10-Q 1 a2014q1form10q.htm 10-Q 2014 Q1 Form 10Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________
Form 10-Q
(Mark One)
T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
or
o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

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

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




SYMBION, INC.
FORM 10-Q
TABLE OF CONTENTS

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





PART 1 - FINANCIAL INFORMATION

Item 1.  Financial Statements

SYMBION, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except shares and per share amounts)
 
 
March 31,
2014
 
December 31,
2013
 
 
 
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
49,027

 
$
55,792

Accounts receivable, less allowance for doubtful accounts of $16,307 and $16,939 at March 31, 2014 and December 31, 2013, respectively
 
80,409

 
77,630

Inventories
 
16,893

 
17,080

Prepaid expenses and other current assets
 
10,571

 
9,594

Current assets of discontinued operations
 
2,306

 
2,580

Total current assets
 
159,206

 
162,676

Property and equipment, net
 
129,124

 
127,334

Intangible assets, net
 
17,970

 
18,566

Goodwill
 
661,673

 
661,758

Investments in and advances to affiliates
 
6,474

 
6,773

Restricted invested assets
 
315

 
177

Other long-term assets
 
13,428

 
13,957

Long-term assets of discontinued operations
 
9,864

 
15,498

Total assets
 
$
998,054

 
$
1,006,739

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
21,740

 
$
19,132

Accrued payroll and benefits
 
12,233

 
12,102

Other current liabilities
 
39,694

 
33,534

Current maturities of long-term debt
 
10,117

 
8,993

Current liabilities of discontinued operations
 
1,151

 
1,180

Total current liabilities
 
84,935

 
74,941

Long-term debt, less current maturities
 
562,507

 
550,986

Long-term deferred tax liabilities
 
75,618

 
76,020

Other long-term liabilities
 
63,293

 
61,404

Long-term liabilities of discontinued operations
 
5,118

 
4,854

 
 
 
 
 
Non-controlling interests—redeemable
 
30,390

 
30,545

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

 

Additional paid-in-capital
 
227,046

 
243,312

Stockholders' notes
 
(485
)
 
(485
)
Retained deficit
 
(115,269
)
 
(106,136
)
Total Symbion, Inc. stockholders' equity
 
111,292

 
136,691

Non-controlling interests—non-redeemable
 
64,901

 
71,298

Total equity
 
176,193

 
207,989

Total liabilities and stockholders' equity
 
$
998,054

 
$
1,006,739

See notes to unaudited consolidated financial statements.


1



SYMBION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands)
 
 
Three Months Ended March 31,
 
 
2014
 
2013
 
 
 
 
 
Revenues
 
$
133,966

 
$
130,383

Operating expenses:
 
 
 
 
Salaries and benefits
 
38,020

 
36,606

Supplies
 
33,918

 
34,404

Professional and medical fees
 
10,666

 
10,341

Lease expense
 
6,759

 
6,735

Other operating expenses
 
9,152

 
8,728

Cost of revenues
 
98,515

 
96,814

General and administrative expenses
 
5,645

 
5,840

Depreciation and amortization
 
5,575

 
5,878

Provision for doubtful accounts
 
3,795

 
2,825

Income from equity investments
 
(598
)
 
(881
)
Gain on disposal or impairment of long-lived assets, net
 
(261
)
 
(492
)
Proceeds from insurance settlements, net
 
(50
)
 

Litigation settlements, net
 
3

 
(163
)
Total operating expenses
 
112,624

 
109,821

Operating income
 
21,342

 
20,562

Interest expense, net
 
(14,365
)
 
(14,753
)
Income before income taxes and discontinued operations
 
6,977

 
5,809

Provision for income taxes
 
1,355

 
1,148

Income from continuing operations
 
5,622

 
4,661

Loss from discontinued operations, net of income taxes
 
(6,142
)
 
(403
)
Net (loss) income
 
(520
)
 
4,258

Less: Net income attributable to non-controlling interests
 
(8,613
)
 
(8,304
)
Net loss attributable to Symbion, Inc.
 
$
(9,133
)
 
$
(4,046
)
See notes to unaudited consolidated financial statements.



2



SYMBION, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
 
 
Three Months Ended March 31,
 
 
2014
 
2013
 
 
 
 
 
Net (loss) income
 
$
(520
)
 
$
4,258

 
 
 
 
 
Comprehensive (loss) income
 
$
(520
)
 
$
4,258

Less: Comprehensive income attributable to non-controlling interests
 
(8,613
)
 
(8,304
)
Comprehensive loss attributable to Symbion, Inc.
 
$
(9,133
)
 
$
(4,046
)
See notes to unaudited consolidated financial statements.




3



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

 
$

 
$
242,597

 
$

 
$
(93,516
)
 
$
59,447

 
$
208,528

Net (loss) income
 
 
 
 
 
 
 
 
 
(4,046
)
 
4,406

 
360

Stock-based compensation
 
 
 
 
 
102

 
 
 
 
 
 
 
102

Acquisition and disposal of shares of non-controlling interests, net
 
 
 
 
 
369

 
 
 
 
 
(47
)
 
322

Distributions to non-controlling interest—non-redeemable holders
 
 
 
 
 
 
 
 
 
 
 
(2,580
)
 
(2,580
)
Balance at March 31, 2013
 
1,000

 
$

 
$
243,068

 
$

 
$
(97,562
)
 
$
61,226

 
$
206,732

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
 
1,000

 
$

 
$
243,312

 
$
(485
)
 
$
(106,136
)
 
$
71,298

 
$
207,989

Net (loss) income
 
 
 
 
 
 
 
 
 
(9,133
)
 
5,211

 
(3,922
)
Stock-based compensation
 
 
 
 
 
96

 
 
 
 
 
 
 
96

Acquisition and disposal of shares of non-controlling interests, net
 
 
 
 
 
(16,362
)
 
 
 
 
 
(6,098
)
 
(22,460
)
Distributions to non-controlling interest—non-redeemable holders
 
 
 
 
 
 
 
 
 
 
 
(5,510
)
 
(5,510
)
Balance at March 31, 2014
 
1,000

 
$

 
$
227,046

 
$
(485
)
 
$
(115,269
)
 
$
64,901

 
$
176,193

See notes to unaudited consolidated financial statements.



4



SYMBION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
 
Three Months Ended March 31,
 
 
2014
 
2013
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
Net (loss) income
 
$
(520
)
 
$
4,258

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
 
Loss from discontinued operations, net of income taxes
 
6,142

 
403

Depreciation and amortization
 
5,575

 
5,878

Amortization of debt issuance costs and discounts
 
1,004

 
963

Payment-in-kind interest expense
 
2,373

 
2,194

Stock-based compensation
 
96

 
102

Gain on disposal or impairment of long-lived assets, net
 
(261
)
 
(492
)
Deferred income taxes
 
1,374

 
1,095

Income from equity investments, net of distributions received
 
358

 
(69
)
Provision for doubtful accounts
 
3,795

 
2,825

Changes in operating assets and liabilities, net of acquisitions and divestitures:
 
 
 
 
Accounts receivable
 
(6,575
)
 
(1,372
)
Other operating assets and liabilities
 
4,849

 
1,081

Net cash provided by operating activities—continuing operations
 
18,210

 
16,866

Net cash provided by operating activitiesdiscontinued operations
 
101

 
582

Net cash provided by operating activities
 
18,311

 
17,448

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of property and equipment, net
 
(3,607
)
 
(3,738
)
Payments for acquisitions, net of cash acquired
 
(428
)
 
196

Proceeds from divestitures
 
313

 
447

Net cash used in investing activities—continuing operations
 
(3,722
)
 
(3,095
)
Net cash used in investing activities—discontinued operations
 
(71
)
 
(163
)
Net cash used in investing activities
 
(3,793
)
 
(3,258
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Borrowings on revolving credit facility
 
10,000

 

Principal payments on long-term debt
 
(2,341
)
 
(11,544
)
Borrowings of long-term debt
 
4,189

 
6,115

Payments of debt issuance costs
 

 
(427
)
Change in restricted invested assets
 
(138
)
 
792

Distributions to non-controlling interest holders
 
(9,335
)
 
(6,582
)
(Payments related to) proceeds from ownership transactions with consolidated affiliates
 
(23,562
)
 
625

Other financing activities
 
(56
)
 
(11
)
Net cash used in financing activitiescontinuing operations
 
(21,243
)
 
(11,032
)
Net cash used in financing activitiesdiscontinued operations
 
(40
)
 
(196
)
Net cash used in financing activities
 
(21,283
)
 
(11,228
)
Net (decrease) increase in cash and cash equivalents
 
(6,765
)
 
2,962

Cash and cash equivalents at beginning of period
 
55,792

 
73,308

Cash and cash equivalents at end of period
 
$
49,027

 
$
76,270

See notes to unaudited consolidated financial statements.


5

SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2014
(Unaudited)


1. Organization
Symbion, Inc. (the “Company”), through its wholly-owned subsidiaries, owns interests in partnerships and limited liability companies that own and operate a national network of short stay surgical facilities in joint ownership with physicians and in some cases healthcare systems. As of March 31, 2014, the Company owned and operated 50 surgical facilities, including 44 ambulatory surgery centers ("ASCs") and six surgical hospitals. The Company also managed seven ASCs and one physician clinic in a market in which the Company operates an ASC and a surgical hospital. The Company owns a majority ownership interest in 30 of the 50 surgical facilities and consolidates 46 surgical facilities for financial reporting purposes. The Company reported two operating surgical facilities as discontinued operations at March 31, 2014.
The Company is a wholly-owned subsidiary of Symbion Holdings Corporation (“Holdings”), which is owned by an investor group that includes affiliates of Crestview Partners, L.P. ("Crestview"), members of the Company's management and other investors.

2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, as well as interests in partnerships and limited liability companies controlled by the Company through its ownership of a majority voting interest or other rights granted to the Company by contract to manage and control the affiliate's business. All significant intercompany balances and transactions are eliminated in consolidation.
Non-Controlling Interests
The physician limited partners and physician minority members of the entities that the Company controls are responsible for the supervision and delivery of medical services. The governance rights of limited partners and minority members are restricted to those that protect their financial interests. Under certain partnership and operating agreements governing these partnerships and limited liability companies, the Company could be removed as the sole general partner or managing member for certain events such as material breach of the partnership or operating agreement, gross negligence or bankruptcy. These protective rights do not preclude consolidation of the respective partnerships and limited liability companies.
Non-Controlling Interests—Non-Redeemable
The consolidated financial statements of the Company include all assets, liabilities, revenues and expenses of surgical facilities in which the Company has sufficient ownership and rights to allow the Company to consolidate the surgical facilities. Similar to its investments in non-consolidated affiliates, the Company regularly engages in the purchase and sale of ownership interests with respect to its consolidated subsidiaries that do not result in a change of control. These transactions are accounted for as equity transactions as they are undertaken among the Company, its consolidated subsidiaries and the non-controlling interest holders. The cash flow effect of these transactions is classified within financing activities in the consolidated statements of cash flows.
Non-Controlling Interests—Redeemable
Each of the partnerships and limited liability companies through which the Company owns and operates its surgical facilities is governed by a partnership or operating agreement.  In certain circumstances, the partnership and operating agreements for the Company's surgical facilities provide that the facilities will purchase all of the physicians’ ownership if certain adverse regulatory events occur, such as it becoming illegal for the physicians to own an interest in a surgical facility, refer patients to a surgical facility or receive cash distributions from a surgical facility.  The non-controlling interests—redeemable are reported outside of stockholders' equity in the consolidated balance sheets.


6

SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE MONTHS ENDED MARCH 31, 2014
(Unaudited)

A summary of activity related to the non-controlling interests—redeemable follows (in thousands):
Balance at December 31, 2012
 
$
29,269

Net income attributable to non-controlling interests—redeemable
 
3,898

Acquisition and disposal of shares of non-controlling interests—redeemable
 
18

Distributions to non-controlling interest —redeemable holders
 
(4,002
)
Balance at March 31, 2013
 
$
29,183

 
 
 
Balance at December 31, 2013
 
$
30,545

Net income attributable to non-controlling interests—redeemable
 
3,402

Acquisition and disposal of shares of non-controlling interests—redeemable
 
268

Distributions to non-controlling interest —redeemable holders
 
(3,825
)
Balance at March 31, 2014
 
$
30,390

Variable Interest Entities
The consolidated financial statements include the accounts of variable interest entities in which the Company is the primary beneficiary, under the provisions of Accounting Standards Codification Topic 810, Consolidation. The variable interest entities of the Company include a surgical facility located in Florida and a surgical facility located in New York. Regarding the Florida facility, the Company has the power to direct the activities of the facility and has fully guaranteed the facility's debt obligations. The debt obligations are subordinated to such a level that the Company absorbs the majority of the expected losses. With regard to the New York facility, the Company is the primary beneficiary due to the power to direct the activities of the facility and the level of variability within the management service agreement as well as the obligation and likelihood of absorbing the majority of expected gains and losses. The consolidated balance sheets of the Company at March 31, 2014 and December 31, 2013 included total assets of $11.3 million and $17.3 million, respectively, and total liabilities of $2.7 million and $3.0 million, respectively, related to the Company's variable interest entities. Effective March 31, 2014, the Company reclassified the New York facility to discontinued operations. As a component of the total assets and total liabilities of the Company's VIEs above, the discontinued operations line items on the consolidated balance sheets at March 31, 2014 and December 31, 2013 included assets of $9.0 million and $14.9 million, respectively, and liabilities of $817,000 and $936,000, respectively, related to the New York facility. See Note 4 on Discontinued Operations and Divestitures for further discussion on the anticipated sale of the New York facility.
Equity Method Investments
The Company has non-consolidating investments in surgical facilities and management companies that own or manage surgical facilities and hospitals. These investments are accounted for using the equity method of accounting. The total amount of these investments included in investments in and advances to affiliates on the consolidated balance sheets was $6.5 million and $6.8 million as of March 31, 2014 and December 31, 2013, respectively. The cash flow effect of transactions related to the purchase and sale of ownership interests with respect to the Company's non-consolidated affiliates is classified within investing activities in the statements of cash flows.
Use of Estimates
The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes. Examples include, but are not limited to, estimates of accounts receivable allowances, insurance liabilities and deferred tax assets or liabilities. In the opinion of the Company's management, all adjustments considered necessary for a fair presentation have been included in the consolidated financial statements. All adjustments are of a normal, recurring nature. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the comparative period's financial statements to conform to the three months ended March 31, 2014 presentation. The reclassifications primarily related to the presentation of discontinued operations and non-controlling interests and had no impact on the Company's consolidated financial position, results of operations or cash flows.
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. The Company uses fair value measurements based on quoted prices in active markets for identical assets or liabilities (Level 1), or inputs other than quoted prices in active markets that are either directly or indirectly observable (Level 2), or unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions (Level 3), depending on the nature of the item being valued.


7

SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE MONTHS ENDED MARCH 31, 2014
(Unaudited)

The carrying amounts reported on the consolidated balance sheets for cash and cash equivalents, accounts receivable, restricted invested assets and accounts payable approximate their fair values.
A summary of the carrying amounts and fair values of the Company's long-term debt follows (in thousands):
 
 
Carrying Amount
 
Fair Value
 
 
March 31,
2014
 
December 31,
2013
 
March 31,
2014
 
December 31,
2013
 
 
 
 
 
 
 
 
 
Senior Secured Notes, net of debt issuance discount
 
$
338,409

 
$
338,142

 
$
353,637

 
$
357,585

PIK Exchangeable Notes
 
118,639

 
118,639

 
118,639

 
118,639

Toggle Notes
 
73,307

 
73,475

 
73,307

 
73,475

The fair values of the Senior Secured Notes and Toggle Notes were based on a Level 1 measurement using quoted prices at March 31, 2014 and December 31, 2013, as applicable. The fair value of the PIK Exchangeable Notes was based on a Level 3 measurement, using a Company-specific discounted cash flow analysis. The carrying amounts related to the Company's other long-term debt obligations approximate their fair values.
The Company maintains a supplemental executive retirement savings plan (the "SERP"). The SERP is a non-qualified deferred compensation plan for eligible executive officers and other key employees of the Company that allows participants to defer portions of their compensation. The assets of the SERP and related obligation are recorded on the consolidated balance sheets at fair value. The fair value was determined based on a quoted market price for the underlying investments held in the SERP, or a Level 1 measurement. As of March 31, 2014 and December 31, 2013, the fair value of the SERP assets were $1.9 million and $1.8 million, respectively, which were included in other long-term assets on the consolidated balance sheets. The Company had liabilities related to the SERP of $1.9 million and $1.8 million as of March 31, 2014 and December 31, 2013, respectively, which were included in other long-term liabilities on the consolidated balance sheets.
Revenue Recognition
The Company recognizes revenues in the period in which the services are performed. Patient service revenues and receivables from third-party payors are recorded net of estimated contractual adjustments and allowances from third-party payors, which the Company estimates based on the historical trend of its surgical facilities’ cash collections and contractual write-offs, accounts receivable agings, established fee schedules, relationships with payors and procedure statistics.
A summary of revenues by service type as a percentage of total revenues follows:
 
 
Three Months Ended
March 31,
 
 
2014
 
2013
 
 
 
 
 
Patient service revenues
 
98.9
%
 
99.0
%
Other service revenues
 
1.1
%
 
1.0
%
Total revenues
 
100.0
%
 
100.0
%
Patient service revenues. Patient service revenues are revenues from healthcare procedures performed in surgical facilities that the Company consolidates for financial reporting purposes.  The fee charged varies depending on the type of service provided, but usually includes all charges for usage of an operating room, a recovery room, special equipment, medical supplies, nursing staff and medications.  The fee does not normally include professional fees charged by the patient’s surgeon, anesthesiologist or other attending physician, which are billed directly by such physicians to the patient or third-party payor.  In a very limited number of surgical facilities, the Company charges for anesthesia services. Patient service revenues are recognized on the date of service, net of estimated contractual adjustments and discounts from third-party payors, including Medicare and Medicaid. 
Other service revenues. Other service revenues consist of management and administrative service fees derived from the non-consolidated surgical facilities that the Company either accounts for using the equity method or does not own an interest. The fees derived from these management arrangements are based on a predetermined percentage of the revenues of each surgical facility and are recognized in the period in which services are rendered.


8

SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE MONTHS ENDED MARCH 31, 2014
(Unaudited)

The following table sets forth patient service revenues by type of payor and as a percentage of total patient service revenues for the Company's consolidated surgical facilities included in continuing operations (dollars in thousands):
 
 
Three Months Ended March 31,
 
 
2014
 
2013
 
 
Amount
 
%
 
Amount
 
%
 
 
 
 
 
 
 
 
 
Private insurance
 
$
76,927

 
58.0
%
 
$
76,151

 
58.9
%
Government
 
47,386

 
35.8
%
 
43,939

 
34.0
%
Self-pay
 
3,115

 
2.4
%
 
3,307

 
2.6
%
Other
 
5,102

 
3.8
%
 
5,791

 
4.5
%
Total patient service revenues
 
$
132,530

 
100.0
%
 
$
129,188

 
100.0
%
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.  The Company maintains its cash and cash equivalent balances at high credit quality financial institutions.
Accounts Receivable and Allowances for Contractual Adjustments and Doubtful Accounts
Accounts receivable are recorded net of contractual adjustments and allowances for doubtful accounts to reflect accounts receivable at net realizable value. Accounts receivable consists of receivables from federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies, employers and patients. Management recognizes that revenues and receivables from government agencies are significant to the Company's operations, but it does not believe that there is significant credit risk associated with these government agencies. Concentration of credit risk with respect to other payors is limited because of the large number of such payors. As of March 31, 2014 and December 31, 2013, the Company had accruals for third-party Medicare and Medicaid settlements of $10.3 million and $10.0 million, respectively, in other current liabilities and $2.1 million and $1.9 million, respectively, in other long-term liabilities on the consolidated balance sheets.
The Company recognizes that final reimbursement of accounts receivable is subject to final approval by each third-party payor.  However, because the Company has contracts with its third-party payors and also verifies insurance coverage of the patient before medical services are rendered, the amounts that are pending approval from third-party payors are minimal.  The Company does not require collateral from self-pay patients. The Company's policy is to collect co-payments and deductibles prior to providing medical services. It is also the Company's policy to verify a patient’s insurance 72 hours prior to the patient’s procedure.  The patient services provided by the Company's surgical facilities are primarily non-emergency services which allows the surgical facilities to have the ability to control the procedures related to seeking and obtaining third-party reimbursements. 
Each surgical facility is responsible for analyzing its own accounts receivable to ensure proper collection. On a consolidated basis, the Company's policy is to review accounts receivables aging, by surgical facility, to determine the appropriate allowance for doubtful accounts. Patient account balances are reviewed for delinquency based on contractual terms. This review is supported by an analysis of the actual revenues, contractual adjustments and cash collections received. An account balance is written off only after the Company has pursued collection with legal or collection agency assistance or otherwise deemed an account to be uncollectible.
A summary of the activity in the allowance for doubtful accounts receivable for the three months ended March 31, 2014 follows (in thousands):
Balance at December 31, 2013
 
$
16,939

Provision for doubtful accounts
 
3,795

Accounts written off, net of recoveries
 
(4,427
)
Balance at March 31, 2014
 
$
16,307

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


9

SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE MONTHS ENDED MARCH 31, 2014
(Unaudited)

Prepaid Expenses and Other Current Assets
A summary of prepaid expenses and other current assets follows (in thousands):
 
 
March 31,
2014
 
December 31,
2013
 
 
 
 
 
Prepaid expenses
 
$
5,285

 
$
5,143

Other current assets
 
5,286

 
4,451

Total
 
$
10,571

 
$
9,594

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

 
$
5,713

Buildings and improvements
 
105,561

 
103,980

Furniture and equipment
 
14,371

 
13,522

Computer and software
 
14,626

 
12,715

Medical equipment
 
80,792

 
79,994

Construction in progress
 
3,571

 
3,000

Property and equipment, at cost
 
224,634

 
218,924

Less: Accumulated depreciation
 
(95,510
)
 
(91,590
)
Property and equipment, net
 
$
129,124

 
$
127,334

The Company leases certain facilities and equipment under capital leases. These assets are depreciated using the straight-line method over the lesser of the lease term or the remaining useful life of the leased asset. The carrying values of assets under capital leases were $4.6 million and $4.4 million as of March 31, 2014 and December 31, 2013, respectively, and are included in property and equipment, net, on the consolidated balance sheets.
Intangible Assets
The Company has indefinite-lived intangible assets related to the certificates of need held by its surgical facilities located in jurisdictions where certificates of need are required. The Company also has finite-lived intangible assets related to physician guarantee agreements, non-compete agreements and a management rights agreement. Physician income guarantees are amortized as recruitment expense into salaries and benefits costs on the consolidated statements of operations over the commitment period of the contract, generally three to four years. Non-compete agreements and the management rights agreement are amortized into depreciation and amortization expense in the consolidated statements of operations over the service lives of the agreements, ranging from three to five years for non-compete agreements and 15 years for the management rights agreement.
A summary of activity related to intangible assets for the three months ended March 31, 2014 follows (in thousands):
 
 
Physician Income Guarantees
 
Management Rights
 
Non-Compete Agreements
 
Certificates of Need
 
Total Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
 
$
1,032

 
$
1,930

 
$
1,814

 
$
13,790

 
$
18,566

Recruitment expense
 
(134
)
 

 

 

 
(134
)
Amortization
 

 
(40
)
 
(422
)
 

 
(462
)
Balance at March 31, 2014
 
$
898

 
$
1,890

 
$
1,392

 
$
13,790

 
$
17,970



10

SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE MONTHS ENDED MARCH 31, 2014
(Unaudited)

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

Acquisitions
 
108

Purchase price adjustments
 
(193
)
Balance at March 31, 2014
 
$
661,673

Impairment of Long-Lived Assets, Goodwill and Intangible Assets
The Company evaluates the carrying values of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist. The Company performs an impairment test by preparing an expected undiscounted cash flow projection. If the projection indicates that the recorded amount of a long-lived asset is not expected to be recovered, the carrying value is reduced to the new estimated fair value.  The cash flow projection applied represents management’s best estimate, using appropriate and customary assumptions and projections, at the date of evaluation.  During the three months ended March 31, 2014, the Company recorded an impairment charge of $6.6 million related to its consolidated surgical facility located in Lynbrook, New York. See Note 4 on Discontinued Operations and Divestitures for further discussion on the anticipated sale of this facility.
The Company tests its goodwill and intangible assets for impairment at least annually, or more frequently if certain impairment indicators arise.  The Company tests goodwill at the reporting unit level, which the Company has concluded to be the consolidated operating results of Symbion, Inc, as the Company has only one operating segment.  In performing the test, the Company compares the carrying value of the net assets of the Company as of December 31, or additionally if impairment indicators are present, to the net present value of the estimated discounted future cash flows of the reporting unit, or the Company.  The cash flow projection and discount rate applied represents management’s best estimate, using appropriate and customary assumptions and projections, at the date of evaluation.  The Company corroborates the results of the discounted cash flow analysis with a market-based approach. As the Company does not have publicly traded equity from which to derive a market value, an assessment of peer company data is performed whereby the Company selects comparable peers based on growth and leverage ratios, as well as healthcare industry specific characteristics.  Management estimates a reasonable market value of the Company based on earnings multiples and trading data of the Company's peers.
Restricted Invested Assets
As a requirement of the operating lease agreement related to the Company's surgical facility located in Chesterfield, Missouri, the Company is required to maintain a letter of credit that is secured by restricted invested assets in the form of certificates of deposit. As of March 31, 2014 and December 31, 2013, restricted invested assets were $315,000 and $177,000, respectively. There were no borrowings against the letter of credit at March 31, 2014 and December 31, 2013.
Other Long-Term Assets
A summary of other long-term assets follows (in thousands):
 
 
March 31,
2014
 
December 31,
2013
 
 
 
 
 
Deferred loan costs
 
$
6,167

 
$
6,809

Medical malpractice insurance recoveries
 
2,193

 
2,193

Assets of the SERP
 
1,907

 
1,783

Other assets
 
3,161

 
3,172

Total other long-term assets
 
$
13,428

 
$
13,957

Deferred loan costs are amortized into interest expense over the maturity period of the related debt obligation. Other long-term assets, not individually disclosed, generally includes security deposits, notes receivable and other miscellaneous deferred costs.


11

SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE MONTHS ENDED MARCH 31, 2014
(Unaudited)

Other Current Liabilities
A summary of other current liabilities follows (in thousands):
 
 
March 31,
2014
 
December 31,
2013
 
 
 
 
 
Interest payable
 
$
11,602

 
$
4,434

Current taxes payable
 
2,346

 
1,975

Insurance liabilities
 
3,870

 
3,726

Third-party settlements
 
10,307

 
10,015

Accounts receivable credit balances
 
3,147

 
3,443

Other accrued expenses
 
8,422

 
9,941

Total other current liabilities
 
$
39,694

 
$
33,534

Other Long-Term Liabilities
A summary of other long-term liabilities follows (in thousands):
 
 
March 31,
2014
 
December 31,
2013
 
 
 
 
 
Facility lease obligations
 
$
50,278

 
$
48,044

Third-party settlements
 
2,090

 
1,910

Medical malpractice insurance liability
 
3,683

 
4,083

Deferred rent
 
3,318

 
3,324

Liability for the SERP
 
1,907

 
1,783

Other liabilities
 
2,017

 
2,260

Total other long-term liabilities
 
$
63,293

 
$
61,404

The Company has a facility lease obligation which was assumed in connection with the Company's acquisition of the surgical hospital located in Idaho Falls, Idaho. This obligation is payable to the lessor of this facility for the land, building and improvements. During the three months ended March 31, 2014, the Company recorded an additional facility lease obligation of $2.3 million for construction costs associated with a radiation oncology building at this facility that is expected to be completed in the second quarter of 2014. The current portion of the facility lease obligations was $360,000 and $308,000 at March 31, 2014 and December 31, 2013, respectively, and was included in other current liabilities on the consolidated balance sheets. The total of the facility lease obligations related to the surgical hospital and radiation oncology building in Idaho Falls, Idaho was $50.6 million and $48.4 million at March 31, 2014 and December 31, 2013, respectively.
Stockholders' Notes
In December 2013, certain employees of the Company exercised stock options and borrowed funds from Holdings to pay the exercise price and applicable taxes payable. Each loan is represented by a full recourse promissory note bearing interest and payable in three equal annual installments beginning December 10, 2014. Payment and performance under the notes is secured by the shares of Holdings common stock received upon exercise of the stock options. The total amount of stockholders' notes outstanding was $485,000 at both March 31, 2014 and December 31, 2013, and was included in stockholders' equity on the consolidated balance sheets.
Operating Leases
The Company leases office space and equipment for its surgical facilities, including surgical facilities under development.  The lease agreements generally require the lessee, or the Company, to pay all maintenance, property taxes, utilities and insurance costs.  The Company accounts for operating lease obligations and sublease income on a straight-line basis.  Contingent obligations of the Company, as defined by each lease agreement, are recognized when specific contractual measures have been met, typically the result of an increase in the Consumer Price Index.  Lease obligations paid in advance are recorded as prepaid rent and included in the prepaid expenses and other current assets on the consolidated balance sheets.  The difference between actual lease payments and straight-line lease expense over the initial lease term, excluding optional renewal periods, is recorded as deferred rent and included in other current liabilities and other long-term liabilities on the consolidated balance sheets.


12

SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE MONTHS ENDED MARCH 31, 2014
(Unaudited)

Stock-Based Compensation
The Company recognizes in the financial statements the cost of employee services received in exchange for awards of equity instruments based on the fair value of those awards. The Company uses the Black-Scholes option pricing model to value stock options awarded subsequent to adoption of ASC 718, Compensation, Stock Compensation.  The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable.  All option pricing models require the input of highly subjective assumptions including the expected stock price volatility and the expected exercise patterns of the option holders.
The Company’s policy is to recognize stock compensation expense using the straight-line method. The Company’s stock compensation expense estimate could vary in the future depending on many factors, including levels of options and awards granted in the future, forfeitures and when option or award holders exercise these awards and depending on whether performance targets are met and a liquidity event occurs.
Professional, General and Workers' Compensation Insurance
The Company maintains general liability and professional liability insurance in excess of self-insured retentions through third-party commercial insurance carriers in amounts that management believes is sufficient for the Company's operations, although, potentially some claims may exceed the scope of coverage in effect. General liability and professional insurance coverage is on a claims-made basis and workers' compensation insurance is on an occurrence basis.
The Company expenses costs under the self-insured retention exposure for general and professional liability and workers' compensation claims which relate to (i) deductibles on claims made during the policy period and (ii) an estimate of claims incurred but not yet reported that are expected to be reported after the policy period expires. Reserves and provisions are based upon actuarially determined estimates. The reserves are estimated using individual case-basis valuations and actuarial analysis. Based on historical results and data currently available, management does not believe a change in one or more of the underlying assumptions will have a material impact on the Company's consolidated financial position or results of operations. Expected insurance recoveries are presented on the consolidated balance sheets separately from the liabilities. At March 31, 2014 and December 31, 2013, $1.9 million and $1.9 million, respectively, were included in other current liabilities and $3.7 million and $4.1 million, respectively, were included in other long-term liabilities on the consolidated balance sheets.  Expected insurance recoveries of $1.1 million and $1.1 million, respectively, were included in prepaid expenses and other current assets and $2.2 million and $2.2 million, respectively, were included in other long-term assets on the consolidated balance sheets at March 31, 2014 and December 31, 2013.
Electronic Health Record Incentives
The American Recovery and Reinvestment Act of 2009 provides for Medicare and Medicaid incentive payments beginning in calendar year 2011 for eligible hospitals and professionals that implement and achieve meaningful use of certified Electronic Health Records ("EHR") technology. Several of the Company's surgical hospitals have implemented plans to comply with the EHR meaningful use requirements of the Health Information Technology for Economic and Clinical Health Act ("HITECH") in time to qualify for the maximum available incentive payments.
Compliance with the meaningful use requirements has and will continue to result in significant costs including business process changes, professional services focused on successfully designing and implementing the Company's EHR solutions along with costs associated with the hardware and software components of the project. The Company currently estimates that total costs incurred to comply will be recovered through the total EHR incentive payments over the projected life cycle of this initiative. The Company incurs both capital expenditures and operating expenses in connection with the implementation of its various EHR initiatives. The amount and timing of these expenditures do not directly correlate with the timing of the Company's cash receipts or recognition of the EHR incentives as other income. The Company initiated its meaningful use initiatives in 2012. During the three months ended March 31, 2014 and 2013, the Company spent $0.5 million and $1.5 million, respectively, related to hardware, software and implementation costs, of which $0.5 million and $1.2 million, respectively, was capitalized in these periods. The Company expects to receive incentive payments and recognize corresponding revenue upon the completion of the EHR meaningful use requirements.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return.  The partnerships and limited liability companies in which the Company has ownership each file separate income tax returns.  The Company's allocated share of income or loss based on its percentage ownership in each partnership and limited liability company is included in taxable income of the Company.  The remaining income or loss of each partnership and limited liability company is allocated to the other owners as taxable income.
The Company uses the asset and liability method to account for income taxes.  Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  If a net operating loss carryforward exists, the Company makes a determination as to whether that net operating loss carryforward will be utilized in the future.  A valuation allowance is established for certain net operating loss carryforwards when their recoverability is deemed to be uncertain.  The carrying value of the net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on


13

SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE MONTHS ENDED MARCH 31, 2014
(Unaudited)

estimates and assumptions.  If these estimates and related assumptions change in the future, the Company may be required to adjust its deferred tax valuation allowances.
During the three months ended March 31, 2014, the Company increased its reserve for uncertain tax positions by approximately $27,000, principally as a result of the accrual of tax and interest on existing uncertain tax positions. This increase affected the effective tax rate. The reserve for uncertain tax positions is included in long-term deferred tax liabilities on the consolidated balance sheets.  The total amount of accrued liabilities related to uncertain tax positions that would affect the Company's effective tax rate if recognized was $460,000 as of March 31, 2014 and $435,000 as of December 31, 2013.
Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-8, “Presentation of Financial Statements and Property, Plant, and Equipment—Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-8”). Among other provisions and in addition to expanded disclosures, ASU 2014-8 changes the definition of what components of an entity qualify for discontinued operations treatment and reporting from a reportable segment, operating segment, reporting unit, subsidiary or asset group to only those components of an entity that represent a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. Additionally, ASU 2014-8 requires disclosure about a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements, including the pretax profit or loss, attributable to the component of an entity for the period in which it is disposed of or is classified as held for sale. The disclosure of this information is required for all of the same periods that are presented in the entity’s results of operations for the period.
From time-to-time, a company may identify one or more individual facilities that do not meet its on-going or future business strategy. In accordance with ASU 2014-8, in the event that an individually significant facility is identified for disposal but does not represent a strategic shift that has, or will have, a major effect on a company's operating and financial results, the results of an identified facility would continue to be reported as a component of the company's consolidated results. In this event and in accordance with ASU 2014-8, additional disclosures would be required.
The provisions of ASU 2014-8 are effective prospectively for all disposals or classifications as held for sale of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted. The Company is currently assessing the impact of ASU 2014-8 on its operating and financial results and anticipates adopting the provisions of ASU 2014-8 as of December 31, 2014.
3. Acquisitions and Developments
Effective March 7, 2014, the Company acquired an incremental ownership interest of 13.6% in the surgical hospital located in Idaho Falls, Idaho for a purchase price of $24.4 million. As of March 31, 2014, the Company had a 61.7% ownership interest in this facility. This transaction was partially financed with $10.0 million of proceeds from the Company's revolving credit facility and the remainder was funded with cash from continuing operations.
Effective January 31, 2014, the surgical hospital located in Lubbock, Texas, in which the Company has a 58.3% ownership interest, acquired the ancillary services of a physician practice located in the same market. The purchase price paid for the acquisition of these services was $428,000. The Company funded this acquisition with cash from continuing operations. These services were merged into the operations of the surgical hospital.
4. Discontinued Operations and Divestitures
Effective March 31, 2014, the Company reclassified its surgical facility located in Lynbrook, New York to discontinued operations. The Company anticipates selling its ownership interest in this facility during 2014. The results of operations related to this facility have been included in discontinued operations for the three months ended March 31, 2014 and 2013. The Company recorded an impairment charge of $6.6 million on March 31, 2014 related to long-lived assets of this facility to write down the assets to the estimated fair value, less costs to sell. The fair value was estimated based on what a market participant is currently willing to pay and represents a Level 2 non-recurring fair value measurement. The impairment loss was included in loss from discontinued operations, net of income taxes, on the consolidated statement of income for the three months ended March 31, 2014. This facility is consolidated for financial reporting purposes.
Effective December 31, 2013, the Company reclassified its surgical facility located in Worcester, Massachusetts to discontinued operations. The Company entered into a purchase agreement effective January 2, 2014 related to the sale of this facility and expects to complete this transaction during 2014. The results of operations related to this facility have been included in discontinued operations for the three months ended March 31, 2014 and 2013. This facility is consolidated for financial reporting purposes.
A summary of certain operating results impacting the statements of operations related to discontinued operations follows (in thousands):


14

SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE MONTHS ENDED MARCH 31, 2014
(Unaudited)

 
 
Three Months Ended
March 31,
 
 
2014
 
2013
 
 
 
 
 
Revenues
 
$
2,418

 
$
5,519

Operating income
 
424

 
656

Loss on sale or disposal
 

 
1,054

Impairment on assets held for sale
 
6,577

 

(Benefit from) provision for income taxes
 
(11
)
 
5

Loss from discontinued operations, net of income taxes
 
(6,142
)
 
(403
)
5. Long-Term Debt
A summary of long-term debt follows (in thousands):
 
 
March 31,
2014
 
December 31,
2013
 
 
 
 
 
Credit Facility
 
$
10,000

 
$

Senior Secured Notes, net of debt issuance discount of $2,591 and $2,858 at March 31, 2014 and December 31, 2013, respectively
 
338,409

 
338,142

PIK Exchangeable Notes
 
118,639

 
118,639

Toggle Notes
 
73,307

 
73,475

Notes payable and secured loans
 
27,423

 
24,970

Capital lease obligations
 
4,846

 
4,753

Total debt
 
572,624

 
559,979

Less: Current maturities
 
(10,117
)
 
(8,993
)
Total long-term debt
 
$
562,507

 
$
550,986

Credit Facility
The Company's senior secured super-priority revolving credit facility (the "Credit Facility”) matures on December 15, 2015. During the three months ended March 31, 2014, the Company borrowed $10.0 million on the Credit Facility. As of March 31, 2014, the Company had letters of credit outstanding of $1.8 million and availability of $38.2 million under the Credit Facility.
Loans under the Credit Facility bear interest, at the Company's option, at the reserve adjusted LIBOR plus 4.50% or at the alternate base rate plus 3.50%. The Company is required to pay a commitment fee at a rate of 0.50% per annum on the undrawn portion of commitments under the Credit Facility. This fee is payable quarterly in arrears and on the date of termination or expiration of the commitments. The interest rate on the Credit Facility was 4.65% at March 31, 2014.
The Credit Facility contains financial covenants requiring the Company not to exceed a maximum net senior secured leverage ratio or fall below a minimum cash interest coverage ratio, in each case tested quarterly. Borrowings under the Credit Facility are subject to significant conditions, including the absence of any material adverse change in the Company's business, financial condition, operations or cash flows. At March 31, 2014, the Company was in compliance with all material covenants contained in the Credit Facility.
Senior Secured Notes
The Senior Secured Notes mature on June 15, 2016. The Senior Secured Notes were issued at a 1.51% discount and accrue interest at the rate of 8.00% per annum, payable on June 15 and December 15 of each year.
The Company may redeem all or any portion of the Senior Secured Notes on or after June 15, 2014 at the redemption price set forth in the indenture governing the Senior Secured Notes, plus accrued interest. The Company may redeem all or any portion of the Senior Secured Notes at any time prior to June 15, 2014 at a price equal to 100% of the aggregate principal amount thereof plus a make-whole premium and accrued and unpaid interest. In addition, the Company may redeem up to 35% of the aggregate principal amount of the Senior Secured Notes with proceeds of certain equity offerings at any time prior to June 15, 2014. At March 31, 2014, the Company had not redeemed any of its Senior Secured Notes.
At March 31, 2014, the Company was in compliance with all material covenants contained in the indenture governing the Senior Secured Notes.


15

SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE MONTHS ENDED MARCH 31, 2014
(Unaudited)

PIK Exchangeable Notes
The PIK Exchangeable Notes mature on June 15, 2017. Interest accrues on the PIK Exchangeable Notes at a rate of 8.00% per year, compounding semi-annually on June 15 and December 15 of each year. The Company pays interest on the PIK Exchangeable Notes in kind by increasing the principal amount of the PIK Exchangeable Notes on each interest accrual date by an amount equal to the entire amount of the accrued interest. On June 15 and December 15 of each year, the Company reclassifies accrued interest to long-term debt. As of March 31, 2014, the Company had accrued interest of $2.8 million on the PIK Exchangeable Notes, which was included in other current liabilities on the consolidated balance sheet.
The PIK Exchangeable Notes are exchangeable into shares of common stock of Holdings at any time prior to the close of business on the business day immediately preceding the maturity date of the PIK Exchangeable Notes at a per share exchange price of $3.50. Upon exchange, holders of the PIK Exchangeable Notes will receive a number of shares of common stock of Holdings equal to (i) the accreted principal amount of the PIK Exchangeable Notes to be exchanged, plus accrued and non-capitalized interest, divided by (ii) the exchange price. The exchange price in effect at any time will be subject to customary adjustments.
The Company may not redeem the PIK Exchangeable Notes prior to June 15, 2014. On or after June 15, 2014, the Company may redeem some or all of the PIK Exchangeable Notes for cash at a redemption price equal to a specified percentage of the accreted principal amount of the PIK Exchangeable Notes to be redeemed, plus accrued and non-capitalized interest. The specific percentage for such redemptions will be 104% for redemptions during the year commencing on June 15, 2014, 102% for redemptions during the year commencing on June 15, 2015, and 100% for redemptions during the year commencing on June 15, 2016.
At March 31, 2014, the Company was in compliance with all material covenants contained in the indenture governing the PIK Exchangeable Notes.
Toggle Notes
The Toggle Notes mature on August 23, 2015. The payment-in-kind interest option on the Toggle Notes expired in February 2012. Cash interest on the Toggle Notes accrues at the rate of 11.0% per annum. As of March 31, 2014, the Company had accrued interest of $851,000 on the Toggle Notes, which was included in other current liabilities on the consolidated balance sheet.
The indenture governing the Toggle Notes includes a mandatory redemption provision. Under this provision, if the Toggle Notes would otherwise constitute applicable high yield discount obligations, within the meaning of Section 163(i)(1) of the Internal Revenue Code of 1986, as amended, the Company is required to redeem, for cash, a portion of the Toggle Notes then outstanding, equal to the mandatory principal redemption amount. Under the mandatory redemption provisions of the Toggle Notes, the Company has repaid $21.4 million of the principal outstanding balance through March 31, 2014.
The indenture governing the Toggle Notes contains various restrictive covenants, including financial covenants that limit the Company's ability and the ability of the Company's subsidiaries to borrow money or guarantee other indebtedness, grant liens, make investments, sell assets, pay dividends or engage in transactions with affiliates. At March 31, 2014, the Company was in compliance with all material covenants contained in the indenture governing the Toggle Notes.
Notes Payable to Banks
Certain of the Company's subsidiaries have third-party bank indebtedness secured by real estate and equipment assets at the surgical facilities to which the loans were made.  These bank indebtedness agreements contain customary covenants related to maintaining certain financial ratios and restricting activities, including the encumbrance of assets, other indebtedness, investing activities and payment of minority interest distributions.
6. Related Party Transactions
On August 23, 2007, the Company entered into a ten-year advisory services and management agreement with Crestview Advisors, L.L.C.  The annual management fee is $1.0 million and payable on August 23 of each year.  As of March 31, 2014, the Company had a prepaid asset of $395,000 related to this annual management fee, which was included in prepaid expenses and other current assets on the consolidated balance sheet.
Affiliates of Crestview and affiliates of the Northwestern Mutual Insurance Company hold the majority of the PIK Exchangeable Notes which entitle them to additional ownership in Holdings upon exchange. The PIK Exchangeable Notes are exchangeable into shares of common stock of Holdings at any time prior to the close of business on the business day immediately preceding the maturity date of the PIK Exchangeable Notes at a per share exchange price of $3.50. Upon exchange, holders of the PIK Exchangeable Notes will receive a number of shares of common stock of Holdings equal to (i) the accreted principal amount of the PIK Exchangeable Notes to be exchanged, plus accrued and non-capitalized interest, divided by (ii) the exchange price. The exchange price in effect at any time will be subject to customary adjustments.
As of March 31, 2014, the principal outstanding balance of the PIK Exchangeable Notes was $118.6 million and accrued interest related to the PIK Exchangeable Notes was $2.8 million. See Note 5 on Long-Term Debt for further discussion of the PIK Exchangeable Notes.


16

SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE MONTHS ENDED MARCH 31, 2014
(Unaudited)

7. Commitments and Contingencies
Lease Guarantees on Non-Consolidated Affiliates
As of March 31, 2014, the Company had outstanding lease guarantees of $827,000 related to operating lease payments of certain of its non-consolidated surgical facilities. These operating leases typically have ten-year terms, with optional renewal periods.
Professional, General and Workers' Compensation Liability Risks
The Company is subject to claims and legal actions in the ordinary course of business, including claims relating to patient treatment, employment practices and personal injuries. To cover these claims, the Company maintains general liability and professional liability insurance in excess of self-insured retentions through third party commercial insurance carriers in amounts that management believes is sufficient for the Company's operations, although, potentially, some claims may exceed the scope of coverage in effect. The professional and general insurance coverage is on a claims-made basis. The workers compensation insurance is on an occurrence basis. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is not aware of any such proceedings that would have a material adverse effect on the Company's business, financial condition or results of operations.
Laws and Regulations
Laws and regulations governing our business, including those relating to the Medicare and Medicaid programs, are complex and subject to interpretation. These laws and regulations govern every aspect of how our surgical facilities conduct their operations, from licensing requirements to how and whether our facilities may receive payments pursuant to the Medicare and Medicaid programs. Compliance with such laws and regulations can be subject to future government agency review and interpretation as well as legislative changes to such laws. Noncompliance with such laws and regulations may subject the Company to significant regulatory action including fines, penalties, and exclusion from the Medicare, Medicaid and other federal healthcare programs. From time to time, governmental regulatory agencies will conduct inquiries of the Company's practices, including, but not limited to, the Company's compliance with federal and state fraud and abuse laws, billing practices and relationships with physicians. It is the Company's current practice and future intent to cooperate fully with such inquiries. The Company is not aware of any such inquiry that would have a material adverse effect on the Company's business, results of operations or financial condition.
Acquired Facilities
The Company, through its wholly-owned subsidiaries or controlled partnerships and limited liability companies, has acquired and will continue to acquire surgical facilities with prior operating histories. Such facilities may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company attempts to assure that no such liabilities exist, obtain indemnification from prospective sellers covering such matters and institute policies designed to conform centers to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for past activities that may later be asserted to be improper by private plaintiffs or government agencies. There can be no assurance that any such matter will be covered by indemnification or, if covered, that the liability sustained will not exceed contractual limits or the financial capacity of the indemnifying party.
The Company cannot predict whether federal or state statutory or regulatory provisions will be enacted that would prohibit or otherwise regulate relationships which the Company has established or may establish with other healthcare providers or have materially adverse effects on its business or revenues arising from such future actions. Management believes, however, that it will be able to adjust the Company's operations so as to be in compliance with any statutory or regulatory provision as may be applicable.
Potential Physician Investor Liability
A majority of the physician investors in the partnerships and limited liability companies which operate the Company's surgical facilities carry general and professional liability insurance on a claims-made basis. Each partnership or limited liability company may, however, be liable for damages to persons or property arising from occurrences at the surgical facilities. Although the various physician investors and other surgeons generally are required to obtain general and professional liability insurance with tail coverage that extends beyond the period of any claims-made policies, such individuals may not be able to obtain coverage in amounts sufficient to cover all potential liability. Since most insurance policies contain exclusions, the physician investors will not be insured against all possible occurrences. In the event of an uninsured or underinsured loss, the value of an investment in the partnership interests or limited liability company membership units and the amount of distributions could be adversely affected.
8. Subsequent Events
None.


17

SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE MONTHS ENDED MARCH 31, 2014
(Unaudited)

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


18

SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE MONTHS ENDED MARCH 31, 2014
(Unaudited)

Condensed Consolidating Balance Sheet as of March 31, 2014
(In thousands)

 
 
Parent Issuer
 
Guarantor Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Consolidated Total
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
3,086

 
$
2,757

 
$
43,184

 
$

 
$
49,027

Accounts receivable, net
 

 
188

 
80,221

 

 
80,409

Inventories
 

 

 
16,893

 

 
16,893

Prepaid expenses and other current assets
 
744

 
1,166

 
8,661

 

 
10,571

Due from related parties
 
3,486

 
22,515

 

 
(26,001
)
 

Current assets of discontinued operations
 

 

 
2,306

 

 
2,306

Total current assets
 
7,316

 
26,626

 
151,265

 
(26,001
)
 
159,206

Property and equipment, net
 
1,633

 
2,100

 
125,391

 

 
129,124

Intangible assets, net
 
1,890

 

 
16,080

 

 
17,970

Goodwill
 
661,673

 

 

 

 
661,673

Investments in and advances to affiliates
 
65,223

 
38,911

 
463

 
(98,123
)
 
6,474

Restricted invested assets
 

 

 
315

 

 
315

Other long-term assets
 
8,817

 

 
4,611

 

 
13,428

Long-term assets of discontinued operations
 

 

 
9,864

 

 
9,864

Total assets
 
$
746,552

 
$
67,637

 
$
307,989

 
$
(124,124
)
 
$
998,054

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
438

 
$

 
$
21,302

 
$

 
$
21,740

Accrued payroll and benefits
 
1,219

 
33

 
10,981

 

 
12,233

Due to related parties
 

 

 
26,001

 
(26,001
)
 

Other current liabilities
 
15,406

 
3

 
24,285

 

 
39,694

Current maturities of long-term debt
 
363

 
863

 
8,891

 

 
10,117

Current liabilities of discontinued operations
 

 

 
1,151

 

 
1,151

Total current liabilities
 
17,426

 
899

 
92,611

 
(26,001
)
 
84,935

Long-term debt, less current maturities
 
539,992

 
1,515

 
21,000

 

 
562,507

Long-term deferred tax liabilities
 
75,618

 

 

 

 
75,618

Other long-term liabilities
 
2,224

 

 
61,069

 

 
63,293

Long-term liabilities of discontinued operations
 

 

 
5,118

 

 
5,118

Non-controlling interests—redeemable
 

 

 
30,390

 

 
30,390

Total Symbion, Inc. stockholders' equity
 
111,292

 
65,223

 
32,900

 
(98,123
)
 
111,292

Non-controlling interests—non-redeemable
 

 

 
64,901

 

 
64,901

Total equity
 
111,292

 
65,223

 
97,801

 
(98,123
)
 
176,193

Total liabilities and stockholders' equity
 
$
746,552

 
$
67,637

 
$
307,989

 
$
(124,124
)
 
$
998,054



19

SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE MONTHS ENDED MARCH 31, 2014
(Unaudited)

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

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

 
$
4,788

 
$
44,589

 
$

 
$
55,792

Accounts receivable, net
 

 

 
77,630

 

 
77,630

Inventories
 

 

 
17,080

 

 
17,080

Prepaid expenses and other current assets
 
1,476

 
1,301

 
6,817

 

 
9,594

Due from related parties
 
3,050

 
23,579

 

 
(26,629
)
 

Current assets of discontinued operations
 

 

 
2,580

 

 
2,580

Total current assets
 
10,941

 
29,668

 
148,696

 
(26,629
)
 
162,676

Property and equipment, net
 
1,422

 
2,100

 
123,812

 

 
127,334

Intangible assets, net
 
1,929

 

 
16,637

 

 
18,566

Goodwill
 
661,758

 

 

 

 
661,758

Investments in and advances to affiliates
 
69,558

 
40,384

 
563

 
(103,732
)
 
6,773

Restricted invested assets
 

 

 
177

 

 
177

Other long-term assets
 
9,419

 

 
4,538

 

 
13,957

Long-term assets of discontinued operations
 

 

 
15,498

 

 
15,498

Total assets
 
$
755,027

 
$
72,152

 
$
309,921

 
$
(130,361
)
 
$
1,006,739

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

 
$

 
$
18,863

 
$

 
$
19,132

Accrued payroll and benefits
 
1,151

 

 
10,951

 

 
12,102

Due to related parties
 

 

 
26,629

 
(26,629
)
 

Other current liabilities
 
8,348

 
3

 
25,183

 

 
33,534

Current maturities of long-term debt
 
344

 
859

 
7,790

 

 
8,993

Current liabilities of discontinued operations
 

 

 
1,180

 

 
1,180

Total current liabilities
 
10,112

 
862

 
90,596

 
(26,629
)
 
74,941

Long-term debt, less current maturities
 
529,912

 
1,732

 
19,342

 

 
550,986

Long-term deferred tax liabilities
 
76,020

 

 

 

 
76,020

Other long-term liabilities
 
2,292

 

 
59,112

 

 
61,404

Long-term liabilities of discontinued operations
 

 

 
4,854

 

 
4,854

Non-controlling interests—redeemable
 

 

 
30,545

 

 
30,545

Total Symbion, Inc. stockholders' equity
 
136,691

 
69,558

 
34,174

 
(103,732
)
 
136,691

Non-controlling interests—non-redeemable
 

 

 
71,298

 

 
71,298

Total equity
 
136,691

 
69,558

 
105,472

 
(103,732
)
 
207,989

Total liabilities and stockholders' equity
 
$
755,027

 
$
72,152

 
$
309,921

 
$
(130,361
)
 
$
1,006,739



20

SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE MONTHS ENDED MARCH 31, 2014
(Unaudited)

Condensed Consolidating Statement of Operations for the Three Months Ended March 31, 2014
(In thousands)

 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Consolidated Total
 
 
 
 
 
 
 
 
 
 
Revenues
$
5,021

 
$
212

 
$
132,651

 
$
(3,918
)
 
$
133,966

Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and benefits

 

 
38,020

 

 
38,020

Supplies

 

 
33,918

 

 
33,918

Professional and medical fees

 
156

 
10,510

 

 
10,666

Lease expense

 

 
6,759

 

 
6,759

Other operating expenses

 

 
9,152

 

 
9,152

Cost of revenues

 
156

 
98,359

 

 
98,515

General and administrative expenses
5,645

 

 

 

 
5,645

Depreciation and amortization
203

 

 
5,372

 

 
5,575

Provision for doubtful accounts

 

 
3,795

 

 
3,795

Income from equity investments

 
(592
)
 
(6
)
 

 
(598
)
Gain on disposal or impairment of long-lived assets, net

 
(64
)
 
(197
)
 

 
(261
)
Management fees

 

 
3,918

 
(3,918
)
 

Equity in earnings of affiliates
(5,618
)
 
(4,624
)
 

 
10,242

 

Proceeds from insurance settlements, net

 

 
(50
)


 
(50
)
Litigation settlements, net

 

 
3

 

 
3

Total operating expenses
230

 
(5,124
)
 
111,194

 
6,324

 
112,624

Operating income
4,791

 
5,336

 
21,457

 
(10,242
)
 
21,342

Interest (expense) income, net
(12,603
)
 
226

 
(1,988
)
 

 
(14,365
)
(Loss) income before income taxes and discontinued operations
(7,812
)
 
5,562

 
19,469

 
(10,242
)
 
6,977

Provision for (benefit from) income taxes
1,439

 

 
(84
)
 

 
1,355

(Loss) income from continuing operations
(9,251
)
 
5,562

 
19,553

 
(10,242
)
 
5,622

Income (loss) from discontinued operations, net of income taxes
118

 
56

 
(6,316
)
 

 
(6,142
)
Net (loss) income
(9,133
)
 
5,618

 
13,237

 
(10,242
)
 
(520
)
Less: Net income attributable to non-controlling interests

 

 
(8,613
)
 

 
(8,613
)
Net (loss) income attributable to Symbion, Inc.
$
(9,133
)
 
$
5,618

 
$
4,624

 
$
(10,242
)
 
$
(9,133
)


21

SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE MONTHS ENDED MARCH 31, 2014
(Unaudited)

Condensed Consolidating Statement of Operations for the Three Months Ended March 31, 2013
(In thousands)

 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Consolidated Total
 
 
 
 
 
 
 
 
 
 
Revenues
$
4,933

*
$

 
$
129,404

*
$
(3,954
)
 
$
130,383

Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and benefits

 

 
36,606

 

 
36,606

Supplies

 

 
34,404

 

 
34,404

Professional and medical fees

 

 
10,341

 

 
10,341

Lease expense

 

 
6,735

 

 
6,735

Other operating expenses

 

 
8,728

 

 
8,728

Cost of revenues

 

 
96,814

 

 
96,814

General and administrative expenses
5,840

 

 

 

 
5,840

Depreciation and amortization
115

 

 
5,763

 

 
5,878

Provision for doubtful accounts

 

 
2,825

 

 
2,825

Income from equity investments

 
(857
)
 
(24
)
 

 
(881
)
Gain on disposal or impairment of long-lived assets, net

 
(436
)
 
(56
)
 

 
(492
)
Management fees

 

 
3,954

 
(3,954
)
 

Equity in earnings of affiliates
(10,535
)
*
(8,563
)