||||||||||||||||||||||||
Distributions |
| (336 | ) | (21 | ) | | | | (1,000 | ) | (1,357 | ) | ||||||||||||||||||||
Noncontrolling interest assumed related to acquisition |
| | | | | | 2,707 | 2,707 | ||||||||||||||||||||||||
Equity-based compensation expense |
| | 7,574 | | | | | 7,574 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance at December 31, 2011 |
1 | 484,064 | 12,766 | 8,500 | | (2,617 | ) | 8,770 | 511,484 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Net Income |
| 30,929 | 3,957 | | | | 1,969 | 36,855 | ||||||||||||||||||||||||
Other Comprehensive Income, net of taxes |
| | | | | 2,616 | | 2,616 | ||||||||||||||||||||||||
Distributions |
| | | | | | (1,630 | ) | (1,630 | ) | ||||||||||||||||||||||
Non-controlling interest assumed related to acquisition |
| | | | | | 18,188 | 18,188 | ||||||||||||||||||||||||
Redemption of units |
| (10,750 | ) | (6,773 | ) | (6,588 | ) | | | | (24,111 | ) | ||||||||||||||||||||
Equity-based compensation expense |
| | 3,082 | | 118 | | | 3,200 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance at December 31, 2012 |
1 | 504,243 | 13,032 | 1,912 | 118 | (1 | ) | 27,297 | 546,602 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Net Income |
2,509 | 8,238 | 2,997 | 2,789 | 16,533 | |||||||||||||||||||||||||||
Other Comprehensive Income, net of taxes |
| | | | | 3 | | 3 | ||||||||||||||||||||||||
Distributions |
| (306,611 | ) | (21,002 | ) | | (4,942 | ) | | (3,480 | ) | (336,035 | ) | |||||||||||||||||||
Redemption of units |
| | (648 | ) | (1,912 | ) | | | | (2,560 | ) | |||||||||||||||||||||
Unit issuance |
| 10,014 | | | | | | 10,014 | ||||||||||||||||||||||||
Equity-based compensation expense |
| | 12,348 | | 1,827 | | | 14,175 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance at December 31, 2013 |
$ | 1 | $ | 210,155 | $ | 11,968 | $ | | $ | | $ | 2 | $ | 26,606 | $ | 248,732 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income from consolidated operations |
$ | 16,533 | $ | 36,855 | $ | 36,019 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Amortization of intangible assets |
25,661 | 24,531 | 20,618 | |||||||||
Non-cash interest expensedebt |
4,545 | 3,550 | 3,860 | |||||||||
Depreciation and other amortization |
9,890 | 7,666 | 5,506 | |||||||||
Provision for bad debts |
57,691 | 51,499 | 51,609 | |||||||||
Loss on disposal of assets |
14 | 2 | 127 | |||||||||
Loss on extinguishment of debt |
11,018 | 8,126 | | |||||||||
Equity-based compensation expense |
14,175 | 3,200 | 7,574 | |||||||||
Deferred income taxes |
(2,435 | ) | (11,851 | ) | (4,999 | ) | ||||||
Changes in operating assets and liabilities, net of acquisitions: |
||||||||||||
Accounts receivable |
(56,994 | ) | (59,742 | ) | (39,276 | ) | ||||||
Other assets |
(3,321 | ) | (4,017 | ) | (2,298 | ) | ||||||
Accounts payable |
(1,215 | ) | (336 | ) | (632 | ) | ||||||
Accrued professional liabilities |
(6,549 | ) | 2,048 | (2,019 | ) | |||||||
Other liabilities |
13,477 | (1,258 | ) | 5,998 | ||||||||
|
|
|
|
|
|
|||||||
Net cash provided by operating activities |
82,490 | 60,273 | 82,087 | |||||||||
Cash flows from investing activities: |
||||||||||||
Acquisition of physician practices, net of cash acquired |
(124,848 | ) | (49,714 | ) | (87,930 | ) | ||||||
Purchase of marketable securities |
(8,963 | ) | (10,709 | ) | (5,566 | ) | ||||||
Maturities and sales of marketable securities |
10,211 | 11,958 | 10,496 | |||||||||
Change in restricted cash |
4,201 | (1,177 | ) | (8,533 | ) | |||||||
Capital expenditures |
(8,938 | ) | (10,671 | ) | (9,739 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash used in investing activities |
(128,337 | ) | (60,313 | ) | (101,272 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Borrowings on long-term debt, net of discounts |
1,157,000 | 702,903 | | |||||||||
Repayments on long-term debt |
(713,933 | ) | (639,524 | ) | (5,075 | ) | ||||||
Debt issuance costs |
(24,126 | ) | (13,880 | ) | | |||||||
Redemption of units |
(648 | ) | (24,111 | ) | | |||||||
Distributions to noncontrolling interests |
(3,480 | ) | (1,630 | ) | (1,000 | ) | ||||||
Distributions to members |
(333,040 | ) | | (1,484 | ) | |||||||
|
|
|
|
|
|
|||||||
Net cash provided by (used in) financing activities |
81,773 | 23,758 | (7,559 | ) | ||||||||
|
|
|
|
|
|
|||||||
Increase (decrease) in cash and cash equivalents |
35,926 | 23,718 | (26,744 | ) | ||||||||
Cash and cash equivalents: |
||||||||||||
Beginning of year |
64,636 | 40,918 | 67,662 | |||||||||
|
|
|
|
|
|
|||||||
End of year |
$ | 100,562 | $ | 64,636 | $ | 40,918 | ||||||
|
|
|
|
|
|
|||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Cash paid for interest |
$ | 39,609 | $ | 41,684 | $ | 35,713 | ||||||
Cash paid for income taxes |
26,790 | 44,261 | 26,315 | |||||||||
Supplemental disclosure for noncash transactions: |
||||||||||||
Distributions payable |
$ | 1,427 | $ | | $ | | ||||||
Earnout accrual related to acquisition of physician practices |
4,683 | | | |||||||||
Issuance of equity related to acquisition of physician practices |
10,014 | | |
The accompanying notes are an integral part of these consolidated financial statements.
5
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(1) Organization
Sunbeam Holdings, L.P. and its subsidiaries (the Company), which operate under the name Sheridan, is a national provider of multi-specialty physician services to hospitals, ambulatory surgery centers and other healthcare facilities. The Company focuses on delivering comprehensive physician services, primarily in the areas of anesthesiology, childrens services, radiology and emergency medicine to healthcare facilities. The Companys contracts with healthcare facilities authorize it to bill and collect charges for fee for service medical services rendered by the Companys healthcare professionals and employees in exchange for the provision of services to the patients of these facilities. Contract revenue is earned directly from the Companys hospital customers through a variety of payment arrangements that are established when payments from third-party payors are inadequate to support the costs of providing the services required under the contract. The Company also provides physician services and manages office-based practices in the areas of gynecology, obstetrics and perinatology.
The consolidated statement of equity has been recast to present the changes in partnership equity for each ownership class in accordance with Staff Accounting Bulletin Topic 4.F, Limited Partnerships.
(2) Significant Accounting Policies
Principles of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries combined with the accounts of the affiliated professional corporations (PCs) with which the Company currently has specific management arrangements. The Companys agreements with these PCs provide that the term of the arrangements are permanent, subject only to termination by the Company, except in the case of gross negligence, fraud or bankruptcy of the Company. These arrangements are captive in nature. Where permitted by law, a majority of the outstanding voting equity instruments of the PCs are owned by nominee shareholders appointed at the sole discretion of the Company, and the Company has a contractual right to transfer the ownership of the PCs at any time to any person it designates as the nominee shareholder. The Company has the right to receive income, both as ongoing fees and as proceeds from the sale of its interest in the PCs, in an amount that fluctuates based on the performance of the PC and the change in the fair value of the Companys interest in the PC. The Company has exclusive responsibility for the provision of all non-medical services required for the day-to-day operation and management of the PCs and establishes the guidelines for the employment and compensation of the physicians. In addition, the agreements provide that the Company has the right, but not the obligation, to purchase, or to designate a person(s) to purchase, the stock of the PCs for a nominal amount. Separately, in its sole discretion, the Company has the right to assign its interest in the agreements. Based upon the provisions of these agreements, the Company has determined that the PCs are variable interest entities and that the Company is the primary beneficiary as defined in the accounting guidance for consolidation.
The Company also consolidates a variable interest entity (VIE) for which the Company is deemed the primary beneficiary; however, the assets are owned by, and the liabilities are obligations of this VIE, not the Company. This VIE is not a guarantor of the Companys debts. As of December 31, 2013 and 2012, the combined total assets included in the Companys consolidated balance sheets relating to this VIE were approximately $3.7 million and $6.7 million, respectively, which excludes goodwill and intercompany balances.
All intercompany and interaffiliate accounts and transactions have been eliminated.
Reclassifications have been made to certain prior period consolidated financial statements to conform with the current year presentation. The Company also reclassified $53.2 million of its $66.0 million of accrued professional liabilities as of December 31, 2012 from current accrued professional liabilities to long-term accrued professional
6
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(2) Significant Accounting Policies (continued)
Principles of Presentation (continued)
liabilities in the accompanying consolidated balance sheets. The current portion of accrued professional liabilities is expected to be paid within one year of the date of the financial statements, and the long-term portion is expected to be paid more than one year after that date. In addition, for the years ended December 31, 2012 and 2011, the Company reclassified $26.4 million and $24.4 million, respectively, of salaries, benefits and other personnel-related expenses from other practice expenses to practice personnel expenses in the accompanying consolidated statement of income and comprehensive income for costs of services that are performed for and are directly related to practice operations. These costs primarily pertain to billing and collection activities and were reclassified in order to better reflect the nature of the expenses.
The consolidated financial statements reflect the Companys evaluation of subsequent events through May 13, 2014, the date the financial statements were available to be issued.
Accounting Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the estimated allowance for contractual adjustments and uncollectible amounts on accounts receivable, the estimated liabilities for reported claims and claims incurred but not reported related to the Companys professional liabilities and self-insured employee health plan, the useful life of and method used for amortizing intangible assets, the allocation of purchase price to acquired assets including identifiable intangibles and goodwill, estimates of cash flows used to assess the recoverability and fair values of goodwill and other intangible assets, and determination of the net realizable value of deferred tax assets, estimation of the effective tax rate, and income and other tax accruals. Actual results could differ from those estimates.
Business Acquisitions
The Company accounts for business acquisitions as required by the provisions of the accounting guidance for business combinations. The Company recognizes, separately from goodwill, the identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values. The Company measures and recognizes goodwill as of the acquisition date as the excess of: (a) the aggregate of the fair value of consideration transferred, the fair value of any noncontrolling interest in the acquiree (if any) and the acquisition date fair value of the Companys previously held equity interest in the acquiree (if any), over (b) the fair value of net assets acquired and liabilities assumed. The Company measures the fair value of all assets acquired and liabilities assumed that arise from contractual contingencies as of the acquisition date. The Company measures all noncontractual contingencies at their acquisition date fair values if, as of the acquisition date, it is more likely than not that the contingency will give rise to an asset or liability.
If information at the acquisition date is incomplete, the Company reports provisional amounts until information becomes available. This measurement period ends once the Company receives sufficient information not to exceed one year. Material adjustments recognized during the measurement period are retrospectively reported in the financial statements of the subsequent period.
7
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(2) Significant Accounting Policies (continued)
Cash and Cash Equivalents
Cash equivalents are defined as all highly liquid financial instruments with maturities of 90 days or less from the date of purchase. The Companys cash equivalents typically consist of demand deposits and deposits in money market accounts. Cash equivalent balances may, at times, exceed federally insured limits.
Restricted Cash and Marketable Securities
The Company has restricted cash and marketable securities related to the collateralization of a reinsurance agreement. The Company classifies investments in marketable debt securities as available for sale. Investments classified as available for sale are carried at fair value, with net unrealized gains and losses, net of related tax effects, included as a separate component of accumulated other comprehensive income (loss). Realized gains and losses are included in other (income) expense, net in the consolidated statements of income and comprehensive income.
Gains are recognized when realized in the Companys consolidated statements of income and comprehensive income. Losses are recognized as realized or upon the determination of the occurrence of an other-than-temporary decline in fair value. The Companys policy is to review its securities on a regular basis to evaluate whether any security has experienced an other-than-temporary decline in fair value. If it is determined that an other-than-temporary decline exists in one of the Companys marketable securities, it is the Companys policy to record an impairment charge with respect to such investment in the Companys consolidated statements of income and comprehensive income.
Accounts Receivable, Net
Accounts receivable are reflected in the consolidated balance sheets net of contractual discounts and provision for uncollectibles. The Company periodically reassesses its accounts receivable, net by analyzing historical cash collections, changes in payor mix and accounts receivable agings. These periodic reassessments may result in adjustments to the Companys recorded contractual discounts and provision for uncollectibles. Adjustments are charged or credited to the consolidated statement of income and comprehensive income in the period of change. Material changes in estimate may result from unforeseen write-offs of patient or third-party accounts receivable, unsuccessful disputes with managed care payors, adverse macro-economic conditions which limit patients ability to meet their financial obligations for the care provided by the Companys physicians, or broad changes to government regulations that adversely impact reimbursement rates for services provided by the Company.
Deferred Financing Costs
Deferred financing costs, which are included in other current and noncurrent assets and are amortized over the term of the related debt using the effective interest method, were $21.4 million and $13.0 million as of December 31, 2013 and 2012, respectively.
Property and Equipment, Net
Property and equipment is stated at cost less accumulated depreciation and other amortization. Property and equipment is depreciated or amortized using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are generally three to five years for equipment, computer hardware, and software; seven
8
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(2) Significant Accounting Policies (continued)
Property and Equipment, Net (continued)
years for furniture and fixtures; and the lesser of the useful life or the remaining lease term for leasehold improvements. Maintenance and repairs are charged to expense when incurred and improvements are capitalized. Upon the sale or retirement of assets, the cost and accumulated depreciation are removed from the consolidated balance sheets and any gain or loss is recognized currently.
Software that has been developed for internal use is accounted for in accordance with ASC 350-40, Internal-Use Software. Only costs incurred during the application development stage, including expenditures for design, coding, installation and testing are capitalized. These capitalized costs include both external consulting fees and internal labor costs for employees directly associated with software development. Upgrades or modifications that result in additional functionality are capitalized, while upgrades or modifications that do not result in additional functionality are expensed as incurred.
Goodwill and Other Intangible Assets
The Company records acquired assets and liabilities at their respective fair values under the acquisition method of accounting. Goodwill represents the excess of cost over the fair value of the net assets acquired. Intangible assets with finite lives, which principally consist of hospital customer relationship assets and physician non-compete agreements, are recognized apart from goodwill at the time of acquisition based on the contractual-legal and separability criteria established in the accounting guidance for business combinations. Intangible assets with finite lives are amortized on either an accelerated basis based on the annual undiscounted economic cash flows associated with the particular intangible asset or on a straight-line basis over their estimated useful lives. Intangible assets with finite lives are amortized over periods of three to twenty-five years.
Goodwill is tested for impairment at a reporting unit level on at least an annual basis in accordance with the subsequent measurement provisions of the accounting guidance for goodwill. The Company defines a reporting unit based on its management structure for services the Company provides. During 2013, the Company completed certain changes to its reporting structure to better align its businesses with Company objectives and operating strategies. These changes resulted in changes to the Companys operating segments and reporting units. In connection with the changes, the Company determined, in accordance with segment reporting guidance, that it provides services through five operating segments. Reporting units as defined by ASC 350, Intangibles-Goodwill and Other, may be operating segments as a whole or an operation one level below an operating segment referred to as a component. The Company used six reporting units to assess potential goodwill impairment in fiscal year 2013. The testing for impairment is completed using a two-step test. The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, a second step is performed to determine the amount of any impairment loss.
The Company uses income and market-based valuation approaches to determine the fair value of its reporting units. These approaches focus on discounted cash flows and market multiples based on the Companys market capitalization to derive the fair value of a reporting unit. The Company also considers the economic outlook for the healthcare services industry and various other factors during the testing process, including hospital and physician contract changes, local market developments, changes in third-party payor payments, and other publicly available information. During 2013, 2012 and 2011, the Company completed its annual impairment test as of June and determined that goodwill was not impaired. The Company did not identify any triggering events that would change this conclusion subsequent to its June 2013 annual impairment test.
9
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(2) Significant Accounting Policies (continued)
Recoverability of Long-Lived Assets
Long-lived assets and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Assets are combined and evaluated at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical performance and projections of future operating results in its evaluation of potential impairment and then compares the carrying amount of the asset to estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds the estimated undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset to its fair value. The Company estimates fair value based on the best information available making whatever estimates, judgments and projections are considered necessary. The estimation of fair value is generally measured by discounting expected future cash flows at discount rates commensurate with the risk involved. The Company does not believe there are any indicators that would require an adjustment to such assets or their estimated periods of recovery at December 31, 2013.
Derivative Instruments and Hedging Activities
The Company previously entered into interest rate swap agreements for the purpose of hedging exposures to interest rates on long-term debt (see Note 12). The Company does not enter into or hold derivatives for trading or speculative purposes. Derivative instruments are measured at fair value on a recurring basis and recognized on the consolidated balance sheets. The Companys policy is to designate, at a derivatives inception, the specific liability being hedged and monitor the derivative to determine if it remains an effective hedge of the designated hedged risk. The criteria for an interest rate swap to qualify for hedge accounting include a link between the cash flows of the swap and the debt, the same basis for determining the interest payments, and offsetting cash flows. The Company has elected to offset derivatives on the balance sheet. Amounts to be received or paid as a result of the derivative instruments are recognized as adjustments to interest incurred on the related debt instruments. Gains or losses resulting from changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income, unless circumstances require the amounts to be recorded in earnings, such as hedge ineffectiveness or the occurrence of the underlying hedged transaction. When ineffectiveness exists or the derivative instrument or specific liability being hedged is terminated, the fair value of the derivative instrument is recognized in earnings in the period affected. There were no derivative instruments outstanding at December 31, 2013 and 2012.
Accrued Professional Liability Risks
The Company maintains professional liability insurance policies with third-party insurers generally on a claims-made basis, subject to self-insured retention, exclusions and other restrictions. The Companys self-insured retention under its professional liability insurance program is also maintained through a wholly owned captive insurance subsidiary. The Company records an estimate of liabilities for self-insured amounts and claims incurred but not reported based on an actuarial valuation using historical loss patterns. Liabilities for self-insured amounts and claims incurred but not reported are not discounted.
Income Taxes
The Company is organized as a limited partnership. Partnerships are conduits that, according to their operating agreements, pass through to each partner their respective share of income and deductions generated by
10
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(2) Significant Accounting Policies (continued)
Income Taxes (continued)
them. The management committee for the Company, from time to time, may deem it necessary to cause the partnership to make tax distributions to its partners according to the partnerships operating agreement.
The Companys wholly owned and affiliated corporate subsidiaries utilize the asset and liability method of accounting for deferred income taxes. Under the asset and liability method, deferred tax assets and liabilities are determined based on the difference between the consolidated financial statements and the tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is established when it is more likely than not that some or all of the deferred tax asset will not be realized.
In the ordinary course of business, there is inherent uncertainty in quantifying income tax positions. In accordance with ASC 740-10, the Company assesses income tax positions and records tax benefits for all years subject to examination based upon managements evaluation of the facts, circumstances, and information available at the reporting dates. For those tax positions with a greater than 50% likelihood of being realized, the Company records the benefit. For those income tax positions where it is more likely than not that a tax benefit will not be sustained, no tax benefit is recognized in the consolidated financial statements. Federal or state taxing authorities may challenge the Companys tax positions upon audit, the results of which may vary from the Companys estimates.
Equity-Based Compensation
The Company measures the cost of employee services received in exchange for equity-based awards based on grant-date fair value. Pre-vesting forfeitures are estimated at the time of grant and the Company periodically revises those estimates if actual forfeitures differ from those estimates. Equity-based compensation related to units is recognized on a straight-line basis over the corresponding vesting periods or the implied service periods. Equity-based compensation expense is recorded as a component of salaries and benefits in the consolidated statements of income and comprehensive income.
Noncontrolling Interests
The consolidated financial statements include all assets, liabilities, revenue and expenses of the less than 100% owned entities that the Company controls or is deemed the primary beneficiary of. The noncontrolling interests represent the equity interests of outside investors in the equity and results of operations of these consolidated entities.
Comprehensive Income
The Company reports comprehensive income, which is a measure of all changes in equity of an enterprise that result from transactions and other economic events in a period, other than transactions with owners. Comprehensive income consists of net income and unrealized gains and losses from securities available for sale and interest rate swaps.
Fair Value of Financial Instruments
The Company is required to re-measure and report certain assets and liabilities at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
11
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(2) Significant Accounting Policies (continued)
Fair Value of Financial Instruments (continued)
participants at the measurement date. The carrying amount of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses approximate fair value due to their short maturities. The carrying amount of long-term debt approximates fair value because the interest rate on such debt changes with market rates. The Company is also required to assess the reliability of the fair value estimate based on the observability of the inputs by categorizing the measurement in a three-tier fair value hierarchy (see Note 15).
Net Revenue
Net revenue consists of fee for service revenue, contract revenue, management fees and other revenue. The Companys net revenue is derived principally from the provision of physician services to patients of the healthcare facilities the Company serves.
Fee for service revenue is billed to patients for services provided, and the Company receives payments for these services from patients or their third-party payors. The Company recognizes revenue, net of contractual discounts and provision for uncollectibles, in the period the services are provided. Services provided but not yet billed are estimated and recognized in the period services are provided as well. The Company records its revenue net of an allowance for contractual discounts, which represents the net revenue the Company expects to collect from third-party payors (including managed care, commercial and governmental payors such as Medicaid and Medicare) and patients insured by these payors. These expected collections are based on the Companys fees and negotiated payment rates in the case of third-party payors, the specific benefits provided for under each patients health care plans, mandated payment rates in the case of Medicare and Medicaid programs, and historical cash collections (net of recoveries).
A significant portion of the Companys uninsured patients will be unable or unwilling to pay for the services provided. Net revenue from uninsured patients is recognized on the basis of Companys usual expected collections from fee for service arrangements. To record this revenue at its estimated realizable value, the Company records a provision for uncollectibles related to its uninsured patients based on its historical cash collections (net of recoveries) from these patients and the Companys estimates of payor mix. Estimates of unbilled revenue, payor mix, contractual discounts, and uncollectibles are periodically assessed for a period of at least one year following the month of service by analyzing actual development, including cash collections, against estimates. Changes in these estimates are charged or credited to the consolidated statement of income and comprehensive income in the period such assessment is made.
The Company also earns contract revenue directly from its hospital customers through a variety of payment arrangements that are established when payments from third-party payors are inadequate to support the costs of the contract. The Company recognizes contract revenue in the period earned.
The Company derives management fees pursuant to contractual agreements with certain of its physician practices, which require the practices to pay the Company management fees that are based on a flat fee or a percentage of net fee for service revenue, depending on the nature of services provided. The Company recognizes management fees in the period earned.
Segment Reporting
The Company provides its services through five operating segments: Anesthesia; Childrens Services; Radiology; Emergency Medicine Services; and Other Services. Anesthesia, Childrens Services, Radiology and
12
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(2) Significant Accounting Policies (continued)
Segment Reporting (continued)
Emergency Medicine Services are aggregated into one Physician Services reportable segment, with the Other Services operating segment presented in the All Other category. The Physician Services segment provides healthcare services to hospitals and ambulatory surgery centers on a fee for service or contract basis. The Other Services segment is an aggregation of other services provided in an office-based setting such as gynecology, obstetrics, and perinatology, as well as management services, including physician recruiting services and other operations that service the Companys business as well as third parties, and ownership in and management services of ambulatory surgery centers.
See Note 20 for financial information of the Companys reportable segments.
Recent Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board (FASB) in the form of Accounting Standards Updates (ASUs) to the FASBs Accounting Standards Codification. The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Companys consolidated financial position or comprehensive income.
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force) (ASU 2013-11). ASU 2013-11 provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists and is intended to eliminate diversity in practice. ASU 2013-11 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013 with early adoption permitted. The Company is currently assessing the impact of this guidance on its consolidated financial statements.
In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02). The objective of ASU 2013-02 is to improve the reporting of reclassifications out of accumulated other comprehensive income. This amendment requires disclosure of information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, disclosure is required, either on the face of the statement where net income is presented or in the notes, of significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other required disclosures that provide additional detail about those amounts. The new requirements are effective prospectively for annual reporting periods beginning after December 15, 2012. The adoption of this ASU did not have an impact on the Companys consolidated financial condition, results of operations and comprehensive income or cash flows.
In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (the revised standard) (ASU 2012-02). ASU 2012-02 is intended to reduce the cost and complexity of testing indefinite-lived intangible assets, other than goodwill, for impairment. It allows companies to perform a qualitative assessment to determine whether further impairment testing of indefinite-lived intangible
13
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(2) Significant Accounting Policies (continued)
Recent Accounting Pronouncements (continued)
assets is necessary, similar in approach to the qualitative approach to testing goodwill for impairment. ASU 2012-02 was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this ASU did not have an impact on the Companys consolidated financial condition, results of operations and comprehensive income or cash flow.
(3) Restricted Cash and Marketable Securities
In accordance with the provisions of a reinsurance agreement between the Company and a third-party insurer, acting as a fronting agent, the Company is required to collateralize the fronting agents exposure. The fronting agents exposure was collateralized by a trust at December 31, 2013 and 2012. At December 31, 2013 and 2012, the cash balances restricted under such arrangement were $14.3 million and $18.5 million, respectively. At December 31, 2013 and 2012, total marketable securities restricted under such arrangement were $4.2 million and $5.5 million, respectively. Such amounts are classified as current assets based upon the maturity of the respective securities and managements expectation with regard to these securities. The Companys restricted marketable securities consist of the following (in thousands):
December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||||||||||
Cost or Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
Cost
or Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||||||||||||||
Certificates of deposit |
$ | 4,229 | $ | 2 | $ | | $ | 4,231 | $ | 5,477 | $ | | $ | (1 | ) | $ | 5,476 |
The original contractual maturities for the Companys marketable securities at December 31, 2013 are all due within one year.
(4) Accounts Receivable, Net
Accounts receivable are reflected in the consolidated balance sheets net of contractual discounts and provision for uncollectibles. The Company periodically reassesses its accounts receivable, net by analyzing historical cash collections, changes in payor mix and accounts receivable agings. Actual collections of accounts receivable in subsequent periods may require changes in the estimated provision for uncollectibles. Changes in these estimates are charged or credited to the consolidated statement of income and comprehensive income in the period of change. Material changes in estimate may result from unforeseen write-offs of patient or third-party accounts receivable, unsuccessful disputes with managed care payors, adverse macro-economic conditions which limit patients ability to meet their financial obligations for the care provided by our physicians, or broad changes to government regulations that adversely impact reimbursement rates for services provided by the Company. The Company recorded write-offs, net of recoveries, of $62.2 million and $42.5 million for the years ended December 31, 2013 and 2012, respectively. The increase in write-offs, net of recoveries, during the year ended December 31, 2013 was due to an increase in revenue as a result of increased patient volumes primarily from acquisitions, organic contract growth and write-offs of radiology services billed from a newly implemented billing system. The Company wrote-off approximately $6.3 million of accounts receivable for dates of service beginning in fiscal year 2012 through June 2013 that were deemed unrecoverable due to performance issues with a billing system that was implemented during fiscal year 2012. The combined effects from changes in estimates related to the valuation of prior period accounts receivable, primarily related to performance issues with the newly implemented billing system was a decrease to income from operations of approximately $5.0 million for the year ended December 31, 2013. Management believes the performance issues were substantially resolved as of December 31, 2013.
14
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(4) Accounts Receivable, Net (continued)
Accounts receivable, net consists of the following (in thousands):
December 31, | ||||||||
2013 | 2012 | |||||||
Fee for service receivables |
$ | 143,066 | $ | 140,987 | ||||
Provision for uncollectibles |
(19,943 | ) | (24,197 | ) | ||||
|
|
|
|
|||||
Fee for service receivables, net |
123,123 | 116,790 | ||||||
Contract receivables, net |
6,499 | 4,392 | ||||||
Management fee and other receivables, net |
919 | 639 | ||||||
|
|
|
|
|||||
Accounts receivable, net |
$ | 130,541 | $ | 121,821 | ||||
|
|
|
|
(5) Other Current Assets
Other current assets consist of the following (in thousands):
December 31, | ||||||||
2013 | 2012 | |||||||
Income taxes receivable |
$ | 12,055 | $ | 6,002 | ||||
Prepaids |
5,323 | 4,649 | ||||||
Other |
6,277 | 7,623 | ||||||
|
|
|
|
|||||
Total other current assets |
$ | 23,655 | $ | 18,274 | ||||
|
|
|
|
(6) Property and Equipment, Net
Property and equipment, net consists of the following (in thousands):
December 31, | ||||||||
2013 | 2012 | |||||||
Equipment, computer hardware and software |
$ | 32,889 | $ | 24,940 | ||||
Furniture and fixtures |
8,262 | 8,341 | ||||||
Leasehold improvements |
8,158 | 7,972 | ||||||
Capitalized projects in progress |
3,491 | 5,024 | ||||||
|
|
|
|
|||||
Total |
52,800 | 46,277 | ||||||
Accumulated depreciation and amortization |
(23,338 | ) | (16,121 | ) | ||||
|
|
|
|
|||||
Property and equipment, net |
$ | 29,462 | $ | 30,156 | ||||
|
|
|
|
The company recorded depreciation and other amortization expense of approximately $9.9 million, $7.7 million and $5.5 million for the years ended December 31, 2013, 2012 and 2011, respectively.
(7) Business Acquisitions
A significant portion of the Companys growth during the past decade has come from acquisitions of regional provider groups and other smaller physician practices along with new contracts, all of which has in part been driven by industry consolidation trends.
15
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(7) Business Acquisitions (continued)
During the year ended December 31, 2013, the Company completed the acquisition of three physician group practices and a management service organization. In April 2013, the Company acquired certain assets of a physician group practice that provides emergency medical services in Florida. In September 2013, the Company acquired all of the stock of a physician group practice that provides anesthesia and pain management in New Jersey. In November 2013, the Company acquired all of the stock of a physician group practice that provides anesthesia services in California. Additionally, in February 2013, the Company acquired all of the stock of a medical service organization located in Kansas that provides medical billing and other management services. The total consideration consisted of cash, the Companys issuance of units, and contingent consideration with a total value of $134.9 million, which is net of $0.9 million of cash acquired. These acquisitions were funded by operating cash flows and the proceeds of issuance of debt. In addition, the Company recorded transaction costs of $1.6 million, which are included in general and administrative costs in the consolidated statement of income and comprehensive income for the year ended December 31, 2013.
These acquisitions have expanded the Companys presence in the markets of the respective acquisitions. The results of operations of the acquired businesses have been included in the Companys consolidated financial statements beginning on the respective acquisition dates. These acquisitions added approximately $15.4 million of net revenue and $4.1 million of gross profit for the year ended December 31, 2013. Pro forma results of operations for acquisitions completed in 2013 have not been presented because the effect of these acquisitions was not material, individually or in the aggregate, to the Companys consolidated statements of income and comprehensive income.
The allocation of purchase price to the fair value of tangible and intangible assets and liabilities, as well as the estimated useful lives of the acquired assets, is provisional and remains preliminary as management continues to assess the valuation of these items and any ultimate purchase price adjustments based on the final assets and net working capital, as prescribed by the purchase agreements. The Company recorded goodwill of approximately $84.5 million (of which $10.2 million is tax deductible goodwill) in accordance with the provisions of ASC 805, Business Combinations (ASC 805) as follows (in thousands):
Fair value of consideration transferred, net of cash acquired |
$ | 134,862 | ||
Net assets acquired: |
||||
Working capital |
(1,973 | ) | ||
Other assets |
1,908 | |||
Intangible assets |
89,978 | |||
Deferred income taxes |
(34,873 | ) | ||
Contingent consideration |
(4,683 | ) | ||
|
|
|||
Total net assets acquired |
50,357 | |||
|
|
|||
Goodwill resulting from the acquisitions |
$ | 84,505 | ||
|
|
Intangible assets primarily consist of customer relationship with a weighted-average amortization period of 20 years.
One purchase agreement entered into during the year ended December 31, 2013 has a contingent consideration provision pursuant to which, if the financial targets are achieved within a performance period, as defined, an estimated maximum future cash payment totaling $6.0 million could be made at the conclusion of the performance period. As of December 31, 2013, the Company has accrued the fair value of the contingent consideration of $4.7 million as its estimate of the additional payments to be made. This balance is included in other long-term liabilities in the accompanying consolidated balance sheet.
16
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(7) Business Acquisitions (continued)
During the year ended December 31, 2012, the Company completed the acquisition of three physician group practices and a 50.1% interest in another physician-related business. In August 2012, the Company acquired certain assets of a physician group practice that provides radiology services in Florida. In December 2012, the Company acquired all of the stock of a physician group practice that provides anesthesia services and pain management in New Jersey. In December 2012, the Company acquired certain assets of a physician group practice that provides anesthesia and pain management services in New Jersey. Additionally, in November 2012, the Company acquired a 50.1% interest in an ambulatory surgery center located in New Jersey. The total consideration consisted of $49.7 million, which is net of $0.6 million of cash acquired. These acquisitions were funded by operating cash flows. In addition, the Company recorded transaction costs of $1.0 million, which is included in general and administrative costs in the consolidated statement of income and comprehensive income for the year ended December 31, 2012.
The allocation of purchase price to the fair value of tangible and intangible assets and liabilities, as well as the estimated useful lives of the acquired assets, was completed in 2013, resulting in no material measurement period adjustments. The Company recorded goodwill of approximately $48.1 million (of which $26.3 million is tax deductible goodwill) in accordance with the provisions of ASC 805, as follows (in thousands):
Consideration paid, net of cash acquired |
$ | 49,714 | ||
Net assets acquired: |
||||
Working capital |
2,041 | |||
Property and equipment |
1,050 | |||
Intangible assets (primarily customer relationships) |
19,224 | |||
Deferred income taxes |
(2,464 | ) | ||
Fair value of noncontrolling interest |
(18,188 | ) | ||
|
|
|||
Total net assets acquired |
1,663 | |||
|
|
|||
Goodwill resulting from the acquisitions |
$ | 48,051 | ||
|
|
During the year ended December 31, 2011, the Company completed the acquisition of three physician practices and a 50.1% interest in another physician-related business. In June 2011, the Company acquired all of the stock of a physician group practice that provides childrens services in Alabama. In November 2011, the Company acquired a 50.1% interest in an ambulatory surgery center located in Florida. In December 2011, the Company acquired all of the stock of two physician group practices that provide anesthesia services in New Jersey and Florida. The total consideration consisted of $87.9 million, which is net of $1.7 million cash acquired. The acquisitions were funded through operational cash flows. In addition, the Company recorded transaction costs of $1.1 million which is included in general and administrative costs in the consolidated statements of income and comprehensive income for the year ended December 31, 2011.
17
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(7) Business Acquisitions (continued)
The allocation of purchase price to the fair value of tangible and intangible assets and liabilities, as well as the estimated useful lives of the acquired assets, was completed in 2012, resulting in no material measurement period adjustments. The Company recorded goodwill of approximately $44.2 million (of which $24.7 million is tax deductible goodwill) in accordance with the provisions of ASC 805, as follows (in thousands):
Purchase price |
$ | 87,930 | ||
Net assets acquired: |
||||
Working capital |
(139 | ) | ||
Property and equipment |
519 | |||
Intangible assets (primarily customer relationships) |
54,348 | |||
Deferred income taxes |
(8,252 | ) | ||
Fair value of noncontrolling interest |
(2,707 | ) | ||
|
|
|||
Total net assets acquired |
43,769 | |||
|
|
|||
Goodwill resulting from the acquisitions |
$ | 44,161 | ||
|
|
During 2011, the Company paid contingent consideration of $500,000 relating to a certain prior year acquisition that was accrued for as of December 31, 2010 as part of the initial purchase price allocation.
(8) Goodwill and Other Intangible Assets
The changes in the carrying amounts of goodwill are as follows (in thousands):
Goodwill, January 1, 2012 |
$ | 747,490 | ||
Acquisitions |
48,051 | |||
Other adjustments |
905 | |||
|
|
|||
Goodwill, December 31, 2012 |
796,446 | |||
Acquisitions |
84,505 | |||
Other adjustments |
72 | |||
|
|
|||
Goodwill, December 31, 2013 |
$ | 881,023 | ||
|
|
Other intangible assets consist of the following (in thousands):
December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
Gross Amount |
Accumulated Amortization |
Net Amount |
Gross Amount |
Accumulated Amortization |
Net Amount |
|||||||||||||||||||
Definite-lived intangible assets: |
||||||||||||||||||||||||
Customer relationships with hospitals |
$ | 549,537 | $ | (115,197 | ) | $ | 434,340 | $ | 459,790 | $ | (90,974 | ) | $ | 368,816 | ||||||||||
Noncompete agreements |
14,886 | (13,287 | ) | 1,599 | 14,655 | (11,849 | ) | 2,806 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total definite-lived intangible assets |
564,423 | (128,484 | ) | 435,939 | 474,445 | (102,823 | ) | 371,622 | ||||||||||||||||
Indefinite-lived intangible assets: |
||||||||||||||||||||||||
Corporate trade name |
76,360 | | 76,360 | 76,360 | | 76,360 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total intangible assets |
$ | 640,783 | $ | (128,484 | ) | $ | 512,299 | $ | 550,805 | $ | (102,823 | ) | $ | 447,982 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
18
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(8) Goodwill and Other Intangible Assets (continued)
The Companys other intangible asset amortization expense for the years ended December 31, 2013, 2012 and 2011 was $25.7 million, $24.5 million and $20.6 million, respectively. Amortization expense for other intangible assets for the years 2014 through 2018 is expected to be $27.8 million, $27.8 million, $27.0 million, $25.4 million and $25.0 million, respectively. The calculation of the weighted-average amortization period includes amortization expense related to years beyond 2018 of $302.9 million.
(9) Other Current Liabilities
Other current liabilities consist of the following (in thousands):
December 31, | ||||||||
2013 | 2012 | |||||||
Refunds payable |
$ | 12,055 | $ | 8,655 | ||||
Other accrued expenses |
10,964 | 10,160 | ||||||
|
|
|
|
|||||
Total other current liabilities |
$ | 23,019 | $ | 18,815 | ||||
|
|
|
|
(10) Accrued Professional Liabilities
At December 31, 2013 and 2012, the Companys total accrued professional liabilities of $60.4 million and $66.0 million, respectively, includes incurred but not reported loss reserves of $32.5 million and $36.2 million, respectively, and loss reserves for reported claims associated with self-insured retention amounts through the Companys wholly owned captive insurance subsidiary of $27.9 million and $29.8 million, respectively.
The activity related to the Companys total accrued professional liabilities is as follows (in thousands):
Years Ended December 31, | ||||||||
2013 | 2012 | |||||||
Balance at beginning of year |
$ | 65,973 | $ | 63,833 | ||||
Provision (adjustment) for losses related to: |
||||||||
Current year |
12,113 | 13,175 | ||||||
Prior years |
(4,574 | ) | (5,203 | ) | ||||
|
|
|
|
|||||
Total provision for losses |
7,539 | 7,972 | ||||||
Claims payments related to: |
||||||||
Current year |
(1,080 | ) | (3,239 | ) | ||||
Prior years |
(12,000 | ) | (3,385 | ) | ||||
|
|
|
|
|||||
Total payments |
(13,080 | ) | (6,624 | ) | ||||
|
|
|
|
|||||
Other, net |
(36 | ) | 792 | |||||
|
|
|
|
|||||
Balance at end of year |
$ | 60,396 | $ | 65,973 | ||||
|
|
|
|
The net decrease in the Companys total accrued professional liabilities for the year ended December 31, 2013 is primarily attributable to the increase in claim payments and adjustments to the provision for losses related to prior years resulting from favorable trends in the Companys claims experience.
Other, net comprises liabilities assumed in connection with the Companys acquisitions and changes in reserves associated with third-party insurance policies.
19
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(11) Long-Term Debt
Long-term debt consists of the following (in thousands):
December 31, | ||||||||
2013 | 2012 | |||||||
$750.1 million 2013 Term Loan, net of unamortized discount of $4.3 million, payable in quarterly installments through June 29, 2018; interest at Interbank Offered Rate (LIBOR) with a floor of 1.00% plus 3.50% (rate of 4.5% at December 31, 2013) |
$ | 745,808 | $ | | ||||
$400.0 million 2013 Second Lien Term Loan, net of unamortized discount of $2.5 million, payable at maturity, December 18, 2021; interest at LIBOR with a floor of 1.00%, plus 7.25% (rate of 8.25% at December 31, 2013) |
397,484 | | ||||||
Revolver, payable at maturity, June 29, 2017; interest at LIBOR or prime plus an applicable margin |
| | ||||||
$597.0 million 2012 Term Loan, net of unamortized discount of $5.5 million, payable in quarterly installments through June 29, 2018; interest at LIBOR with a floor of 1.25% plus 4.75% (rate of 6.00% at December 31, 2012) |
| 591,519 | ||||||
$110.0 million 2012 Second Lien Term Loan, net of unamortized discount of $1.0 million, payable at maturity, June 29, 2019; interest at LIBOR with a floor of 1.25%, plus 7.75% (rate of 9.00% at December 31, 2012) |
| 108,979 | ||||||
|
|
|
|
|||||
Total |
1,143,292 | 700,498 | ||||||
Less: Current portion |
(8,270 | ) | (6,000 | ) | ||||
|
|
|
|
|||||
Long-term debt |
$ | 1,135,022 | $ | 694,498 | ||||
|
|
|
|
On June 29, 2012, the Company entered into a first lien credit agreement and second lien credit agreement with a syndicate of banks. The first lien credit agreement included a $600.0 million first lien term loan (the 2012 Term Loan) and a $100.0 million revolving credit facility (the Revolver), and the second lien credit agreement included a $110.0 million second lien term loan (the 2012 Second Lien Term Loan). The 2012 Term Loan and the 2012 Second Lien Term Loan were issued at discounts of $6.0 million and $1.1 million, respectively. The net proceeds from the financing of $702.9 million were used to retire the Companys then outstanding term loans totaling $635.3 million and accrued interest thereon of $1.4 million, and pay $12.8 million of the financing costs. Net proceeds to the Company were $53.4 million.
These transactions were accounted for as a substantial modification of debt. Unamortized discounts, deferred financing and other costs of $7.7 million related to the retired debt as well as a $0.4 million loss on early termination of a related interest rate swap were expensed and recorded as a loss on extinguishment of debt in the accompanying consolidated statement of income and comprehensive income during the year ended December 31, 2012. The financing costs related to the new credit facilities of $14.3 million were recorded in other current assets and other assets in the accompanying consolidated balance sheet as of December 31, 2012 and were being amortized over the terms of the related debt.
On February 13, 2013, the Company entered into an amendment to the 2012 Term Loan (2013 Amendment), which reduced the applicable margin rate, added an additional $75.0 million of debt to the 2012 Term Loan and incurred an exchange of debt among multiple lenders. The 2013 Amendment did not modify any other terms of the 2012 Term Loan and constituted a repricing transaction in respect to the 2012 Term Loan. The net proceeds of the 2013 Amendment of $672.0 million were used to refinance the existing 2012 Term Loan of $591.5 million and pay accrued interest. In addition, the Company paid a total of $9.7 million in fees in relation to the transaction. Net proceeds to the Company were $61.1 million.
20
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(11) Long-Term Debt (continued)
The 2013 Amendment involved multiple lenders who were considered members of a loan syndicate. In determining whether the refinancing was to be accounted for as a debt extinguishment or modification, the Company considered whether the creditors remained the same or changed and whether the change in debt terms was substantial. The debt terms were considered substantially different if the present value of the cash flows of the term loans under the credit agreement, as amended, was at least 10% different from the present value of the remaining cash flows of the original term loans (the 10% Test). The Company performed a separate 10% Test for each individual creditor participating in the loan syndicate. The loans of creditors who did not participate in the 2013 Amendment were accounted for as a debt extinguishment. When there was a change in principal balance for individual creditors, in applying the 10% Test, the Company used the cash flows related to the lowest common principal balance, or the Net Method. Under the Net Method, any principal in excess of a creditors reinvested principal balance was treated as a new, separate debt issuance, and any decrease in principal was treated as a partial extinguishment of debt.
For debt considered to be extinguished, the unamortized deferred financing costs and unamortized original issue discount associated with the extinguished debt were expensed. For debt considered to be modified, the unamortized deferred financing costs and unamortized original issue discount associated with the modified debt continue to be amortized, new creditor fees were capitalized and new third-party fees were expensed. For new creditors, new creditor fees and new third-party fees were capitalized. As a result, the Company recorded a loss on the extinguishment of debt in the accompanying consolidated statement of income and comprehensive income of $4.4 million related to the 2013 Amendment during the year ended December 31, 2013. Deferred financing costs of $7.1 million were recorded in other current assets and other assets, as well as a debt discount that reduced long-term debt in the accompanying consolidated balance sheet, and are being amortized over the terms of the related debt.
On December 18, 2013, the Company entered into another amendment to the 2012 Term Loan and the 2012 Second Lien Term Loan, (the 2013 Term Loan and the 2013 Second Lien Term Loan, respectively, and the Credit Facilities, collectively). The 2013 Term Loan permits the borrowing of new 2013 term loans, including an $85.0 million incremental first lien term loan, a $70.0 million incremental first lien delayed draw term loan with an interest rate of 0.25% per quarter on the aggregate principal amount which was drawn in January 2014, and a revolving credit facility of up to $100.0 million, which includes a borrowing capacity of $20.0 million for issuances of letters of credit. Additional term loans or revolving credit commitments may be obtained subject to certain conditions. The net proceeds from the 2013 Second Lien Term Loan of $400.0 million were used for (i) the declaration and payment of a dividend to the Companys unitholders, (ii) the repayment of Sheridans then outstanding 2012 Second Lien Term Loan totaling $110.0 million and accrued interest thereon of $2.2 million, and (iii) the payment of $14.6 million of the transaction expenses, including financing costs. Net proceeds to the Company were $358.7 million.
The December amendment to the Credit Facilities also involved multiple lenders who were considered members of a loan syndicate, and the Company used the same methodology as described above to determine the amounts to be capitalized to deferred financing costs and the amounts to be expensed. As a result, the Company recorded a loss on the extinguishment of debt in the accompanying consolidated statement of income and comprehensive income of $6.6 million related to the amendment of the Credit Facilities during the year ended December 31, 2013. Deferred financing costs of $10.6 million were recorded in other current assets and other assets, as well as a debt discount that reduces long-term debt in the accompanying consolidated balance sheet, and are being amortized over the terms of the related debt.
21
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(11) Long-Term Debt (continued)
The Credit Facilities bear interest at a rate equal to an applicable margin plus, either (1) a base rate determined by reference to the highest of (a) the prime lending rate of Credit Suisse AG, (b) the federal funds rate plus 1/2 of 1% and (c) a reserve adjusted Eurodollar rate determined by reference to the London interbank rate for deposits in dollars for a one month interest period plus 1.00% or (2) a reserve adjusted Eurodollar rate determined by reference to the London interbank rate for deposits in dollars for the applicable interest periods. The Credit Facilities annual base rate may never be lower than 2.00% and Eurodollar rate may never be lower than 1.00%.
The initial applicable margin for initial term loans under the 2013 Term Loan is 2.50% with respect to base rate loans and 3.50% with respect to Eurodollar rate loans. The initial applicable margin for revolving loans is 3.75% with respect to base rate loans and 4.75% with respect to Eurodollar rate loans, and it may be reduced subject to the Company attaining certain first lien leverage ratios. The applicable margin for term loans under the 2013 Term Loan is 6.25% with respect to base rate loans and 7.25% with respect to Eurodollar rate loans.
At December 31, 2013, the maximum available to the Company under the Revolver was $99.9 million, net of outstanding letters of credit with an aggregate face amount of $0.1 million. No amounts were drawn on the Revolver as of December 31, 2013 and 2012.
The Credit Facilities and the Revolver are collateralized by all the assets and equity of the Companys subsidiaries, excluding its captive insurance subsidiary and certain other subsidiaries as defined in the credit agreements. The Company is subject to certain covenants and restrictions under the Credit Facilities. At December 31, 2013, the Company was in compliance, in all material respects, with these financial covenants and restrictions.
Annual maturities of long-term debt outstanding as of December 31, 2013 are as follows (in thousands):
For the Years Ended December 31, |
||||
2014 |
$ | 8,270 | ||
2015 |
8,270 | |||
2016 |
8,270 | |||
2017 |
8,270 | |||
2018 |
716,988 | |||
Thereafter |
400,000 | |||
|
|
|||
Total |
$ | 1,150,068 | ||
|
|
(12) Interest Rate Swaps
The Company is exposed to market risks arising from adverse changes in interest rates associated with variable rate debt. The Company had previously entered into interest rate swap agreements, which effectively converted a portion of the Companys variable interest rate to fixed interest rates of outstanding borrowings under its then outstanding term loan, which the Company refinanced in 2012. As a result, the one outstanding interest rate swap, with a notional amount of $180.0 million, was terminated in July 2012, at a loss of $0.4 million, and the loss was reclassified to earnings in the same period. During 2011, one interest rate swap agreement with a notional value of $50.0 million expired, which effectively converted a variable interest rate to a fixed interest rate of 5.341%. The swap agreements were designated as a cash flow hedge and accounted for at
22
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(12) Interest Rate Swaps (continued)
fair value with the effective portion of gains or losses reported in other comprehensive income (loss). The interest rate swap was highly effective at hedging the hedged risk and any ineffectiveness was immaterial to the financial statements. The net effect on the Companys operating results was that interest on the variable rate debt being hedged was recorded based on fixed interest rates. The effect of interest rate swap agreements on interest expense was an increase of approximately $4.8 million and $10.7 million for the years ended December 31, 2012 and 2011, respectively. The Company did not have any derivatives outstanding at December 31, 2013 and 2012.
The following table presents the pretax impact that changes in the fair value the derivative designated as a cash flow hedge had on accumulated other comprehensive income and earnings during the years ended December 31, 2013, 2012 and 2011 (in thousands):
Derivatives in Subtopic 815-20 Cash Flow Hedging Relationships |
Amount of Gain (Loss) Recognized in Other Comprehensive Income (Effective Portion) |
Location of Gain (Loss) from Accumulated Other Comprehensive Income into Income |
Amount of Gain
(Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion) |
|||||||||||||||||||||||||
2013 | 2012 | 2011 | 2013 | 2012 | 2011 | |||||||||||||||||||||||
Interest rate swap |
$ | | $ | 4,454 | $ | 9,851 | Interest expense, net | $ | | $ | 4,817 | $ | 10,662 |
(13) Retirement Plans
The Company maintains qualified contributory savings plans (the Plans) as allowed under Section 401(k) of the Internal Revenue Code. In addition, in connection with certain acquisitions, the Company continues to maintain defined contribution savings plans allowed under Section 401(k) and/or Section 401(a). The Plans permit participant contributions and allow elective Company contributions or required Company contributions subject to the limits defined by each of the Plans. In connection with the Plans, the Company recorded an expense of approximately $10.6 million, $12.4 million and $9.1 million for the years ended December 31, 2013, 2012 and 2011, respectively. The expense was recorded in personnel expenses as well as a portion in general administrative expenses in the accompanying consolidated statements of income and comprehensive income.
(14) Income Taxes
The provision for income taxes consists of the following (in thousands):
Years Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Federal: |
||||||||||||
Current |
$ | 17,425 | $ | 21,389 | $ | 26,060 | ||||||
Deferred |
(1,114 | ) | (8,995 | ) | (4,147 | ) | ||||||
|
|
|
|
|
|
|||||||
Total federal |
16,311 | 12,394 | 21,913 | |||||||||
|
|
|
|
|
|
|||||||
State: |
||||||||||||
Current |
2,384 | 6,320 | 5,931 | |||||||||
Deferred |
(395 | ) | (2,428 | ) | (969 | ) | ||||||
|
|
|
|
|
|
|||||||
Total state |
1,989 | 3,892 | 4,962 | |||||||||
|
|
|
|
|
|
|||||||
$ | 18,300 | $ | 16,286 | $ | 26,875 | |||||||
|
|
|
|
|
|
23
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(14) Income Taxes (continued)
The differences between the effective rate and the United States federal income tax statutory rate are as follows (in thousands):
Years Ended December 31, | ||||||||||||||||||||||||
2013 | % | 2012 | % | 2011 | % | |||||||||||||||||||
Tax at federal statutory rate |
$ | 12,191 | 35.00 | % | $ | 18,599 | 35.00 | % | $ | 22,013 | 35.00 | % | ||||||||||||
Equity -based compensation expense of flow-through entities |
4,961 | 14.24 | % | 1,120 | 2.11 | % | 2,651 | 4.22 | % | |||||||||||||||
State income taxes, net of federal benefit |
2,454 | 7.04 | % | 2,893 | 5.44 | % | 3,673 | 5.84 | % | |||||||||||||||
Imputed interest, non-deductible dividend expense |
216 | 0.62 | % | 190 | 0.36 | % | 141 | 0.22 | % | |||||||||||||||
Flow-through entities not subject to tax |
(942 | ) | (2.70 | %) | (666 | ) | (1.25 | %) | (529 | ) | (0.84 | %) | ||||||||||||
Change in accrual estimate relating to uncertain tax positions |
(723 | ) | (2.08 | %) | (466 | ) | (0.88 | %) | 418 | 0.66 | % | |||||||||||||
Change in valuation allowance |
72 | 0.21 | % | (3,688 | ) | (6.94 | %) | | | |||||||||||||||
Noncontrolling interest |
(976 | ) | (2.80 | %) | (682 | ) | (1.28 | %) | (259 | ) | (0.41 | %) | ||||||||||||
Other, net |
1,047 | 3.00 | % | (1,014 | ) | (1.91 | %) | (1,233 | ) | (1.96 | %) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 18,300 | 52.53 | % | $ | 16,286 | 30.65 | % | $ | 26,875 | 42.73 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of deferred income tax assets and liabilities are as follows (in thousands):
December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
Total | Current | Non-Current | Total | Current | Non-Current | |||||||||||||||||||
Self-insurance accruals |
$ | 18,671 | $ | (1,260 | ) | $ | 19,931 | $ | 19,627 | $ | 19,627 | $ | | |||||||||||
Lease obligation |
17 | | 17 | | | | ||||||||||||||||||
Provision for uncollectibles |
5,156 | 5,156 | | 5,757 | 5,757 | | ||||||||||||||||||
Net operating loss carryforward of cash basis affiliates |
3,446 | | 3,446 | 3,155 | | 3,155 | ||||||||||||||||||
Employee benefits |
19 | | 19 | 7 | | 7 | ||||||||||||||||||
AMT credit carryforward |
100 | 100 | | 292 | 292 | | ||||||||||||||||||
Accrued expenses |
10,332 | 10,332 | | 6,627 | 6,627 | | ||||||||||||||||||
Other, net |
1,400 | 1,400 | | 2,260 | 2,260 | | ||||||||||||||||||
Impairment of purchase option |
604 | | 604 | 604 | | 604 | ||||||||||||||||||
Deferred payment |
461 | | 461 | 438 | | 438 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Deferred tax assets |
40,206 | 15,728 | 24,478 | 38,767 | 34,563 | 4,204 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Valuation allowance |
(981 | ) | | (981 | ) | (909 | ) | | (909 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total deferred tax assets, net |
39,225 | 15,728 | 23,497 | 37,858 | 34,563 | 3,295 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Goodwill and other intangible assets |
(191,869 | ) | | (191,869 | ) | (156,216 | ) | | (156,216 | ) | ||||||||||||||
Prepaid items |
(1,237 | ) | (1,237 | ) | | (1,072 | ) | (1,072 | ) | | ||||||||||||||
Accrual basis income of cash basis affiliates |
(588 | ) | (588 | ) | | (935 | ) | (935 | ) | | ||||||||||||||
Unrealized (gain) loss on marketable securities |
(1 | ) | (1 | ) | | 1 | 1 | | ||||||||||||||||
Property and equipment |
(6,431 | ) | | (6,431 | ) | (8,101 | ) | | (8,101 | ) | ||||||||||||||
Other, net |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Deferred tax liabilities |
(200,126 | ) | (1,826 | ) | (198,300 | ) | (166,323 | ) | (2,006 | ) | (164,317 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total deferred tax assets (liabilities) |
$ | (160,901 | ) | $ | 13,902 | $ | (174,803 | ) | $ | (128,465 | ) | $ | 32,557 | $ | (161,022 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
24
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(14) Income Taxes (continued)
The Company includes interest and penalties related to income tax liabilities in the provision for income taxes. For the years ended December 31, 2013, 2012 and 2011, the Company accrued penalties of $0.1 million, $0.2 million and $0.3 million, respectively, and interest, net of federal and state tax benefit, of $0.1 million for each year. As of December 31, 2013 and 2012, the Companys liabilities for penalties were $0.2 million and $0.5 million, respectively, and interest, net of federal and state tax benefit of $0.1 million and $0.2 million, respectively. At December 31, 2013, the Company had $0.3 million of unrecognized tax benefits that, if recognized, would favorably impact its effective tax rate.
The Companys liability for uncertain tax positions could be reduced over the next twelve months by approximately $0.1 million, excluding accrued interest, due to the expiration of statutes of limitation or settlements with taxing authorities. Although the Company anticipates additional changes in its liabilities for uncertain tax positions related to certain temporary differences, an estimate of the range of such changes cannot be made at this time.
The Companys wholly owned corporate subsidiaries file a consolidated tax return with their parent company. The remaining affiliated professional contractors in which the Company has a controlling financial interest file tax returns on an individual basis. The Company is currently subject to federal and various state income tax examinations for the tax years 2009 to 2012.
The affiliated professional contractors in which the Company has a controlling financial interest have net operating loss carryforwards for federal and state tax purposes totaling $4.4 million and $4.4 million, respectively at December 31, 2013, and $4.7 million and $4.4 million at December 31, 2012, respectively, expiring at various times commencing in 2019.
The Company also has a net operating loss carryforward for federal and state tax purposes of $1.6 million and $8.7 million, respectively, at December 31, 2013 and a net operating loss carryforward for federal and state tax purposes of $8.0 million at December 31, 2012, related to a VIE that is included in the consolidated financial statements. The net operating losses begin to expire at various times commencing in 2024. The net deferred tax asset related to the net operating losses of the VIE is approximately $0.8 million at December 31, 2013 and 2012, respectively. During the year ended December 31, 2012, the VIE had a nonrecurring income recognition event which enabled the entity to utilize all of its federal and $3.0 million of its state net operating loss carry forwards. As a result, the Company released $3.6 million of the valuation allowance on these deferred tax assets. A valuation allowance remains on the remaining tax asset.
(15) Fair Value Measurements
Fair Value Hierarchy
The carrying amounts of cash and cash equivalents, restricted cash, restricted marketable securities, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short maturities of the respective instruments. The carrying value of the variable-rate long-term debt approximates fair value at December 31, 2013 and 2012, since the related interest rates approximate current market rates available for similar debt instruments.
25
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(15) Fair Value Measurements (continued)
Fair Value Hierarchy (continued)
Financial assets and liabilities are categorized based on the inputs to the valuation technique into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The various levels of the fair value hierarchy are described as follows:
| Level 1Quoted prices in active markets for identical assets or liabilities. |
| Level 2Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| Level 3Inputs that are generally unobservable and typically reflect managements estimate of assumptions that market participants would use in pricing the asset or liability. |
The use of observable market data is required when available in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest-level input that is significant to the fair value measurement.
Recurring Fair Value Measurements
The following table presents the Companys fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis (in thousands):
December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
Fair Value Measurements | Fair Value Measurements | |||||||||||||||||||||||
Description |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Unobservable Inputs (Level 3) |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Unobservable Inputs (Level 3) |
||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Certificates of deposit |
$ | | $ | 4,231 | $ | | $ | | $ | 5,476 | $ | |
Non-Recurring Fair Value Measurements
The Company follows the provisions of ASC 820-10-05 for its nonfinancial assets and liabilities that are not permitted or required to be measured at fair value on a recurring basis. The Companys nonfinancial assets and liabilities that are not permitted or required to be measured at fair value on a recurring basis typically relate to long-lived assets held and used and goodwill. The Company is required to provide additional disclosures about fair value measurements as part of its financial statements for each major category of assets and liabilities measured at fair value on a nonrecurring basis. At December 31, 2013 and 2012, no fair value adjustments or fair value measurements were required for nonfinancial assets or liabilities.
Fair Valuation Methods
Certificates of depositThese securities are valued using industry-standard models that consider various assumptions, including time to maturity, applicable market volatility factors, and current market and selling
26
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(15) Fair Value Measurements (continued)
Fair Valuation Methods (continued)
prices for the underlying debt instruments that are traded on the open market, even if not highly liquid. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data and are supported by observable levels at which transactions are executed in the marketplace.
(16) Commitments and Contingencies
Major Customers
A significant portion of the Companys net revenue is derived from delivering hospital-based physician services at multiple hospitals that have common ownership. For the years ended December 31, 2013, 2012 and 2011, no hospital system comprised 10% or more of the Companys net revenue.
Self-Insurance
Due to the nature of its business, the Company becomes involved as a defendant in medical malpractice lawsuits, some of which are currently ongoing, and is subject to the attendant risk of substantial damage awards. Since January 2003, the Company has generally maintained a claims-made insurance arrangement with a third-party insurer. The insurance arrangements with the third party are reinsured through the Companys wholly owned captive insurance company, Marblehead Surety & Reinsurance Company, Ltd. (Marblehead) either directly between the insurer and Marblehead or between the Company and Marblehead as part of its self-insured retention. This exposure is collateralized by assets held in trust to the benefit of the Companys third-party insurers.
In addition, the Company continues to purchase professional liability insurance on a claims-made basis from third party insurers on certain acquired practices and for a limited number of other physicians that practice in states or hospitals with malpractice coverage requirements different than those provided through its arrangement with Marblehead.
The liabilities for self-insurance in the accompanying consolidated balance sheets include estimates of the ultimate costs related to both reported claims on an individual and aggregate basis and unreported claims. The estimates are based on the Companys historical experience, the advice of outside legal counsel and actuarial analysis.
There can be no assurance that an existing or future claim or claims will not exceed the limits of available insurance coverage or that any insurer will remain solvent and able to meet its obligations to provide coverage for any such claims. A judgment against the Company in excess of such coverage could have a material adverse effect on the consolidated financial position, operations and comprehensive income or cash flows of the Company.
Litigation
During the normal course of its business, the Company is a party to pending and threatened legal actions and proceedings. The majority of these matters involve claims of medical malpractice. These lawsuits are not expected to result in settlements or judgments that exceed the Companys insurance coverage and its reserves for uninsured claims, litigation and assessments. Therefore, management believes, based on the advice of legal counsel, that the ultimate resolution of such matters will not have a material adverse impact on the consolidated financial position, results of operations and comprehensive income, or cash flows of the Company.
27
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(16) Commitments and Contingencies (continued)
Lease Commitments
The Company leases office space and furniture and equipment under various non-cancellable operating leases. The Companys rent expense under operating leases for the years ended December 31, 2013, 2012 and 2011 was $9.1 million, $8.1 million and $6.7 million, respectively. Future annual minimum payments under non-cancellable operating leases as of December 31, 2013 are as follows (in thousands):
For the Years Ended December 31, |
||||
2014 |
$ | 5,655 | ||
2015 |
4,654 | |||
2016 |
4,229 | |||
2017 |
3,593 | |||
2018 |
3,414 | |||
Thereafter |
19,032 | |||
|
|
|||
Total |
$ | 40,577 | ||
|
|
Government Regulation
A significant portion of the Companys net revenue is derived from payments made by government health care programs, principally Medicare and Medicaid. These government programs, as well as private insurers, have taken and may continue to take, steps, including a movement towards managed care, to control the cost, eligibility for, use and delivery of health care services as a result of budgetary constraints and cost containment pressures. These third-party payors may also attempt to control costs using other measures, including bundling payments for multiple services and denying or reducing reimbursement for certain services and treatments. As a result, payments from government programs or private payors may decrease significantly. The Companys business may be materially affected by limitations of or reductions in reimbursement amounts or rates or elimination of coverage for certain individuals or treatments.
Moreover, because government programs generally provide for reimbursement based on a fee schedule rather than on the providers charges, the Company generally cannot increase their revenue from these programs by increasing the amount the Company charges for their services. In addition, funds the Company receives from third-party payors are subject to audit with respect to the proper billing for physician and ancillary services, and accordingly, the Companys revenue from these programs may be adjusted retroactively. Any retroactive adjustments to the Companys reimbursement amounts could have a material effect on its consolidated financial condition, results of operations and comprehensive income, as well as cash flows.
The healthcare industry is governed by a framework of federal and state laws, rules, and regulations that are extensive and complex and for which, in many cases, the industry has the benefit of only limited judicial and regulatory interpretation. Medicare and Medicaid fraud and abuse laws prohibit, among other things, any false claims, or any bribe, kick-back or rebate in return for the referral of Medicare and Medicaid patients. Violation of these prohibitions may result in civil and criminal penalties and exclusion from participation in the Medicare and Medicaid programs. If the Company is found to have violated these laws, rules, or regulations, the Companys business, and consolidated financial position, results of operations and comprehensive income, and cash flows could be materially adversely affected.
Moreover, the federal healthcare reform legislation signed into law in 2010 contains numerous provisions that may reshape the United States healthcare delivery system, and healthcare reform efforts continue to attract
28
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(16) Commitments and Contingencies (continued)
Government Regulation (continued)
significant legislative interest, legal challenges and public attention that create uncertainty and the potential for additional changes. Healthcare reform implementation, additional legislation or other changes in government regulation may affect the Companys reimbursement, restrict the Companys existing operations, limit the expansion of the Companys business or impose additional compliance requirements and costs, any of which could have a material adverse effect on the Companys business, financial position, results of operations and comprehensive income, and cash flows.
Management has implemented policies and procedures that management believes will ensure that the Company is in substantial compliance with these laws and regulations but there can be no assurance the Company will not be found to have violated certain of these laws and regulations.
In addition, Medicare reimbursement rates could be reduced due to updates made on an annual basis based on statutory formulas. Presently, Medicare pays for all physician services based upon a national fee schedule, which contains a list of uniform rates. The payment rates under the fee schedule are determined based on national uniform relative value units for the services provided, a geographic adjustment factor, and a conversion factor.
The fee schedule is adjusted annually based on a complex formula that is linked in part to the use of services by Medicare beneficiaries and the growth in gross domestic product. Since 2002, this formula has resulted in negative payment updates under the fee schedule that have grown increasingly larger, and Congress has repeatedly intervened with interim legislation to prevent scheduled payment reductions. For 2014, the Centers for Medicare & Medicaid Services, the agency responsible for administering the Medicare program, projected a rate reduction of 20.1% from 2013 levels. In December 2013, Congress passed legislation that provided for a 0.5% increase from 2013 payment levels through March 31, 2014. If Congress fails to intervene to prevent the negative update factor, which would go into effect on April 1, 2014, through either another temporary measure or a permanent revision to the statutory formula, the resulting decrease in payment may adversely impact physician revenues as well as our revenues.
In addition, the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012, imposed across-the-board cuts (sequestrations) to mandatory and discretionary spending, which included aggregate reductions to Medicare payments to providers of 2% per fiscal year, which went into effect in April 2013. The Bipartisan Budget Act of 2013, which was signed into law in December 2013, extended these annual reductions of 2% for an additional two years, through 2023, and was further extended by Congress to 2024. Any reductions in Medicare reimbursement rates may not only have a detrimental impact on the Companys reimbursement rates for Medicare patients, but also for other patients covered by certain Medicaid and commercial payors that base their rates on a percentage of Medicare rates. Accordingly, any significant spending reductions affecting Medicare, Medicaid or other publicly funded or subsidized health programs could have a material adverse effect on the Companys consolidated financial condition, results of operations and comprehensive income, and cash flows.
(17) Related Parties
For the years ended December 31, 2013, 2012 and 2011, the Company paid Hellman & Friedman Capital Partners, VI, L.P. (H&F), a party related to a member of the Company, $285,000, $131,000 and $35,500, respectively, for reimbursement of expenses. Additionally, during the years ended December 31, 2013, 2012 and 2011, the Company paid $1.4 million, $1.1 million and $0.9 million, respectively, to two companies affiliated with H&F for payroll and billing related services. At December 31, 2013 and 2012, amounts due to these companies were immaterial.
29
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(18) Members Equity
The Company is a limited partnership, and the equity interests of the partners are designated in units. The Class A Units of the Company were issued to investment fund affiliates of Hellman & Friedman LLC and certain key executives at a price of $1,000 per unit, for a total price of approximately $410.9 million. In 2013, Class A-1 Units valued at $10.0 million were issued as a portion of the consideration paid for an acquisition.
Certain key executives of the Company have unit incentive award agreements. The Company has awarded Class B-1, B-2 and B-3 Units (collectively referred to as the Class B Units), Class C Units and Class D and D-1 Units (collectively, the Class D Units) with varying restrictions and performance criteria.
The Class B-1 Units generally vest 25% per year commencing on the first anniversary of the acquisition or grant date and fully vest upon an earlier change of control. The Class B-2 and B-3 Units are market-based units
and will vest upon the achievement of certain distribution targets with respect to the Class A, A-1 and B Units on a cumulative basis. The Class C Units became fully vested at the third anniversary from their grant date. The Class D and D-1 Units vest 20% per year commencing on the first anniversary of the grant date or fully vest upon an earlier change of control. The Company recognizes compensation expense related to its units on a straight-line basis over the corresponding vesting periods or implied service periods, as applicable.
Distributions are made to holders of the Companys units under the limited partnership agreement of the Company as follows: (i) to the Class A and A-1 unitholders, pro rata in accordance with the number of each such unitholders Class A and A-1 Units, until the sum of the cumulative distributions (less tax distributions) equals the sum of the Class A unitholders aggregate capital contributions; (ii) to the Class C unitholders on a pari passu basis, pro rata in accordance with the number of each unitholders Class C Units, until, with respect to the vested Class C Units, the sum of the cumulative distribution made in respect of such vested Class C Unit equals an aggregate of $1,000 per unit; and (iii) to the Class A, B and D unitholders on a pari passu basis, subject to certain restrictions primarily related to individual unit participation amounts, the value of the Company at the time of issuance and the liquidation value of the Company.
Each Class A Unit of the Company has the right to one vote for each Class A Unit. The Class A-1, B, C and D Units of the Company have no voting rights, except that they can vote on certain adverse amendments to, and terminations of, the limited partnership agreement of the Company. The Class A-1, B, C and D Units also contain various restrictions related to their sale or transfer as defined in the limited partnership agreement and a related unitholders agreement.
30
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(18) Members Equity (continued)
The Class B Unit activity of the Company and corresponding weighted-average, grant-date fair values are as follows:
Type of Class B Units |
Units | Grant Date Fair Value per Unit |
||||||
Total Class B Units at December 31, 2010 |
99,784 | |||||||
|
|
|||||||
Class B-1 |
1,065 | $ | 428 | |||||
Class B-2 |
500 | 426 | ||||||
Class B-3 |
500 | 401 | ||||||
|
|
|||||||
Total Class B Units issued during the year ended December 31, 2011 |
2,065 | |||||||
|
|
|||||||
Class B-1 |
(375 | ) | $ | 428 | ||||
Class B-2 |
(188 | ) | 426 | |||||
Class B-3 |
(187 | ) | 401 | |||||
|
|
|||||||
Total Class B Units forfeited during the year ended December 31, 2011 |
(750 | ) | ||||||
|
|
|||||||
Total Class B Units at December 31, 2011 |
101,099 | |||||||
|
|
|||||||
Class B-1 |
4,374 | $ | 476 | |||||
Class B-2 |
2,098 | 458 | ||||||
Class B-3 |
2,097 | 419 | ||||||
|
|
|||||||
Total Class B Units issued during the year ended December 31, 2012 |
8,569 | |||||||
|
|
|||||||
Class B-1 |
(223 | ) | $ | 476 | ||||
Class B-2 |
(700 | ) | 458 | |||||
Class B-3 |
(700 | ) | 419 | |||||
|
|
|||||||
Total Class B Units forfeited during the year ended December 31, 2012 |
(1,623 | ) | ||||||
|
|
|||||||
Class B-1 Units redeemed during the year ended December 31, 2012 |
(15,742 | ) | $ | 476 | ||||
|
|
|||||||
Total Class B Units at December 31, 2012 |
92,303 | |||||||
|
|
|||||||
Class B-1 |
(1,621 | ) | $ | 470 | ||||
Class B-2 |
(992 | ) | 450 | |||||
Class B-3 |
(992 | ) | 393 | |||||
|
|
|||||||
Total Class B Units forfeited during the year ended December 31, 2013 |
(3,605 | ) | ||||||
|
|
|||||||
Class B-1 Units redeemed during the year ended December 31, 2013 |
(1,543 | ) | $ | 546 | ||||
|
|
|||||||
Total Class B Units at December 31, 2013 |
87,155 | |||||||
|
|
The Companys Class C Units had a grant-date fair value of approximately $304 per unit.
The Companys Class D Units issued during 2013 and 2012 had a weighted-average, grant-date fair value of approximately $493 per unit and $388 per unit, respectively.
The Company recorded approximately $3.3 million, $3.2 million and $7.6 million in compensation expense for the years ended December 31, 2013, 2012 and 2011, respectively, related to the vesting of the Class B, C and D Units. The fair value of the Units was based on an independent third-party valuation obtained by the Company.
31
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(18) Members Equity (continued)
For the Class A and D Units issued during the year ended December 31, 2013, the determination of the fair value was based on the following assumptions: (i) risk-free interest rates of 0.32% for those units issued through November 2013, (ii) expected lives of two years, (iii) asset volatility of 30.0%, and (iv) an expected dividend yield assumption of 0%. For the Class B and D Units issued during the year ended December 31, 2012, the determination of the fair value was based on the following assumptions: (i) risk-free interest rates of 0.34% for those units issued through September 2012 and 0.32% for those issued in November 2012, (ii) expected lives of three years, (iii) asset volatility of 35.0%, and (iv) an expected dividend yield assumption of 0%. For the Class B Units issued during the year ended December 31, 2011, the determination of the fair value was based on the following assumptions: (i) risk-free interest rates of 0.37%, (ii) expected lives of three years, (iii) asset volatility of 35.0%, and (iv) an expected dividend yield assumption of 0%.
At December 31, 2013, the total equity-based compensation cost related to the Companys Class B and D Units remaining to be recognized as compensation expense over a weighted-average period of four years is $15.3 million.
In December 2013, the Company amended the terms of the limited partnership agreement to enable the distribution of a dividend of $325.0 million to its unitholders. In accordance with the amended agreement, $323.6 million of the dividend was paid in December 2013 to the A, A-1, C, D and D-1 unitholders and to the B-1, B-2 and B-3 unitholders to the extent they were vested at that time. The remaining dividends declared are recorded as $0.6 million of current and $0.8 million of long-term dividends payable in the accompanying consolidated balance sheet at December 31, 2013 and will be paid upon vesting of the respective units. The amendment to the agreement was accounted for as a modification and resulted in an increase to equity-based compensation expense of $10.9 million for the year ended December 31, 2013.
During 2013 and 2011, a tax distribution in the amount of $9.5 million and $1.5 million, respectively, was made to the partners of the Company in accordance with the terms of its operating agreement. During 2012, the Company did not make a tax distribution to its partners.
In 2013, the Company redeemed certain Class A and B-1 Units for total consideration of $0.6 million. During 2012, the Company redeemed certain Class A, B-1 and C Units for total consideration of $24.1 million.
A Units |
A-1 Units |
B-1 Units |
B-2 Units |
B-3 Units |
C Units |
D Units |
D-1 Units |
Total Units |
||||||||||||||||||||||||||||
Balance, at December 31, 2010 |
417,722 | | 50,052 | 24,866 | 24,866 | 10,000 | | | 527,506 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Granted |
| | 1,065 | 500 | 500 | | | | 2,065 | |||||||||||||||||||||||||||
Forfeited |
| | (375 | ) | (188 | ) | (187 | ) | | | | (750 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance, at December 31, 2011 |
417,722 | | 50,742 | 25,178 | 25,179 | 10,000 | | | 528,821 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Granted |
| | 4,374 | 2,098 | 2,097 | | 11,357 | 6,918 | 26,844 | |||||||||||||||||||||||||||
Redeemed |
(8,404 | ) | | (15,742 | ) | | | (7,750 | ) | | | (31,896 | ) | |||||||||||||||||||||||
Forfeited |
| | (223 | ) | (700 | ) | (700 | ) | | | | (1,623 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance, at December 31, 2012 |
409,318 | | 39,151 | 26,576 | 26,576 | 2,250 | 11,357 | 6,918 | 522,146 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Granted |
| 7,245 | | | | | 6,300 | 5,700 | 19,245 | |||||||||||||||||||||||||||
Redeemed |
| | (1,543 | ) | | | (2,250 | ) | | | (3,793 | ) | ||||||||||||||||||||||||
Forfeited |
| | (1,621 | ) | (992 | ) | (992 | ) | | | | (3,605 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance, at December 31, 2013 |
409,318 | 7,245 | 35,987 | 25,584 | 25,584 | | 17,657 | 12,618 | 533,993 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Exercisable, December 31, 2013 |
| | 33,094 | | | | 2,271 | | 35,365 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(19) Net Revenue
Net revenue consists of fee for service revenue, contract revenue, management fees and other revenue. The Companys net revenue is derived principally from the provision of physician services to patients of the healthcare facilities the Company serves.
Net revenue consists of the following (in thousands):
Year Ended December 31, | ||||||||||||||||||||||||
2013 | 2012 | 2011 | ||||||||||||||||||||||
Medicare |
$ | 125,545 | 13.7 | % | $ | 120,900 | 14.5 | % | $ | 116,785 | 15.3 | % | ||||||||||||
Medicaid |
60,487 | 6.6 | % | 55,863 | 6.7 | % | 54,004 | 7.1 | % | |||||||||||||||
Commercial and managed care |
577,676 | 62.8 | % | 519,437 | 62.1 | % | 491,875 | 64.5 | % | |||||||||||||||
Self-pay |
58,197 | 6.3 | % | 58,004 | 6.9 | % | 54,455 | 7.1 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net adjudicated fee for service revenue |
821,905 | 89.4 | % | 754,204 | 90.2 | % | 717,119 | 94.1 | % | |||||||||||||||
Net non-adjudicated fee for service revenue |
65,312 | 7.1 | % | 51,290 | 6.1 | % | 16,672 | 2.2 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net fee for service revenue |
887,217 | 96.5 | % | 805,494 | 96.3 | % | 733,791 | 96.2 | % | |||||||||||||||
Contract revenue |
77,834 | 8.5 | % | 70,567 | 8.4 | % | 68,676 | 9.0 | % | |||||||||||||||
Management fee and other revenue |
11,883 | 1.3 | % | 11,754 | 1.5 | % | 11,535 | 1.6 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Revenue, net of contractual discounts |
976,934 | 106.3 | % | 887,815 | 106.2 | % | 814,002 | 106.8 | % | |||||||||||||||
Provision for uncollectibles |
(57,691 | ) | (6.3 | %) | (51,499 | ) | (6.2 | %) | (51,609 | ) | (6.8 | %) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net revenue |
$ | 919,243 | 100.0 | % | $ | 836,316 | 100.0 | % | $ | 762,393 | 100.0 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The Company also earns contract revenue directly from its hospital customers through a variety of payment arrangements that are established when payments from third-party payors are inadequate to support the costs of the contract. Contract revenue for the years ended December 31, 2013, 2012 and 2011 was $77.8 million, $70.6 million and $68.7 million, respectively.
The Company derives management fees pursuant to contractual agreements with certain of its physician practices, which require the practices to pay the Company management fees that are based on a flat fee or a percentage of net fee for service revenue, depending on the nature of services provided. The Company also earns other revenue for services performed that are ancillary to its primary operations. Management fees and other revenue for the years ended December 31, 2013, 2012 and 2011 was $11.9 million, $11.8 million and $11.5 million respectively.
(20) Segment Reporting
The physician services segment represents an aggregation of anesthesia, childrens services, radiology, and emergency medicine services, providing healthcare services to hospitals and ambulatory surgery facilities on a fee for service or contract basis. These operating segments were aggregated into one reportable segment due to their similar economic characteristics, products, production methods and distribution methods.
The other services segment is an aggregation of other services provided in an office-based setting such as gynecology, obstetrics, and perinatology, as well as management services, including physician recruiting services and other operations that service the Companys business as well as third parties, and ownership in and management services of ambulatory surgery centers. The services within this operating segment are deemed to be
33
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(20) Segment Reporting (continued)
significantly different than those provided within physician services and do not meet the aggregation criteria prescribed by the segment reporting guidance nor do they meet the quantitative thresholds that would require a separate presentation. Accordingly, it is presented in the other services category.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Segment amounts disclosed are prior to any elimination entries made in consolidation, except in the case of net revenues, where intercompany charges have been eliminated.
Assets, capital expenditures and certain expenses are not allocated to the segments. Unallocated expenses include general and administrative expenses, net interest expense, depreciation and amortization, income taxes and non-controlling interest. The Company evaluates segment performance based on profit and loss before the aforementioned expenses.
The following table presents financial information for each reportable segment (in thousands):
Year ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Net Revenue: |
||||||||||||
Physician services |
$ | 854,393 | $ | 772,581 | $ | 706,520 | ||||||
Other services |
64,850 | 63,735 | 55,873 | |||||||||
|
|
|
|
|
|
|||||||
Total net revenue |
919,243 | 836,316 | 762,393 | |||||||||
|
|
|
|
|
|
|||||||
Income from operations: |
||||||||||||
Physician services |
198,675 | 184,316 | 173,707 | |||||||||
Other services |
8,863 | 11,065 | 8,550 | |||||||||
General and administrative |
(78,277 | ) | (58,338 | ) | (55,463 | ) | ||||||
Depreciation and amortization |
(35,551 | ) | (32,197 | ) | (26,124 | ) | ||||||
|
|
|
|
|
|
|||||||
Total income from operations |
93,710 | 104,846 | 100,670 | |||||||||
|
|
|
|
|
|
|||||||
Reconciliation of Income from operations to Net Income: |
||||||||||||
Income from operations: |
93,710 | 104,846 | 100,670 | |||||||||
Interest expense, net |
47,818 | 43,638 | 37,677 | |||||||||
Other (income) expense, net |
41 | (59 | ) | 99 | ||||||||
Loss on extinguishment of debt |
11,018 | 8,126 | | |||||||||
Provision for income taxes |
18,300 | 16,286 | 26,875 | |||||||||
|
|
|
|
|
|
|||||||
Net income from consolidated operations |
$ | 16,533 | $ | 36,855 | $ | 36,019 | ||||||
|
|
|
|
|
|
(21) Subsequent Events
In February 2014, the Companys joint venture (JV) with a subsidiary of HCA Holdings, Inc. (HCA) developed to provide hospital-based physician services to HCA affiliates commenced operations. The Company owns 51% of the JV, and, under the terms of the limited liability and related agreements, the Company will earn billing and management fees and earnings distributions. The Company contributed goodwill, other intangible assets and a nominal amount of cash upon inception of the JV in 2014, and has no material obligations or guarantees related to the JV. The Company determined that the JV is a VIE due to the Companys equity interest,
34
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF DECEMBER 31, 2013 AND 2012 AND
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(21) Subsequent Events (continued)
billing and management fees, and earnings distributions; however, it is not the primary beneficiary of the JV as it does not have the power to independently direct the activities that most significantly impact the JVs economic performance due to shared control with HCA. Therefore, the Company will account for its investment in the JV under the equity method of accounting.
In February 2014, the Company acquired all of the stock of a physician group practice that provides anesthesia services in Florida as part of the expansion of the Companys presence in that market. The effect of this acquisition was not material to the Companys consolidated financial statements.
35
Exhibit 99.3
![]() |
![]() | |
INDEPENDENT AUDITORS REVIEW REPORT |
To the Board of Directs and Members of
Sunbeam Holdings, L.P.
Sunrise, Florida
We have reviewed the accompanying condensed consolidated balance sheet of Sunbeam Holdings, L.P. and its subsidiaries (the Company) as of March 31, 2014, and the related condensed consolidated statements of income and comprehensive income and cash flows for the three-month periods ended March 31, 2014 and 2013 (the interim financial information).
Managements Responsibility for the Interim Financial Information
The Companys management is responsible for the preparation and fair presentation of the interim financial information in accordance with accounting principles generally accepted in the United States of America; this responsibility includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in accordance with accounting principles generally accepted in the United States of America.
Auditors Responsibility
Our responsibility is to conduct our reviews in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion.
Conclusion
Based on our reviews, we are not aware of any material modifications that should be made to the interim financial information referred to above for it to be in accordance with accounting principles generally accepted in the United States of America.
Report on Condensed Consolidated Balance Sheet as of December 31, 2013
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of the Company as of December 31, 2013, and the related consolidated statements of income and comprehensive income, equity, and cash flows for the year then ended (not presented herein); and we expressed an unmodified audit opinion on those audited consolidated financial statements in our report dated March 31, 2014. In our opinion, the accompanying condensed consolidated balance sheet of the Company as of December 31, 2013, is consistent, in all material respects, with the audited consolidated financial statements from which it has been derived.
June 6, 2014
1
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) (in thousands, except share data)
March 31, 2014 |
December 31, 2013 |
|||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 105,890 | $ | 100,562 | ||||
Restricted cash |
18,023 | 14,270 | ||||||
Restricted marketable securities |
4,481 | 4,231 | ||||||
Accounts receivable, net of allowances of $18.2 million and $20.1 million as of March 31, 2014 and December 31, 2013, respectively |
133,993 | 130,541 | ||||||
Deferred taxes |
11,996 | 13,902 | ||||||
Other current assets |
31,570 | 23,655 | ||||||
|
|
|
|
|||||
Total current assets |
305,953 | 287,161 | ||||||
Property and equipment, net |
29,784 | 29,462 | ||||||
Goodwill |
912,160 | 881,023 | ||||||
Other intangible assets, net |
541,323 | 512,299 | ||||||
Other assets |
35,410 | 22,427 | ||||||
|
|
|
|
|||||
Total assets |
$ | 1,824,630 | $ | 1,732,372 | ||||
|
|
|
|
|||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 8,270 | $ | 8,270 | ||||
Accounts payable |
1,397 | 1,168 | ||||||
Accrued salaries and benefits |
84,438 | 70,178 | ||||||
Accrued professional liabilities |
13,033 | 11,895 | ||||||
Other current liabilities |
28,877 | 23,019 | ||||||
|
|
|
|
|||||
Total current liabilities |
136,015 | 114,530 | ||||||
Long-term debt, net of current portion |
1,203,029 | 1,135,022 | ||||||
Deferred taxes |
171,616 | 174,803 | ||||||
Accrued professional liabilities |
52,896 | 48,501 | ||||||
Other long-term liabilities |
10,478 | 10,784 | ||||||
|
|
|
|
|||||
Total liabilities |
1,574,034 | 1,483,640 | ||||||
|
|
|
|
|||||
Commitments and contingencies (Note 14) |
||||||||
Equity: |
||||||||
General Partner |
1 | 1 | ||||||
Class A Units, 416,563 authorized and issued as of March 31, 2014 and December 31, 2013 |
211,810 | 210,155 | ||||||
Class B Units, 110,034 authorized and 87,155 issued as of March 31, 2014 and December 31, 2013 |
12,111 | 11,968 | ||||||
Class D Units, 38,475 and 30,275 authorized and issued as of March 31, 2014 and December 31, 2013 |
| | ||||||
Accumulated other comprehensive income, net of tax |
2 | 2 | ||||||
|
|
|
|
|||||
Total members equity |
223,924 | 222,126 | ||||||
Noncontrolling interests |
26,672 | 26,606 | ||||||
|
|
|
|
|||||
Total equity |
250,596 | 248,732 | ||||||
|
|
|
|
|||||
Total liabilities and equity |
$ | 1,824,630 | $ | 1,732,372 | ||||
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited) (in thousands)
For the Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Revenue, net of contractual discounts |
$ | 263,458 | $ | 229,626 | ||||
Provision for uncollectibles |
(12,636 | ) | (12,950 | ) | ||||
|
|
|
|
|||||
Net revenue |
250,822 | 216,676 | ||||||
Operating expenses |
||||||||
Practice personnel expenses |
179,509 | 157,654 | ||||||
Other practice expenses |
17,291 | 15,830 | ||||||
General and administrative |
22,361 | 15,442 | ||||||
Depreciation and amortization |
9,889 | 8,743 | ||||||
|
|
|
|
|||||
Income from operations |
21,772 | 19,007 | ||||||
Interest expense, net |
19,017 | 12,006 | ||||||
Loss on extinguishment of debt |
| 4,390 | ||||||
Other expense, net |
12 | | ||||||
|
|
|
|
|||||
Income before income taxes and noncontrolling interests |
2,743 | 2,611 | ||||||
Provision for income taxes |
1,138 | 1,372 | ||||||
|
|
|
|
|||||
Net income before unconsolidated joint ventures |
1,605 | 1,239 | ||||||
Net income (loss) from unconsolidated joint ventures |
(432 | ) | | |||||
|
|
|
|
|||||
Net income |
1,173 | 1,239 | ||||||
Net (income) loss attributable to noncontrolling interests |
(635 | ) | (917 | ) | ||||
|
|
|
|
|||||
Net income attributable to Sunbeam Holdings, L.P. and subsidiaries limited partners |
$ | 538 | $ | 322 | ||||
|
|
|
|
|||||
Net income |
$ | 1,173 | $ | 1,239 | ||||
Other comprehensive income, net of taxes: |
||||||||
Net change in fair value of investments, net of taxes |
| 3 | ||||||
|
|
|
|
|||||
Total comprehensive income |
1,173 | 1,242 | ||||||
Less: Comprehensive income attributable to noncontrolling interests |
(635 | ) | (917 | ) | ||||
|
|
|
|
|||||
Comprehensive income attributable to Sunbeam Holdings, L.P. and subsidiaries limited partners |
$ | 538 | $ | 325 | ||||
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in thousands)
For the Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 1,173 | $ | 1,239 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Amortization of intangible assets |
7,121 | 6,436 | ||||||
Non-cash interest expensedebt |
1,321 | 1,119 | ||||||
Depreciation |
2,768 | 2,307 | ||||||
Loss on disposal of fixed assets |
| 11 | ||||||
Net loss from unconsolidated joint ventures |
432 | | ||||||
Loss on divestiture |
1,817 | | ||||||
Loss on extinguishment of debt |
| 4,390 | ||||||
Provision for uncollectibles |
12,636 | 12,950 | ||||||
Equity-based compensation expense |
1,255 | 830 | ||||||
Provision for deferred income taxes |
(1,282 | ) | (2,017 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(6,591 | ) | (15,258 | ) | ||||
Other current assets |
(3,593 | ) | (1,567 | ) | ||||
Other assets |
(229 | ) | 26 | |||||
Accounts payable |
65 | (217 | ) | |||||
Accrued professional liabilities |
212 | 2,232 | ||||||
Other accrued expenses |
12,518 | 8,208 | ||||||
|
|
|
|
|||||
Net cash provided by operating activities |
29,623 | 20,689 | ||||||
|
|
|
|
|||||
Cash flows from investing activities: |
||||||||
Acquisitions of businesses, net of cash acquired |
(80,379 | ) | (1,434 | ) | ||||
Purchases of marketable securities |
(1,494 | ) | | |||||
Maturities of marketable securities |
1,245 | 978 | ||||||
Change in restricted cash |
(3,753 | ) | | |||||
Capital expenditures |
(2,886 | ) | (2,387 | ) | ||||
Investments in joint ventures |
(4,217 | ) | | |||||
|
|
|
|
|||||
Net cash used in investing activities |
(91,484 | ) | (2,843 | ) | ||||
|
|
|
|
|||||
Cash flows from financing activities: |
||||||||
Borrowings of debt |
70,000 | 672,000 | ||||||
Debt issuance costs |
(350 | ) | (9,575 | ) | ||||
Repayment of debt |
(1,893 | ) | (598,680 | ) | ||||
Redemption of units |
| (296 | ) | |||||
Distributions to noncontrolling interests |
(570 | ) | (499 | ) | ||||
|
|
|
|
|||||
Net cash provided by financing activities |
67,187 | 62,950 | ||||||
|
|
|
|
|||||
Increase in cash and cash equivalents |
5,328 | 80,796 | ||||||
Cash and cash equivalents: |
||||||||
Beginning of year |
100,562 | 64,636 | ||||||
|
|
|
|
|||||
End of period |
$ | 105,890 | $ | 145,432 | ||||
|
|
|
|
|||||
Supplemental cash flow information: |
||||||||
Interest paid |
$ | 17,489 | $ | 10,551 | ||||
Taxes paid |
2,999 | 7,203 | ||||||
Supplemental disclosure for noncash transactions: |
||||||||
Carrying amount of deconsolidated practices (Note 2) |
$ | 11,860 | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (unaudited)
(1) Organization
Sunbeam Holdings, L.P. and its subsidiaries (the Company), which operate under the name Sheridan, is a national provider of multi-specialty physician services to hospitals, ambulatory surgery centers and other healthcare facilities. The Company focuses on delivering comprehensive physician services, primarily in the areas of anesthesiology, childrens services, radiology and emergency medicine to healthcare facilities. The Companys contracts with healthcare facilities authorize it to bill and collect charges for fee for service medical services rendered by the Companys healthcare professionals and employees in exchange for the provision of services to the patients of these facilities. Contract revenue is earned directly from the Companys hospital customers through a variety of payment arrangements that are established when payments from third-party payors are inadequate to support the costs of providing the services required under the contract. The Company also provides physician services and manages office-based practices in the areas of gynecology, obstetrics and perinatology.
(2) Basis of Presentation
Principles of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. All adjustments necessary for a fair presentation have been included. All such adjustments are considered to be of a normal and recurring nature. Interim results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2014. The preparation of the financial statements in conformity with GAAP requires management to makes estimates and assumptions that affect the amounts reported in the accompanying condensed consolidated financial statements and notes. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries along with the accounts of the affiliated professional corporations (PCs) with which the Company currently has specific management arrangements. The Companys agreements with these PCs provide that the term of the arrangements are permanent, subject only to termination by the Company, except in the case of gross negligence, fraud or bankruptcy of the Company. These arrangements are captive in nature as a majority of the outstanding voting equity instruments of the PCs are owned by nominee shareholders appointed at the sole discretion of the Company. The Company has a contractual right to transfer the ownership of the PCs at any time to any person it designates as the nominee shareholder. The Company has the right to receive income, both as ongoing fees and as proceeds from the sale of its interest in the PCs, in an amount that fluctuates based on the performance of the PC and the change in the fair value of the Companys interest in the PC. The Company has exclusive responsibility for the provision of all non-medical services required for the day-to-day operation and management of the PCs and establishes the guidelines for the employment and compensation of the physicians. In addition, the agreements provide that the Company has the right, but not the obligation, to purchase, or to designate a person(s) to purchase, the stock of the PCs for a nominal amount. Separately, in its sole discretion, the Company has the right to assign its interest in the agreements. Based upon the provisions of these agreements, the Company has determined that the PCs are variable interest entities and that the Company is the primary beneficiary as defined in the accounting guidance for consolidation.
The Company also consolidates a variable interest entity (VIE) for which the Company is deemed the primary beneficiary; however, the assets are owned by, and the liabilities are obligations of this VIE, not the Company. This VIE is not a guarantor of the Companys debts. As of March 31, 2014 and December 31, 2013,
5
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (unaudited)
(2) Basis of Presentation (continued)
Principles of Presentation (continued)
the total assets included in the Companys consolidated balance sheets relating to this VIE were approximately $3.4 million and $3.7 million, respectively, which excludes goodwill and intercompany balances.
All intercompany and interaffiliate accounts and transactions have been eliminated.
Investment in Joint Venture
The Companys joint venture (JV) with a subsidiary of HCA Holdings, Inc. (HCA) commenced operations in February 2014. The JV was formed to provide hospital-based physician services to HCA affiliates. The Company owns 51% of the JV, and, under the terms of the limited liability and related agreements, the Company earns billing and management fees and earnings distributions, and has no material obligations or guarantees related to the JV. The Company determined that the JV is a VIE due to the Companys equity interest, billing and management fees, and earnings distributions; however, it is not the primary beneficiary of the JV as it does not have the power to direct the activities that most significantly impact the JVS economic performance due to shared control with HCA. Therefore, the Company has accounted for its investment in the JV under the equity method of accounting.
On February 1, 2014, the Company contributed eight sites of service to the JV. The Company accounted for the contribution of the eight sites of service in accordance with ASC 810 Deconsolidation of a subsidiary or derecognition of a group of assets. Accordingly, the Company deconsolidated the eight sites of service with a carrying amount of approximately $11.8 million, comprised primarily of goodwill and other intangible assets. The Company recorded a $10.0 million investment in the JV equal to the fair value of the Companys retained investment in the assets contributed. The Company recorded a loss on divestiture of $1.8 million in the first quarter of 2014 which is included in general and administrative expenses in the accompanying condensed consolidated statement of income and comprehensive income. The loss on divestiture is the difference between the fair value of the Companys retained interest in the JV and the carrying amount of the assets contributed to the JV. The Company also contributed approximately $4.2 million of cash to the JV during February 2014. As of March 31, 2014, the Companys investment in the JV totaled approximately $14.0 million which has been recorded in other assets in the accompanying condensed consolidated balance sheet.
Recent Accounting Pronouncements
Changes to U.S. GAAP are established by the Financial Accounting Standards Board (FASB) in the form of accounting standards updates (ASUs) to the FASBs Accounting Standards Codification. The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Companys consolidated financial position or results of operations.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to
6
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (unaudited)
(2) Basis of Presentation (continued)
Recent Accounting Pronouncements (continued)
obtain or fulfill a contract. The guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018 using one of two retrospective application methods. The Company is currently assessing the impact of this guidance on its condensed consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11). The guidance requires an entity to present its unrecognized tax benefits net of its deferred tax assets when settlement in this manner is available under the tax law, which would be based on facts and circumstances as of the balance sheet reporting date and would not consider future events. Gross presentation in the notes to the financial statements is required. ASU 2013-11 is applicable on a prospective basis to all unrecognized tax benefits that exist at the effective date, with the option to apply it retrospectively. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014, with early adoption permitted. The Company is currently assessing the impact of this guidance on its condensed consolidated financial statements.
(3) Restricted Cash and Marketable Securities
In accordance with the provisions of a reinsurance agreement between the Company and a third-party insurer, acting as a fronting agent, the Company is required to collateralize the fronting agents exposure. The fronting agents exposure was collateralized by a trust at March 31, 2014 and December 31, 2013. At March 31, 2014 and December 31, 2013, the cash balances restricted under such arrangement were $18.0 million and $14.3 million, respectively. At March 31, 2014 and December 31, 2013, total marketable securities restricted under such arrangement were $4.5 million and $4.2 million, respectively. Such amounts are classified as current assets based upon the maturity of the respective securities and managements expectation with regard to these securities.
The Companys restricted marketable securities consist of the following (in thousands):
March 31, 2014 | December 31, 2013 | |||||||||||||||||||||||||||||||
Cost or Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
Cost or Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||||||||||||||
Certificates of deposit |
$ | 4,479 | $ | 2 | $ | | $ | 4,481 | $ | 4,229 | $ | 2 | $ | | $ | 4,231 |
The original contractual maturities for the Companys marketable securities at March 31, 2014 are all due within one year.
(4) Accounts Receivable, Net
Accounts receivable are reflected in the consolidated balance sheets net of contractual discounts and provision for uncollectibles. The Company periodically reassesses its accounts receivable, net by analyzing historical cash collections, changes in payor mix and accounts receivable agings. Actual collections of accounts receivable in subsequent periods may require changes in the estimated provision for uncollectibles. Changes in these estimates are charged or credited to the consolidated statement of income and comprehensive income in the period of change. Material changes in estimate may result from unforeseen write-offs of patient or third-party accounts receivable, unsuccessful disputes with managed care payors, adverse macro-economic conditions which
7
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (unaudited)
(4) Accounts Receivable, Net (continued)
limit patients ability to meet their financial obligations for the care provided by our physicians, or broad changes to government regulations that adversely impact reimbursement rates for services provided by the Company. The Company recorded write-offs, net of recoveries, of $15.5 million for both three-month periods ended March 31, 2014 and 2013.
Accounts receivable, net consists of the following (in thousands):
March 31, 2014 |
December 31, 2013 |
|||||||
Fee for service receivables |
$ | 140,677 | $ | 143,066 | ||||
Provision for uncollectibles |
(17,854 | ) | (19,943 | ) | ||||
|
|
|
|
|||||
Fee for service receivables, net |
122,823 | 123,123 | ||||||
Contract receivables, net |
8,673 | 6,499 | ||||||
Management fee and other receivables, net |
2,497 | 919 | ||||||
|
|
|
|
|||||
Accounts receivable, net |
$ | 133,993 | $ | 130,541 | ||||
|
|
|
|
(5) Other Current Assets
Other current assets consist of the following (in thousands):
March 31, 2014 |
December 31, 2013 |
|||||||
Income taxes receivable |
$ | 12,559 | $ | 12,055 | ||||
Prepaids |
7,166 | 5,323 | ||||||
Other |
11,845 | 6,277 | ||||||
|
|
|
|
|||||
Total other current assets |
$ | 31,570 | $ | 23,655 | ||||
|
|
|
|
(6) Property and Equipment, Net
Property and equipment, net consists of the following (in thousands):
March 31, 2014 |
December 31, 2013 |
|||||||
Equipment, computer hardware and software |
$ | 33,644 | $ | 32,889 | ||||
Furniture and fixtures |
8,342 | 8,262 | ||||||
Leasehold improvements |
7,961 | 8,158 | ||||||
Capitalized projects in progress |
5,475 | 3,491 | ||||||
|
|
|
|
|||||
Total |
55,422 | 52,800 | ||||||
Accumulated depreciation and amortization |
(25,638 | ) | (23,338 | ) | ||||
|
|
|
|
|||||
Property and equipment, net |
$ | 29,784 | $ | 29,462 | ||||
|
|
|
|
The Company recorded depreciation and other amortization expense of approximately $2.8 million and $2.3 million for the three months ended March 31, 2014 and 2013, respectively.
8
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (unaudited)
(7) Business Combinations
A significant portion of the Companys growth during the past decade has come from acquisitions of regional provider groups and other smaller physician practices along with new contracts, all of which has in part been driven by industry consolidation trends.
During the three months ended March 31, 2014, the Company completed the acquisition of two physician group practices. In February 2014, the Company acquired all of the stock of a physician group practice that provides anesthesia and pain management services in Florida. In March 2014, the Company acquired certain assets of a physician group that provides anesthesia and pain management services in Florida as well.
These acquisitions have expanded the Companys presence in the markets of the respective acquisitions. The results of operations of the acquired businesses have been included in the Companys consolidated financial statements beginning on the respective acquisition dates. These acquisitions added approximately $12.0 million of net revenue and $2.0 million of gross profit for the three months ended March 31, 2014. Pro forma results of operations have not been presented because the effect of these acquisitions is not material to the Companys consolidated results of operations individually or in the aggregate.
The allocation of purchase price to the fair value of tangible and intangible assets and liabilities, as well as the estimated useful lives of the acquired assets, is provisional and remains preliminary as management continues to assess the valuation of these items and any ultimate purchase price adjustments based on the final assets and net working capital, as prescribed by the purchase agreements. The Company recorded goodwill of approximately $36.5 million ($35.3 million of which is tax deductible goodwill) in accordance with the provisions of ASC 805, Business Combinations (ASC 805) as follows (in thousands):
Fair value of consideration transferred, net of cash acquired |
$ | 80,379 | ||
Net assets acquired: |
||||
Working capital |
554 | |||
Other assets |
605 | |||
Intangible assets |
42,661 | |||
Other long-term liabilities |
80 | |||
|
|
|||
Total net assets acquired |
43,900 | |||
|
|
|||
Goodwill resulting from the acquisitions |
$ | 36,480 | ||
|
|
(8) Goodwill and Other Intangible Assets
The changes in the carrying amounts of goodwill are as follows (in thousands):
Goodwill, December 31, 2013 |
$ | 881,023 | ||
Acquisitions |
36,480 | |||
Other adjustments |
(5,343 | ) | ||
|
|
|||
Goodwill, March 31, 2014 |
$ | 912,160 | ||
|
|
In conjunction with the commencement of operations of the JV, the Company contributed $5.3 million of goodwill during the three months ended March 31, 2014. (See Note 2)
9
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (unaudited)
(8) Goodwill and Other Intangible Assets (continued)
Other intangible assets consist of the following (in thousands):
March 31, 2014 | December 31, 2013 | |||||||||||||||||||||||
Gross Amount |
Accumulated Amortization |
Net Amount |
Gross Amount |
Accumulated Amortization |
Net Amount |
|||||||||||||||||||
Definite-lived intangible assets: |
||||||||||||||||||||||||
Customer relationships with hospitals |
$ | 584,421 | $ | (122,157 | ) | $ | 462,264 | $ | 549,537 | $ | (115,197 | ) | $ | 434,340 | ||||||||||
Noncompete agreements |
16,147 | (13,448 | ) | 2,699 | 14,886 | (13,287 | ) | 1,599 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total definite-lived intangible assets |
600,568 | (135,605 | ) | 464,963 | 564,423 | (128,484 | ) | 435,939 | ||||||||||||||||
Indefinite-lived intangible assets: |
||||||||||||||||||||||||
Corporate trade name |
76,360 | | 76,360 | 76,360 | | 76,360 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total intangible assets |
$ | 676,927 | $ | (135,605 | ) | $ | 541,323 | $ | 640,783 | $ | (128,484 | ) | $ | 512,299 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The Companys other intangible asset amortization expense for the three months ended March 31, 2014 and the three months ended March 31, 2013 was $7.1 million and $6.4 million, respectively.
(9) Other Current Liabilities
Other current liabilities consist of the following (in thousands):
March 31, 2014 |
December 31, 2013 |
|||||||
Refunds payable |
$ | 13,615 | $ | 12,055 | ||||
Other accrued expenses |
15,262 | 10,964 | ||||||
|
|
|
|
|||||
Total other current liabilities |
$ | 28,877 | $ | 23,019 | ||||
|
|
|
|
(10) Accrued Professional Liabilities
The Companys professional liability loss reserves included in other accrued liabilities and other non-current liabilities in the accompanying condensed consolidated balance sheets consisted of the following (in thousands):
March 31, 2014 |
December 31, 2013 |
|||||||
Estimated losses under self-insured programs |
$ | 31,576 | $ | 27,915 | ||||
Incurred but not reported losses |
34,353 | 32,481 | ||||||
|
|
|
|
|||||
Total accrued professional liabilities |
65,929 | 60,396 | ||||||
Less estimated payable within one year |
13,033 | 11,895 | ||||||
|
|
|
|
|||||
$ | 52,896 | $ | 48,501 | |||||
|
|
|
|
10
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (unaudited)
(10) Accrued Professional Liabilities (continued)
The changes to the Companys estimated losses under self-insured programs as of March 31, 2014 were as follows (in thousands):
Balance, December 31, 2013 |
$ | 60,396 | ||
Provisions related to current period |
3,314 | |||
Payments for prior period reserves |
(3,102 | ) | ||
Other, net |
5,321 | |||
|
|
|||
Balance, March 31, 2014 |
$ | 65,929 | ||
|
|
Other, net comprises liabilities assumed in connection with the Companys acquisitions and changes in reserves associated with third-party insurance policies.
(11) Long-Term Debt
Long-term debt consists of the following (in thousands):
March 31, 2014 |
December 31, 2013 |
|||||||
$818.2 million and $750.1 million, 2013 Term Loan, respectively, net of unamortized discount of $4.5 million and $4.3 million, respectively, payable in quarterly installments through June 29, 2018; interest at Interbank Offered Rate (LIBOR) with a floor of 1.00% plus 3.50% (rate of 4.5% at March 31, 2014) |
$ | 813,720 | $ | 745,808 | ||||
$400.0 million 2013 Second Lien Term Loan, net of unamortized discount of $2.4 million and $2.5 million, respectively, payable at maturity, June 29, 2020; interest at LIBOR with a floor of 1.00%, plus 7.25% (rate of 8.25% at March 31, 2014) |
397,579 | 397,484 | ||||||
Revolver, payable at maturity, June 29, 2017; interest at LIBOR or prime plus an applicable margin |
| | ||||||
|
|
|
|
|||||
Total |
1,211,299 | 1,143,292 | ||||||
Less: Current portion |
(8,270 | ) | (8,270 | ) | ||||
|
|
|
|
|||||
Long-term debt |
$ | 1,203,029 | $ | 1,135,022 | ||||
|
|
|
|
As of March 31, 2014, the Companys long-term debt consists of an $830.0 million first lien term loan (the 2013 Term Loan), a $100.0 million revolving credit facility (the Revolver), and a $400.0 million second lien term loan (the 2013 Second Lien Term Loan) (the Credit Facilities, collectively). On December 18, 2013, the Company entered into an amendment to its then outstanding 2012 loan. This 2013 Term Loan permitted the borrowing of new 2013 term loans, including an $85.0 million incremental first lien term loan and a $70.0 million incremental first lien delayed draw term loan with an interest rate of 0.25% per quarter on the aggregate principal amount. The incremental first lien delayed draw was drawn in January 2014. Net proceeds to the Company were $69.7 million.
On February 13, 2013, the Company entered into an amendment to its then outstanding 2012 term loan (2013 Amendment), which reduced the applicable margin rate, added an additional $75.0 million of debt to the 2012 Term Loan and incurred an exchange of debt among multiple lenders. The 2013 Amendment did not modify any other terms of the 2012 Term Loan and constituted a repricing transaction in respect to the 2012
11
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (unaudited)
(11) Long-Term Debt (continued)
Term Loan. The net proceeds of the 2013 Amendment of $672.0 million were used to refinance the existing 2012 Term Loan of $591.5 million and pay accrued interest. In addition, the Company paid a total of $9.7 million in fees in relation to the transaction. Net proceeds to the Company were $61.1 million.
The 2013 Amendment involved multiple lenders who were considered members of a loan syndicate. In determining whether the refinancing was to be accounted for as a debt extinguishment or modification, the Company considered whether the creditors remained the same or changed and whether the change in debt terms was substantial. The debt terms were considered substantially different if the present value of the cash flows of the term loans under the credit agreement, as amended, was at least 10% different from the present value of the remaining cash flows of the original term loans (the 10% Test). The Company performed a separate 10% Test for each individual creditor participating in the loan syndicate. The loans of creditors who did not participate in the 2013 Amendment were accounted for as a debt extinguishment. When there was a change in principal balance for individual creditors, in applying the 10% Test, the Company used the cash flows related to the lowest common principal balance, or the Net Method. Under the Net Method, any principal in excess of a creditors reinvested principal balance was treated as a new, separate debt issuance, and any decrease in principal was treated as a partial extinguishment of debt.
For debt considered to be extinguished, the unamortized deferred financing costs and unamortized original issue discount associated with the extinguished debt were expensed. For debt considered to be modified, the unamortized deferred financing costs and unamortized original issue discount associated with the modified debt continue to be amortized, new creditor fees were capitalized and new third-party fees were expensed. For new creditors, new creditor fees and new third-party fees were capitalized. As a result, the Company recorded a loss on the extinguishment of debt in the accompanying consolidated statement of income and comprehensive income of $4.4 million related to the 2013 Amendment during the three months ended March 31, 2013. Deferred financing costs of $7.1 million were recorded in other current assets and other assets, as well as a debt discount that reduced long-term debt in the accompanying consolidated balance sheet, and are being amortized over the terms of the related debt.
The Credit Facilities bear interest at a rate equal to an applicable margin plus, either (1) a base rate determined by reference to the highest of (a) the prime lending rate of Credit Suisse AG, (b) the federal funds rate plus 1/2 of 1% and (c) a reserve adjusted Eurodollar rate determined by reference to the London interbank rate for deposits in dollars for a one month interest period plus 1.00% or (2) a reserve adjusted Eurodollar rate determined by reference to the London interbank rate for deposits in dollars for the applicable interest periods. The Credit Facilities annual base rate may never be lower than 2.00% and Eurodollar rate may never be lower than 1.00%.
The initial applicable margin for initial term loans under the 2013 Term Loan is 2.50% with respect to base rate loans and 3.50% with respect to Eurodollar rate loans. The initial applicable margin for revolving loans is 3.75% with respect to base rate loans and 4.75% with respect to Eurodollar rate loans, and it may be reduced subject to the Company attaining certain first lien leverage ratios. The applicable margin for term loans under the 2013 Term Loan is 6.25% with respect to base rate loans and 7.25% with respect to Eurodollar rate loans.
At March 31, 2014, the maximum available to the Company under the Revolver was $98.4 million, net of outstanding letters of credit with an aggregate face amount of $1.6 million. No amounts were drawn on the Revolver as of March 31, 2014 and December 31, 2013.
The Credit Facilities and the Revolver are collateralized by all the assets and equity of the Companys subsidiaries, excluding its captive insurance subsidiary and certain other subsidiaries as defined in the credit
12
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (unaudited)
(11) Long-Term Debt (continued)
agreements. The Company is subject to certain covenants and restrictions under the Credit Facilities. At March 31, 2014, the Company was in compliance, in all material respects, with these financial covenants and restrictions.
(12) Retirement Plans
The Company maintains qualified contributory savings plans (the Plans) as allowed under Section 401(k) of the Internal Revenue Code. In addition, in connection with certain acquisitions, the Company continues to maintain defined contribution savings plans allowed under Section 401(k) and/or Section 401(a). The Plans permit participant contributions and allow elective Company contributions or required Company contributions subject to the limits defined by each of the Plans. In connection with the Plans, the Company recorded expenses of approximately $3.0 million and $3.1 million for the three months ended March 31, 2014 and 2013, respectively. The expenses were recorded in practice personnel expenses and general administrative expenses in the accompanying condensed consolidated statements of income and comprehensive income.
(13) Fair Value Measurements
Fair Value Hierarchy
Financial assets and liabilities are categorized based on the inputs to the valuation technique into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The various levels of the fair value hierarchy are described as follows:
| Level 1Quoted prices in active markets for identical assets or liabilities. |
| Level 2Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| Level 3Inputs that are generally unobservable and typically reflect managements estimate of assumptions that market participants would use in pricing the asset or liability. |
The use of observable market data is required when available in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest-level input that is significant to the fair value measurement.
Recurring Fair Value Measurements
The following table presents the Companys fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis (in thousands):
March 31, 2014 Fair Value Measurements |
December 31, 2013 Fair Value Measurements |
|||||||||||||||||||||||
Description |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Unobservable Inputs (Level 3) |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Unobservable Inputs (Level 3) |
||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Certificates of deposit |
$ | | $ | 4,481 | $ | | $ | | $ | 4,231 | $ | |
13
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (unaudited)
(13) Fair Value Measurements (continued)
Recurring Fair Value Measurements (continued)
In addition to the preceding disclosures ASC 825 Financial Instruments requires the disclosure of the estimated fair value of financial instruments. The carrying amounts of cash and cash equivalents, restricted cash, restricted marketable securities, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short maturities of the respective instruments. The carrying value of the variable rate long-term debt is estimated based on current market interest rates for debt with similar maturities (Level 2) and approximates fair value at March 31, 2014 and December 31, 2013, since the related interest rates approximate current market rates available for similar debt instruments.
Non-Recurring Fair Value Measurements
The Company follows the provisions of ASC 820-10-05 for its nonfinancial assets and liabilities that are not permitted or required to be measured at fair value on a recurring basis. The Companys nonfinancial assets and liabilities that are not permitted or required to be measured at fair value on a recurring basis typically relate to long-lived assets held and used, goodwill and the investment in joint ventures. The Company is required to provide additional disclosures about fair value measurements as part of its financial statements for each major category of assets and liabilities measured at fair value on a nonrecurring basis. During the three months ended March 31, 2014, the Company recognized a loss of $1.8 million in order to recognize the fair value of its investment in the JV at March 31, 2014 (See Note 2). At March 31, 2014 and December 31, 2013, there were no other fair value adjustments or fair value measurements that were required for nonfinancial assets or liabilities.
Fair Valuation Methods
Certificates of depositThese securities are valued using industry-standard models that consider various assumptions, including time to maturity, applicable market volatility factors, and current market and selling prices for the underlying debt instruments that are traded on the open market, even if not highly liquid. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data and are supported by observable levels at which transactions are executed in the marketplace.
(14) Commitments and Contingencies
Major Customers
A significant portion of the Companys net revenue is derived from delivering hospital-based physician services at multiple hospitals that have common ownership. For the three months ended March 31, 2014 and 2013, no hospital system comprised 10% or more of the Companys net revenue.
Self-Insurance
Due to the nature of its business, the Company becomes involved as a defendant in medical malpractice lawsuits, some of which are currently ongoing, and is subject to the attendant risk of substantial damage awards. Since January 2003, the Company has generally maintained a claims-made insurance arrangement with a third-party insurer. The insurance arrangements with the third party are reinsured through the Companys wholly owned captive insurance company, Marblehead Surety & Reinsurance Company, Ltd. (Marblehead) either directly between the insurer and Marblehead or between the Company and Marblehead as part of its self-insured retention. This exposure is collateralized by assets held in trust to the benefit of the Companys third-party insurers.
14
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (unaudited)
(14) Commitments and Contingencies (continued)
Self-Insurance (continued)
In addition, the Company continues to purchase professional liability insurance on a claims-made basis from third party insurers on certain acquired practices and for a limited number of other physicians that practice in states or hospitals with malpractice coverage requirements different than those provided through its arrangement with Marblehead.
The liabilities for self-insurance in the accompanying consolidated balance sheets include estimates of the ultimate costs related to both reported claims on an individual and aggregate basis and unreported claims. The estimates are based on the Companys historical experience, the advice of outside legal counsel and actuarial analysis.
There can be no assurance that an existing or future claim or claims will not exceed the limits of available insurance coverage or that any insurer will remain solvent and able to meet its obligations to provide coverage for any such claims. A judgment against the Company in excess of such coverage could have a material adverse effect on the consolidated financial position, operations and comprehensive income or cash flows of the Company.
Litigation
During the normal course of its business, the Company is a party to pending and threatened legal actions and proceedings. The majority of these matters involve claims of medical malpractice. These lawsuits are not expected to result in settlements or judgments that exceed the Companys insurance coverage and its reserves for uninsured claims, litigation and assessments. Therefore, management believes, based on the advice of legal counsel, that the ultimate resolution of such matters will not have a material adverse impact on the consolidated financial position, results of operations and comprehensive income, or cash flows of the Company.
Government Regulation
A significant portion of the Companys net revenue is derived from payments made by government health care programs, principally Medicare and Medicaid. These government programs, as well as private insurers, have taken and may continue to take, steps, including a movement towards managed care, to control the cost, eligibility for, use and delivery of health care services as a result of budgetary constraints and cost containment pressures. These third-party payors may also attempt to control costs using other measures, including bundling payments for multiple services and denying or reducing reimbursement for certain services and treatments. As a result, payments from government programs or private payors may decrease significantly. The Companys business may be materially affected by limitations of or reductions in reimbursement amounts or rates or elimination of coverage for certain individuals or treatments.
Moreover, because government programs generally provide for reimbursement based on a fee schedule rather than on the providers charges, the Company generally cannot increase their revenue from these programs by increasing the amount the Company charges for their services. In addition, funds the Company receives from third-party payors are subject to audit with respect to the proper billing for physician and ancillary services, and accordingly, the Companys revenue from these programs may be adjusted retroactively. Any retroactive adjustments to the Companys reimbursement amounts could have a material effect on its consolidated financial condition, results of operations and comprehensive income, as well as cash flows.
The healthcare industry is governed by a framework of federal and state laws, rules, and regulations that are extensive and complex and for which, in many cases, the industry has the benefit of only limited judicial and
15
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (unaudited)
(14) Commitments and Contingencies (continued)
Government Regulation (continued)
regulatory interpretation. Medicare and Medicaid fraud and abuse laws prohibit, among other things, any false claims, or any bribe, kick-back or rebate in return for the referral of Medicare and Medicaid patients. Violation of these prohibitions may result in civil and criminal penalties and exclusion from participation in the Medicare and Medicaid programs. If the Company is found to have violated these laws, rules, or regulations, the Companys business, and consolidated financial position, results of operations and comprehensive income, and cash flows could be materially adversely affected.
Moreover, the federal healthcare reform legislation signed into law in 2010 contains numerous provisions that may reshape the United States healthcare delivery system, and healthcare reform efforts continue to attract significant legislative interest, legal challenges and public attention that create uncertainty and the potential for additional changes. Healthcare reform implementation, additional legislation or other changes in government regulation may affect the Companys reimbursement, restrict the Companys existing operations, limit the expansion of the Companys business or impose additional compliance requirements and costs, any of which could have a material adverse effect on the Companys business, financial position, results of operations and comprehensive income, and cash flows.
Management has implemented policies and procedures that management believes will ensure that the Company is in substantial compliance with these laws and regulations but there can be no assurance the Company will not be found to have violated certain of these laws and regulations.
In addition, Medicare reimbursement rates could be reduced due to updates made on an annual basis based on statutory formulas. Presently, Medicare pays for all physician services based upon a national fee schedule, which contains a list of uniform rates. The payment rates under the fee schedule are determined based on national uniform relative value units for the services provided, a geographic adjustment factor, and a conversion factor. The fee schedule is adjusted annually based on a complex formula that is linked in part to the use of services by Medicare beneficiaries and the growth in gross domestic product. Since 2002, this formula has resulted in negative payment updates under the fee schedule that have grown increasingly larger, and Congress has repeatedly intervened with interim legislation to prevent scheduled payment reductions. For 2014, the Centers for Medicare & Medicaid Services, the agency responsible for administering the Medicare program (CMS), projected a rate reduction of 20.1% from 2013 levels and earlier estimates had projected a 24.4% reduction. A series of laws was enacted that delayed the scheduled reduction in physician payments and provided for a 0.5% increase through December 31, 2014, and a zero percent update from 2014 payment amounts to the 2015 Physician Fee Schedule through March 31, 2015. If Congress fails to intervene to prevent the negative update factor in the future through either another temporary measure or a permanent revision to the statutory formula, the resulting decrease in payment may adversely impact physician revenues, as well as our revenues.
In addition, the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012, imposed across-the-board cuts (sequestrations) to mandatory and discretionary spending, which included aggregate reductions to Medicare payments to providers of 2% per fiscal year, which went into effect in April 2013. The Bipartisan Budget Act of 2013, which was signed into law in December 2013, extended these annual reductions of 2% for an additional two years, through 2023. Any reductions in Medicare reimbursement rates may not only have a detrimental impact on the Companys reimbursement rates for Medicare patients, but also for other patients covered by certain Medicaid and commercial payors that base their rates on a percentage of Medicare rates. Accordingly, any significant spending reductions affecting Medicare, Medicaid or other publicly funded or subsidized health programs could have a material adverse effect on the Companys consolidated financial condition, results of operations and comprehensive income, and cash flows.
16
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (unaudited)
(15) Related Parties
For the three months ended March 31, 2014 and 2013, the Company paid Hellman & Friedman Capital Partners, VI, L.P. (H&F), a party related to a member of the Company, $21,000 and $23,000, respectively, for reimbursement of expenses. Additionally, during the three months ended as of March 31, 2014 and 2013, the Company paid $0.5 million, respectively, to two companies affiliated with H&F for payroll and billing related services. At March 31, 2014, amounts due to these companies were $0.3 million. No amounts were due as of December 31, 2013.
(16) Members Equity
The Company is a limited partnership, and the equity interests of the partners are designated in units. The Class A Units of the Company were issued to investment fund affiliates of Hellman & Friedman LLC and certain key executives at a price of $1,000 per unit, for a total price of approximately $410.9 million. In 2013, Class A-1 Units valued at $10.0 million were issued as a portion of the consideration paid for an acquisition.
Certain key executives of the Company have unit incentive award agreements. The Company has awarded Class B-1, B-2 and B-3 Units (collectively referred to as the Class B Units), Class C Units and Class D and D-1 Units (collectively, the Class D Units) with varying restrictions and performance criteria.
The Company recognizes compensation expense related to its units on a straight-line basis over the corresponding vesting periods or implied service periods, as applicable. The Company recognized equity based compensation of $1.3 million and $0.8 million for the three months ended March 31, 2014 and 2013, respectively.
The Company issued 8,600 of class D units during the three months ended March 31, 2014. No units were issued during the three month period ended March 31, 2013.
(17) Net Revenue
Net revenue consists of fee for service revenue, contract revenue, management fees and other revenue. The Companys net revenue is derived principally from the provision of physician services to patients of the healthcare facilities the Company serves.
Adjudicated fee-for-service revenue represents our net revenue for which we have a significant level of contract and other rate information available electronically that we can rely on for estimating our contractual discounts. Non-adjudicated fee-for-service revenue represents revenue for which we generally base our contractual discounts on actual and historical cash collections, adjusted for agreed upon contracted payor rate increases.
The Company also earns contract revenue directly from its hospital customers through a variety of payment arrangements that are established when payments from third-party payors are inadequate to support the costs of the contract.
The Company derives management fees pursuant to contractual agreements with certain of its physician practices, which require the practices to pay the Company management fees that are based on a flat fee or a percentage of net fee for service revenue, depending on the nature of services provided. The Company also earns other revenue for services performed that are ancillary to its primary operations.
17
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (unaudited)
(17) Net Revenue (continued)
Net revenue consists of the following (in thousands):
For the three months ended March 31, | ||||||||||||||||
2014 | 2013 | |||||||||||||||
Medicare |
$ | 31,005 | 12.4 | % | $ | 32,756 | 15.1 | % | ||||||||
Medicaid |
13,803 | 5.5 | % | 14,581 | 6.7 | % | ||||||||||
Commercial and managed care |
141,412 | 56.4 | % | 130,782 | 60.4 | % | ||||||||||
Self-pay |
15,078 | 6.0 | % | 15,273 | 7.0 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net adjudicated fee for service revenue |
201,298 | 80.3 | % | 193,392 | 89.2 | % | ||||||||||
Net non-adjudicated fee for service revenue |
36,973 | 14.7 | % | 15,151 | 7.0 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net fee for service revenue |
238,271 | 95.0 | % | 208,543 | 96.2 | % | ||||||||||
Contract revenue |
21,576 | 8.6 | % | 18,405 | 8.5 | % | ||||||||||
Management fee and other revenue |
3,611 | 1.4 | % | 2,678 | 1.2 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Revenue, net of contractual discounts |
25,187 | 10.0 | % | 21,083 | 9.7 | % | ||||||||||
Provision for uncollectibles |
(12,636 | ) | (5.0 | %) | (12,950 | ) | (5.9 | %) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net revenue |
$ | 250,822 | 100.0 | % | $ | 216,676 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
(18) Segment Reporting
The Physician Services segment represents an aggregation of anesthesia, childrens services, radiology and emergency medicine services, providing healthcare services to hospitals and ambulatory surgical facilities on a fee for service or contract basis. These operating segments were aggregated into one reportable segment due to their similar economic characteristics, products, production methods and distribution methods.
The Other Services segment is an aggregation of other services provided in an office-based setting such as gynecology, obstetrics and perinatology, as well as ambulatory service centers, physician recruiting services and other operations that service the business as well as third parties. The services within this operating segment are deemed to be significantly different than those provided within Physician Services and do not meet the aggregation criteria prescribed by the segment reporting guidance nor do they meet the quantitative thresholds that would require a separate presentation. Accordingly, it is presented in the All Other category.
Segment amounts disclosed are prior to any elimination entries made in consolidation, except in the case of net revenue, where intercompany charges have been eliminated.
Assets, capital expenditures and certain expenses are not allocated to the segments. Unallocated expenses include general and administrative expenses, net interest expense, depreciation and amortization, income taxes and non-controlling interests. The Company evaluates segment performance based on profit and loss before the aforementioned expenses.
18
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (unaudited)
(18) Segment Reporting (continued)
The following table presents financial information for each reportable segment (in thousands):
For the three months ended March 31, | ||||||||
2014 | 2013 | |||||||
Net revenue: |
||||||||
Physician Services |
$ | 236,015 | $ | 200,161 | ||||
Other services |
14,807 | 16,515 | ||||||
|
|
|
|
|||||
Total net revenue |
$ | 250,822 | $ | 216,676 | ||||
|
|
|
|
|||||
Income from operations: |
||||||||
Physician Services |
$ | 51,992 | $ | 40,898 | ||||
Other services |
2,030 | 2,294 | ||||||
General and administrative |
(22,361 | ) | (15,442 | ) | ||||
Depreciation and amortization |
(9,889 | ) | (8,743 | ) | ||||
|
|
|
|
|||||
Total income from operations |
$ | 21,772 | $ | 19,007 | ||||
|
|
|
|
|||||
Reconciliation of income from operations to net income: |
||||||||
Income from operations: |
$ | 21,772 | $ | 19,007 | ||||
Interest expense, net |
19,017 | 12,006 | ||||||
Loss on extinguishment of debt |
| 4,390 | ||||||
Other (income) expense, net |
12 | | ||||||
Provision for income taxes |
1,138 | 1,372 | ||||||
Loss on unconsolidated joint ventures |
432 | | ||||||
|
|
|
|
|||||
Net income |
$ | 1,173 | $ | 1,239 | ||||
|
|
|
|
(19) Subsequent Events
On May 29, 2014, Sunbeam Holdings, L.P., Sunbeam GP Holdings, LLC, a Delaware limited liability company and the sole holder of membership interests in the General Partner, Sunbeam GP LLC, a Delaware limited liability company and the general partner of Sunbeam Holdings, L.P. (the General Partner), Sunbeam Primary Holdings, Inc., a Delaware corporation and a wholly owned subsidiary of Sunbeam Holdings, L.P. (Sunbeam Primary), and HFCP VI Securityholders Rep LLC, a Delaware limited liability company, entered into a definitive purchase agreement and agreement and plan of merger (the Merger Agreement) with AmSurg Corp., a Tennessee corporation (AmSurg), Arizona Merger Corporation, a Delaware corporation and direct wholly owned subsidiary of AmSurg (Merger Sub), and Arizona II Merger Corporation, a Delaware corporation and direct wholly owned subsidiary of AmSurg (Merger Sub II), pursuant to which (i) AmSurg will purchase 100% of the issued and outstanding membership interests of the General Partner and (ii) Sunbeam Holdings, L.P. will merge with and into Sunbeam Primary, with Sunbeam Primary surviving such merger (Merger 1), and immediately following Merger 1, Merger Sub will merge with and into Sunbeam Primary, with Sunbeam Primary surviving such merger as a wholly owned subsidiary of AmSurg (Merger 2). If, based upon the relative proportion of cash and stock included in the merger consideration payable under the Merger Agreement, the transactions contemplated by the Merger Agreement are intended to qualify as a plan of reorganization within the meaning of Section 1.368-2(g) of the Treasury Regulations, then, following Merger 2, Sunbeam Primary will merge with and into Merger Sub II, with Merger Sub II surviving as a wholly owned subsidiary of AmSurg.
19
SUNBEAM HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (unaudited)
(19) Subsequent Events (continued)
The aggregate merger consideration payable as a result of the transaction will be $2.35 billion, subject to certain adjustments, and will be composed of cash and either shares of AmSurgs common stock or shares of AmSurgs preferred stock. Prior to the closing of the transaction, AmSurg may elect to replace all or any portion of such merger consideration to be paid in its capital stock with cash.
The transaction is expected to close in the third quarter of 2014 and is subject to, among other things, the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, as well as other customary closing conditions.
The consolidated financial statements reflect the Companys evaluation of subsequent events through June 6, 2014, the date the financial statements were available to be issued.
20
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